Who wouldn’t want exposure to the retirement sector?
The listed retirement sector has been in the press these past few weeks as some of the leading players are raising capital. Ryman Healthcare is issuing new equity while Summerset Group is issuing corporate bonds.
For some readers less familiar with the sector I’ll do my best to give a brief overview in the next couple of paragraphs. According to the Retirement Village Association (RVA)’s latest 2022 annual report, there are 405 villages across the country operating 38,600 villas, apartments and serviced apartments that house more than 48,000 older New Zealanders. In New Zealand, the larger operators have adopted the integrated retirement village model: integrated retirement villages provide a range of care and accommodation options that are designed to cater for residents along the full continuum of care with the main advantage being that residents do not need to leave the village if or when their or their partner’s health deteriorates. Jones Lang Lasalle which prepares an industry-wide report each year, estimates that approximately 14% of people over the age of 75 now live in some form of retirement village, so it is a sector that impacts many, many people. And not just the residents, there are their families and friends as well as all the people employed in or around the villages!
The listed sector in New Zealand comprises five major operators and in aggregate accounts for a little over $7 billion of market capitalisation on the NZSX at current prices. (Ryman Healthcare itself had a larger market capitalization at one point but I will come back to that later). The first and original retirement listed retirement village operator, Metlifecare, was acquired in 2020 by EQT Infrastructure, an investment organization headquartered in Sweden, which highlights the global appeal of the sector.
Ryman Healthcare has been in the news as it was forced to raise $902 million in new equity capital to repay United States Private Placement (USPP) bondholders. $30 million of this was for transactional advice and investment banking fees (lucky for some!) and a whopping $135 million was costs associated with the full repayment of the USPP Notes.
I remember when Ryman listed in 1999. Founders Kevin Hickman and John Ryder set the business up back in 1984 in Christchurch and had expanded operations in the South Island, welcoming Ngai Tahu and Direct Capital as shareholders in 1996. In 1999, the company was seeking funds to expand in to the North Island. The company listed on the NZSX in June that year raising $25 million to give it a market value of $135 million (interestingly the same amount of the penalty fees the company has just paid the USPPs). The late Brian Gaynor once described Ryman as a “measured tortoise” but over the years its aggressive property expansion meant it took on more and more debt, not so much in the earlier days but a lot over the past five years or so. For equity holders the debt-funded expansion was good news as the company didn’t issue dilutive equity capital to do so. The share market rewarded Ryman handsomely – at its peak the company’s market capitalisation reached over NZ$8 billion and Ryman was one of the largest companies listed on our exchange. Shareholders from the initial float had achieved a compounded return of almost approximately 25% per annum over that 20-year period including dividends.
Not long after the share price peak, the Covid pandemic reared its ugly head and has gone on to have profound implications for the retirement village industry. To its credit, Ryman from all accounts has handled its response in an exemplary manner. More recently as interest rates have moved higher, and property prices stalled or fallen, Ryman’s and other companies’ share prices in the sector have lost some of their gloss.
This year, the listed retirement village companies share prices bounced off recent lows but remain at levels where a lot of negativity is priced in terms of weaker unit/dwelling prices and lower build rates. Investor confidence seems to hinge on seeing more stability in the housing market as many incoming residents rely on selling their home to fund the purchase of a dwelling.
As the market sentiment gradually turned more positive during the latter stages of 2022, Ryman put its hand up for some more money and this time it was equity. From what we have heard from management, the purpose of the offer is to reset the company’s capital structure, provide funds to strengthen its balance sheet through the repayment of debt and better enable it to execute on its growth framework. The retail offer price was set at a 22% discount to the company’s closing share price of $6.40 on Tuesday 14 February 2023, the day before the capital raising announcement was made.
Although the new share issue is dilutive, this is a sizeable discount for one of New Zealand’s highest quality private retirement village operators. We have seen a tough market environment for shares as a whole in 2022, and for retirement villages in particular on concerns that a falling property market and the lengthening of the time to sell a property to fund a retirement village unit. Although the outlook for property is still uncertain in the near term, such opportunities to acquire Ryman shares at such levels do not come up often, especially within the context of favourable long-term ageing population demographics.
And then for those more conservative readers, as luck would have it, another blue-chip operator in the sector, Summerset Group, is currently in the market seeking to raise up to $175 million of fixed rate, guaranteed, secured, unsubordinated bonds. The group’s principal use of debt is to facilitate the acquisition of land for development and the development and construction of retirement villages. More specifically this issue is to repay a portion of existing bank debt, refinancing its existing corporate bonds, and for general corporate purposes.
Hobson Wealth is a co-manager on the transaction, so I can’t say too much on the specifics. But what I can say is that the flip side to a higher Official Cash Rate and a higher cost of borrowing is more attractive rates paid to investors participating in such corporate bond issues.
My last comment is again a reference to the RVA’s 2022 Annual Report. President Graham Wilkinson attributes the strong growth over the past two decades “…to two powerful factors: the favourable demographic story, which we [RVA] believe will continue for the foreseeable future, and an overwhelming resident satisfaction rate underpinned by a comprehensive regulatory regime”. With these tailwinds, who wouldn’t want exposure to the sector?