Jan 2022: Ryman Healthcare – Why?

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Ryman Healthcare – Why?

Jan 2022 ($12.50)

 

Those wanting to read a piece that explains a new idea to them in full technicolour maybe disappointed by what comes next. Looking at Ryman Healthcare there are many obvious points (such as its great history of growth and highly respected brand and reputation). There are also questions that arise. We looked at the company briefly a few years back. However, it was only in recent months that we spent more time on it, importantly on its business model and its accounts. Having done so we feel we have now answered the questions that arose as we did so. As a result, we are excited about what we have found/concluded. Explaining those questions and answers to someone who has not looked at the company closely however is hard. Attached to this note you will find an excel spreadsheet. In it we have laid out the story of Ryman as we see it in tables and charts. What follows below is a series of questions to try and get readers thinking on the right lines about it. After that, some observations and a short conclusion. We know that a US$4bn company based in New Zealand will not get on many of our readers radars. That is a shame as we think the compounding abilities of this business in the next twenty years are likely as impressive as they were in the last twenty.

Asking the right questions

Ryman Healthcare has a wonderful brand having an almost perfect reputation for providing the very best retirement villages in New Zealand and Australia. Indeed, anyone looking at the wider global offering of retirement homes may quickly conclude that they are the best in the world in this area. Furthermore, global populations are aging and the need for elderly care is paramount. It is rarely provided with the love and commitment that Ryman brings. So, why are such a company’s shares available to purchase at 12x earnings?

Fig.1: Ryman Healthcare price/book value Source: Bloomberg

Ryman has grown its book value per share at 18% pa over the last 25 years. Additionally paying a c.2-3% dividend yield on top of that growth each year. It has done so by making past ROE’s that are c.20%. If such a level of return is likely to be replicated in the future why do the shares today trade on 2x book?

Fig.2: Ryman Healthcare book value per share

 Source: Bloomberg

Answers and getting lost to find them

Whilst we think the answers to the above questions are partly in the spreadsheet we have enclosed and what follows, we think there is a danger in readers looking for them too quickly. The reason being that just more questions will arise (we have done this advisory job for a long time now!). Crucially we think an understanding of a company like Ryman rests upon an investor already having great foundations in their own approach to a number of factors. These being:

  • What is the right accounting measure of return to focus on when trying to understand a company’s equity compounding potential? Our answer is unequivocally Return on Equity (ROE)
  • How mid-range ROE companies (15-25%) can compound capital powerfully if they have sufficient redeployment opportunities to so do
  • Having an eye always toward deferred gratification and how today’s investment return can be ignored if you think tomorrow’s is compelling enough
  • Being genuinely open minded as to where your future investing compound returns may come from in terms of sectors, business models and geography.

It is quite likely that on reading the above list many professional investors whom we advise will be offended. “Of course, I understand those factors” being their response. All we will say in riposte is that we thought we did too, until only a few years back when we started to see the compounding wood for the trees…

So, whilst the job of the researcher and analyst is to find new ideas, we think in this case just representing the conclusion will likely illicit the wrong response. Whilst of course we provide our conclusions below we think investors would be best to lose themselves in reading the accounts and conference calls of Ryman as we have, listing the questions that arise as they go. If this piece acts as a prompt to do just that we are happy.

Property revaluation

The role that property profits and revaluations play in this company’s business model is crucial to its valuation and understanding. Simply put, part of the company’s revenue and profit is derived from the management fee it charges the resident. However, a large component is also the future value participation share they have with residents (Ryman get to keep up to 20% of the value of the property at its future sale). Important also the company renews this arrangement with every new owner of the property post a resident leaving or dying.

Whilst this is a simple to understand offer to the buyer that Ryman residents seemingly welcome and enjoy it does not make for easy accounting. In practice the company has a modestly profitable business day to day (c.10-12% ROE pre-revaluations). That is supplemented when a future sale of properties is made. The way the model is accounted for however means that the investment properties that the group possess are revalued every six months. The result is that part of the profits that are reported under GAAP and used by us in our EPS and ROE calculations in the attached excel sheet are non-cash. In a world of sometimes inflated profits and where cash is the truth-teller many readers might be forgiven for getting a little twitchy at this point. However, we observe a few important points:

  • There has almost never been a downward valuation/reversal of the group investment property in any period in 25 years
  • Whilst part of property profits are made from revaluations, a good proportion are made from actual cash sales (both of new units and second-hand ones when an occupant dies/leaves)
    • These cash sales create regular and sizable profits. These profits are importantly a function of the carrying value of the property. Aka if past revaluations were erroneous, losses on sale would result, not profits
  • The participation in the future value of each property and the village it is situated in is a core part of this company’s businesses model
    • As such if no revaluations occurred and instead larger profits on sale were reported profits would more closely match cashflow
    • But the outcome would be lumpy – the revaluation method effectively smooths the value created
  • Property revaluations are done assuming c.3% rises in value. More importantly however is the 11-16% discount rate used to bring those values back to today’s prices. This is an important point we think. By using such a high rate, the company is still ensuring that a high proportion of value accretion is deferred, not booked to profits today
  • Finally, the revaluation contribution to profits needs to be looked at in context. If it related to constant revaluation of say Oxford Street then of course there is only so many times that can occur. Also, it could not be considered recurring. But that is different to say the revaluation that might regularly happen of a housebuilders land once it has been built upon. Every year’s new land is bought and developed. Whether all the resulting profits are booked at sale or before sale will only affect their timing not their quantum.
    • In a business such as Ryman which talks to 20-25% development margins
    • And who keeps c.20% of the upside of the property sold
    • Regular and repeatable lifts in value are highly likely as more and more sites are developed and retained

The answer to the “why” question earlier is that the 12x PE multiple we are using at the start of this note uses GAAP earnings. Part of those earnings come from the regular biannual revaluation of its investment properties.

Cash vs Profits and value creation

Like us many readers will have numerous Cash vs Profit experiences at other companies they have analysed. Thus, ‘follow the cash’ is an often-repeated phase to make sure an investor is not deceived in his analysis. In the case of Ryman, we think investors should look closely at cashflow, but also at the very long-term increases in the book and tangible book value of the company.

Anyone that has read the above disclosure we have given, that part of annual profits are derived from property revaluations, will know that this company’s reported profits and cashflows will differ. This is indeed the case. However not in the way a reader might imagine. Whilst current year free cashflow omits to have the boost from non-cash property valuations shown in the P/L it has another positive driver not evident in profits. This being the proceeds the group has received from new and second-hand sales.

Fig.3: How Ryman spent its 3/2022 cash inflow of NZ$839m

 Source: Ryman Healthcare 2021-year end results presentation

As such the group’s cashflow is actually better not worse than its P/L profits. What does its use the cash received on residential sales for…? Significant investment in new centres and funding the building of the care homes within them. As a result, the group regularly talks of planning to grow profits by 15% pa over the medium term, achieving this via new village growth and their slow but steady maturity. It’s cashflows show this growth can be fully afforded.

This we think is interesting as cashflows should be observed as not ‘better’ or ‘worse’ than profits, but in Ryman’s case ‘different’. This is due to advance receipt of payments for units sold and delayed profits on sale that are being estimated in revaluations but not yet received in cash.

Another way to get an insight into the company’s cashflow is to look at its total assets vs net assets and how the difference is funded. As at March 2021 total assets were NZ$9.17bn and net assets were NZ$2.82bn. The gap between the two suggest leverage (aka risk). However a glance at the company’s balance sheet shows only NZ$2.2bn of debt. The remainder of gross assets are funded by ‘occupancy advances – noninterest bearing – NZ$3.7bn’. This is the accumulation of all the property purchases the group has received less what it has paid out. At its most simple level this is float (other people’s money) and most readers know how powerful a driver of future returns that can be.

Value creation

In recent years we have become more interested in ‘put up to make more’ businesses, especially in what has driven their value creation over time. Mostly for the reason that they can often be misunderstood by markets. One thing we noticed when looking at Ryman was that its book value growth was actually greater than that what would have been achieved just from the compounding of its ROE alone. As this is seemingly impossible in the wonderful world of accounting, we set about looking a little closer assuming we had made a mistake. What we found we think is interesting. Whilst the company regularly re-values its investment property and this contributes to annual reported profits, its PPE (land bank) is also revalued. However, this PPE valuation uplift is taken straight to reserves (i.e. it does not flow through the profit and loss account at all). This can be seen in two charts. The first below shows how actual rises in book value have been greater than that calculated just looking at the ROE less the Pay-Out ratio.

Fig.4: Book value grows faster than sustainable growth rate!

 Source: Bloomberg

The second chart which shows that no recognition of this uplift was recognised in profits can be seen in the Appendix. It shows the Ryman changes to equity statement from its March 2021 annual report. In terms of the simplicity of what we are looking for in companies, this statement is a great example. It shows Ryman has shareholder equity of NZ$2.829bn. Of this we can clearly see that NZ$2.385bn has come from multiple year retained earnings. However, what we can also see is that a further NZ$453m has been contributed from ‘asset revaluation reserve’. Very, very, few companies have accounts that look like this.

Roughly right or accurately wrong

Hopefully what is laid out above and, in our spreadsheet, gives a glimpse as to the financial model of Ryman Healthcare. This note has not spoken to the company’s business model, brand or reputation, but we concluded in our work that all three were exceptional.

Accepting that we cannot know exactly what the true profitability for this company might be in a given year we think is a helpful and liberating process. For only by doing so can we start to think less about accuracy and more about what exactly this business model is and what its future prospects are most likely to be. In turn we can then consider what price we might pay for it.

Simply put this company has a remarkable reputation in a global industry that is otherwise consistently poor. Its brands, business model and market growth potential when combined offer a long runway of growth. Its offering to customers is fair and its business model self-funding. The deferral of some of its charges (i.e. a max 20% take on sale) is a clever deferred gratification offering that resonates with customers. All this means an ability to reinvest c.70% of its earnings for many years (decades?) to come. As such Rymans target to achieve 15% profits growth may well be achieved and we think at similar ROE’s to its past (i.e. c.20%). Adding to that 15% growth is a 2% pa dividend yield (1/3 profits on PE of 15x). The result is we are looking at potential increases in shareholder value of 17% pa.

On a trip to Omaha a few years ago a wise old man advised us to look for businesses that are a ‘win win for all’ (stakeholders). Ryman we suggest is one such company.

Our best guess is that we are paying 2x book for such future compounding and likely a 12x PE today. Maybe the PE is 14x or 15x….. does it really matter?! Such prices for c.17% prospective growth and 20% ROE is such a growing sector look exceptional to us.

Enjoy your study of Ryman Healthcare, we did.

“Good enough for Mum” Ryman Healthcare motto

With kind regards

Andrew Hollingworth

The Directors and employees of Holland Advisors may have a beneficial interest in some of the companies mentioned in this report via holdings in a fund that they also act as managers to.

Appendix

Source: Ryman Healthcare, 2021 Report & Accounts

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This document does not consist of investment research as it has not been prepared in accordance with UK legal requirements designed to promote the independence of investment research. Therefore even if it contains a research recommendation it should be treated as a marketing communication and as such will be fair, clear and not misleading in line with Financial Conduct Authority rules. Holland Advisors is authorised and regulated by the Financial Conduct Authority. This presentation is intended for institutional investors and high net worth experienced investors who understand the risks involved with the investment being promoted within this document. This communication should not be distributed to anyone other than the intended recipients and should not be relied upon by retail clients (as defined by Financial Conduct Authority). This communication is being supplied to you solely for your information and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose. This communication is provided for information purposes only and should not be regarded as an offer or solicitation to buy or sell any security or other financial instrument. Any opinions cited in this communication are subject to change without notice. This communication is not a personal recommendation to you. Holland Advisors takes all reasonable care to ensure that the information is accurate and complete; however no warranty, representation, or undertaking is given that it is free from inaccuracies or omissions. This communication is based on and contains current public information, data, opinions, estimates and projections obtained from sources we believe to be reliable. Past performance is not necessarily a guide to future performance. The content of this communication may have been disclosed to the issuer(s) prior to dissemination in order to verify its factual accuracy. Investments in general involve some degree of risk therefore Prospective Investors should be aware that the value of any investment may rise and fall and you may get back less than you invested. Value and income may be adversely affected by exchange rates, interest rates and other factors. The investment discussed in this communication may not be eligible for sale in some states or countries and may not be suitable for all investors. If you are unsure about the suitability of this investment given your financial objectives, resources and risk appetite, please contact your financial advisor before taking any further action. This document is for informational purposes only and should not be regarded as an offer or solicitation to buy the securities or other instruments mentioned in it. Holland Advisors and/or its officers, directors and employees may have or take positions in securities or derivatives mentioned in this document (or in any related investment) and may from time to time dispose of any such securities (or instrument). Holland Advisors manage conflicts of interest in regard to this communication internally via their compliance procedures.

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This is the privacy notice of Holland Advisors London Ltd our company number is 07431314. Our registered office is at 7 York Road, Woking, Surrey, GU22 7XH.

 

Introduction

This notice describes how we collect, store, transfer and use personal data. It tells you about your privacy rights and how the law protects you.

In the context of the law and this notice, ‘personal data’ is information that clearly identifies you as an individual or which could be used to identify you if combined with other information. Acting in any way on personal data is referred to as ‘processing’.

This notice applies to personal data collected through our website www.hollandadvisors.co.uk.

Except as set out below, we do not share, or sell, or disclose to a third party, any information collected through our website.

 

Data Protection Officer

We have appointed a data protection officer (‘DPO’) who is responsible for ensuring that our privacy policy is followed. If you have any questions about how we process your personal data, including any requests to exercise your legal rights, please contact our DPO, Claire Brunt at  claire@hollandadvisors.co.uk.

 

Personal data we process

1. How we obtain personal data

The information we process about you includes information:

  • you have directly provided to us
  • that we gather from third party databases and service providers
  • as a result of monitoring how you use our website or our services

2. Types of personal data we collect directly

When you use our website, you may provide personal data by submission of data by our Sign Up or Contact Us forms. This can be categorised into the following groups:

  • personal identifiers, such as your first and last names
  • contact information, such as your email address and your telephone number for communication
  • records of communication between us including messages sent through our website, email messages and telephone conversations
  • marketing preferences that tell us what types of marketing you would like to receive

3. Types of personal data we collect from your use of our services

By using our website and our services, we process:

  • technical information about the hardware and the software you use to access our website and use our services, including your Internet Protocol (IP) address, your browser type and version and your device’s operating system
  • usage information, including the frequency you use our services, the pages of our website that you visit, whether you receive messages from us and whether you reply to those messages
  • your preferences to receive marketing from us; how you wish to communicate with us; and responses and actions in relation to your use of our services.

4. Our use of aggregated information

We may aggregate anonymous information such as statistical or demographic data for any purpose. Anonymous information is that which does not identify you as an individual. Aggregated information may be derived from your personal data but is not considered as such in law because it does not reveal your identity.

For example, we may aggregate usage information to assess whether a feature of our website is useful.

However, if we combine or connect aggregated information with your personal data so that it can identify you in any way, we treat the combined information as personal data, and it will be used in accordance with this privacy notice.

5. The bases on which we process information about you

The law requires us to determine under which of six defined bases we process different categories of your personal data, and to notify you of the basis for each category.

If a basis on which we process your personal data is no longer relevant then we shall immediately stop processing your data.

If the basis changes then if required by law we shall notify you of the change and of any new basis under which we have determined that we can continue to process your information.

6. Information we process with your consent

Through certain actions when there is no contractual relationship between us, such as when you browse our website or ask us to provide you more information about our business, you provide your consent to us to process information that may be personal data.

Wherever possible, we aim to obtain your explicit consent to process this information, for example, we ask you to agree to our use of non-essential cookies when you access our website.

We continue to process your information on this basis until you withdraw your consent or it can be reasonably assumed that your consent no longer exists.

You may withdraw your consent at any time by instructing us  claire@hollandadvisors.co.uk.

7. Information we process for the purposes of legitimate interests

We may process information on the basis there is a legitimate interest, either to you or to us, of doing so.

Where we process your information on this basis, we do after having given careful consideration to:

  • whether the same objective could be achieved through other means
  • whether processing (or not processing) might cause you harm
  • whether you would expect us to process your data, and whether you would, in the round, consider it reasonable to do so

For example, we may process your data on this basis for the purposes of:

  • improving our services
  • record-keeping for the proper and necessary administration of our business
  • responding to unsolicited communication from you to which we believe you would expect a response
  • preventing fraudulent use of our services
  • exercising our legal rights, including to detect and prevent fraud and to protect our intellectual property
  • insuring against or obtaining professional advice that is required to manage business risk
  • protecting your interests where we believe we have a duty to do so

 

How and when we process your personal data

8. Your personal data is not shared

We do not share or disclose to a third party, any information collected through our website.

 

Use of information we collect through automated systems

9. Cookies

Cookies are small text files that are placed on your computer’s hard drive by your web browser when you visit a website that uses them. They allow information gathered on one web page to be stored until it is needed for use at a later date.

They are commonly used to provide you with a personalised experience while you browse a website, for example, allowing your preferences to be remembered.

They can also provide core functionality such as security, network management, and accessibility; record how you interact with the website so that the owner can understand how to improve the experience of other visitors.

Some cookies may last for a defined period of time, such as one visit (known as a session), one day or until you close your browser. Others last indefinitely until you delete them.

Your web browser should allow you to delete any cookie you choose. It should also allow you to prevent or limit their use. Your web browser may support a plug-in or add-on that helps you manage which cookies you wish to allow to operate.

The law requires you to give explicit consent for use of any cookies that are not strictly necessary for the operation of a website.

10. Personal identifiers from your browsing activity

Requests by your web browser to our servers for web pages and other content on our website are recorded.

We record information such as your geographical location, your Internet service provider and your IP address. We also record information about the software you are using to browse our website, such as the type of computer or device and the screen resolution.

We use this information in aggregate to assess the popularity of the webpages on our website and how we perform in providing content to you.

 

Other matters

11. Your rights

The law requires us to tell you about your rights and our obligations to you in regard to the processing and control of your personal data.

We do this now, by requesting that you read the information provided at  http://www.knowyourprivacyrights.org

12. Communicating with us

When you contact us, whether by telephone, through our website or by email, we collect the data you have given to us in order to reply with the information you need.

We record your request and our reply in order to increase the efficiency of our business. We may keep personally identifiable information associated with your message, such as your name and email address so as to be able to track our communications with you to provide a high quality service.

13. Complaining

If you are not happy with our privacy policy, or if you have any complaint, then you should tell us.

When we receive a complaint, we record the information you have given to us on the basis of consent. We use that information to resolve your complaint.

14. Retention period

Except as otherwise mentioned in this privacy notice, we keep your personal data only for as long as required by us to provide you with the services you have requested.

15. Compliance with the law

Our privacy policy complies with the law in the United Kingdom, specifically with the Data Protection Act 2018 (the ‘Act’) accordingly incorporating the EU General Data Protection Regulation (‘GDPR’) and the Privacy and Electronic Communications Regulations (‘PECR’).

16. Review of this privacy policy

We shall update this privacy notice from time to time as necessary.