ARV - Arvida Group

[Basil]

A few additional thoughts.  Lot of care suites in the pipeline....I think these will be VERY slow sellers.
Makes no sense whatsoever to me, (from a capital management and efficiency perspective when the cost of capital and interest rates are this high) that they bought a whopping 55 hectare site in Warkworth with planning and resource consenting progressing and then they will sell the surplus land in due course.
This is a massive site and there will be a lot of surplus land.    What's it going to be worth when they try and resell it?  Its clear to me we are already in a recession and the Reserve Bank wants to make it a deep and very protracted one.  In this sort of environment development land prices can suffer really big falls.

Questions that present.
Why are they not using their capital more efficiently and stopping land purchases at elevated prices especially when the site is vastly bigger than they need ?
Why are they not buying their own shares back at half price getting a 100% instant return on capital ?


 

[Untamed]

I think you're wrong. Care suites will be the new "go to" for those who are considering a move to an RV in their 80s and older. If ARV's care suites are similar to the OCA model, where they are "for life" with increasing levels of care/nursing support as needed, they will become a very attractive option. Continuity of care is already a huge "carrot" especially for couples. People don't want to have to move out of their "home" if they require a higher level of care, nor do they want their spouse moving. They will pay for the peace of mind that Care Suites provide. If I were in that position it would be a no-brainer.

A few additional thoughts.  Lot of care suites in the pipeline....I think these will be VERY slow sellers.
Makes no sense whatsoever to me, (from a capital management and efficiency perspective when the cost of capital and interest rates are this high) that they bought a whopping 55 hectare site in Warkworth with planning a resource consenting progressing and then they will sell the surplus land.
This is a massive site and there will be a lot of surplus land.    What's it going to be worth when they try and resell it?  Its clear to me we are already in a recession and the Reserve Bank wants to make it a deep and protracted one.  In this sort of environment development land prices can suffer really big falls.

Questions that present.
Why are they not using their capital more efficiently and stopping land purchases at elevated prices especially when the site is vastly bigger than they need ?
Why are they not buying their own shares back at half price getting a 100% instant return on capital ?


 

[winner (n)]

Those Forbar targets

Are they really serious or just dreaming

Some might say its irresponsible for outfits like Forbar saying (by way of recommendation) you could double your money in 12 months ... when its highly unlikely it will happen

[winner (n)]

I'll do a Forbar

Target $1.00 by Easter

[Basil]

http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ARV/403208/384609.pdf
Care suite sales, we will see but the facts are they only sold 19 in the first half down from 39 in the PCP.
Reflecting on this a bit more and I see in the last presentation they also bought land at Lincoln in Caterbury, 11 hectares, in Nov 2022.  So two expensive land acquisitions this half, one for far more land than is what's needed tying up expensive debt for years when they already have a development pipeline of over 2100 units which is ~ 10 year pipeline at the current build rate !  WOW!  Where's the sense in that when they could be buying back their own shares at half price ? 

It seems to me they seem to be in some sort of state of denial that anything they are doing inefficiently is affecting the share price.  You can see that in the latest investor news when they blame the Ryman capital raise for the depressed share price but what they don't say is that no other company in this sector is trading at half the asset backing so there is no acknowledgement of their own part in this.
Heck, even OCA is trading at a lower discount to NTA than ARV so the market is obviously saying they're not executing efficiently or with significant development margin or that's its unloved for some other reason or combination of reasons. 

Winner - Forbar were the lead on the original float of ARV so you have to consider their recommendation in that context and of course they never stuff their discretionary fully managed client portfolios with shares they couldn't place elsewhere do they....  What surprises me the most is the other three analysts seem to be following along like obedient little puppy dogs with their price targets and the average price target 12 months hence is $1.78 !
https://www.marketscreener.com/quote/stock/ARVIDA-GROUP-LIMITED-20708484/consensus/
If I thought in a deep and protracted recession, there was any realistic chance of it getting anywhere near that within 12 months I'd be backing the truck and trailer up...  I'm not.

They're going to face a significant increase in interest costs in FY24 due to higher interest rates and holding too much development land, a likely material reduction in development margin, likely slow sales on care suites, likely much higher costs for running villages and providing care for residents...all with the economy in deep recession.  On the balance of probabilities, I foresee a material reduction in earnings per share in FY24.  The shares are cheap, but they are cheap for some pretty good reasons and until we see the real estate market pick up I see very little chance of a meaningful share price recovery.
Happy to hold my bonds with a 7.2% yield to maturity.  Just calling it as best as I see it for the year ahead. 
Disc: No shares held, no short position, substantial holding in the ARV010 bonds bought at ~ 7% yield to maturity.
Others will see it differently and that's fine.

[winner (n)]

Basil said 'It seems to me they seem to be in some sort of state of denial that anything they are doing inefficiently is affecting the share price.'

I tend to agree with that sentiment. As I've said a few times before they seem to talk a lot but don't always deliver. And it shows in their financial performance.

Mark from Listers said that the March quarter was quite lucrative for investors - the NZX50 was even up 3.6% ....but poor old Arvida was down 18% ..... far worse than OCA at -4% and SUM down a fraction.

That's a pretty big under performance.

They blame RYM but I reckon this under performance is their own doing

Does it make ARV really really cheap - not compared to the others in the sector
And no matter how hard that Aaron from Forbar raves about them (gets a lot of media as well) no way is the share price going to $1.75 and even OUTPERFORM might be pushing it.

Anyway thats how I see it

[Mos]

At the current SP of $0.97 at 50% of NTA, surely ARV buying back shares will create more shareholder value than new developments and paying dividends that are subject to tax. Why can't the Board see this and act on it?

[BlackPeter]

Reflecting on this a bit more and I see in the last presentation they also bought land at Lincoln in Caterbury, 11 hectares, in Nov 2022.  So two expensive land acquisitions this half, one for far more land than is what's needed tying up expensive debt for years when they already have a development pipeline of over 2100 units which is ~ 10 year pipeline at the current build rate !  WOW!  Where's the sense in that when they could be buying back their own shares at half price ?

Maybe they are a bit more farsighted than just assuming that every trend knows only one direction (currently downwards). Being for some time in this business they might know that real estate is cyclical and that prices are unlikely to drop much further when the demand is high.

Lincoln is one of the centre pieces of the fastest growing district in New Zealand (Selwyn District) - good public transport, a university, good medical services, a mayor wearing pink sneakers - and yes, NZ's second largest city is just a short bus trip away.

I think their acquisition makes a lot of sense, and just because Auckland house prices are crumbling does not mean that they do the same in more desirable parts of the country. Not everybody wants to live every couple of years through a five hundred year cyclone (and they will come more often ...).

Did you look at the house price trend in Canterbury before you made you comments? Looks like the markets are already speaking.

[winner (n)]

Typical of them not delivering what they say they will is the F22 result

At the time of the last capital raise late 2021 they indicated / guided that the current business was on track to achieve underlying profit of $67.0m - full year F22 result would be this plus what Arena contributed over 4 months.

Well that $67.0m ended up as $58.6m - a 13% miss

But never mind the contribution made the total bottom line more respectable and some thought the result was great but the market has spoken with share price down to where it is today

[Basil]

Yeap, this dog got suckered into all the talk of the placement and acquisition of Arena villages being eps accretive.   Burned up "low five figures" on that before I woke up and smelled the coffee. Thing is it was eps accretive but the result itself, as you've pointed out above, doesn't speak well as to how well the rest of the business performed in FY22 does it!   Care suites being rolled out across the business now...hmmm...haven't we seen this movie before and know how that goes...

At the last call on 29 November the CEO and CFO were asked by one of the analysts (share price at the time was ~ $1.20 ~ 38% discount to NTA), at what point does it make more sense / would you consider buying your own shares back? It was clear from the long pause and puzzled type response this was something that had not been considered at that point.  Why wasn't it considered by the board at some point in the last half ?  Subsequent to that they've gone ahead and purchased a whopping 55 hectares just out of Warkworth of which they will only use a fraction and then once consented (2 years?), will try and sell the rest...all the while funding this using expensive floating rate debt and also already carrying a development book of 10 years at the current build rate.   What part of this makes common sense with the cost of funds where they presently are ?

Not sure the whole "too much expensive debt" issue really dawned on them until very late in the half...maybe a reaction to the RYM debt fiasco?  I prefer management being proactive rather than reactive...isn't that what they're paid the big bucks to do ?

BP - I am not going off on a tangent debating the merits of different regions.  I'm looking at this from a top down approach.  Massive 10 year development book being added too, using expensive floating rate debt when their shares are half NTA.  They then blame shift to RYM as to why their shares are in the dog box.    They go on to talk a lot about playing defensive now and using capital efficiently in their investor news having just blown a huge amount on two very expensive land acquisitions.  Their talk and their actions don't appear to line up...,

[winner (n)]

Buy back ......what ......borrow more to buy back your own shares when heavily indebted already?

[Basil]

Not suggesting that mate.  Simply saying buy back shares at half price instead of land that won't be developed for many years, at full price.   Its all about eps accretive acquisitions don't you know 

[snapiti]

thanks everyone for some good reading........I like to keep it simple.....leveraged developers are going to get crushed in the current macro environment. The heads winds could not be worse at the moment and foreseeable future 

[Shareguy]

Have been away and have just been having a look at the update.  Pleasing to see margin up and demand strong. Seems prudent to cut built rate and conserve cash until we see house prices stabilising and interest rates coming down.

Forbar have a vested interest in being positive given they own over 12 percent of the company. They are also sitting on a substantial unrealised loss at current prices.

I think all the retirement sector including Arvida should look at a pause on dividends and a cut back on build rates. 

The Arena living Acquisition has not lived up to expectations, as fas as EPS. I suspect that the leaky buildings they agreed to buy have needed a lot more spent on remediation than thought. Arv highlighted at the time the big discount to valuation that was achieved....but was it?

I don't see them as the same quality as Rym or Sum, however at current pricing can not see why the huge discount to NTA is warranted. Can't see anything in their update that changes my view that it is very good buying for a long term hold.

Time will tell.

[Arbroath]

Well I'm enjoying the negativity atm so I can accumulate below $1.00. Didn't hear a lot of criticism of the sector or Arvida when they were $1.80-$2.00 territory.

Accept the point about land banking but they still have relatively low gearing and by the time they develop this they can sell surplus land in 3-4 years into a hopefully better part of the cycle.