Editorial: Troubling debt levels in essential sector

An analyst says he can’t see how Ryman can service its core debt without making some meaningful changes to the business, or raising capital. Photo / NZME

EDITORIAL:

After sustained growth over several years, a strong signal has been issued to the retirement sector of potential over-reach.

This week, investment management firm Forsyth Barr expressed concern at the debt levels of one of the major players, in particular.

Senior analyst Aaron Ibbotson said it was natural and understandable for companies to take on more debt while the value of assets was increasing but property values were now declining, coupled with higher interest costs.

“We’ve had a very short downturn in house prices, we’ve got a very dramatic increase in interest rates and a pretty rapid deterioration of general macro [economic] conditions. Eighteen months ago, the market would have been on their backs to grow faster.”

Indeed, there has long been baying for the sector to ramp up developments. A Jones Lang LaSalle report last year pointed out there were 345,969 New Zealanders over 75, with the number expected to increase to 832,810 by 2048. Based on that increase, a further 24,413 new retirement units would be needed in the next 10 years.

One player has answered the call more than others. In May last year, it was reported that Ryman Healthcare, with around $11 billion of assets, could set an all-time record development rate, eclipsing work streams since being founded 25 years ago.

However, it was already apparent that Ryman Healthcare was also trading at a decade-low valuation of 1.5 times net tangible assets and the increasingly diverse building programme, once seen as admirable as it stretched to 16 sites in New Zealand and Australia, now has analysts troubled.

Ryman is no stranger to defying expectations. It beat expectations when it announced a $692.9m audited reported net profit after tax in the full year to March 31, 2022, up on the previous year’s $423.1m. In noting the impressive bottom line, however, analysts also pointed to a low share price.

This time, however, Forsyth Barr analyst Ibbotson says he can’t see how Ryman can service its core debt without making some meaningful changes to the business, or raising capital.

As Ibottson notes, banks have more detailed information than analysts and are apparently unconcerned. But an estimated $2b of core debt, some of which was on floating interest rates, has come about “quite quickly, for Ryman in particular”.

Ibbotson advises is time for the sector to show it can generate returns, which it has not done for the past few years. “I am looking forward to when they slow down developments so they can recover Capex and generate some cash.”

It’s certainly doable. As mentioned, Ryman has the ability to defy expectations.

Ryman group chief executive Richard Umbers said it had already made moves to manage its capital over the past 18 months. “The board and management are mindful of where our current debt balance is at, which reflects the investments we have made in new villages over recent years.”

New Zealand’s largest listed retirement business is crucial to the country’s ability to meet the needs of a generation seeking suitable accommodation over the next decade, and it must ensure it can fulfill its part.