A village model with investment appeal

It is estimated that the number of people over the age of 75 will double in Australia over the next 20 years. The “grey market” will fundamentally shape the landscape of the Australian economy. Living for longer, and used to comfort, they will expect to see out their days in the quality of life to which they are accustomed.

There are a number of quality Australian health care companies that are perfectly positioned for this growing market. Cochlear is at the forefront of hearing-aid devices, Ramsay Health Care is a leading private hospital operator, and CSL is at the cutting edge of biological advances. But there is one sector in which Australian companies have been unable to successfully achieve scale.

Traditionally, retirement villages have been modelled on a typical residential community - a number of units surrounding a communal centre. But practicality and functionality doesn’t address the emotional issues. Age does not change one’s desire for comfort, community or independence.

Everyone values their independence. That is why incarceration is punishment – it involves the absence of independence. And everyone values community. For these reasons, as well as a sense of ownership and achievement, people have a deep attachment to their own home.

The major step to a retirement village is therefore often borne of need, such as that for additional support.

Evidently, and yes I am acutely aware of the fact that I have only vicarious experience here, retirees rank reputation and affordability as the two highest priorities when assessing retirement villages. Developers must also consider ‘high care’ facilities that will cater to the broad needs of residents, and the best should also be able to offer different levels of care to accommodate both partners. Many developers, however, will only address basic needs, as health care costs can quickly grow out of control if not managed effectively.

But where Australian retirement villages have lagged, New Zealand retirement villages have forged ahead. Our neighbours have developed a sustainable model that profitably caters to retirees’ needs – both physically and socially. Indeed, there is one New Zealand company that not only leads the way in terms of its services and offering, but it has also produced stellar returns for the past decade. If you can indulge me for a moment, these returns show no signs of fading into the sunset.

Ryman Healthcare (RYM.NZ) floated on the New Zealand Stock Exchange in 1999, raising $25 million. Since then, it has invested another $1.1 billion into the business without raising a single cent from investors. What’s more, the company has paid $265 million in dividends over its lifetime – a stunning performance indeed.

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Ryman Healthcare understands that residents should not feel forced to move – as such, it has developed a community that fosters a deep level of care throughout every stage of life. Management has been able to leverage this reputation into a business model that produces multiple revenue streams from its residents.

Upon entering a village, residents pay an “Occupancy Advance”, which entitles them to reside within a unit. During their residence, Ryman caps the management fees at 20% of the Occupancy Advance to ensure that the residents have certainty with their financial future. The fees are collected when the resident vacates the unit, at which point Ryman generates further returns from reselling the accommodation.

But the key to Ryman’s business model is offering the full continuum of care at its villages - from independent living through to assisted living and specialist dementia care. Care fees provide a high margin of return, and are collected on a weekly basis.

You may consider that a business that has been operating for three decades would have achieved maturity, but this is far from the case. Ryman Healthcare only has a 10% share of the retirement village market in New Zealand. The number of beds and units is now almost double that built five years ago, and management is aiming to add 700 beds per annum. Part of this strategy is expansion into the Australian market. Management purchased a block of land in Melbourne in 2011, and has plans for the site to be fully operational by early next year.

While risks will always be inherent with any overseas expansion, Ryman’s competent management should be able to implement the business model in accordance with targets. With that being, said the current share price, which has nearly doubled in the past 12 months, appears to have accounted for the potential upside of the company’s growth plans.

I will be watching this company closely. Ryman appears to be a fantastic company, providing an exceptional standard of care for a growing number of residents – a reputation that will hold it in good stead as its somewhat fragmented Australian competitors develop equally fragmented offerings.

Roger Montgomery is the founder of The Montgomery Fund. To invest, visit www.montinvest.com