By Tim O'Loan
Tim O'Loan is Amova Research Analyst, equities.
Although the sector’s fundamentals, most notably our aging population, have remained supportive of long-term growth, it's been a contrasting time for the top two, reflecting different strategies, leadership and positioning in relation to rapidly changing market conditions.
Rewind a few years and as the sun continued to shine on the housing market and interest rates sat at record lows, it certainly seemed like Ryman was the one making hay. Their model at the time was to aggressively use debt funding for growth – too aggressively it turned out, as interest rates rose and the heat went out of the housing market. Suddenly over-leveraged to the tune of some $3B of debt, and in breach of US Private Placement (USPP) covenants, it was forced into the first of what would be two capital raises, a change of leadership and a strategic reset to reposition for a very different operating environment.
By contrast, although seen at the time as very much the smaller of the two players, Summerset was actually much better-placed when the economic downturn hit. Not only was it not as highly leveraged, nor had it entered the USPP market, its pricing model was sharper, with 25% Deferred Management Fees (versus 20% at the time for Ryman) and a fee structure linked to CPI (rather than fixed). This meant that as Ryman was squeezed by the market conditions, Summerset could roll with them and breathe more easily – and in doing so avoid the reputational hits faced by its competitor.
While Ryman still to this day retains the bigger footprint in terms of village units, by 2025 the market had already begun to price Summerset as the sector leader – and with a development pipeline that will double its Net Tangible Assets (NTA), is well-placed to deliver consistent future growth.
Amova’s Research Analyst, Equities, Tim O'Loan.
This year has already seen a number of changes to the Retirement Villages Act brought in, but it is the next set of regulatory changes around aged care reform that will arguably have the more profound impact on the sector.
The cost of public hospital specialist aged care can be up to $1500 per day – a financial and indeed capacity burden that will become increasingly unmanageable as our aging population ages yet further. Addressing the funding gap to enable the economics to stack up for retirement village operators to offer a continuum of care makes sense for all parties. With changes expected to be brought in as early as next year, Ryman should be well-placed given its greater existing aged-care-focused inventory – but with a strong development pipeline, Summerset is also handily placed for the longer-term.
With regulatory reform underway in Australia too, expansion across the Ditch offers a further tailwind for both. Australia already accounts for about 20 per cent of Ryman’s earnings. and with only around a third of Australian operators offering a full continuum of care, Ryman’s integrated model and established brand presence gives them a huge advantage to take advantage of aged care reform here too.
Summerset’s expansion into Australia has been a bit more slow-going. We know they’ve invested significantly over there to benefit from the same demographic drivers as we have in New Zealand, and so their proposed Investor Day scheduled for May will be highly instructive as to what their Australian product and strategy looks like.
With exceptional leadership in place and solid underlying fundamentals for the sector, the future prospects for both Summerset and Ryman look positive, even if – given the uncertain economic environment and somewhat listless housing market – this turns out to be something of a sideways year. These conditions may explain why the market is still pricing in risk and uncertainty, but we have confidence that both operators, while still at different points in their own journeys, are now well-positioned for ongoing successful and profitable growth.
