Ryman Healthcare: Firmer House Prices and Population Growth Suggest Recovery Potential

Narrow-moat-rated Ryman Healthcare RYM faced significant challenges in recent years, but we see signs of conditions stabilizing. We maintain our fair value estimate at NZD 10 per security. The securities screen as significantly undervalued.

Since 2020, Ryman Healthcare faced lockdowns and supply chain challenges, followed by rising interest rates and falling house prices, making it harder for retirees to sell their homes and move into a Ryman village. The time for incoming residents to sell their home and move in increased, and Ryman’s new sales receivables nearly doubled from NZD 208 million in September 2021 to NZD 390 million in September 2022, at the same time that construction timeframes and costs blew out due to supply chain and labor shortages. A stretched balance sheet ensued, but capital strength was restored via the blemish of a dilutive capital raising in March 2023.

Underlying profitability remained solid throughout, with resale margins on existing retirement village apartments remaining above 24%, and new development margins above 21% consistently since 2020. Ryman also has 95% aged-care occupancy, well above the industry average.

New Zealand house prices recorded a third straight month of rises, according to data from the Real Estate Institute of New Zealand released on Thursday. A stabilization in house prices underpins the potential value in Ryman’s resale bank of NZD 1.78 billion, which implies potential future resale margins of 25%. The resale bank measures the resale gains that could be achieved if existing residents vacate and Ryman can on-sell the apartments to new buyers at current market rates.

Meanwhile, estimated resident population data from Statistics New Zealand suggests that after New Zealand’s stricter and longer border closures ended, population growth recovered rapidly, and grew 2.07% in the year to June 2023.