New Zealand's second-biggest listed retirement village owner and operator, Metlifecare, has set aside $22 million to fix weathertightness issues but one analyst has asked if that will be enough for the business.
Arie Dekker, a Credit Suisse analyst, released a note headlined 'additional remediation provisioning likely required', reacting to a Herald article about Metlifecare buildings with weathertightness issues in four villages: three in Auckland and one north of Wellington.
Glen Sowry, chief executive of the business with a $1.1 billion market capitalisation and 24 villages, said Metlifecare was "reviewing all of our villages to identify areas of potential design risk and where remediation work may be required".
The four villages are Pinesong, where one 19-unit building is being demolished, Waitakere Gardens, where up to 183 apartments could be affected, Dannemora Gardens, where 16 balconies are being fixed and Coastal Villas on the Kapiti Coast, where a reclad programme has begun, Sowry said.
Dekker raised the issue of the national portfolio review and its implications.
"There has been an article in the press noting remediation issues at Metlifecare villages. The article notes a broader review of the portfolio is being undertaken. Some of these issues are existing known issues (Pinesong and Coastal Villa remediation) which are already provisioned for in the accounts while new issues have been identified at Waitakere Gardens and Dannemora, two villages that Metlifecare acquired four years ago.
"The provision in the accounts currently is $22 million against the CBRE valuation of villages, being the estimate of the gross cash flows included for remediation work over a six year period," he said in the note.
However, in citing the extent of issues, he wondered if $22 million was enough.
"It is too early for Metlifecare to quantify the cost of remediation works at these sites while it is not discussing the broader portfolio implications at this point. It is also too early to understand whether remediation effects will necessitate residents to be rehoused for a period. We expect an update on these matters and any potential issues in the broader portfolio at the half year result.
"An increase in the $22 million provision may be required at half year which will act as an offset against what is expected to be a reasonably large uplift in the CBRE valuation given ongoing strength in MET's portfolio," Dekker said.
Metlife care is looking at remediation of about 70 units at Coastal Villas over six years where there are exterior cladding issues and remediation of a small number of units at Pinesong, Dekker said.
"We note that redevelopment of a 19-unit block at Pinesong into a larger apartment block (48 units) is being undertaken as a separate project to remediation works and are not part of the provisions," Dekker said.
"Metlifecare has had to rehouse some residents in vacant units. When this occurs for remediation purposes, Metlifecare does not recognise a resale gain or turnover of the exiting resident and treats the purchase of the occupation right agreements as an investment cash outflow," he said.
Some residents are being re-housed in places which are fixed. Dekker had questions about the financial implications of the situation.
"As well as the gross capex associated with remediation works, the timing of resales and the requirement to purchase some stock for a period of time is the other key cash flow impact that can arise from the need to undertake remediation works."
At Coastal Villas, Metlifecare had to repurchase two to three occupation rights agreements as it worked progressively through the remediation issues there, he said.
"Depending on the situation and solution at Waitakere Gardens it is possible that there could be large ORA timing impacts associated with remediation.
"Metlifecare is reviewing its broader portfolio and is aware of issues at both Waitakere Gardens and Dannemora. These are not external cladding issues but are water proof issues on the balconies. As much as 180 units could be impacted at Waitakere Gardens while there are issues with 16 units at Dannemora.
"More work is still being undertaken to understand the extent of the issues and to determine the course of action. It is too early for Metlifecare to quantify the cost of remediation works at these sites while it is not discussing the broader portfolio implications at this point," Dekker said.
Sowry said last week a broad approach was being taken to the issues.
"We are progressively reviewing all of our villages to identify areas of potential design risk and where remediation work may be required. We have a programme of work to remediate a small number of balconies (16) in one small part of our Dannemora Garden's village. We have also commenced work on a reclad programme with a number of villas within our Coastal Villas village on the Kapiti Coast," Sowry said.