RYM-Ryman

[Basil]

I am surprised that no class action suits have been taken with respect to Ryman as they have basically admitted to a multitude of questionable accounting treatments over years.

As an accountant this is why I have disdain for RYM and wonder where the auditors were in all this?
If RYM were listed in Australia I think there would have been a very good chance of a class action lawsuit.

In the years to come in investment analysis courses at Universities around New Zealand, RYM will make an excellent case study for how the market changes over time.  Once a situation where RYM dominated the industry and enjoyed first mover advantage, (analogous in the gold mining industry to walking around and picking up huge gold chunks just lying on the ground), to 30 years later, the market is so saturated with supply, everyone in the industry is struggling to a greater or lesser degree and in effect, is analogous to being involved in hard rock mining with far more modest returns.

To me, their key competitive advantage over all the years has been fixed fees for life and low 20% DMF.  This was funded by very high asking prices for their units, (nothing is for nothing).  Now they have the same or very similar high unit prices, many sites with little or nothing going for them in terms of views, (their Lincoln Road Henderson site a good example with nothing going for it other than proximity to supermarkets), and very high fixed fees or indexed to inflation at moderately higher levels with much higher DMF's.  Hmmm, just throw away both your key competitive advantages...what could possibly go wrong...

As you suggest Mos, approx. a decade is a long time for those cheap fixed fees for life to wash through the system.  Operational cash burn is something to very closely watch in the years ahead.  I think it's telling that when RYM announced the completion of this capital raise they said words to the effect of, "this positions us to grow once the market starts to improve".  Clearly, their balance sheet debt level reset is only part of their problems fixed.  Growing eps after all that share issuance is going to be a massive challenge.

I remember very well the days when under Simon Challis excellent leadership, RYM promised and delivered 15% CAGR in underlying earnings year after year after year.  Now things are so bad they want to dispense completely with using this metric to measure anything.  WOW ! That says it all in my opinion.  It's never going back to what it once was, I am certain of that.

[BlackPeter]

As an accountant this is why I have disdain for RYM and wonder where the auditors were in all this?
If RYM were listed in Australia I think there would have been a very good chance of a class action lawsuit.

Probably material for a separate thread (Quality of financial audits) - but let's face it: financial audits (any audits) give rarely a reliable view of where a company is going. They normally parrot the impression the relevant CFO wants to create.

Remember CBL? South Canterbury Finance? Hanover Finance? Any of the other 47 (yes, fourty-seven) NZ Finance companies which always passed audits but suddenly and unexpectedly went down?

I guess Ryman just demonstrates that nobody learned from this experience. Too many auditors just parrotting what they are told (or not looking hard enough). But the old saying "he who pays the piper calls the tune" clearly captures it. Just wondering who is paying for all these amazing financial audits?

[Basil]

Too many auditors just parrotting what they are told (or not looking hard enough). But the old saying "he who pays the piper calls the tune" clearly captures it.

Yes, hard to argue against that.  Its pretty disappointing especially the loss of ~ $6 Billion with all those finance companies.  One of the issues is the competitive tendering process for audits and as a result junior and intermediate level staff do a huge amount of the donkey work so firms can remain competitive.  The fact is it takes several decades of experience to build up the necessary level of deep cynicism and mistrust to be a really effective auditor.  Still...audits are signed off by an audit partner who should have that experience. It's amazing there haven't been more lawsuits against audit firms.

[KW]

Village standard was still outstanding.His care was outstanding.
The atmosphere was friendly.Staff even offered me a cup of tea and a biscuit.
So their villages and care remain outstanding.

Dont confuse the product with the business.  There is a long list of companies that had outstanding products, but who still went bankrupt or were bought out for peanuts because they couldnt make the financials stack up.  Better or best doesnt always = stock market winner.

And its not a given that running a company for the benefit of its customers and employees means that there will be similar benefits accruing to shareholders.  In many instances, the great product only exists because shareholders are continually subsidising the users. 

[KW]

To me, their key competitive advantage over all the years has been fixed fees for life and low 20% DMF.  This was funded by very high asking prices for their units, (nothing is for nothing).  Now they have the same or very similar high unit prices, many sites with little or nothing going for them in terms of views, (their Lincoln Road Henderson site a good example with nothing going for it other than proximity to supermarkets), and very high fixed fees or indexed to inflation at moderately higher levels with much higher DMF's.  Hmmm, just throw away both your key competitive advantages...what could possibly go wrong...

Once upon a time those high prices bought you a spacious villa unit in a village style atmosphere, surrounded by lovely gardens, and offering privacy from neighbours.  Now it buys you a unit in a cramped village, no privacy, very little garden, with high density apartment blocks hanging over you.  The village feels more like a Govt institution. 

For this reason, I wouldnt put any credence in their quoted NTA.  There $900k villa is no longer worth that.  Booking statutory profits from constantly revaluing the villages upwards but without doing any devaluing of villages as property prices fall, has left them carrying a book value far above market value. 

They need to cut prices dramatically to catch up.  But until they are forced to buy back the units in a timely manner (say 6 months) they will drag out the non-sales for as long as possible, while ex-residents suffer.

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[lorraina]

Dont confuse the product with the business.  There is a long list of companies that had outstanding products, but who still went bankrupt or were bought out for peanuts because they couldnt make the financials stack up.  Better or best doesnt always = stock market winner.

And its not a given that running a company for the benefit of its customers and employees means that there will be similar benefits accruing to shareholders.  In many instances, the great product only exists because shareholders are continually subsidising the users.

I was bought up believing.
"Give people/customers what they want,and you will get what you want."
Perhaps better said ."being customer driven."
I must admit if I had to go into care I would insist it was with RYM.
 

[Ferg]

Probably material for a separate thread (Quality of financial audits) - but let's face it: financial audits (any audits) give rarely a reliable view of where a company is going. They normally parrot the impression the relevant CFO wants to create.

Remember CBL? South Canterbury Finance? Hanover Finance? Any of the other 47 (yes, fourty-seven) NZ Finance companies which always passed audits but suddenly and unexpectedly went down?

I guess Ryman just demonstrates that nobody learned from this experience. Too many auditors just parrotting what they are told (or not looking hard enough). But the old saying "he who pays the piper calls the tune" clearly captures it. Just wondering who is paying for all these amazing financial audits?

External auditors never (not rarely) give a view of where a company is going in the audit report within the annual financial statements, other than statements the company meets (or does not meet) the tests for being a going concern.  Which is very different from an investors view of "is this company going to make money in the future?"

An external auditor's role is to sign off the accounts as showing a true and fair view as at the balance date.  They are not providing some sort of warranty or guarantee as to a business not going bust.  Investors cannot place any reliance on a clean external auditors report as providing any sort of surety the business is financially sound given there are numerous events that could happen after the audit report is signed, or if there was wholesale fraud within the entity which in some cases can be very difficult to detect if there is collusion between staff members. 

The going concern tests can examine events after balance date but this is restricted to the period prior to signing the report.  If investors want the going concern test to provide some sort of open ended guarantee, then it would only be possible with a raft of caveats which renders it useless.  In any case, no auditors would want to put their name to anything of the sort even with a raft of caveats.

External auditors usually work in conjunction with government agencies [and companies]. They are tasked with providing objective and public opinions about the organization's financial statements and whether they fairly and accurately represent the organization's financial position.

Source: https://www.investopedia.com/terms/a/auditor.asp

[Basil]

At just $2.61 the market is telling RYM directors and management they're failures.  I am sure the underwriters are "absolutely thrilled" being underwater as much as they are.  Cry me a river, I really don't care.  The underwriting gig is normally money for jam so if they get left holding the baby with shitty nappies this time, too bad.

This talk of additional asset write-downs that Matt Peek was alluding too has piqued my interest in terms of a further chapter to this long running fiasco.  How much is anticipated, anyone want to opine on that ?

What's the real NTA going to be after these further write-downs ?  Maybe $4.50 ?  $2.00 maybe on the cards for this poor performer considering its well-known huge operational cash burn problem and slow-moving stock ?  Just as well incoming CEO's don't "kitchen sink" all the problems to make themselves look better in future years...Opps, hang on a minute, that's exactly what most of them do.  The annual result in late May could be a real shocker.

[Ferg]

This talk of additional asset write-downs that Matt Peek was alluding too has piqued my interest in terms of a further chapter to this long running fiasco.  How much is anticipated, anyone want to opine on that ?

I could have a stab at it but I'm an information vacuum concerning Rymans.  Historically weren't Ryman units more expensive than other operators but only had a 20% DMF which was their point of difference?  If so, do we know how much more expensive they used to be?

[Basil]

Not sure its to do with that, but that in itself is an issue.  Huge problems with subsidence at the huge Remuera Edmund Hillary village.  Trying to stabilize that site, which was built on a former rubbish tip, but will that solve the problem or merely kick the can down the road.   Could be write-downs there and at a number of other villages with problems or land held for resale where the prices paid and / or carrying value is no longer realistic in terms of its likely resale value. 

Was some talk of ~ $300m write-down a while back, probably just idle speculation but it will be interesting to see how this pans out.  The way I see it, there's always more than one cockroach in the kitchen and with the likes of RYM and FBU for that matter, which is another notable example, they just keep on coming out of the woodwork.  No matter how many cockroaches you stomp on, they just keep on coming.

[BlackPeter]

Not sure its to do with that, but that in itself is an issue.  Huge problems with subsidence at the huge Remuera Edmund Hillary village.  Trying to stabilize that site, which was built on a former rubbish tip, but will that solve the problem or merely kick the can down the road.   Could be write-downs there and at a number of other villages with problems or land held for resale where the prices paid and / or carrying value is no longer realistic in terms of its likely resale value. 

Was some talk of ~ $300m write-down a while back, probably just idle speculation but it will be interesting to see how this pans out.  The way I see it, there's always more than one cockroach in the kitchen and with the likes of RYM and FBU for that matter, which is another notable example, they just keep on coming out of the woodwork.  No matter how many cockroaches you stomp on, they just keep on coming.

Hard to believe that we talking about the star and once darling of NZ's investor community. Ryman Healthcare - this amazing company founded by John Ryder and Kevin Hickman. Didn't they put both into the NZ Business Hall of Fame? This must mean something - Is public acknowledgement and praise in the NZ business world really always the start of the downturn?

So many amazing businesses NZ grew over the past decades. Ryman one of them. And now cockroaches seem to come out of so many cavities.

[Ferg]

Potential Ryman write down

Comments from FY25 half year presentation:
p7: "New RV unit pricing structure implemented on 1 October 2024" {which is after the HY reporting period of 30 Sep}
p14: "Choice of 30% or 25% DMF with the latter having a higher entry price"
p14: "Of contracts signed post 1 October 2024 for new residents, approximately three quarters are at a 30% DMF and at list price"
p14: on new pricing...."It is expected to take 15 years for the majority of the benefit to be realised."
p29: Year 5+ NZ annual value growth of +3.4% (Oz +2.6%) and the discount rate for NZ was ~13.6%.
p57: Auckland ILU resale affordability of (1.06/1.18=) 90% {this measures ILU price relativity versus the surrounding area}
p57: rest of New Zealand ILU affordability of (0.70/0.72=) 97%
p57: Oz ILU affordability of (0.96/1.6=) 60%
p57: the affordability percentages for serviced units are much lower.

So it sounds like lower DMF gets a higher price and vice versa and it will take some years for the benefit of the new DMF scheme to flow through the books.

Higher DMF% means a lower unit price which IMV means a write down of current stock.  Whether this happens in one hit or as old contracts roll off remains to be seen.

Future growth rates at +3.4% for 5+ years seem optimistic.  OCA in AR24 had +2.5% to +3.5% for 5 years plus. 

I believe Ryman ILU prices (as measured by affordability percentages) are higher than other RV operators.  I don't know the SUM %'s but OCA had 70-72% for apartments and villas in the last HY presentation (p40).

I'm not sure where the RYM discount rate of ~13.6% sits relative to SUM for property valuation purposes but OCA's median discount rate for FY24 was 14.9% (source: p64 OCA AR2024) and the last half year presentation had a range of 14-20% (p36).

Around 75% of non-current assets are in NZ (source:p93 FY24 AR).  Let's assume 75% of $10.8b of 'investment properties' (source: p27 FY25 half year presentation) is in NZ = $8.1b.

Each 1% of NZ investment property write-downs is $81m.  The question for me is what overall % write down is required?  And how much have they booked already?  To get to your $300m requires a write-down of around 3.7% on the NZ assets.

The multi-million dollar question.....is 3.7% enough?

[Basil]

p14: on new pricing...."It is expected to take 15 years for the majority of the benefit to be realised."

Many thanks Ferg.  Gosh that's breathtaking.

p57: rest of New Zealand ILU affordability of (0.70/0.72=) 97%

So for the majority of Kiwi's by the time they pay real estate agents and lawyers fees there is a net cost to moving into an ILU unit.  This is a far cry from the early days when an ILU was typically 70% and incoming residents freed up capital for bucket list activities.

p57: Oz ILU affordability of (0.96/1.6=) 60%

I understand it's about the same for SUM.  This confers a substantial advantage in the years ahead on SUM and RYM relative to OCA who don't operate there.  This is the one and only encouraging thing in the entire report.
Thanks again mate for your analysis, much appreciated.  I see many, many years of ongoing underperformance going ahead, relative to SUM.  On the other hand, maybe if it gets down to $2.00, all that's priced in ?

[Ferg]

Thanks.  It would be interesting to compare some variables between all RV operators, namely ILU affordability, assumed 5+ year growth rates and the discount rates used to value investment properties.  This should show who is the most conservative and who is the most aggressive in their portfolio valuation.  This leads to believability in NTA and the future impact on inventory turnover, achievable prices and potential resale gains.

[Basil]

I had a good sit down with Earl Gasparich several years ago when he was leading OCA.  His comments on this were that the various retirement companies use the same valuers who he thought were very conservative.

If you capitalize the negative value of head office costs and the operational cash burn of villages, the effect on NTA is massive. A secondary issue is the value of old unsold stock.  If for example a care suite has been on the market for more than 12 months, it should be discounted by X and maybe 2X if it's been unsold for 24 months.  X according to the valuers is about 25% from memory, with OCA.  I'm not sure how you capitalize the negative value of grossly incompetent management or boards of directors other than to stay away unless the shares are dirt cheap.

OCA last time I looked, is trading at a 54% discount to NTA and as mentioned earlier in this thread, I see no reason based on recent years evidence of management and directors' inept behaviors as to why the discount should be any less for RYM.  Apply that to say, a new post capital raises and post write-downs NTA of $4.50 and fair value is only about $2.07.  Allowing a margin of error, that's why I'm not interested in RYM at anything more than $2 and even then, only as a trade as I think the long term returns for any company other than best of breed SUM, will underperform the general market due to the ongoing saturation of unit supply, massive head office costs and cash burn and in RYM's case a 15 year future legacy of insufficient DMF earnings.

P.S. Posted at 5.14 p.m. Closed down another 10 cents to $2.51.  Underwriters and all those that took part in the capital raise at $3.05, down 54 cents, (nearly 18%) in a very short space of time.