Retirement Sector Stocks

[winner (n)]

https://www.nzherald.co.nz/property

https://www.nzherald.co.nz/property/barfoot-thompson-unsold-houses-hit-record-6200-places-available/JDBIGEDHHVFFZK57KXASDJJIOA/

/barfoot-thompson-unsold-houses-hit-record-6200-places-available/JDBIGEDHHVFFZK57KXASDJJIOA/

Good that sales were the most since July 2021 ...and strong across all price levels

Things looking good for rest of year and into next year

[Shareguy]

 https://milfordasset.com/insights/stock-story-ryman-healthcare-and-summerset-retirement-villages

[Basil]

Some time back I posted my thesis of what drove super normal profits for this sector in the early part of this century.  Basically, that real estate in real terms had gone up 600% over a 25 year period and this super unusual price escalation that drove super profits for the sector in the 2010's and 2020's is over, never to be repeated and that remains my core thesis.

My thesis is sideways from here is the most likely outcome for the foreseeable future and that's how it is playing out.  Note that sideways is actually going down in real terms with the impact of inflation each year.  In a sustained environment of this new type, no company in this sector does well as over time they are reselling properties for less money in real inflation adjusted terms than they originally sold them for. I believe in this thesis so strongly that I have no exposure to this sector whatsoever despite my belief that one company SUM, is exceptionally well managed.  To illustrate the difference in these two types of property markets consider this example. 

A retirement village spends $300,000 to build a new unit and sells it for $400,000, earning $100,000 development margin.  10 years later in a booming market that used to prevail they could resell it for say $1m and make a $600,000 resale profit + the DMF fee.  (That's what previously drove the bonanza once in a lifetime sector gains)  In a prolonged sideways market they might resell it for $400,000 ten years later, which is only $300,000 in real inflation adjusted terms and make no DMF fee because they have lost that 25% through the effects of inflation erosion of the real inflation adjusted resale price.  The latter example is the environment that currently prevails and has done for some time already.  Returns and cash flow are likely to be very poor in a sideways market for all companies in this sector.

https://www.interest.co.nz/property/132891/housing-market-not-its-usual-self-it-prepares-onset-winter

The huge capital gain game is over for retirement village companies.  Yeah, they will keep operating if they don't shoot themselves in the foot and go broke, but expectations should be for at best, very modest capital gains over time, if any, and extremely low dividend yield.

[Poet]

Some time back I posted my thesis of what drove super normal profits for this sector in the early part of this century.  Basically, that real estate in real terms had gone up 600% over a 25 year period and this super unusual price escalation that drove super profits for the sector in the 2010's and 2020's is over, never to be repeated and that remains my core thesis.

My thesis is sideways from here is the most likely outcome for the foreseeable future and that's how it is playing out.  Note that sideways is actually going down in real terms with the impact of inflation each year.  In a sustained environment of this new type, no company in this sector does well as over time they are reselling properties for less money in real inflation adjusted terms than they originally sold them for. I believe in this thesis so strongly that I have no exposure to this sector whatsoever despite my belief that one company SUM, is exceptionally well managed.  To illustrate the difference in these two types of property markets consider this example. 

A retirement village spends $300,000 to build a new unit and sells it for $400,000, earning $100,000 development margin.  10 years later in a booming market that used to prevail they could resell it for say $1m and make a $600,000 resale profit + the DMF fee.  (That's what previously drove the bonanza once in a lifetime sector gains)  In a prolonged sideways market they might resell it for $400,000 ten years later, which is only $300,000 in real inflation adjusted terms and make no DMF fee because they have lost that 25% through the effects of inflation erosion of the real inflation adjusted resale price.  The latter example is the environment that currently prevails and has done for some time already.  Returns and cash flow are likely to be very poor in a sideways market for all companies in this sector.

https://www.interest.co.nz/property/132891/housing-market-not-its-usual-self-it-prepares-onset-winter

The huge capital gain game is over for retirement village companies.  Yeah, they will keep operating if they don't shoot themselves in the foot and go broke, but expectations should be for at best, very modest capital gains over time, if any, and extremely low dividend yield.

An interesting thesis, and may turn out to be right in a ten-year time frame.

I think though that there will be opportunities within that ten-year time frame to make considerable capital gains - especially in OCA

My thesis is that despite the macro outlook being somewhat bleak - the current shareprice (62c) is a market overreaction (downwards). I predict that at some point in the next couple of years it will be considerably higher and will represent a good return for someone buying at today's price.

I'll check back in with you when that day comes (if it does)

I also think that a large part of the issue with the OCA shareprice is due to contagion from the farce going on at RYM. That will fade.

[ValueNZ]

If you expect negative nominal, so deeply negative real house price growth (say -2% p.a nominal for 10 years) then these companies probably aren't the greatest investment, but I still would expect a decent return at todays prices. I imagine the DMF would just barely cover the shortfall + refurb. But development margin still being earned, and float being generated.

If you expect sideways nominal, negative real, the DMF would cover refurb and still generate some cash flows for investors. So development margin + DMF + float being generated. Returns are good in this scenario.

If you expect slight positive nominal (2%-3% p.a), sideways real, the returns become world class at todays prices. Development margin + resale margin + DMF + float being generated.

And if you expect real positive returns (I don't), the numbers start to get silly.

My base case is sideways real.

[BlackPeter]

If you expect negative nominal, so deeply negative real house price growth (say -2% p.a nominal for 10 years) then these companies probably aren't the greatest investment, but I still would expect a decent return at todays prices. I imagine the DMF would just barely cover the shortfall + refurb. But development margin still being earned, and float being generated.

If you expect sideways nominal, negative real, the DMF would cover refurb and still generate some cash flows for investors. So development margin + DMF + float being generated. Returns are good in this scenario.

If you expect slight positive nominal (2%-3% p.a), sideways real, the returns become world class at todays prices. Development margin + resale margin + DMF + float being generated.

And if you expect real positive returns (I don't), the numbers start to get silly.

My base case is sideways real.

I  think this makes a lot of sense.

Sure - real estate prices are still high in NZ compared to incomes (though the ratio did drop over the recent years), but there are many factors likely to keep property prices in NZ relatively high. Our PM just gave a promotional speech in the UK, but I see well off people not just from there, but from all over the world coming to NZ to find a safe haven. They will need (upper market) property, and this will keep prices up. This process will first indirectly and later directly feed the need for upmarket retirement villages as well.

And this trend will add to the well known demographic bubble - still more (reasonably wealthy) elderlies, many of them without kids prepared to look after them, ready to do the next step into a sheltered retirement home. Demand typically keeps prices up.

So - yes, its unlikely that we have another big property boom (though one does not know what happens if the RBNZ needs to drop the interest rates significantly lower to compensate for Dumbs actions in the US), but expecting real estate to further drop in real terms is in my view as unrealistic.

[Waltzing]

its the weather... the UK people come for the weather.... they have had enough of the rain...

 well thats what they say....

 but can the RV sector beat TRA over the next 10 years...

 also NZ is a small country... houses go up in small country's  .....

 look at holland... floating houses... common ....

 BOP is a traffic jam... small towns in the wakaTOO are experiances suburb growth....

 Houses prices there dropped 2.5 percent since?

 is there a farther big drop to come... probably but in 10 years it could all take off again....

 wasnt 2008 just the other day?
 

[Basil]

My thesis is that despite the macro outlook being somewhat bleak - the current shareprice (62c) is a market overreaction (downwards). I predict that at some point in the next couple of years it will be considerably higher and will represent a good return for someone buying at today's price.

I'll check back in with you when that day comes (if it does)

I also think that a large part of the issue with the OCA shareprice is due to contagion from the farce going on at RYM. That will fade.

The accounting fiasco's and debt, stock and development mismanagement at RYM has been eye-popping to say the least.  Management, despite many changes over the years have made a complete and consistent hash of RYM ever since Simon Challis left and while I think there's is some effect on other's still listed in this sector, each is mostly its own specific case.

OCA simply cannot get out of its own way with all the unsold care suites of which there are literally hundreds on hand and cannot grow earnings handicapped by having the majority of their units being in care which subsequent Govt's have consistently underfunded to the point where ROE with care is appallingly bad.

OCA have consistently over the years proven they can't grow earnings and it's highly likely that will continue when they report next month.  Until they can grow earnings, I see fair value in the 60s, (8.5 cents eps x no growth PE of 8  To me, it all comes down to whether the new CEO can pull out the full $15m per annum in the cost of doing business over FY26 and FY27.  If so, we could see a modest uptick in earnings and a commensurate increase in the share price.  Only time will tell. 

I lost patience waiting for eps growth years ago and sold two thirds at $1.40 and the rest at slightly above $1.  Not regrets about those decisions.  I made two subsequent forays trading some and met with moderate success each time, not enough success to warrant much further attention or investment of time.

If you expect sideways nominal, negative real, the DMF would cover refurb and still generate some cash flows for investors. So development margin + DMF + float being generated. Returns are good in this scenario.

Its been sideways nominal since August 2022 and there's a vast amount of housing stock overhanging the market both listed for sale and unlisted, (vendors waiting for their opportunity in a crowded market).  Returns are not good, (nothing like what they have been in the past), in a protracted sideways nominal market. Sticking with my example earlier today.  If inflation is 2.5% per annum for a decade, that compounds to exactly a 28% reduction in the real sale price of that unit 10 years later.  This eats all of the DMF and leaves absolutely nothing for all the refurbishment and refit costs so RV's are losing money on resales, (which is where the lion's share of the profits have always come from in this sector)  Julian Cook once told me, we make nothing from a new village, sure we bank development profit but all this goes into the development costs of the common area facilities as well as roads, footpath's etc, the real money is in the resale profits.  RV investment has always been predicated upon the theory that housing goes up over time in real terms and if it doesn't the sector performance wilts as the most substantive reason for its very existence, (from a shareholder's point of view) does not apply when prices consistently decline in real terms.

Sure - real estate prices are still high in NZ compared to incomes (though the ratio did drop over the recent years),

The last time I looked at this which wasn't that long ago, we are still about 20% above the long run average affordability in terms of average house prices to income ratio which underpins my thesis that there's a lot of room to go with a gradual reduction in real inflation adjusted terms with house prices. (Just as well we know that the house price to income ratio will never decline below the 10 year average eh :-)  That said, more worryingly, the price relativity between RV ILU units and house prices has moved from an average of about 70% a decade ago to now be close to 100% in many major metropolitan areas.  This makes it harder for people to downsize. 

Further underpinning my underperform thesis for this sector is the vast plethora of new supply from unlisted companies chasing the rainbow of Gold that RYM so richly mined years ago.  It's all about supply and demand and there's such a LOT of supply of both RV units and houses. I don't see things improving materially for any company in this sector in the foreseeable future, perhaps for as long as the rest of this decade. 

[KW]

Dont forget the new rules that anyone can now build a granny flat in their backyard. There will be reduced need for old people to move into a RV if they can have their own place at the back of one of their kids' place.  It will probably be cheaper for the oldies to sell their house, build a granny flat, and have $500k left over to spend on their family.  Plus the kids get left with an asset.

[Shareguy]

Dont forget the new rules that anyone can now build a granny flat in their backyard. There will be reduced need for old people to move into a RV if they can have their own place at the back of one of their kids' place.  It will probably be cheaper for the oldies to sell their house, build a granny flat, and have $500k left over to spend on their family.  Plus the kids get left with an asset.

Yes very good point KW

[Greekwatchdog]

Aged Care Sector Montgomerie-Ibbotson Aged Care Pricing Index EX For Bar

The aged care sector is doing better than it seems. Apart from select price cuts by Ryman Healthcare (RYM), unit pricing is stable, sales are stable, and New Zealand house prices are stable. We are all waiting for the recovery—with a capital R—in the New Zealand housing market. That may come if mortgage rates fall substantially more than expected, but until then, 'what you see is what you get'. Stable sales and stable pricing are likely to persist for some time. Given sharply reduced deliveries, that should be enough for RYM and Oceania Healthcare (OCA) to slowly clear their inventories and give them breathing space to focus on efficiencies and cost out—long overdue for both. OUTPERFORM-rated OCA remains our top pick in the sector, given its care suite focus—where demand appears to be the most resilient—and its ability to pay down a material portion of its net debt via an inventory sell down. Ryman Healthcare and Summerset (SUM) are both NEUTRAL-rated.

RYM cutting prices, sector sales holding up


Our analysis of advertised unit prices shows RYM has cut prices across specific new and resale villages in early 2025 as it focuses on realising cash from its inventory. While RYM's sales suffered in 2H25 as it implemented DMF and weekly fee pricing changes, we are confident this slowdown is isolated to RYM and likely transitory, with underlying sector demand holding up. Both SUM and OCA have given recent sales updates highlighting stable momentum, and our channel checks with large private operators indicate similar trends.

NZ housing market—sales improving, days to sell remain elevated


The combination of subdued sales activity and extended days to sell has impacted the New Zealand housing market and aged care settlements in recent years, but we see emerging signs of a return to normal. 2H25 (March period end) was the fourth consecutive period where NZ house sales grew sequentially. Sales for 2H25 were ~39k, down from the 2H21 ~53k peak, but in line with the average for the five years prior to that. Days to sell remain ~+25% above pre-COVID but have not moved higher—a reduction here is likely the catalyst needed for the aged care operators to realise cash from built-up unit inventory.

Unit price buffer remains at a 'normal' level


Our unit price buffers (representing the cumulative unit price inflation of aged care providers in excess of the broader NZ residential market since pre-COVID) for RYM and SUM are both in neutral territory, where they have been for two and a half years. While there remains a risk of a double dip in NZ house prices, we expect falling interest rates will be supportive to modestly increasing house prices over the medium term, broadly in line with household income growth.
With the exception of RYM's recent selective unit price cuts, unit prices have been flat. Over the last year, average ILU prices have fallen -1% and -5% for SUM and RYM respectively.

[Basil]

https://www.interest.co.nz/property/133138/total-number-homes-barfoot-thompson-has-available-sale-17-year-high

[Shareguy]

https://www.interest.co.nz/property/133138/total-number-homes-barfoot-thompson-has-available-sale-17-year-high

Yes there is a lot of properties on the market in Auckland. Properties are selling if vendors are realistic and prepared to meet the market. However with winter coming up will be interesting to see how this goes. On the plus side I see at least 50 bp to come on the OCR. Mixed reports on emigration and immigration which are big drivers of the property market. In some areas houses are selling well under the old CV.  Will be interesting to see what happens. I'm currently looking at buying myself. Very interesting.

This lady can go into a village after a failed deal. Real shame and very common with development type properties.  Sometimes the best deal is not the best deal....

https://www.oneroof.co.nz/news/sour-taste-elderly-woman-sells-home-for-1-01m-after-losing-1-65m-in-failed-deal-47504

[Basil]

Not sure that's the whole story as normally at auction you have to pay a 10% deposit after the fall of the hammer so presumably she kept 10% of the original auction proceeds, (less costs).  To me, as I see it, the above sales data for April is the first hard data of the effect on the local market from all the international trade tensions.   I think international matters have sucked the wind out of the sails of any confidence remaining in the economy and the RBNZ desperately needs to cut 50 bps on 28 May otherwise its going to be yet another cold winter of discontent in more ways than one.

[Shareguy]

Not sure that's the whole story as normally at auction you have to pay a 10% deposit after the fall of the hammer so presumably she kept 10% of the original auction proceeds, (less costs).

Indeed Basil.

We sold an old ex state house rental property in Otara at the same time for a ridiculous amount. Developers were paying crazy price's. It was common for developers to want 6 to 12 months settlement and 5 percent deposit or even less. This was so they could get the scheme plan done and approved by council. We made it very clear to the agent what we expected. Deposit had to be paid immediately when it was accepted.  Some agents and venders accepted several weeks. Had 4 offers and accepted one for slightly less than the top price with 10 percent deposit and 30 day settlement. I suspect this lady did not have good advice because it was known that a lot of these developers were shonky at the time.