WEEKLY STOCK COMMENT: METLIFECARE
Roy Davidson, 22 February 2018
MET is the second-largest operator in the New Zealand retirement and aged care sector. MET has a portfolio focussed on the retirement sector, centred around Auckland and the Bay of Plenty.
The retirement of the ‘baby boomers’ over the next several decades will underpin strong growth in demand for retirement village units. According to Statistics NZ, the over 75 age group – the target population for MET’s retirement village units – will more than double from 259,400 to 560,900, from 2011 to 2036, a compound rate of nearly 4%. The 75+ population has recently been growing at 7,100 per annum, will increase further to 9,400 per annum from 2016–2021, and peak at around 15,000 per annum from 2021–2035. The 75% increase in the rate of growth from the pre-2011 period to the recent 2011–2016 period has, we believe, been a key factor in lifting demand for retirement villages in the last two years.
MET has a similar business model to Ryman and Summerset, with the sale of occupational rights agreements (ORAs) allowing capital to be recycled for use in subsequent villages, and operators to retain capital gains on resale of ORAs as units are vacated. MET has assembled a development team and has been building a landbank that is sufficient to see it comfortably meet its guidance of c200 units per annum. We believe that MET will be able to exceed this target from FY18 if current developments are developed on schedule.
Of the listed retirement operators, MET has the largest exposure to Auckland, with two thirds of its portfolio located in the region, and the remainder located in the Bay of Plenty, which is also experiencing rapid growth. Recent results have demonstrated good leverage to the Auckland housing market with resale margins up strongly. However, this also presents a risk as both regions have experienced very strong house price inflation in recent years.
Following a period of consolidation after the global financial crisis, MET has taken its place as one of the three major participants in industry growth, alongside Ryman and Summerset. Around two-thirds of MET’s existing retirement village portfolio is weighted to Auckland (significantly more than Ryman and Summerset) where house prices have risen most over the last several years, and this has boosted returns. We are cautious as to whether this is sustainable, which, when combined with MET’s shorter track record on development and lower share of aged care, leads us to view it as a riskier proposition than its two main peers.
Risks to MET include: 1) Housing downturn, 2) regulatory change, 3) increased competition.