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UPDATE: Metlifecare shares fall 4.8% as posts drop as first-half profit falls 66%

Monday 26th February 2018

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(Recasts lede to include share price, adds broker comments) 

Metlifecare shares fell 4.8 percent after New Zealand's second-largest listed retirement village operator posted a 66 percent drop in first-half profit as the property market slowed and it missed out on sales gains after it bought back units to temporarily rehouse residents while it fixed up leaky buildings in their villages.

The stock dropped 30 cents to $5.95, near a two-week low, after the Auckland based company reported net profit of $56.4 million, or 26.5 cents per share, in the six months ended Dec. 31, 2017, from $165 million, or 77.1 cents, in the year-earlier period. The company booked a $60 million gain in the value of its investment property, compared with a $259 million gain in the year-earlier period.

Excluding the unrealised valuation gains and other non-cash items, underlying pre-tax profit slipped 6.2 percent to $36.2 million, and the company said that while it expects to deliver a stronger second-half performance, underlying operating cash flow and profit for the 2018 financial year are expected to be "in line" with last year, before rising again in 2019.

The fall in the share price is "in line with a slight downgrade in underlying profit compared with what the market was expecting," said Bryon Burke, head of equities at Craigs Investment Partners. The shares have lifted 12 percent over the past year.

Greg Smith, head of research at Fat Prophets, said the result contained some "encouraging aspects" and the company's main drivers, the growing and ageing population, haven't "gone away." 

He noted that occupancy rates were very high and the pipeline of new development is going well. 

In the first half, the company increased its total number of units and beds 2.8 percent to 4,603 after delivering 94 new units and beds, compared with 97 in the year-earlier period, and said a further 160 units are due for completion in the fourth quarter of this financial year. Its occupancy remained at 98 percent, which it said reflected good demand for its product.

The retirement village operator and developer said it's on track to deliver more than 254 retirement units and care beds in 2018 financial year, joining the sector on a major construction drive in anticipation of an ageing population in need of supported housing. The value of Metlifecare's investment properties lifted 9.5 percent to $3 billion.

Like many New Zealand building owners, Metlifecare has been hurt by the country's leaky building crisis and expects to spend $44 million over seven years to remediate four to five of its villages. During the first half, it bought back 41 units to temporarily house residents while it fixes the units and estimates that's caused it to miss out on $6-$7 million of resale gains during the period, although the company will resell those at a later date and book the gains then. In Auckland, its affected buildings at Waitakere Gardens and Dannemora are expected to be released back on the market in about 18 months, while a new building at Pinesong is expected to be completed in the middle of this calendar year.

While that weighed on the result today Fat Prophet's Smith said the refurbishment and modernisation programme is "ultimately that is going to drive pricing, occupancy, earnings growth longer term so it was good to see them focusing on it."  

Meantime, the impact of a wet winter and the general election also had a cooling effect on the country's inflated property market, and while the company achieved pricing and margin uplift during the period, the sales environment had become more testing with longer settlement times. Still, Metlifecare said market conditions had firmed since December and the company had signed more sales and resales applications for settlement in the second half of the 2018 year than at the equivalent time last year.

In the first half, the company's total sales volumes dropped 29 percent to 188, as new sales fell 63 percent to 33, and resales slipped 11 percent to 155.

Chief executive Glen Sowry told BusinessDesk the first-half result would have been "very strong" if the company hadn't bought back units to temporarily house residents. 

"We are feeling confident about how the second half is shaping up. We are off to a good start," he said.

He said the property market "has returned to more normal long-run typical growth" after two to three years of "abnormally high house price inflation", particularly in Auckland.

Metlifecare will pay a 3.25 cent first-half dividend on March 29, up from 2.25 cents a year earlier.



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