Retirement village stocks have benefited from large revaluation gains in the latest round of financial results as surging property prices have boosted the value of their units.
But with Treasury forecasting house price growth to slump from 17.3 per cent over the last year to 0.9 per cent next year and the official cash rate expected to begin rising again from mid way through next year these revaluations could be under pressure in the future.
Mark Lister, head of private wealth research at Craigs Investment Partners said rising property prices were not the only driver for retirement village operator's valuations.
"They have two aspects to their business - one is the healthcare side and the care fees and all of those healthcare operations. That demand is there and it is going to be pretty insulated from whatever is happening in the economy or housing market. That piece of the business is very much needs driven."
But he said they were also essentially property developers. "The ebbs and flows of the property market do have an impact and as they resell units or apartments or properties the selling price of the units will be driven by what is happening out there in the broader market. That can be a very lucrative part of the business."
Lister said he expected the big property uplift across the country over the last 12 months would be reflected over the next couple of years as lots of the units changed hands.
"There is still a bit of that good stuff to come." But he said analysts would likely be dropping their property price growth expectations due to the increasing headwinds.
"There is a few more headwinds than there were three months ago. We have got all those policy changes from the government and now we are all expecting interest rates to rise maybe sooner and more quickly than we thought before. That is not going to tank the property market. But I think it slows down the pace of those gains.
"It is a headwind to the sector."
But he believed it was still a good sector to be invested in because of the aging population and the healthcare pressures on the public sector which meant there was growing demand.
Fletcher's retirement foray
Fletcher Building revealed plans to enter the retirement village sector this week at its investor day this week.
Lister said it was an interesting move by Fletcher. "There is certainly plenty of opportunity to go around. I don't think it necessarily detracts from the investment case for some of the established players like Ryman or Summerset or Oceania. It doesn't change our view on them.
"There is no harm in having credible competition."
Harbour Asset Management portfolio manager Shane Solly said the Fletcher announcement highlighted the attractive growing market for senior living in New Zealand.
"There a silver- tsunami of over 60 year olds wanting different living options and this is an extension of what's on offer."
Solly said Fletcher's offer was very lifestyle focused and very different from the integrated care offer provided by the listed retirement village operators.
"The Fletcher offer seems to be aimed at younger lifestyle focused residents. This may mean they will need to move to another village as they get older and need care support."
Solly said Fletcher's offer was also relatively modest in size at 100 unit versus the 200 plus per annum units being developed by the smallest of the listed integrated care village operators.
He said it was also not always an easy sector for developers to get into pointing to some in Australia which had struggled to find their feet.
"Developers in Australia that have entered the sector have generally struggled – it's hard to get right - for example developer Lend Lease has spent several years trying to reduce its lifestyle focused exposure to the space, while Stockland has had a stop start exposure to the sector."
Out of favour
Once share market darling Ryman Healthcare appears to have fallen out of favour with analysts.
Both UBS and Jarden reiterated their sell ratings on the stock this week after Ryman reported a full year underlying net profit after tax of $224 million.
UBS analyst Jeremy Kincaid said the result was 3 per cent below consensus and his expectations for the stock.
Kincaid said the miss reflected a lower than expected number of new sales at 503 units - UBS had expected 566 sales.
The company's debt also rose to $2.25 billion which was $110m higher than UBS expected, although that was also offset by a record valuation gain.
Kincaid increased his 12 month price target from $12.90 to $13.20 but maintained his sell rating on Ryman due to its rising debt and profit growth headwinds.
"In our opinion, debt has been an ongoing and growing issue for Ryman."
Kincaid said its analysis of individual villages had found that the working capital drag during the construction of high density villages was likely to be the key cause for the debt issue.
While Ryman appeared to moving its build programme to a more even split of high density and broad acre development sites that came with other issues.
"Broad acre units typically sell for less than high density units which makes growth in realised development margins challenging. For this reason, we do not believe Ryman will achieve its target of doubling underlying net profit every five years."
Jarden analyst Andrew Steele also reiterated his sell rating on the stock calling it a "soft" result with the underlying profit inline with Jarden forecasts but down 7 per cent year on year.
Steele said on an ex-development basis Ryman's net profit had declined every year since 2018.
Jarden cuts its target price from $12.10 to $11.60 on the stock based on higher than expected net debt and lower sell down of developments.
Steel said Ryman's development guidance of 900 to 1000 beds and units for FY21 was below his forecast of 1100 and considerably below the company's stretch target of 1300 which was presented the its half year result.
"We believe at the current share price, Ryman represents an unappealing risk reward."
Infratil has launched a six and a half year bond offer looking to raise up to $100m paying a 3.6 per cent interest rate.
The rate seems attractive compared to others in the market but David McLeish, head of fixed income at Fisher Funds says it come with some fishhooks.
McLeish said Infratil had about 10 bonds outstanding and they all traded at a similar spread above the government bond rate.
"It is not particularly attractive versus all the other bonds that are outstanding for Infratil but Infratil does trade at a higher yield than a number of other issuers."
He said that was because the bonds were unrated which meant typically the company had to pay a higher yield to compensate investors for that uncertainty, especially retail investors.
McLeish said Infratil was a great business for share investors but was less attractive for debt investors as the company was an acquisitive business and used debt to do that.
"When you are putting leverage inside a business that does make it more risky. They have done well with those acquisitions so they do have a good track record of performing and making it worth their while but there is a higher risk associated with that."
And he said when the company sold an investment the money was used to acquire other assets or return those funds to shareholders rather than looking after bondholders first.
"We don't like that, sitting lower on the list." Despite that McLeish said he expected it to be well supported by retail investors due to the well known Infratil name and the higher interest rate.
"From a more institutional perspective we think from a risk adjusted sense that there are better opportunities out there in the market."
The offer closes on June 30 or sooner if the capital target is met.