Tougher times put pressure on retirement village sector

Thursday, 30 May 2024

Ryman Healthcare’s profit after tax declined to just $4.8 million in the year to March 31.

Demand for retirement village offerings remains strong, but the sector is feeling the impact of tougher economic times and a softer housing market, analysts say.

Earlier this week, one of New Zealand’s biggest retirement village operators, Ryman Healthcare, reported that its profit after tax plunged significantly over the year to March 31.

The company’s profit declined 98% from $257.8 million to just $4.8m.

Impairments involving the write downs of land held for sale and of villages for development, and other one-off costs, which amounted to $283.9m, and a fall in the value of its investment properties were to blame, it said.

Underlying profit was $270m, down 11% on last year’s $301.9m, but within the range of $265m to $285m that it flagged earlier this year.

The profit decline came despite an 18% increase in the company’s revenue to $689.9m for the year, driven by growth in care, village and deferred management fees.

It announced the need to spend capital to complete committed village buildings and the desire to limit increased borrowing has led it to suspend dividend payments.

Ryman had planned to build a retirement village on the old teachers' college site in Karori, Wellington, but it is now selling the site.

Additionally, several properties in its land bank, including sites in Kohimarama, Auckland and Karori and Newtown in Wellington, were being sold, the company said.

But Ryman was not the only retirement village operator to release its latest financial results recently Oceania Healthcare and Arvida Group also reported back to the market this week

Oceania announced profit after tax of $31.5m over the year to March, an increase of 104.5% on last year, and its revenue was up 7.4% to $265m from $247m last year.

Operating cash flow increased 21.7% to $85.4m from $70.2m last year, and that reflected increased proceeds from first time sales and resales during the period, the company said.

Its total assets increased to $2.8 billion, largely due to development across 10 sites and the purchase of land adjacent to its Bream Bay village in Ruakaka, Northland and The Helier villages in Auckland, as part of the company’s capital investment strategy, it said.

Despite increased profit, Oceania was not paying a final dividend as it wanted to provide for ongoing investment in the company’s growth and portfolio transformation. The company is also selling a number of its properties.

Arvida announced its profit after tax was up 69% to $139m for the year to March 31, but its underlying profit of $85m was down 3% due to higher interest costs.

Revenue was up 11% on last year to $247.2m, while total assets were up 12% to $4.2b.

High inflation, high interest rates and a slow residential property market had impacted cash flow generation from operations, the company said.

Arvida Group has confirmed it recently settled on the sale of its Strathallan village in Timaru.

“Good progress with revenue uplift and cost out strategies has been made during the year to improve cash flow and profit performance, and we are making a concerted effort to reduce our operating costs.”

It had embarked on a programme to assess and execute options to improve Arvida’s value for shareholders, and it was pausing dividends while that programme was underway.

The company also confirmed it had sold the Strathallan village in Timaru.

Of the rest of the “big six” operators, Bupa New Zealand and Metlifecare are not listed on the NZX sharemarket, while Summerset Group reports to a different balance date.

But earlier this year, Summerset announced it had defied a “challenging” environment to deliver a 62% increase in profit after tax for the year to December 31.

Overall, the operators who reported recently produced a mixed bag of results. So what does this say about how the sector is faring in the current economic climate?

Ryman Healthcare acting executive chairperson Dean Hamilton said the impact of high interest rates, construction cost increases, and wage inflation were sector wide.

There had been a bit of a land-grab when interest rates were low, but now many developers did not have the capital to get builds done, he said.

Ryman Healthcare acting executive chair Dean Hamilton says there has been a reassessing of land banking, costs, and selling land.

“Meanwhile, it looks like retirement village operators are carrying too much land. There are projects you want to do that just can’t be done at this point.

“So there’s been a reassessing of land banking, and costs, and selling land. Because if you don’t think you can build, it is better to sell than hold.

“At Ryman, we are no different. We will continue to build, but at a lower and more considered rate than we would have in the past.”

The demand for retirement village units and for aged care was still strong, he said.

Over the past year, Ryman sold a record 1800 units, and 2200 new people move into its aged care facilities. Across its villages, the vacancy rate was 5%, while there was a 96% occupancy rate in aged care.

But the softer housing market was a challenge as most people needed to sell their homes to buy into a village, and residential sales were down, he said.

“It means people might delay going into a village, although where people need care, it is more needs based, so we can fill those places up more easily.”

Hamilton said it was here that operators were facing another problem, and that was the aged care funding model.

Funding from the Government had not kept pace with the increasing costs of providing care, and it was getting harder to make things work, he said.

Some of the pressures on the sector are starting to ease, Oceania Healthcare chief executive Brent Pattison says.

“We are already seeing villages close, and it will lead to a net decline in aged care bed numbers.

“Yet we know an increase in the aged care population is coming. Unless there are some solutions, it will become a hospital system issue.”

Changes needed to be made to the funding model, including an increase in Government funding and some means-testing, he said.

“We will be following the Government’s aged care provision inquiry, but I’m optimistic the Government will see operators as part of the solution as we provide a quality service.”

Oceania chief executive Brent Pattison agreed there had been a confluence of pressure on the sector, including ongoing uncertainty around the housing market, cost inflation, and aged care funding.

But some of those pressures looked to be easing, with wage inflation in the sector moderating from about 8% to about 3%, and construction costs stabilising as supply chain disruptions lifted, he said.

“There is still a housing crisis, and inflationary pressures, but it feels like the worm is starting to turn.

Oceania’s new luxury village, The Helier, is a different type of retirement product.

“Also, our business model, and the sector is better understood. There is greater visibility and transparency on results from operators, and the market is responding to that.”

Oceania’s suspension of dividends reflected the company was at the end of an intense investment cycle, and the growth phase needed to be completed before returns were paid out, he said.

“Our investors understand that, and they know there is great demand for our product.

“Last year we had the highest number of sales in five years, and enquiries for the coming year are elevated, so there is sustained momentum. We have invested heavily, and believe in our long-term strategy.”

The impact of the tougher economic climate on the sector was acknowledged by investment analysts.

But Nikko Asset Management investment analyst Tim O’Loan said each of the operators that reported recently had some specific issues to address, and the market was watching them.

With Oceania it was inventory levels, and the selling down of The Helier, a different type of high-end product, while with Arvida it was the realisation of value for shareholders, and some concern around its gearing and the level of debt it was carrying.

Demand is still there for retirement village offerings, Nikko Asset Management’s Tim O’Loan says.

With Ryman, it was the impairment costs and a need to refocus on cash flow, which impacted on value for shareholders, and the company had also just changed the way it reported and disclosed.

But Oceania seemed confident on sales, and expected to be cash flow positive in aged care and retirement units over the next 12 months, while Arvida appeared to be navigating the climate okay, and had not massively increased their debt or gearing, he said.

“And we think Ryman are addressing some of their issues, and have set the company up to realise its value and improve its outcomes for shareholders.”

More broadly, it was a difficult operating environment, with high interest rates and inflation and a soft housing market, and that was coming through in the reporting, O’Loan said.

“But we still like the sector, even though it has dropped off a bit. Demand is still there, and the operators are doing a good job.

“The established villages have waiting lists, and as the population ages more will be needed. It’s just a matter of waiting as they work through things, and that takes a bit of time.”

Craigs Investment Partners portfolio manager Mohandeep Singh said the Ryman, Oceania and Arvida results were not a huge surprise as the sector had been under pressure for the last year.

The state of the housing market was the key factor, because retirement village operators were, ultimately, residential housing developers, and that was a tough gig at the moment, he said.

“They are developing for a part of the market that is more needs-based than the broader market.

The brand equity of the big retirement village names is strong because they have done a good job, Craigs Investment Partners’ Mohandeep Singh says.

“But the same pressures apply, although for different operators, it partly comes down to the type of development they are doing.”

Ryman has had a focus on denser, multi-unit, apartment style villages rather than the more traditional village of standalone units, for example.

Broad acre stule villages could be developed and sold in stages, and it cost less to build than an apartment block where it was not possible to develop three floors, and sell them before moving on to the next three, he said.

“Higher density developments mean cash is tied up for longer, and they are more expensive, especially with costs and interest rates going up, and that should be a consideration with future developments.”

The aged care funding model was an issue, particularly for villages which were care bed heavy, he said.

“But operators can choose the way they split their villages between units and aged care beds, and the mix is always changing.

“Ryman has signalled they have overbuilt their care product as a percentage, and will be working to lower that, and look at more broad acre development in future to go along with their more intensified offerings.”

Singh said while there were a host of factors impacting on the sector, the important question for the sector was had they done right by their residents.

“And for the most part, yes, they have. So for those big names, their brand equity and presence remains strong because they have done a good job, and it will tide them over.

“It’s just that other things have impacted on their profitability and costs right now, so a key feature of all the reporting has been a concentration on debt, and a renewed focus on cash flow. And that’s sensible in harder times.”