by Octagon Asset Management
By: Tobias Newton Octagon Asset Management.
We think the key drivers for the sector have improved dramatically in recent quarters and see several tailwinds, listed below (in no particular order).
Whilst these fundamentals have all improved, valuations remain low and current price to net tangible assets (NTA) multiples are between -1.0 and -1.5 standard deviations below their 10-year trend. All names in the sector are trading well below independently assessed book values and balance sheet repair is underway. This scenario is quite rare and suggests scope for gains as the NZ housing market begins to improve.
How retirement villages actually make money
New Zealand’s listed cohort is down to three key names — Ryman Healthcare, Summerset and Oceania Healthcare — with Radius Healthcare a smaller, more care-heavy player. Their revenue engines can be powerful in combination, with new development and portfolio growth benefitting from large pools of interest free resident capital.
Key revenue streams include;
For many years, a buoyant housing market pushed unit prices and average DMFs higher. From IPO to the 2021 peak, share prices and asset values compounded handsomely, Ryman, for a long time, was a market darling.
Why the fall from grace?
Aged-care equities have been punished for more than just softer housing market conditions.
The list of reasons that investors have decided to shun the sector is long and, at least partly, self-inflicted:
The result? Asset write-downs, restructurings, equity raisings and, for investors, a multi-year lesson in cyclicality.
Housing: what needs to change (and is starting to)
Turnover has been anaemic since late-2021. Elevated interest rates, softer employment confidence and a buyer-seller mismatch have kept inventory high and investors on the sidelines (rents down, holding costs up — the maths no longer works at today’s prices). For a genuine turn you need three things: lower mortgage rates, rising GDP and job growth.
The good news: affordability has improved markedly and is back near 2015/16 levels on price-to-income metrics (chart below). We are closer to the point where lower rates translate into higher transaction volumes.
The recent downside surprise in quarterly GDP figures and a soft Q3 labour market statistic underscores slack in the economy. With limited fiscal room and structural reforms in education or energy offering little near-term growth, monetary policy will have to do more of the heavy lifting. When labour demand improves, net migration typically follows — and with it, housing demand and confidence.
The valuation setup: wide discounts, narrow expectations
While alternative (traditional) listed property assets in NZ are up 19% year-to-date, the aged-care sector has fallen sharply. Despite better trading commentary and a repaired balance sheet, Ryman still trades below its recent equity-raise price. Across the group, current prices imply minimal growth with shares at some of the widest discounts to independently assessed NTA in the sector’s listed history:
In plain English: an average ~30% discount to book, for businesses with long-duration and powerful demographic tailwinds from our ageing cohort of asset rich baby boomers.
If public markets won’t close that gap, private capital may do so. The last two public to private takeovers in the space completed at ~0.83× NTA (Arvida, 2024) and (Metlifecare, 2020).
What’s changed inside the businesses
The sector has finally read the room. After investors demanded better disclosure, cashflow and capital discipline, operators have:
What to watch from here
Downside Risks
Bottom line
Aged-care equities were re-rated down for very good reasons and the sector destroyed a lot of investor sentiment built up over many years. Many of those reasons are now ‘in the price’ and then some. With housing affordability back to mid-2010s levels (compared to household income), monetary policy likely to ease further, and operator discipline improving, the sector offers clean leverage to a housing recovery.
You don’t need to believe blue-sky growth to win from here; you need a normal cycle and disciplined execution. If public markets won’t pay up for that, private buyers probably will.
Tobias Newton is an Equity Analyst and Assistant Portfolio Manager at Octagon Asset Management.
This article has been prepared in good faith based on information obtained from sources believed to be reliable and accurate. This article does not contain financial advice. Some of the Octagon portfolios may own securities issued by companies mentioned in this article.
Octagon Asset Management is the investment manager for Octagon Investment Funds and the Summer KiwiSaver scheme.
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