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Metlifecare eschews a share buyback for investing in growth

Tuesday 27th August 2019

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Metlifecare has ruled out trying to see whether a share buyback would help narrow the deep discount to net tangible assets because it believes it can add more value using available funds to keep developing its retirement village portfolio.

Metlifecare shares fell 4 cents to $4.36 yesterday but their NTA at June 30 was $6.96, up from $6.89 a year earlier. Shares in rivals Ryman Healthcare and Summerset trade at premiums to NTA.

The discount “remains a source of frustration for the board and management,” says chief executive Glen Sowry.

“We think that the levers that we can control will be the performance of the company, the customer experience and that drives demand which supports sales,” Sowry says.

“We’ve just reported a strong result, particularly in the current climate.”

Metlifecare’s net profit for the year ended June fell to $39.2 million from $122.7 million the previous year because the unrealised value of its villages rose by $53.9 million this year compared with $132.7 million the previous year.

Underlying net profit was up 4 percent and underlying operating cash flow rose 2 percent.

Sowry says both board and management gave the idea of a buyback a lot of thought and discussion but rejected it.

“With the development programme we’ve got ahead of us and the investment in remediation and upgrading the portfolio, they’re big chunky numbers – in the year just gone we spent $240 million and we expect that to increase going forward,” he says.

“We believe we’ve got value accretive growth ahead of us and that makes more sense than a buyback.”

Metlifecare chair Kim Ellis raised the possibility of a share buyback at last year’s annual meeting.

The company certainly doesn’t lack for firepower; gearing at June 30 was just 15 percent, up from 9 percent a year earlier.

Drawn debt at balance date was $278 million and, after allowing $38 million to complete properties being developed, the company still had $134 million headroom on its banking facility.

The company has also received a conditional offer on its Albany site. It bought the three-hectare site in March 2016 after going unconditional the previous December, but has now decided that the capital would provide more immediate growth opportunities elsewhere.

The company already owns a number of villages on Auckland’s North Shore including Greenwich Gardens and Hibiscus Coast and the company says that market is currently its most challenging.

Metlifecare will also progressively release further capital as it sells down the $139 million of completed but unsold stock at June 30.

The company’s development slowed to 182 units and beds in the year from 254 the previous year as it took stock of the slowing housing market, particularly in Auckland.

Sowry says the company delayed commencing some projects while it assessed the market and fine-tuned the timing and procurement of various stages but that he expects it will build about 250 units this year.

Metlifecare’s villages are concentrated in Auckland – 18 of the 28 villages are located there with another five in the Bay of Plenty.

House prices in Auckland fell 3.5 percent in the year ended June, according to the Real Estate Institute’s House Price Index – house prices outside of Auckland were up 6.5 percent in the June year.

Sowry says reasons for the discounted share price include that concentration of Metlifecare’s portfolio in Auckland and the fact that it has had to conduct remediation due to leaky building issues – he says it will take another three or so years to complete that work.

The overall value of Metlifecare’s portfolio rose 7 percent to $3.5 billion in the latest year but the company has been achieving above-valuation prices on sales.

But the company’s progress suggests the discount isn’t warranted.

The company settled 7 percent more occupation right agreements in the latest year, despite the difficult market, at 6 percent higher average prices “outperforming both the market and unit prices assumed in the valuation.”

It settled 116 sales of new occupation right agreements, up 18 percent from the previous year, and 354 resales, up 3 percent. A further 115 homes were under contract at balance date.

Another area in which the company believes the value will prove more than valuers CBRE see is of its new care homes at The Avenues and Papamoa Beach in the Bay of Plenty.

It impaired the newly completed homes by $16.3 million, essentially the difference between CBRE’s valuation and what they cost to build.

But the company expects the existence of these care homes will enhance the value of the surrounding villages because residents will effectively be offered a continuum of care.

Metlifecare’s original focus was to build villages which ageing people would be attracted to for lifestyle reasons but it changed course several years ago to adopt the more Ryman-like continuum of care model so that residents would have the peace of mind knowing they would not have to move out as they became frail, ill or suffered from dementia.


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