Roy Davidson, 8 February 2018

Ryman Healthcare 080218

Ryman Healthcare is New Zealand’s pre-eminent listed retirement and aged care provider, providing services to over 9,000 residents. RYM’s integrated facilities, from independent apartments through to serviced units, resthome and hospital beds, cater for the changing needs of occupants as they age.

RYM has a strong focus on providing a continuum of care to residents with a circa 60:40 split between living units and aged-care beds. RYM’s business model provides the advantage of very strong cash flows, which is sufficient to support ongoing development. The company enjoys above average margins supported by a strong management team, operational synergies, solid pricing power, increased brand recognition and stable earnings and cash flows from a large and mature portfolio of villages.

The number of over 75’s is set to grow sharply in the next two decades, doubling to over 500,000. RYM is well-positioned to benefit from this accelerated growth in demand for retirement and aged care facilities and services, especially given its in-house design/development capability. Australia faces similar demographic challenges to New Zealand, which bodes well for RYM’s continued expansion into Australia.

A key driver of growth over the coming years will be Australia where RYM is aiming to have five villages operating by 2020. Australia is particularly promising as we believe RYM has a significant advantage over its competitors due to its continuum of care model. Most villages in Australia are currently either standalone retirement or aged care villages, and it can be disrupting for residents to move between villages. Sales at RYM’s first Melbourne village (Weary Dunlop) were the fastest the company has ever experienced and development margins will be higher than first anticipated (18% vs 15%). RYM has also received higher accommodation bonds for its aged care beds than its Australian peers, which will help fund future development.

In our view, RYM has the most attractive retirement/aged care portfolio in New Zealand in terms of locations and mix of assets within villages while the expansion into Australia is promising. Over the coming years, RYM will look to build three villages a year, one in Auckland, one elsewhere in New Zealand, and one in Australia. Rising property prices have been a major tailwind for the sector, with operators benefitting from resale gains. However, we expect a softening property market to dent sector sentiment and provide an earnings headwind. RYM remains the best positioned ahead of this in our view, with a high quality portfolio, proven track record and more defensive continuum of care model.

Risks to RYM include: 1) falling property prices, 2) reputational damage, 3) increased competition.