I was a shareholder in Ryman Healthcare for many years.

In fact, it was one of my best-ever picks.

I was a buyer between 2007-2009, an investment of $4,000 that eventually grew to over $40,000 – one of my first 10x investments.

Ryman did well during those years due to a combination of things. They were a pioneer in a growing industry. The business model was excellent (I’ve explained it at length in this article). But most importantly – they had a rockstar management team.

David Kerr became Chairman of Ryman in 1999 before their IPO, and continued in that role until 2022.

Simon Challies was CFO in 1999 and was promoted to CEO in 2006, serving in that role until retiring in 2017.

The Kerr/Challies combo was legendary. To give you an idea of what a monster CEO Challies was, read this profile of him by Stuff.

Anyone would love to have this man working for them.

Together, Kerr and Challies grew the company from a market cap of $135 million to over $4.7 billion, an astonishing return of 3,381%.

Unfortunately, this duo ended in 2017, when Challies was forced to retire due to his worsening Parkinsons.

Kerr retired as Chariman four years later.

This Batman and Robin team who shepherded one of the best performances in NZX history, now needed to be replaced.

Kerr was succeeded by Greg Campbell, a reasonably experienced director from NZ. He only lasted a couple of years, and was then succeeded in 2023 by Dean Hamilton – the Chairman of Fulton Hogan.

As for Challies, he was replaced as CEO by his good friend Gordon McCleod, the CFO at the time. He lasted four years before stepping down in 2021, and was replaced by Richard Umbers.

Umbers was coming off a stint as CEO of Myer in Australia.

Here’s how Myer’s share price performed during his years as CEO (during one of the biggest bull markets in history, no less):

$2.44 to $0.46.

If you had invested $10,000 on his first day as CEO, you’d have been left with $1,885 by the time he resigned.

Why?

Well, Myer was profitable when he took the reigns, making about $100m in profit in 2014.

Over his four years as CEO, sales and profit declined every year, eventually making a loss of $480m just before his resignation.

It was around this time I sold my shares.

I would have loved to have been a shareholder forever, however, one of the wisdoms of investing is – “when the facts change, your decisions must change”.

When musical chairs starts at the executive level it’s rarely a good sign. Unless it’s Jeff Bezos coming in as CEO and Warren Buffett as Chairman, I’ve learned (from past bad experiences and losing lots of money) it’s best to jump ship, wait to see if things stabilize and re-establish your shareholding later.

Especially when you have a CEO who ran a company into the ground in his last role, it makes zero sense to wait and see if he’ll perform poorly managing your company too. History has already told you he will.

History proved right.

Here’s how Ryman has performed since Umbers took the wheel:

Unsurprisingly, Umbers has been fired (technically he “resigned” with a $1.5m severance).

Ryman Healthcare is in emergency mode, as its market cap has fallen from around $7b to $2.7b today.

Its shares are trading at prices not seen since 2013, over a decade ago.

This is one of New Zealand’s great companies. Can it be salvaged or will it continue the way of Pumpkin Patch, into bankruptcy at the hands of a line of fumbling CEOs?

Let’s take a deeper look.

Why Are Ryman Shares Tumbling?

We’ll start with the big question – why is the market punishing Ryman so badly?

In short – they got caught with their pants down.

The retirement business model is very lucrative. You rent out retirement apartments to old people, they die, you rent it to the next person. You use that money to build even more villages, and the cycle continues. If done prudently, these companies amass a lot of land, build a lot of homes, and essentially become property tycoons with billions of dollars of assets.

Normally, you build a village, sell the living rights to the first lot of residents, then use that money to build the next village. However, Ryman got greedy. They took on billions in debt to try and expand faster than they should have. At one point they were developing 14 new villages in Auckland alone – building much faster than they could sell.

Then Covid hit. The cost of builders went up. The cost of nurses went up. Interest rates went up. Inflation went up. The cost of testing/quarantine amounted to millions. The property market flopped.

This led to Ryman having a cost blowout amidst a slowdown in sales.

With rising interest rates they couldn’t pay off their debts on time.

As one domino falls, the next one is soon to follow.

Ryman was very close to defaulting on their debt/solvency requirements.

Warren Buffett has a saying – “When the tide goes out, you see who’s been swimming naked.”

Well, Covid took the tide out, and Ryman was definitely naked!

To prevent disaster, they needed to raise close to a billion dollars to keep their lenders happy.

Here’s how the capital raise went down:

Here’s what all these numbers mean:

Before the capital raise, they had $3.026b in debt.

They raised $902 million. Paid down debt of $725 million.

This left them with $2.301m in debt.

This brought their gearing percentage down from 45% to 34% – a significant improvement.

Now – a few questions you might have:

Didn’t they raise $902 million? Why did they only pay off $725 million in debt?

First – they had to pay the investment bankers $30m to put the deal together (yes, this is why investment bankers are so rich).

Secondly, they had to pay a penalty of $134m to their US lender for repaying their debt notes early.

So in short, Ryman just spent $164 million in fees to get themselves out of this debt debacle.

That’s 18% of their $902 capital raise that didn’t go towards paying off debt, but basically went up in smoke. $164 million – poof!

To make things triply worse, they raised capital at $5 per share.

Eighteen months earlier their share price was almost $17, and several NZX companies had the foresight to raise money then, including their competitors Oceania Healthcare and Arvida.

Not Ryman.

Ryman ended up massively diluting shareholders by raising money at 2015 prices, while also burning $164m in shareholder money that only went to making a few bankers rich – obviously pissing off a lot of shareholders in the process.

They’ve also been forced to suspend their dividend until 2026, to fix their cashflow and debt issues.

Are you surprised investors all hate Ryman right now?

But….

This is where the savvy investor comes in.

Stocks that are hated by the market can often prevent wonderful opportunities.

If you had told me in 2018 that one day Ryman would again trade under $4, I would have happily bet six figures against you.

Yet here we are.

So What Shape Is Ryman In Now?

Is Ryman investable? Let’s go through a quick recap of how these companies work.

If you want to live in a Ryman property during retirement, you purchase an ORA (occupational rights agreement).

This ORA gives you the right to live in a village home for as long as you like (but you do not own the home – very important).

Once you move out (usually when you die), Ryman buys the ORA back off you, minus a 20% “management fee”

So if you purchase an ORA for $500k, and then ten years later you die, Ryman will buy the ORA back from you for $500k, minus a $100k fee.

Then they will sell this ORA to the next resident.

It’s important to understand that by selling you the ORA, they don’t actually sell you the home itself, so Ryman maintains ownership of all its properties.

Ryman owns 48 villages and almost 10,000 homes/apartments. This is essentially a massive property portfolio, making Ryman one of the biggest homebuilders/homeowners in the country.

The second way Ryman makes money is from weekly living fees that residents pay for village upkeep (like keeping the gardens clean and security etc) – this is usually a few hundred dollars a month.

The third way Ryman makes money is from “care fees”, by providing round-the-clock care to patients who need it (like a nursing home service).

But the key to keeping this whole machine working is the ORA.

In practice, they sell an ORA for $800k, and when that resident moves out (dies) Ryman will rebuy the ORA for $800k, minus the 20% fee. But (this is a big but) they don’t need to pay back that $800k until a new resident moves in and they collect a fresh $800k.

Essentially, after they sell the ORA, they have access to that $800k float, forever.

Times that by 10,000 residents and that’s a huge amount of interest-free capital they have available to invest and compound – if used wisely.

That means what you want to see from a “well-managed” retirement home provider in New Zealand is:

• Steadily growing property portfolio.
• Rising ORA sales (especially new sales, but resales are great too).
• Not too much debt.

If they can do that, they will accumulate a very large amount of assets, with very little risk.

For over a decade Ryman performed exceptionally on all three, until it started flopping on the last one.

As for how it looks today, let’s start with the Income Statement:

On the revenue side, the income statement shows us:

• Care and village fees are up
• DMF (this is Ryman’s 20% cut of each ORA) are up
• Total revenue is up almost 20%.

This looks healthy, but, it also doesn’t mean much.

The way Ryman really makes its money is not from care fees and village fees (in fact, the care business makes a loss). Even the DMF isn’t the main ingredient in its growth.

The way Ryman makes money is by selling ORAs, then using ORA money to reinvest in more property.

The key metric therefore is ORA sales, especially new ORA sales, as opposed to ORA resales (both are great, but new sales are what move the needle).

Their latest data shows new ORA sales are down over 20%, both in volume and dollar value ($330m in 2024 versus $420m in 2023).

This is expected, as new ORA sales come from newly built villages, and as Ryman has slowed down its construction pipeline, less new ORA sales is the obvious result.

As for resales, both volume and gross is up ~10%, which is healthy.

Overall, the business is slowing down but it’s still growing. $330m in new ORAs is still a good result – remember, once they make that initial ORA sale, they have access to that floating capital forever.

So verdict on the ORA situation – slowing down, but still working, and still profitable. I give them a B+.

Something else of note on the Income Statement – Ryman recorded a $324m loss before property revaluations, and almost a bottom line loss. It’s final profit was $4.7m, versus $258m last year:

But here’s something you might not know:

Most of these retirement operators never make a profit. That’s why none of them pay tax.

Look at the statement above. Even last year, Ryman got a $51m tax credit (basically a refund). This year, they got a $149m tax credit.

Why? Because the business itself (village fees and care fees) doesn’t make a profit!

As I said – they don’t make any money from the actual business of retirement living. They make their money from amassing property (using ORA money). And as every New Zealander knows – capital gains on property are not taxable (which explains the Kiwi obsession with investment property).

So to me personally, their reported profit figures are close to meaningless. To underscore this point – you’ll notice above they had a fair value movement of $179m (meaning their properties got valued $179m upwards). However, during the year they changed the way their properties are assessed – a prudent move during this whole “company cleanup” they’re going through. This resulted in their existing properties getting revalued $400m downwards:

If they hadn’t done that, their fair value movements would have been $579m – meaning they would have reported over $500m profit!

And again – that figure would have been close to meaningless. It’s not $500m coming into their bank account. It’s just changing a number in an Excel spreadsheet.

As they said in Wolf Of Wall Street – “It’s all a fugazi. You know what a fugazi is? It’s a whazy, a woozie. It’s fairy dust. It’s not fucking real!”

That’s what these Income Statements of retirement villages are. They’re fugazis.

However, what’s not a fugazi is the Balance Sheet. Those numbers are definitely real!

Let’s take a look:

Three numbers matter the most here, which I’ve highlighted.

First – the investment properties. Currently, they’re worth $10 billion, which is great. We want that number to always be growing – as high as possible. After all, the name of the game here is to amass as many property assets as possible.

Second – the occupancy advances, also in green. This is the ORA money and is non-interest bearing – meaning it costs nothing for the company to use. $5b in interest-free capital is every investor’s dream! Since this “debt’ is free, I don’t even consider it debt, and also want this number to go as high as humanly possible. Like I said – more ORA sales = good.

Finally – loans and borrowings. This debt is not the kind of debt we like – it costs interest and during a high-interest environment that ends up being a lot of money (and is what got Ryman in trouble in the first place). The big red flag here is even after raising a billion dollars to pay down their debt mountain, debt is still going up ($2.3b to $2.5b). I want to see this number going down, and by a lot!

Let’s compare this to Summerset’s Balance Sheet – arguably the best-managed retirement operator in the market right now:

You can see Summerset has $1.4b in debt against $6.4b in properties, giving it debt-to-assets of about 21%.

By contrast, Ryman has $2.5b in debt against $10b in properties – which puts them at 25%.

Now you might think – that’s not a huge difference. But consider: Ryman just raised a billion dollars (in desperate circumstances) to clear debts, and slashed its dividend to clear debts, while Summerset basically did nothing. Yet Ryman is still more heavily geared than Summerset and their debt is still rising. This shows just how bad their situation was/is.

So my verdict on the Ryman Balance Sheet – they’re definitely not going bankrupt, but they have work to do. I give them a C+. If it’s Friday and I’m in a good mood, maybe a B-.

Let’s move to the Cash Flow Statement.

Reading a cashflow statement for this industry is important, but it’s a bit different to other businesses. Again – their cash from “operating activities” is only marginally useful, because Ryman doesn’t make money from its operating activities.

What we want to see is lots of ORA money coming in, and not that much ORA money going out.

We also want to see that its costs are not blowing out.

We can see $1b in ORA money coming in, and only $460m going out, which is great. That’s about half a billion they’ve added to their ORA float which can lead to growth in assets.

The concerning part is that operating expenses have gone up to $624m (from $478m last year). That’s a huge increase, probably explained by the nurse shortage, the builder shortage, and inflation in general. Many companies in NZ are actively in the “cost cutting” phase – Ryman will need to turn its attention there too.

However, the bigger concern for me is the debt picture. In the financing section, what do you notice:

The first thing I notice is they’ve taken on $200m in additional debt during the year (say what?!)

They’re saving $68m per year in dividends which have been suspended. Where’s that money going?

If you look closer at the Cash Flow Statement, you’ll also see they bought another $582m in properties.

Why not pay down the debt instead?

Only Ryman knows….

Verdict on their cash flows? D-

There’s a lot more we could dig into with this company, but those are the main pieces – debt, ORA sales, cashflow, costs.

Is Ryman worth the risk?

As I write this, Ryman is being traded at $3.76/share, valuing the company at $2.59b.

As per their balance sheet, they currently have net assets of $4.4b.

Meaning an investment in Ryman today means you’re buying $1 of assets for 58 cents.

Sounds like a decent deal, but does that $4.4b in net assets stay $4.4b?

Last year it was $4.6b.

If they don’t start managing their debt properly, maybe next year it’s $4b. Then $3.8b.

So how do we know?

Let me put it this way:

If Warren Buffett took over as CEO of Ryman tomorrow, I would put my entire net worth on the company. It would flourish. The business model is excellent. The product (judging by resident satisfaction scores) is excellent. The industry prospects and demographics are excellent. Buffett would effortlessly grow their net assets from $4.4b to $10b over the next five years. The share price would 10x.

The point I’m making is Ryman is not dealing with a product problem, or a market problem, but a management problem.

In other words, they’ve been run by a crap board and a crap CEO.

The fact the NZX has three other companies in the exact same industry with the exact same business model and are doing just fine is undeniable proof of this.

The CEO being fired is a start, but the big question is – who will be the next CEO?

We know it won’t be Warren Buffet, obviously, but can they find someone to right the ship?

This is the missing puzzle piece, and is why Ryman is risky.

Good CEOs are not easy to find in New Zealand.

Most of NZ’s best and brightest leave the country, and the CEO picture isn’t any different. New Zealand has recently seen an exodus of CEOs to overseas.

The good ones left (Sophie Maloney, Rod Duke etc) are definitely not coming to Ryman.

If Ryman announced tomorrow that Simon Challies was returning as CEO, I wouldn’t be able to buy shares fast enough. But that’s not happening either.

So who’s it going to be?

As Shakespeare famously said – that is the question.

Until we know the answer, my opinion is Ryman remains uninvestable.

Disclosure: Long SUM.