Ryman Has Tempered Its Growth Ambitions, in Favor of Achieving Positive Free Cash Flow

Ryman is New Zealand’s largest retirement village operator, controlling about a fifth of a fragmented market. It combines retirement and aged care facilities, so residents can transition from independent to supported living. In addition to a reputation for quality, we believe the integrated model is a benefit that many competitors would struggle to replicate, due to the costs of retrofitting existing nonintegrated facilities. We believe Ryman Healthcare remains positioned to achieve earnings growth over the next 10 years, driven by favorable demographics, and Ryman's brand. Ryman has substantial growth plans, particularly in Australia. Its expansion has been measured, so far focused exclusively on the state of Victoria, mostly around Melbourne. Feedback from Australian customers has been positive. Though no sites have been acquired outside Victoria yet, we expect Ryman to continue to gain traction in Australia, and we assume it will eventually expand elsewhere in Australia. Ryman’s earnings are exposed to residential property prices on several fronts. Ryman’s residents typically fund their entry into a village by selling their primary residence, so residential property prices influence the proceeds residents have available, and therefore, Ryman’s development margins. Residents might choose to defer or even cancel their plans to move into a retirement village should they struggle to sell their property at a desired price, which could slow Ryman’s sales cycle, or undermine occupancy, which has typically been high. That could be detrimental for margins and returns, given the level of operating leverage in the business. Ryman sells occupancy rights to residents, but retains the exposure to capital gains (or losses) on its units, further adding to its house price exposure. Retirement unit management fees are also linked to sale prices of its units. A prolonged stagnation or fall in house prices and transaction volumes could have adverse effects on Ryman’s earnings.