Morningstar | Ryman to Look Over Softer Melbourne Prices. FVE Unchanged at NZD 13
The slide in Melbourne dwelling prices continues, as CoreLogic reports a 9.8% decline in the median dwelling price for the year to March 2019, bringing the total decline since the peak to 10.3%. We are not overly concerned by the orderly retracement in dwelling prices as retirement living and aged care are very long-duration businesses. There is a silver lining to falling dwelling prices, as prices for development sites are falling, helping to restore initial development margins on future sites to approximately 20%.Ryman Healthcare has only one mature village in Melbourne. This means only a few units will be resold each year, and as such the moderation in Melbourne dwelling prices will have an immaterial impact on near-term earnings. Further, as Melbourne dwelling prices are still up a net 25.5% over the past five years, most retirees would have benefited from substantial increases in their home equity, the primary funding source for a retirement living unit, or ILU. We continue to expect Ryman Healthcare will have little trouble selling newly completed units in its Melbourne villages. But, upfront development profits for units currently undergoing development will fall as incoming residents have less buying power than they did 12 to 18 months ago.
Both our forecasts and NZD 13 fair value estimate are unchanged for narrow-moat-rated Ryman Healthcare. The stock screens as fairly valued, current trading at NZD 12.30.
Ryman Healthcare will release its annual results for the year ending March 31 in late May. Key information will be the presales (unconditional occupational rights agreements), which could fall if prospective Melbourne customers are unable to commit due to challenges in selling the family home. We will also be focused on Melbourne’s residential rental vacancy rate as this is a key barometer for demand. Margins on new developments and profits on each resold unit also provide a strong indicator of the resilience of Ryman Healthcare’s two most profitable activities.
Ryman Healthcare develops, owns and operates integrated retirement villages, resthomes and hospitals for the elderly within New Zealand and Australia.
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