Investing in New Zealand’s retirement sector
The NZX listed retirement sector, consisting of Ryman Healthcare, Summerset, and Metlifecare, enjoyed another stellar year of growth during 2013, cementing the sector as a top performer. The challenge for investors in 2014 is assessing whether the share prices and valuations of each business are justified by the pace of growth in village development, residents and earnings in each case.
Head and shoulders above the rest
The New Zealand share market as measured by the NZSX50 Gross index produced a very creditable 16.5 per cent return for the calendar year, following on from a 24.2 per cent return in 2012. However, this pales when compared to the retirement village sector. For the 2013 calendar year, Ryman produced a return of 74.3 per cent, Summerset 46.5 per cent and Metlifecare a creditable 27.7 per cent return. An equally weighted portfolio of each would have returned close to 50 per cent, 33 per cent above the market return, and around 46 per cent above bank deposits for the year. Underlying the strength and popularity of the sector with investors, these returns come on the back of a 70.5 per cent return in 2012 for Ryman, 67.2 per cent for Summerset and 37.2 per cent for Metlifecare.
The vast majority of these returns over the last two years have come by the way of capital growth (growth in the share price as opposed to income returns to shareholders). For example Ryman, the largest cash generator in the sector, paid 11c per share in dividends during 2013, an income yield of 1.4 per cent on the current share price. This means that the market is valuing the future earnings of each company (and therefore the sector), very highly, and banking on strong growth in earnings from the well-publicised tailwinds the sector has in years and decades to come.
Banking on tomorrow
But just how much future growth and profitability is already capitalised into today’s share price for each company? Put simply, at today’s share prices, new investors are being asked to pay a substantial price to access the future earnings of the sector.
History shows us that the sector has grown its earnings year on year, justifying paying a higher price than the market average for today’s earnings. Using Ryman as an example again, ten years ago in 2004 it paid; 2.33 cents per share to investors as dividends, in 2014, we forecast this to be 12 cents per share, so the income paid has risen 415 per cent over that ten year period. This track record certainly justifies Ryman’s position as a high-quality, proven company. However, continued growth in earnings will need to occur to justify its current share price.
What’s next for the big three?
For Summerset, a 2014 focus will be improving its development margins further after good gains as a listed company. In addition to its 16 operating villages, Summerset maintains a five year development land bank. In late 2013, Summerset received resource consents for villages at Karaka and Hobsonville and acquired two Christchurch sites. It recently raised its annual build target to 300 retirement units by 2015. Last year was a busy one on the corporate front for Summerset, with its cornerstone shareholder, Australian private equity firm Quadrant, selling its stake further in two tranches to end the year with a 23.2 per cent shareholding.
Metlifecare, the second-largest operator in New Zealand, really came to the attention of the broader market with its 2012 acquisition of Vision Senior Living, and Private Life Care Holdings. Its major shareholder, Australian business RVG, sold down its remaining 38 per cent stake in November 2013. New Zealand infrastructure investor Infratil purchased some of this stake, and the remainder was sold to institutional and retail investors. Like its competitors, Metlifecare will be focused on building its run rate of development in 2014, in its case towards 300 units per annum. If the market can gain some confidence around the sustainable growth rate, and development margins are solid, Metlifecare could see some good performance given it’s currency the cheapest of the three stocks.
Ryman’s business model provides the advantage of very strong cash flows ($222m in FY13), which enables it to support a larger ongoing development programme. Ryman has lifted its forecast New Zealand build-rate again, from 550 units or beds per year to 700. The biggest influence for Ryman in 2014 is likely to be news on its progress in Australia. Its first village at Wheelers Hill in Melbourne is progressing to plan, and the company has indicated it will look for further sites in Australia during 2014.
If Ryman can prove its ability to develop and grow an Australian business at rates similar to that achieved in New Zealand, this would be the next catalyst for investment markets. However, given Ryman’s cautious, prudent approach to expansion across the Tasman, we expect this could take some time to develop.
In all, after a very strong run from the sector, we expect modest performance in 2014, with investors focusing on the continued attainment of growth milestones for each of the businesses.