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A Broker's PreView - Arvida's Auckland Acquisition

Overview: Arvida listed late last year, becoming the 4th retirement village operator on the NZX. They are also currently the smallest such provider, with 17 villages and aged care facilities around the country. As with its listed peers, Arvida is looking to expand, and this week announced the acquisition of three Auckland villages.

Pros: The $62million Auckland purchase is instantly earnings accretive due to the high occupancy levels of 97 percent in the acquired villages, and the “strong care focus”.

 

This care focus differentiates Arvida from the likes of Ryman, Summerset and Metlifecare, who have a lower proportion of care bed facilities. The other operators focus more in the development space, building large scale villages which include stand alone units, serviced apartments, with some care facilities thrown in on top.

Aged care facilities are generally more cash generative compared to stand alone units due to higher fees and government subsidies. This allows Arvida to pay a higher dividend than its peers, boasting a gross dividend yield north of 6 percent.

Cons: Arvida noted in their Wednesday announcement, that the Auckland purchase includes scope for “meaningful brownfield development” (brownfield in this context means extending or developing current villages). This increases the risk associated with the company as they develop the properties. This is not the only area Arvida are looking to develop with other villages also containing brownfield opportunities.

Along with the brownfield execution risk, Arvida investors should be mindful that the villages have only recently started operating under Arvida’s banner. There is good potential for efficiencies to be created, but also the prospects of speed bumps if integration is not smooth. So far, the company has noted that integration has allowed them to renegotiate terms with a number of suppliers.

Price performance: The Company listed at 95 cents per share, and briefly traded at a premium. The share price hit lows of 85 cents, before raising $41 million at 84 cents this week.

Investment outlook: A good dividend yield will attract some investors, and with the share price currently below the Net Asset Backing of the company, there is prospect for upside if they can keep their ducks in a row.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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