Jenny Ruth: Ryman Healthcare rise makes mouths water

Retirement village operator Ryman Healthcare seldom commands headlines but its share price performance is enough to make any investor's mouth water.

Over the past two years, the NZX Top 50 index, which Ryman joined in September 2003, has not disappointed investors, gaining about 40 per cent.

But Ryman's shares have risen about 160 per cent from $2.10 to $5.50 in those same two years.

The stock's earlier years as a listed company showed a less spectacular but still solid performance. It listed in July 1999 after a $1.35 a share float.

Backing the share's performance is a solid record of profitability. Ryman reported a $6.2 million net profit for the year ended March 1999 ahead of its listing. In the year ended March this year, the firm chalked up a 28 per cent jump in net profit to $23.5 million, or just under 27 per cent compound annual growth since the list.

Last month, the company reported a 54 per cent rise in first-half profit to $17 million and said it would probably do the same again in the second half.

And this is in a sector where many of the other players have struggled. Certainly, all the listed players, Abano, formerly Eldercare, Metlifecare and Calan, have had chequered careers to the extent that Metlifecare is in the process of being taken over by a Macquarie Bank unit and the other two have exited the sector.

Ryman's record isn't perfect: in the year ended March 2002, net profit dropped 21.5 per cent to $11.1 million.

One reason profitability is so strong at present is the impact of the housing market boom and, since the housing market was still rather depressed in early 2002, you might attribute that profit drop to the state of the market.

Not so, says co-founder and managing director Kevin Hickman. That profit drop was the result of timing differences, with units in the company's villages selling slower than expected combined with delays in new units becoming available for sale.

The average age of occupants of Ryman's villages, which provide the entire gamut of care from independent units through serviced apartments, resthome beds and hospital care, is 84 years. He says when people decide to move into one of its villages, it's because of need, "things going wrong in their lives", and that decision does not have much to do with the state of the housing market.

The main impact on Ryman of a housing market slowdown is that the number of days it takes to sell houses increases, which impacts on cashflow.

The company has yet to see much of the benefits of the present boom. Its residents usually stay until they die and Ryman is entitled to a set percentage of the resale value of their units. At March 31, the company had $77.6 million in its asset revaluation reserve which should be gradually realised over the next few years and that's assuming no further increase in house prices.

Hickman says that, by and large, Ryman's villages aren't located in the hot spots or "flash end" of the property market but in "the middle market" in the suburbs where most people live.

The typical cycle in such areas is for house prices to leap ahead every seven years or so and then stagnate until the next boom. Rarely do prices ease much in such areas.

Hickman says he and former partner John Ryder - the company's name is a combination of their family names (Hickman jokes it could have been Hicker) - got involved in the industry after investigating a fire in an old people's home.

"We looked at how poorly it was done in those days. You don't want your parents going back to boarding school and there wasn't a hell of a lot of choice in those days. We felt the elderly should have the choice."

Anyone who has visited Ryman's villages, which are named after famous New Zealand women including Malvina Major, Frances Hodgkins and Ngaio Marsh, can attest to their quality. But even Hickman acknowledges that his industry is in trouble, largely because residents are dependent on Government funding, which hasn't kept pace with costs.

He describes the industry as "under siege" and that it will be in crisis within three years. Backing those statements is the evidence of so many charitable organisations leaving or threatening to leave the industry.

Some might point to Ryman's profitability as giving the lie to arguments about under-funding. Partly, Ryman makes the economics work due to its scale. Its Invercargill village has 157 care beds.

It's evident the company's profits don't come from its resthome and hospital beds but from the integrated nature of its villages and the fact that Ryman is involved from the pre-development stage. As Hickman says: "We're not supermarket shoppers".

Because Ryman develops its own villages, rather than contracting that work out, it gets to bank the development profits. That means its starting costs are lower than if it had ready-built facilities.

Michelle Perkins, an analyst at ABN Amro Craigs, says Ryman also benefits from being able to spread the costs of services from its kitchen operations to nursing care across an entire village.

High occupancy rates also help: she notes that Eldercare's occupancy rates are below 90 per cent while it is at near capacity at Ryman.

Demand for Ryman's facilities is certainly strong and demographics suggest it will only get stronger as the baby boomers age.

Another benefit of Ryman's business model is that it appears to get ever stronger as the business gets larger. Each year, it becomes less dependent on sales of new units, which in 2000 accounted for 41.5 per cent of total sales but were down to 29.7 per cent in the first half of this year.

Ryman is in the process of stepping up its development rate from about 150 new apartments to 250 a year.

The company operates 14 villages throughout New Zealand, is in the process of developing five more and enlarging some existing ones and is continuing to negotiate other sites.

The large number of sites means it has greater flexibility. A slowdown in one area can be matched by scaling back construction there to concentrate on a better-performing area.

Perkins says Ryman is one of her firms' top investment picks, particularly at a time when the economy is likely to at least cool.

John Cairns, an analyst at Forsyth Barr, also rates the stock a buy. Perkins forecasts that Ryman's net profit will rise to $39.1 million in 2007. Cairns puts it higher at $39.4 million. 


Who, what, where

* Ryman Healthcare headquarters: Christchurch.
* Profile: The company builds and runs retirement villages all over New Zealand providing care from independent units to hospital beds.
* Market capitalisation: $546 million.
* Latest results: Ryman reported a 54 per cent rise in net profit to $17.1 million for the six months ended September.
* Management: Managing director Kevin Hickman, chief financial officer Simon Challies, operations manager and director of nursing Barbara Reynen, development manager Ray Versey, sales manager Debbie Jarratt, property and purchasing manager Philip Mealings and design chief Taylor Allison.
* Major shareholders: Emerald Capital 16 per cent, Hickman family trust 15.2 per cent, Ngai Tahu 12.5 per cent and Fisher Funds Management 10.9 per cent.