Headwinds that have faced listed real estate for the past two years

The unpopular policy direction that the retirement sector is having to reconsider is that investors are no longer happy to see debt mount up. There are two main reasons for this. Firstly, debt is now expensive because interest rates have risen and secondly because lenders are more risk averse than they were. The US regional banking crisis was really the cherry on top of the cost of debt rising to levels not seen in over two decades. Ideally investors would now prefer zero debt, part of the popularity of US Mega Cap growth stocks. If you can’t quite deliver zero debt, investors are looking for moderate debt levels and if you can’t quite manage that, then you better be reducing it and the quicker the better.

This pivot can be well illustrated by looking at the recent Ryman Healthcare result. Back in February, when they raised capital to pay back their US Private debt holders, they committed to becoming free cash flow positive by their 2025 Financial Year end5. This effectively meant that their net debt would rise in the intervening period which is not exactly hitting the mark of quickly reducing debt. So it was not too surprising to see that in last months result they demonstrated an increased focus on generating free cash flow. As you can see below, for every strategic goal the most important financial metric is now free cash flow. 

That said, somewhat bizarrely, not every retirement sector operator got the memo about reducing debt. On 31st October Arvida announced that they had restructured its debt facilities and that its total drawn debt was now $755 million. Interestingly the Arvida CEO namechecked ANZ, BNZ and ASB as its banking syndicate. We can only speculate as to whether Westpac were feeling unhappy or relieved not to be lenders. However, we can be pretty sure that Arvida shareholders were unhappy. At the time of writing this article, the Arvida share price has dropped by more than 20% since that drawn debt update at the end of October. I have a rule of thumb that when the debt owed by a company, I’m invested in, exceeds the size of its market capitalisation, I’m often left wishing I didn’t own it. Perhaps I’m not the only investor that has that rule. 

So, Arvida aside, the listed New Zealand retirement sector has moved from growing and increasing debt to seeking cash generation. The conundrum facing investors, is what is the value of a retirement village operator that is no longer a growth vehicle? Frankly, I do not have the answer to that question. I do know that you tend to face an investor migration as the shareholder base of a company changes. Growth investors are natural sellers while value investors become sporadic buyers in such a situation. A rotation of a shareholder base like that does not happen over weeks or months, it tends to take longer. However, the process will be all the smoother the quicker the listed retirement operators can become free cash flow positive. The go-go days appeared to have passed and it’s now time for the retirement sector to show investors the money.