ARV - Arvida Group

[Greekwatchdog]

Announcement

Arvida Group Limited (NZX:ARV) advises that an extension to its current bank debt facility was executed yesterday. The bank facility limit has been increased by $100 million to $675 million and ASB has been introduced to the syndicated facility alongside ANZ and BNZ. The additional $100 million has a 3.5 year tenure.

In addition, an amendment to the interest coverage ratio (ICR) has been approved by the syndicate members. The ICR is amended to 1.75x for the next four financial reporting periods to and including 30 September 2024 and is calculated based on an adjusted EBITDA with all interest cost included. All development gains are now included in the calculation. All other material terms and conditions remain unchanged.

As at 31 March 2023, $500 million of bank facilities were drawn.

Total facilities (inclusive of $125 million of retail bonds) are $800 million. Interest rate hedging of $220 million is in place at a weighted average interest rate of 2.8% (excluding margin and line fees).

[Shareguy]

Announcement

Arvida Group Limited (NZX:ARV) advises that an extension to its current bank debt facility was executed yesterday. The bank facility limit has been increased by $100 million to $675 million and ASB has been introduced to the syndicated facility alongside ANZ and BNZ. The additional $100 million has a 3.5 year tenure.

In addition, an amendment to the interest coverage ratio (ICR) has been approved by the syndicate members. The ICR is amended to 1.75x for the next four financial reporting periods to and including 30 September 2024 and is calculated based on an adjusted EBITDA with all interest cost included. All development gains are now included in the calculation. All other material terms and conditions remain unchanged.

As at 31 March 2023, $500 million of bank facilities were drawn.

Total facilities (inclusive of $125 million of retail bonds) are $800 million. Interest rate hedging of $220 million is in place at a weighted average interest rate of 2.8% (excluding margin and line fees).

Funny. Just talking about that impediment.  Now its gone.

[Basil]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ARV/409324/391872.pdf
Nice, headroom of $175m looks quite comfortable to me.

[Shareguy]

I doubled my holding today. It's way undervalued in my opinion. Based on last year we should have an update next week.

[Basil]

Best value of the sector by miles in my opinion.  Good luck with it mate.
I'm happy to wait until its confirmed headwinds have abated and we have a new uptrend.

[Shareguy]

Best value of the sector by miles in my opinion.  Good luck with it mate.
I'm happy to wait until its confirmed headwinds have abated and we have a new uptrend.

Yes buying in a downtrend not good. After debt covenants sorted I thought why wait. Still only a small holding for me. Also thinking update should be positive. April normally a great month for shares.

[Breezy]

Yes buying in a downtrend not good. After debt covenants sorted I thought why wait. Still only a small holding for me. Also thinking update should be positive. April normally a great month for shares.

Doesn't really matter, cheap is cheap.

[Basil]

I agree it screams "cheep" louder than a budgie
Closing at 93 cents for the quarter a full $1.00 below last stated NTA of $1.93.
From my perspective as a significant bondholder, (bought at ~ 7% gross yield to maturity), I am happy with how they are managing their debt and plenty of talk in recent presentations about their ability to adapt and slow their development pipeline gives me a lot of comfort they are managing their business well.

FY23 development pipeline was heavily skewed to the second half with a target of 270 units, only 51 of which were delivered in the first half so if they built ~ 220 in 2H the bank debt rising from $430m at 30 Sept to $500m confirmed yesterday looks satisfactory to me.

I would expect their sales will have been affected by the much slower real estate market this summer just like the rest of the sector. 
 

[Shareguy]

Why I added to my position.

The stock hit a low of $.91 on Friday and looking at the buyers I thought may go down into the eighties. Once the announcement re funding was announced buyers returned and the share price ended at $.93

FB have a target price of $1.80 AND SAY

We reiterate our OUTPERFORM rating and maintain our view that ARV provides one of the most attractive risk rewards in the New Zealand market. However bear in mind they own a good chunk of the company based on last disclosure (12.3 percent as at 1/3/23) so got to be careful with what they say. With that in mind they did add 8 m shares to last disclosure.

Also take comfort that some of the directors thought buying at $1.16 in December was good. Also ACC buying 4m shares in Feb 23 at $1.16

The fundamentals speak for them selves. A PE of 7.9 based on EPS forecast FY23 of 11.7 cps at Fridays close of $.93. Last stated NTA of $1.93

Talking of NTA.

I hear you all saying devaluation on the cards. I point out that MetLife recent results point to a positive increase in assets and the same valuer generally does many of the listed retirement businesses.

From MetLife's result

The net profit after tax includes a fair value gain on investment property of $46.7 million (compared to a fair value gain of $129.6 million at 31 December 2021). This gain was largely driven by strong resale and new development pricing during the period, which supported growth in the valuation of Metlifecare's existing portfolio.

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/MET/407101/389050.pdf

As far as demand is concerned every report I have seen shows increased demand with shortages unless more units are built than forecast.

Now I thought it was good value at $1.00 and now we are at $.93 and we all no it's not good to buy in a down trend.

I'm picking that unless there are some cockroaches lurking this weeks update should be positive and the downside is very limited.

Having such a good rating and being best in class also adds to my opinion that I'm on the right track.

https://www.canstarblue.co.nz/home-garden/retirement-villages/

Hopefully we will soon see.

Disc, I could be wrong so do your own research.

[Basil]

Must admit I can work out in my head why all the other companies in this sector are priced where they are but this one has me quite perplexed.  Actually, I can't work it out.  Nothing much wrong with their business model that I can see, pretty modest care ratio which is really good in the current "extreme care cost" environment and most villages are full feature with all the bells and whistles which is what's really in demand.
Further, at their most recent call on 29 November 2022 they said 2H had started well with strong sales in October and November, although there are delay's with settlements for obvious reasons with the slowing real estate market.

The only weakness I can see in their model is the relatively weak development margin compared to the rest of the sector, which did improve to 20% in the first half which was a notable improvement with very high construction costs but this is still at quite a divergence to the sector and has been for some time.

Possible reasons I have tried to think of to explain the apparent extreme bargain share price level, noting the market is always looking forward.
1. Further significant construction costs increases in the year(s) ahead that are unable to be passed onto buyers in a weaker real estate market leading to a considerable reduction in development margins for the foreseeable future.
2. A significant reduction in the build target for FY24 and FY25 because of a very weak real estate market leading to much lower development numbers as well as a much lower development margin per unit.
3. Significant further weakness and slowness in the real estate market with the 40 year low in the level of transactions in February 2023 continuing through FY24 and possibly into FY25 leading to much lower new sales and resales going forward potentially quite significantly impacting earnings.
4. Continuing escalation in the cost of providing care far above the rate of inflation. (I think this is highly likely).
5. Cost escalation elsewhere in the business above the rate of inflation that is unable to be recovered due to their fixed fees for life business model leading to increasing operational losses at a village level, (excluding gains on new sales and resales).  (Highly likely).

Debt doesn't look like a concern for any reasonable person, anymore.

The share price graph looks incredibly weak and the downtrend is deeply embedded so no follower of technical analysis will touch this until there are at least the first makings of a bottoming out.  I would have thought all of this is already fully baked into the share price??? hence why I am perplexed... but these are strange times so in the short run who really knows?    (Noting that Forbar are by no means out on a limb with their share price target of $1.80...the average of 4 analysts is $1.78).  Go figure...
For what its worth, (which isn't much because I have got this one wrong twice already which is why I won't buy a third time until it's proven from a TA perspective to be in a new uptrend), I think all the analysts are far too optimistic thinking this is going back to ~ $1.80 within 12 months but surely we are somewhere near the bottom and as soon as the market sees house prices stabilize, whenever that is, surely there's a decent sized feed to be had here on a 3-5 year view?
At this stage my fear of getting bitten a third time outweighs my desire for a feed.  I'm happy to wait for a new uptrend to start.  Acknowledge others are braver than me with this one and good luck to them I say.

[Greekwatchdog]

Interesting debate.

I thought prior to RYM CR announcement that OCA, ARV and SUM were sort of finding there way back up. Post RYM CR its been back down.

I added more $0.92 on Friday prior to ARV debt announcement. Have been since they hit $1.05. That was the major concern for me, now they have that sorted I can only see this nudging upwards, but this market is difficult to work out. I do look forward to that Investor Update given they FY result was skewed to the 2nd half after a OK HY.

Both RYM and SUM posted solid sales numbers despite the apparent head winds. I don't expect that to be any different for ARV or OCA for that matter when they report FY.
 

[Shareguy]

Must admit I can work out in my head why all the other companies in this sector are priced where they are but this one has me quite perplexed.  Actually, I can't work it out.  Nothing much wrong with their business model that I can see, pretty modest care ratio which is really good in the current "extreme care cost" environment and most villages are full feature with all the bells and whistles which is what's really in demand.
Further, at their most recent call on 29 November 2022 they said 2H had started well with strong sales in October and November, although there are delay's with settlements for obvious reasons with the slowing real estate market.

The only weakness I can see in their model is the relatively weak development margin compared to the rest of the sector, which did improve to 20% in the first half which was a notable improvement with very high construction costs but this is still at quite a divergence to the sector and has been for some time.

Possible reasons I have tried to think of to explain the apparent extreme bargain share price level, noting the market is always looking forward.
1. Further significant construction costs increases in the year(s) ahead that are unable to be passed onto buyers in a weaker real estate market leading to a considerable reduction in development margins for the foreseeable future.
2. A significant reduction in the build target for FY24 and FY25 because of a very weak real estate market leading to much lower development numbers as well as a much lower development margin per unit.
3. Significant further weakness and slowness in the real estate market with the 40 year low in the level of transactions in February 2023 continuing through FY24 and possibly into FY25 leading to much lower new sales and resales going forward potentially quite significantly impacting earnings.
4. Continuing escalation in the cost of providing care far above the rate of inflation. (I think this is highly likely).
5. Cost escalation elsewhere in the business above the rate of inflation that is unable to be rec overed due to their fixed fees for life business model leading to increasing operational losses at a village level, (excluding gains on new sales and resales).  (Highly likely).

Debt doesn't look like a concern for any reasonable person, anymore.

The share price graph looks incredibly weak and the downtrend is deeply embedded so no follower of technical analysis will touch this until there are at least the first makings of a bottoming out.  I would have thought all of this is already fully baked into the share price??? hence why I am perplexed... but these are strange times so in the short run who really knows?    (Noting that Forbar are by no means out on a limb with their share price target of $1.80...the average of 4 analysts is $1.78).  Go figure...
For what its worth, (which isn't much because I have got this one wrong twice already which is why I won't buy a third time until it's proven from a TA perspective to be in a new uptrend), I think all the analysts are far too optimistic thinking this is going back to ~ $1.80 within 12 months but surely we are somewhere near the bottom and as soon as the market sees house prices stabilize, whenever that is, surely there's a decent sized feed to be had here?
At this stage my fear of getting bitten a third time outweighs my desire for a feed.  A feed is coming here but my sense is its still cooking in the kitchen and needs some more time for preparation.

Good points Basil. I agree with all of your points and agree that the risks are real and that the market is expecting a very bad result going forward. Is the lower development margin lower because of remediation costs being high? A number of the Arena villages were leaky. Negative cashflow not a good thing with expenses and cost of care hurting. I agree with you that surely this is all priced in. I'm not going to buy anymore until after the update.  If it's a good update well.........

[Basil]

My late Mum was at the Peninsula Club and the block of units she was in, (she had a lovely large 110 square meter unit with a sunroom had a very, very slight leak in it).  I think her block was scheduled for a complete rebuild once all the residents passed on / moved on.  Arena paid us out as a corporate buy-back 4 months after she vacated the unit so that suggests they are buying back every unit in that block as residents pass on or leave. The problem with buying villages with leaks is once you start scratching beneath the surface of the problem you can unearth a scale that's very easy to outstrip previous remediation cost estimates.
Who knows, maybe that's one of the reasons why the share price is where it is too?

Provided you take a medium to long term view its hard to see how you guys could not do well buying here.
Even if it took 5 years to get back to $1.80 and you collect 5.5% yield that's a decent annual return.
As soon as this shows some life from a technical perspective, I'm favorably inclined towards holding a modest equity stake in tandem with my decent sized bond investment.   I think ARV will post pretty reasonable sales numbers this coming week.  We'll see how OCA go when they report.

[Plata]

Am I correct in thinking that in the last half result, if you remove resale gains and development margin then operating cashflow was basically 0? I'm not an expert on this sector so could be wrong, but I don't like that all of their existing assets seem to make no money unless prices continue to rise.

[winner (n)]

ARV never really been liked by the market - ask it's greatest advocate in t_j_jackson. WILL THINGS CHANGE?

Market never really liked numerous capital raises to buy things, especially as they under water on all of them - PROBABLY NEVER CHANGE

EPS acquisitions that were not EPS accretive ..... hmmm NOT GOOD

Increase in Book Value per Share last 5 years about 10% pa. About the same as OCA and significantly below that of RYM and SUM. CAN THEY EVER OUTPERFORM RYM AND OCA - PROBABLY NOT

Takes a lot to change the pecking order - old timers say once a market pariah always a market pariah .... no wonder how cheap they appear to be

etc

etc

etc

ARV probably be a profitable investment over time ....but probably not as profitable as others