What's going on with retirement village share prices?

Anyone who has bought shares in major retirement village operators might have been avoiding looking at their portfolios recently.

Ryman has dropped from a peak in 2020 of more than $14 a share to $1.83 this week. Summerset has dropped from more than $15 to $6.78. Oceania is down from a peak of $1.50 in 2021 to 66c.

Other operators have had smaller falls over a similar timeframe. Arvida has dropped from more than $2 to $1.69 and Radius is down 4.2 percent over five years.

So is it worth holding on?

Generate investment specialist Greg Smith said there was still an attractive demographic story for retirement village operators.

"Summerset's first-half sales were up 17 percent on the previous year, including a 23 percent increase in resales, while cash flow from its existing operations improved significantly. Its underlying profit was slightly lower, however, and development margins have come back to 20 percent.

"Ryman is a different proposition. It has been through a much more substantial balance-sheet and operating reset. Its latest full-year result showed its first positive free cash flow in more than a decade, at $188 million, while operating profitability almost doubled and gearing fell to 27.8 percent. That suggests the repair job is gaining traction, but it remains more of a turnaround story."

He said there was also a lot of uncertainty hanging over the sector because of the election and proposed regulatory changes.

"The Government has proposed capping repayments for departing residents at nine months, with 10 percent paid upfront within four weeks. Labour wants three months, wanting a bill before a select committee in its first 100 days if elected, and it has said that would cover current residents as well as new ones. Under Labour's version, operators could have to repay a departing resident before the next one's money arrives, which means a much larger funding requirement. The Government's own modelling put the extra capital needed under a three-month rule at $3.2 billion to $4.1 billion. Even the nine-month proposal is a hit to operators, but Labour's is far steeper."

Koura founder Rupert Carlyon agreed it was a concern for the industry.

"This whole right to occupy model … I would argue they've got away with murder for a very long time and they've structured their business models around it … probably change has been necessary and change that is coming is probably going to threaten some of those business models."

He said another concern was staffing. "Increases in minimum wage and living wage changes over the last few years have really impacted a lot of their workers and their worker base. It's a tough model right now."

He said the fortunes of the companies were also tied to the wider, stagnant housing market.

"Because they are highly leveraged, when property prices keep going up, they can sell properties easily and quickly.

"But unfortunately, with the property market so static, it's been very, very tough for them. And it's hard to see a recovery without a recovery in the property market, because it's going to make it hard for them to sell their stock."

Smith said Labour's proposal to lift pay for care and support workers could also add costs.

"Its proposed capital gains tax on investment and commercial property is aimed mainly at investors, but it adds uncertainty to sentiment around the housing market, which drives resales.

"None of this destroys the long-term demographic case, but it makes the near-term investment case more complicated. So yes, these shares can recover, particularly if housing activity picks up. But investors will want greater certainty around both operating cash flow and the policy environment first, and for Ryman, which issued a lot of new shares last year, I'd expect the market to focus on valuation relative to net assets rather than a return to old share prices."

Gertjan Verdickt, a former University of Auckland finance lecturer now at the University of Queensland, said whether Summerset would recover relied on a tug-of-war between its collapsing short-term momentum and its healthy underlying business.

"While the stock has dipped more than 40 percent over the last year, analyst consensus remains overwhelmingly positive about its recovery potential, with an average one-year target price of $12.56, an 80 percent-plus upside from today's price."

He agreed Ryman seemed a classic turnaround story but was a riskier option than Summerset.

"While Summerset managed its debt relatively smoothly, Ryman over-leveraged itself during the property boom, forcing a capital raise, a management shakeup, and a dividend suspension. Ryman's stock currently trades at $1.84. This is a massive drop from its historical highs above $16, but recent financial results suggest the bottom may finally be in. Similarly, analysts seem to be positive."