Ryman Healthcare. Arrested development NZ$9.60 NEW ZEALAND. Event. Impact. Earnings and target price revision. Price catalyst

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1 NEW ZEALAND RYM NZ Price (at 6:, 19 May 216 GMT) Outperform NZ$9.6 Valuation NZ$ DCF (WACC 9.%, beta.8, ERP 7.%, RFR 4.5%, TGR 2.%) 12-month target NZ$ month TSR % Volatility Index Low GICS sector Health Care Equipment & Services Market cap NZ$m 4,8 3-day avg turnover NZ$m 4.4 Number shares on issue m 5. Investment fundamentals Year end 31 Mar 216A 217E 218E 219E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % PGCFPS x PGCFPS rel x EPS adj EPS adj growth % PER adj x PER rel x Total DPS Total div yield % Franking 1 % ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability. RYM NZ vs NZSE5, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May 216 (all figures in NZD unless noted) 2 May 216 Macquarie Securities (NZ) Limited Arrested development Event Ryman released its full year result, which was largely in line with our forecasts. The company provided development guidance for the next 4 years, which was below our 217 forecast, but above our longer-term forecasts. Impact Development rate. The result was largely in line with our expectations and so in our view the key news released was the development rate forecasts. The forecasts were lower than we expected in FY17 and FY18 (FY17=-285 and FY18=-3), which can be largely explained by delays in the consenting process for the Melbourne village pushing out the village opening to FY18. The longer term development rates were higher than we had previously assumed (1,5 unit/beds per annum, Macq=1,2) driven by an expected two unit per annum development rate in Melbourne. Operating revenue in line with expectations ($261m, Macq=$261 m). The two components disclosed by Ryman were also in line with our forecasts (Care fees=$29m, Macq=$29m and Management fees=$51m, Macq=$51m). Realised gains slightly ahead of forecast ($123m, Macq=$121m). Resale gains were ahead of our expectations ($61m, Macq=$57m) driven by a higher than expected number of resales (69, Macq=644). Development margin was below our forecasts ($62m, Macq=$64m) driven by a lower number of sales (518, Macq=581), which was partly offset by a better than expected margin (28%, Macq=25%). Underlying earnings were slightly above forecast ($158m, Macq=$157m). The impact of the above forecast realised gains was partially offset by higher than expected operating expenses ($24m, Macq=$23m). Change in DCF/target price. There are three drivers to the increased valuation; more specifically the target price increased because: time ($.4), development period ($.7) and development rate ($.6). Earnings and target price revision The reduction in development rate over the next two years drags down short to medium term earnings forecasts; EPS revisions: FY17= -3.7%, FY18= 2.% and FY19= -.8%. Target price increased from $9.3 to $11.. Price catalyst 12-month price target: NZ$11. based on a DCF methodology. Catalyst: First half result Action and recommendation We rate Ryman an Outperform with an $11 target price. In our view, the Australian retirement village market is less competitive and thus more attractive than NZ and so RYM successful entrance into this market and its exceptional earnings track record justifies the premium the stock currently trades on (see valuation section for details). Please refer to page 8 for important disclosures and analyst certification, or on our website

2 Forecast and target price changes The result was largely in line with our forecasts and so the key change we have made is to our development forecasts: reducing short/medium term and increasing long term. This reduces development margins and deferred management fee amortisation in the short/medium term, but the longer term revisions are the dominant impact for our DCF. See section below for more details. We have upgraded our target price from $9.3 to $11.. This change have been driven by: Time elapsed. We last adjusted our Ryman valuation in November the elapsed time increases the valuation. Development period. Increase in the development period (back to 1 years). Revisions. The key revisions made are to development forecasts reducing short/medium term, but increasing long term. Fig 1 Decomposition of target price revisions Previous Target Price Time elapsed Dvelopment period Revisions New Target Price Impact Development rate Ryman provided explicit development guidance for the next four years; during which time the company is intending on ramping up to developing two Australian villages per annum. The chart below provides our interpretation of the development guidance. Fig 2 Development rate guidance (assuming RYM s chart is to scale) FY17 FY18 FY19 FY2 FY21 NZ Australia One of the key assumptions for the increase in Australian development rate is arguably land availability. The company is targeting acquiring at least two more pieces of land in the next year and then maintaining this momentum, which will see them build up a land bank in Melbourne. 2 May 216 2

3 In our view the Australian market is less competitive than NZ. Australia enjoys the same demographic tail winds, but the largest players have very little development planned (Lend Lease indicated that they are exploring an offshore expansion and Stockland have 1,1 unit land bank). We had previously assumed a linear transition from the previous development target to the new development target, which implied a significantly higher development rate in FY17. We also took the opportunity to increase the proportion of beds to 3%, based on the generic village of a total of 28 units and 12 beds. The chart below provides our development forecast adjustments. Fig 3 Changes to development rate forecasts FY17 FY18 FY19 FY2 FY21 Total units Total care beds Average prices and affordability Ryman provided an interesting chart in its result release presentation showing the average price per retirement unit in Auckland and Melbourne and the average house price in these cities. This illustrated the significant gap that exists between unit values and house prices, which should act as a buffer in a difficult housing environment. We like this argument, but our suspicion is that outside of Auckland the differential would be significantly smaller. To estimate the average unit values outside of Auckland we first calculated the average portfolio values and then adjusted for Auckland and Melbourne averages. We estimate that the average list price for an independent unit is $59, across the entire portfolio. This assumes that an assisted unit is worth 6% of an independent unit and that the number of unoccupied units was 289 at the end of FY16. This implies that the average value of independent units in the rest of NZ is $452, and assisted units are $271,, which is head of the average house price outside of Auckland. It is important to note that a significant proportion of Ryman NZ units outside of Auckland are in Christchurch and Wellington where the median price is above Ryman average independent unit ($486k and $491k respectively). This still supports our suspicion that the average gap between house and RYM unit values is modest outside of Auckland. It is worth noting that valuations in these markets are arguably less stretched. Fig 4 Average prices ($) 14 Assisted Independent House Auckland Melbourne Rest of NZ Source: Corelogic, Company data, Macquarie Research, May May 216 3

4 Valuation In our opinion, the best way to estimate the value of aged care companies is DCF; the cash flows and earnings of recently developed villages take a number of years to reach mature levels. Our cash flow forecasts have two key assumptions. Specifically: Retirement unit development rate. Retirement unit development is highly accretive and so a key assumption in our valuation is the rate at which they can develop units. The central case is that Ryman achieves its targeted development rate of 1,5 units and beds per annum from 218 for our 1 year development period. If we increase (reduce) this target by 2 units per annum our DCF valuation increases by $1/share (reduces by $1/share) House price appreciation. Retirement unit prices are set with reference to the house prices in the village's catchment, because the sale of the family home is the typical method of financing the acquisition of the right to occupy a retirement unit. Our central case assumes 4% house price inflation. If we increase (reduce) this target by 1% per annum our DCF valuation increases by $2.3/share (reduces by $2/share). Aged care bed development in New Zealand is not as accretive as Australia and so our valuation is not sensitive to this assumption. In fact if we assume that Ryman does not develop any beds our DCF reduces by $.5/share! This of course holds every other assumption constant, which is unrealistic without care average entry ages would drop and average tenure would climb. For the sake of completeness we have also included earnings multiples for Ryman and its closet comparables (Summerset, Metlifecare and Aveo). Fig 5 Adjusted earnings multiples and 5 year growth rates Ryman Metlifecare Summerset Aveo Year ending Mar-17 Jun-16 Dec-16 Jun-16 Share price $9.65 $5.79 $4.67 $3.31 Underlying EPS (cps) Underlying P/E Five year growth 16% 1% 25% 15% Source: Bloomberg, Macquarie Research, May 216 Ryman is priced at a premium to its peers when value is measured using P/Es; it has the highest P/E and a middle of the pack but the highest growth rate. The figure below shows that Ryman is also at the top of the pack when measured on a price to book basis. Fig 6 Price to book Ryman Metlifecare Summerset Aveo As at Mar-17 Jun-16 Dec-16 Jun-16 Share price $9.65 $5.79 $4.67 $3.31 Net tangible assets per share $2.86 $4.9 $2.5 $2.92 Price to book However, Ryman s premium needs to be put into context it has a very impressive track record, which is unmatched in the sector. 2 May 216 4

5 Fig 7 Adjusted profit since listing ($m) May 216 5

6 Fig 8 Financial summary PROFIT & LOSS 1H16a 2H16a 1H17e 2H17e PROFIT & LOSS FY16a FY17e FY18e FY19e Revenue Revenue Care fees Care fees Management fees Management fees Other revenues Other revenues Operating revenue Operating revenue Fair value adjustment (FVA) Fair value adjustment (FVA) Realised resale gains Realised resale gains Realised development margins Realised development margins Unrealised revaluation adjustment Unrealised revaluation adjustment Total fair value adjustment (FVA) Total fair value adjustment (FVA) Operating expenses Operating expenses EBITDA EBITDA Depreciation Depreciation Amortisation.... Amortisation.... EBIT EBIT Net interest expense Net interest expense NPBT NPBT Taxation Taxation Accounting NPAT Accounting NPAT Unrealised FVA net of deferred tax Unrealised FVA net of deferred tax "Realised" NPAT "Realised" NPAT KEY ASSUMPTIONS 1H16a 2H16a 1H17e 2H17e KEY ASSUMPTIONS FY16a FY17e FY18e FY19e RV units developed RV units developed Aged-care beds developed Aged-care beds developed Gross RV unit development margins 27.8% 28.2% 24.% 24.% Gross NZ RV unit development margins 27.6% 24.% 22.5% 22.5% Gross occupancy advances Gross occupancy advances Accrued but unrealised capital gains Accrued but unrealised capital gains Estimated market value of units Estimated market value of units MULTIPLES AND PER-SHARE METRICS 1H16a 2H16a 1H17e 2H17e MULTIPLES AND PER-SHARE METRICS FY16a FY17e FY18e FY19e EPS (reported) 26.5c 34.6c 14.7c 19.6c EPS (reported) 61.1c 34.3c 4.7c 48.5c EPS (realised) 14.1c 17.5c 15.3c 2.3c EPS (realised) 31.5c 35.6c 42.4c 5.6c PER (reported) 18.x 15.7x 19.5x 28.x PER (reported) 15.7x 28.x 23.6x 19.8x PER (realised) 34.2x 3.4x 29.3x 27.x PER (realised) 3.4x 27.x 22.6x 19.x Payout ratio (realised) 49.8% 49.7% 49.7% 5.2% Payout ratio 49.8% 5.% 5.% 5.% DPS (cps) 7.3c 8.7c 7.6c 1.2c DPS (cps) 16.c 17.8c 21.2c 25.3c Imputation.%.%.%.% Imputation.%.%.%.% Dividend yield (gross) 1.5% 1.7% 1.7% 1.9% Dividend yield (gross) 1.7% 1.9% 2.2% 2.6% NTA per share NTA per share P/NTA 4.x 3.6x 3.5x 3.4x P/NTA 3.6x 3.4x 3.2x 3.x EV/EBIT 19.x 16.7x 2.5x 28.4x EV/EBIT 16.7x 28.4x 24.x 2.3x EV/EBITDA 18.2x 16.1x 19.6x 26.6x EV/EBITDA 16.1x 26.6x 22.6x 19.1x Shares on issue (closing) Shares on issue (closing) Shares on issue (weighted) Shares on issue (weighted) KEY RATIOS 1H16a 2H16a 1H17e 2H17e KEY RATIOS FY16a FY17e FY18e FY19e Revenue growth (ex FVA) 16.1% 13.9% 15.6% 17.1% Revenue growth (ex FVA) 15.% 16.4% 12.9% 14.% NPAT growth (IFRS) 22.9% 29.% -44.4% -43.4% NPAT growth (IFRS) 26.3% -43.9% 18.6% 19.2% EPS growth (IFRS) 22.9% 29.% -44.4% -43.4% EPS growth (IFRS) 26.3% -43.9% 18.6% 19.2% Realised NPAT growth 6.% 24.9% 8.9% 16.1% Realised NPAT growth 15.7% 12.9% 19.2% 19.4% Realised EPS growth 6.% 24.9% 8.9% 16.1% Realised EPS growth 15.7% 12.9% 19.2% 19.4% DPS growth 15.9% 19.2% 4.1% 17.2% DPS growth 17.6% 11.3% 19.1% 19.3% ROA (IFRS) 8.8% 9.1% 7.% 4.7% ROA (IFRS) 9.1% 4.7% 5.% 5.2% ROE (IFRS) 24.3% 25.1% 19.3% 12.5% ROE (IFRS) 25.1% 12.5% 13.9% 15.5% Debt/(debt + equity) 29.3% 29.1% 26.4% 25.7% Debt/(debt + equity) 29.1% 25.7% 25.% 22.1% Interest coverage (IFRS) 29.9x 36.1x 27.3x 19.2x Interest coverage 36.1x 19.2x 23.8x 28.1x BALANCE SHEET 1H16a 2H16a 1H17e 2H17e BALANCE SHEET FY16a FY17e FY18e FY19e Net working capital (ex cash) Net working capital (ex cash) Investment properties Fixed assets PP&E PP&E Intangible assets.... Intangible assets.... Other assets Other assets Total assets deployed (ex cash) Total assets deployed Occuapncy advances (net) Occuapncy advances (net) Net bank debt Net debt Other liabilities Other liabilities Minority interests.... Minority interests.... Shareholders' equity Shareholders' equity Net tangible assets Net tangible assets DCF VALUATION Total /Share % CASH FLOW FY16a FY17e FY18e FY19e WACC 8.98% Receipts from residents TGR 2.% Payments to residents Payments to suppliers/employees Retirement units 4, % Total operating cashflow Aged care beds 1, % Investing cashflow Corporate % Free cash flows (equity) DCF Enterprise value 5, % Dividends Net debt % Equity raised/(bought back).... Landbank & WIP % Purchase of treasury stock Value of unused tax credits % Debt raised/(repaid) Equity value: combined group 5, % Change in cash May 216 6

7 Fundamentals Macquarie Quant View The quant model currently holds a reasonably positive view on Ryman Healthcare. The strongest style exposure is Growth, indicating this stock has good historic and/or forecast growth. Growth metrics focus on both top and bottom line items. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers. 51/415 Global rank in Health Care Equip. & Services % of BUY recommendations 33% (1/3) Number of Price Target downgrades Number of Price Target upgrades Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Health Care Equip. & Services) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. MetlifeCare 1.9 MetlifeCare Fisher & Paykel Healthcar Fisher & Paykel Healthcar Japara Healthcare Summerset Group.4.3 Japara Healthcare Summerset Group Regis Healthcare -.3 Regis Healthcare % -8% -6% -4% -2% % 2% 4% 6% 8% 1% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. MetlifeCare Fisher & Paykel Healthcar Japara Healthcare Summerset Group Regis Healthcare MetlifeCare Fisher & Paykel Healthcar Japara Healthcare Summerset Group Regis Healthcare % -5% -3% -1% 1% 3% 5% 7% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Cash NTM Price to Earnings LTM Price to Earnings NTM EV/EBITDA LTM Turnover(USD) 125 Day Turnover (USD) 25 Day ROIC FY SAL Growth 5yr Historic -28% -33% Negatives Positives -23% -26% 32% 31% 3% 3% -4% -2% % 2% 4% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score Percentile relative to sector(/415) Percentile relative to market(/398) Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 2 May 216 7

8 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie South Africa Outperform expected return >+1% Neutral expected return from -1% to +1% Underperform expected return <-1% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3 index return Neutral (Hold) return within 5% of Russell 3 index return Underperform (Sell) return >5% below Russell 3 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 6 1% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 4 6% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 3 4% in a year. Low medium stock should be expected to move up or down at least 25 3% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 216 AU/NZ Asia RSA USA CA EUR Outperform 5.34% 59.9% 46.67% 44.76% 6.66% 46.12% (for global coverage by Macquarie, 3.72% of stocks followed are investment banking clients) Neutral 34.14% 25.66% 32.% 49.9% 3.33% 35.1% (for global coverage by Macquarie, 4.79% of stocks followed are investment banking clients) Underperform 15.52% 15.26% 21.33% 5.33% 9.2% 18.78% (for global coverage by Macquarie, 2.31% of stocks followed are investment banking clients) RYM NZ vs NZSE5, & rec history (all figures in NZD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, May month target price methodology RYM NZ: NZ$11. based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at Date Stock Code (BBG code) Recommendation Target Price 22-May-215 RYM NZ Outperform NZ$ Mar-214 RYM NZ Outperform NZ$ Nov-213 RYM NZ Outperform NZ$7.5 Target price risk disclosures: RYM NZ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN , AFSL , a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by, a division of Macquarie Equities Limited ABN AFSL ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN , AFSL No ) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business 2 May 216 8

9 in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act Apart from Macquarie Bank Limited ABN (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return and delete the document. We do not guarantee the integrity of any s or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at Macquarie Group 2 May 216 9