Retirement village exposure has long been a mainstay of our clients' investment portfolios. Ryman being Christchurch based means we have many clients who rallied behind the stock early, realising the company’s potential. The NZX now has 4 pure play retirement companies, and Infratil who own 20% of Metlifecare and RetireAustralia (who have 28 villages in NSW, SA and QLD).
So investors are awash with options when it comes to retirement village exposure, but what option is right for you. There is no one right answer to this at the moment, as every retirement village operator offers a slight variant on the same theme (that theme being an aging population and a strong property market).
The table below shows the mix each operator has in terms of Aged Care Beds compared to Retirement Village Units. We can see below that Ryman is currently the largest operator in the sector, and also have the greatest number of care beds. The mix between aged care beds and retirement village units is one aspect to consider when deciding which exposure is right for you. The higher proportion of care beds the more insulated an operator is from a property market retraction. This is because care beds, although lower margin in a growth environment, have superior cash flow in a low growth environment. Having the care on offer will also make the village more attractive due to the market demand for the ‘continuum of care.’
So, all else being equal, a little bit of care in a retirement village portfolio is a ‘nice to have’, but what other factors should investors consider?
The respective development pipeline is a good measure of future potential. You can see that the market gives a high premium to a company’s development pipeline by comparing the price to NTA column in figure 2 to the development pipeline in figure 3. The market particularly likes new villages as traditionally they have provided the highest development margin. This, and the historically strong execution of new villages is why Ryman and Summerset trade at large premiums to their NTA.
Metlifecare, on the other hand, trades at a very small premium to NTA, with the market currently not pricing in a premium based on their development pipeline. Metlifecare do not have the strong development record that Summerset and Ryman boast, but successful execution of their current projects could start to see a premium develop. Metlifecare also have the largest exposure to the Auckland property market (as a percentage of their overall business) with 70% of their portfolio Auckland based. This has been positive of late and a key reason why their NTA has grown 69% in the last 3 years. This also presents itself as the major risk for the company.
|Company||Code||Price||Consensus Target Price||Net Asset Backing||Price to NTA|
Metlifecare’s exposure to Auckland property highlights a key risk across the entire sector; that property prices have buoyed the sector, and a reversal of the current momentum would impact every one of the listed operators.
Those that have some care as part of their portfolio will have some insulation, but we also have to consider the level of gearing each respective company has. Not surprisingly, it is the two companies that are leading the way in development that carry the most gearing, Ryman and Summerset who both have gearing in the 30% range. This level of debt is not an issue in the current environment, but a strong retraction in house prices (mid-development) will start to see the heavy developers come under pressure.
- Increase demand for units – It is estimated there will be demand for an additional 1,654 retirement village units every year in New Zealand between 2016 and 2043.
- If we look ahead to 2043, Statistics New Zealand’s population forecasts suggest the number of people in this age bracket will grow by 164 percent. In Auckland, that growth rate is expected to be 205 percent.
- Increased penetration rates – up to 12.4% in 2016, from 12.1% in 2015. Penetration in Auckland is 15.1%. Industry expects penetration to continue to increase.
- If the industry can achieve a higher penetration rate of 16 percent, the number of additional units needed between 2016 and 2043 would be 60,123 or 2226.7 per annum – the equivalent of 14.8 new villages of 150 units per annum.
- Trend to larger villages. Number of villages dropped by 6 in 2016, number of beds increased 8%.