ANALYSIS:
Questions about regretting growing too fast, or taking on too much debt, are typically reserved for starry-eyed entrepreneurs.
But this week, Richard Umbers, the chief executive of listed Ryman Healthcare with a $3.3 billion market capitalisation, faced those questions, with some whispered “I told you so”'s to rub salt in it.
Following five years of heat from equity analysts, Ryman has surrendered to its $3b net debt position and asked shareholders to help repay almost one third of it.
Capital raises at the scale of Ryman’s $902 million offer are uncommon.
In recent times, it only comes second to Air New Zealand’s $1.2b raising early last year which was forced upon it by an unprecedented pandemic.
Ryman put itself in this position all on its own as it built retirement villages across New Zealand and in Melbourne at an aggressive pace.
Its gearing ratio was currently sitting at 45 per cent, a level Umbers conceded he was no longer comfortable with.
For context, that’s around the same scale of debt Fonterra faced in 2016 and 2017 before ratings agencies put it on notice. Money was cheaper then, with the official cash rate at or below 2 per cent.
The OCR is now at 4.25 per cent, coupled with a crumbling in property prices which reduces Ryman’s value on paper.
Umbers said on Markets with Madison this week that it could not have predicted the situation it’s now found itself in.
However, at some point in the past year, Ryman’s leadership realised that with the tide of rising interest rates coming in quick, it was becoming too heavy to float. Offloading debt suddenly became a matter of urgency.
Here’s how that situation unfolded, leading to Ryman’s mea culpa moment, going cap in hand to investors.
Ryman listed on the New Zealand Stock Exchange in 1999, raising $25m at a total value of $135m.
Within four years it was added to the top 50 list of companies, and in 2009 included in the top 10.
In the decade that followed it expanded rapidly, opening another 15 villages across New Zealand and Australia and purchasing another 15 land sites, all to reach its target of adding 700 units or beds to its network every year.
In its first 17 years as a listed company, Ryman added $500m of debt, according to Forsyth Barr senior equity analyst Aaron Ibbotson.
What came next was a “debt explosion”, he said.
Ryman added $2.5b of net debt to its balance sheet between the 2016 financial year and now, despite not having a single year of positive free cash flow since the 2014 financial year, Ibbotson’s note to clients said this week.
“The reasons for the debt explosion is not primarily accelerated growth nor is it increased Covid costs or the recent material slowdown in the housing market.”
It was the fault of a focus on high-density retirement villages that had longer lead times, Ibbotson explained.
“The debt build-up has been a strong contributing factor to Ryman being by far the worst performing New Zealand aged care company over the last five years.”
Its share price has fallen 40 per cent in the past five years.
In 2019, Jarden head of research Arie Dekker publicly raised concerns about the retirement village sector’s debt and the vacuum of information surrounding it.
“The absolute quantum of leverage in the sector has increased materially, and the ability of the sector to handle this leverage in a major downturn is, in our view, questionable,” Dekker told me in 2019.
“Certainly, more transparency is needed for the investors.”
The chorus of concern grew louder with Ibbotson jumping on the issue in October 2020, downgrading Ryman to a neutral rating, from outperform.
In 2021, Umbers entered. He was hired into the top job following a career leading supermarkets and retailers in Australia and Germany.
In the year to March 31, 2022, Ryman’s profits and revenue grew at double-digit rates. So it added more debt, issuing another $290m through a second US private placement - which is what it’s now being forced to repay ahead of time.
Months later, the valuation of its portfolio started slipping, causing profits to fall.
The mood at Ryman seemingly changed.
In a sign its finances were in need of fixing, it announced a dividend reinvestment plan to raise up to $44m in equity at its first-half result for financial year 2023.
Criticism continued, as analysts tasked with watching Ryman like hawks said it was not enough.
“Small sip of the cup unlikely to quench thirst,” Dekker’s note to clients in December was titled.
Its share price fell further.
Ibbotson said the devaluing of retirement village operators on the market was “a Ryman problem, not a sector problem”.
This year he told me it could be forced to raise as much as $1b in capital. He was almost bang on the money.
When I asked Umbers if a capital raise was being considered in January this year, he did not say.
Highlighting the dividend reinvestment plan, he said he was “mindful” of its debt position.
If Ryman raised capital two years ago when its share price was worth $17, not the $6.40 it is now, it could have made the same amount of money by only issuing less than half as much equity.
Ibbotson didn’t say “I told you so” this week, but laughed when I suggested he could. He was actually preparing to write another critical note when the raise was unexpectedly announced.
In October, Dekker called the retirement sector “asset rich, cash poor” highlighting it needed to do more to prove it could generate better cash returns.
This week’s raise did not remediate Dekker’s view. His report this week said $902m would not alleviate its underlying issue of negative cash flow.
“Critically, we believe a large part of the operations remains a black box.”
Ibbotson agreed many questions remained unanswered, but he applauded Ryman’s commitment to return to positive free cash flow by the 2025 financial year.
Of course, Ryman still has debt - $2.24b to be exact, if its capital raise offer is taken up in full.
When I asked what its average interest rate was on its remaining “mortgage”, Umbers would not say.
“We haven’t shared it, as it happens.”
Instead, he talked up the ageing, wealthy baby boomer population that would need somewhere to live and be cared for if they sold up the family home.
That’s the central view that convinced Ryman’s management it could load up on so much debt in the first place.
While its words may not have changed, its actions have - and asking the market for help speaks volumes.
The question now is if investors want anything to do with it and its ageing clientele.
Hear from four of the company's executives in this episode of Markets with Madison.