Dr. David Kerr, how has Ryman Healthcare weathered 2022?

It is a good tradition to start the RV Capital meeting with a Q&A with one of the companies in which the fund is invested into. In 2023, we had the pleasure of Dr David Kerr answering our questions on Ryman Healthcare.

As a service for our readers, we are sharing the transcripts of the RV Capital meeting 2023 in Engelberg with you.


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We have discussed the following topics:


[00:00:00] Rob Vinall: Thank you everyone for coming. I think it’s a cliche at the start of an event like this to say you’re happy to be here. But I can tell you I’m happy to be here. Thank you. Whenever people said you should go to Berkshire because who knows how many more opportunities there were going to be. I always thought they were referring to Charlie Munger. But I’ve received so many well wishes from you. Lots of emails from people who aren’t here as well. I haven’t had a chance to respond to those yet, but I will do it next week. Thank you so much. It means a lot to me.

And yeah, I couldn’t be happier to be here. Sitting next to me is David Kerr. I’m going to introduce you, David, shortly. But first, I’m going to introduce some of the other important people here and then quickly go through the agenda for the next two days. And then we’ll get to our fireside chat. So I have had a partner since the last time we met, a business partner. Andreas, are you here? Andreas will join me on the Q&A in the second section, so I’ll wait until then before introducing you. I also have a board member of my company now responsible for compliance, Reinhardt Zimmermann. On the DJ on the technical equipment, as always, is Tilman. Thank you, Tilman, for all of your efforts.

And then many of you asked whether my children will be handing out the mics for the chat. Later on, they will be. I don’t see them yet here. It looks like they’re still sleeping in so maybe hold back the applause for when they come a bit later. So what is the agenda? A lot of you be familiar with it. A few changes and a few tweaks compared to prior years, but not too many. Shortly in a few moments I’m going to do a fireside chat with David and that will be from 9:00 until 10:00 and then from 10:00 until 10:30. They’ll be a coffee break. From 10:30 until 12:00, there’s going to be the Q&A with Andreas and me. You can ask whatever you want.

Last year was a tough year, not just from a health perspective, but also from an investment management perspective. There’s not much we can do about last year’s performance, but we can answer your questions and talk about whatever’s on your mind. So we’re very much looking forward to that. Then at 12:00, the formal sessions break, but the conversations will continue, and there is sort of two streams that we can go on. So, there are the skiers in the group. Roughly, I think typically is sort of about 1/3 of the group of skiers, and they’re traditionally we have our resident powder hound in Nate, Nate Chesley, Nate you want to quickly stand up?

He very kindly organises skiing every year. Yeah, a quick round of applause. So the skiers need to orientate themselves towards him. In the past years, Joel Cohen, Nate’s colleague, has organised the hikers. Joe couldn’t be here this year, but Andreas is going to take care of the hikers. So if you’re thinking more of going for a walk around the Trübsee, which is a very nice lake. Sort of halfway up the mountain. Then orientate yourselves towards Andreas after the morning sessions, and then we’ll meet back here at 6:00 PM. All the stools will be cleared away and there’ll be buffet-style or rather cocktail-style tables put up. And the buffet, the idea being that people can move around and talk to each other. It’s an incredibly friendly open group, as I’m sure many of you have already noticed from last night, everyone was delighted to connect with other people.

I don’t advertise this event. Anyone who comes it’s because they’ve actively sort of selected in to come and that always creates a sort of positive dynamic of, it’s only people here who want to be here and I’m sure especially if you’re new to the event, you’ll have lots of interesting connections this evening. Then on Sunday, we meet back here at 9:00 AM and there are going to be three sessions. First, I’m going to do a fireside chat with one of my peers up until Andreas joined, I was working on my own, but I didn’t, in a formal perspective, but I wasn’t working on my own in the sense that I was working in isolation. I’ve always had a very vibrant community of investors that I exchange ideas and every year I normally do a fireside chat with one of those. This year I’m happy to say it will be with Matthias Reichert. Matthias, do you want to quickly stand up?

And then there’s that will be from 9:00 until 9:45. There’ll be no pause. Then we’re going to go from 9:45 to 10:30, a new type of event. We have an author present in the group, Jacob McDonough, are you around? There he is. I only met Jacob this year at the Berkshire Hathaway shareholder meeting. At the book signing where he very kindly recognised me, which was nice. As he’s the one who put the effort into writing a book. I loved the book and when he said he was going to come to this meeting, I asked if we could do a fireside chat and yeah, I’m looking forward to that tomorrow. He’s brought some copies of his book with him and he’s going to do a signing afterwards if anyone wants to get one of his books.

So they’ll be a pause between 10:30 and 11:00 AM tomorrow for the signing and then it will be the final session. It always flies by quicker than you would hope, and traditionally we’ve always done a panel discussion as a final session. There will be a panel discussion again this year.

The tweak is in the past, it was always investors in funds. You know the purpose of tomorrow’s sessions is to help emerging managers to get started. And like I say in the past,

the conversations were with people who invest in funds and the tweak tomorrow will be we’re going to have three emerging managers up on the stage or rather, sorry recently started managers so people who started a fund in the last sort of two or three years as they have the more immediate experience of what it takes to get started what the challenges are, how they solve them, so I’m looking forward to that will be a slightly different perspective to prior years.

So that’s the schedule and now it’s my great pleasure to introduce, David, for the fireside chat. A few of you might be wondering where the fireside is actually, but as you may have noticed, in Europe we have a little bit of a shortage of energy at the moment, so we went for the environmentally friendly solution, but I hope we could still recreate the same sense of cosiness. David, thank you so much for coming. You’re from New Zealand which means you and your lovely wife, Debbie, had a 30-hour flight over yesterday to get here, I think. Almost certainly makes you have had the longest journey.

[00:07:39] David Kerr: We did indeed, Rob, and it’s great to be here. I just need to note that Debbie and I had our 50th wedding anniversary on the flight. She’s showing great loyalty I suggest.

[00:07:59] Rob Vinall: That sets a very high bar for all of us. And we’ve known each other for many years. You’re the very long-term, or you were until very recently, the long-term chairman of Ryman Healthcare. You recently stepped down as both chairman and board member. I’m delighted to have you here because I think you could speak to the history of the company longer than pretty much anyone alive today. I know you wanted to emphasise, though you’re speaking as a guess, as an investor in the company today as opposed to an official spokesman for the company.

[00:08:36] David Kerr: Exactly so I don’t have any information that you don’t already have as a result of the half-year result, and I suppose I could advise that I feel a similar pain to other shareholders just right now. So yes, and look, it’s nice to be here and companies like Ryman are blessed with long-term investors such as Rob’s Capital Investment. And many of you around the room. So look, it was nice to meet with you last evening. A number of you and I look forward to chatting with you again, over the next day or so.

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And now, without further ado, enjoy the conversation.

How does a medical practitioner end up as a chairman of Ryman Healthcare?

[00:09:10] Rob Vinall: Great. So I know a lot of the people here will be very familiar with Ryman, others less so. We’re going to talk about Ryman in a few moments, but I think first of all we would love to get to know you and you’re a GP, a doctor. So my first question is how does a medical practitioner end up as a chairman of one of New Zealand’s largest companies?

[00:09:34] David Kerr: Well, yes. So you’re right, I trained in medicine in New Zealand. I’m going a little slowly so that everybody can understand me and I entered general practice, family medicine and with the mortgage and all those sorts of responsibilities and when Debbie and I were doing our houses we would go to a paving company to buy paving stones and to a plant company to buy plants. And the paving stone company was owned by a man called John Ryder, who I then developed a bit of a relationship with and he became a patient and he also owned Ethel McCulley’s which had a big network of plants, trees, a garden, garden centres, all that sort of thing. And then cell phones became the rage and I found that he and his mate owned a company called Ben Rumble which sold the most cell phones in New Zealand.

And as this sort of evolved our relationship grew a little stronger as friends. And in order to address their big mortgage, I always go when somebody called. So there was a dictum in medicine when I trained that grown you may but go you must. So 4:00 on a Friday afternoon is the least popular time for a doctor to get a call because everybody else is gone. And I got a call to go to a motel which is a like a just a cheap hotel. When I turned up and it looked different from when I’d been there a couple of months before. There was some building that had gone on and I sort of thought, well, yes. I walked in and there was John Ryder sitting in the office. What are you doing here? I said and he said, oh, we think we might get into rest homes. And I said, and what he had done was they had connected all of these individual units worth a corridor down the back, and they’ve put in nurses.

Now prior to this, the average rest home in New Zealand was an old house converted where the bedrooms had curtains going four ways and there was a bed in each corner of the bedroom and John’s friend Kevin Hickman, who is a private investigator, had been called to a fire at a rest home and just to assess whether it was a legitimate claim or not and what he had seen upset him because there was an elderly lady on a chair being wheeled down to the bathroom down a corridor with her 90 askance and an absolute loss of dignity. And Kevin’s response to that was that is not going to be good enough for my mum.

So not good enough for mum became a bit of a mantra and so these two bought this motel, motorhome cheap hotel, and converted it into a rest home. And the thing that fascinated me on looking at it was that first of all everyone had their own bathroom. So they had privacy, and their dignity was restored. The second thing that was evident was that there was a registered nurse there instead of somebody who had no training and the registered nurse had pathways and procedures and protocols. And there was a formal training programme for the carers. So the built form was significantly better. The care was better, and privacy and dignity were retained. And so I found that very interesting, and so we chatted and then he rang me a while later, and said, oh, we’ve got to do another one. And it was exactly the same thing, on the other side of the city.

In Christchurch, yes, I’m sorry, yes. And so I was interested but no more than interested and he asked me a few things about what I felt about care. What were the imperatives of care? And then he told me, oh, we’re going to buy a hospital. Why would you do that, John? And my vision of a hospital was the sort of public hospital we have an operation and that sort of thing. No, no. He said because people in the converted hotels’ needed care and he couldn’t put care into the facility that he had. So we’re going to buy a hospital. The hospital-level care, and so they’re in, was the birth of the concept of a continuum of care between somebody who had a level of independence through to somebody who needed care, and then they asked me, oh, would you like to be a director?

[00:14:31] Rob Vinall: So this was at the time that we’re now sort of two facilities?

[00:14:35] David Kerr: Several facilities and been right, the cell phone, manufacturer retailer and all these other companies and I was surprised about that because I wasn’t involved in corporate life, except that I had a track record getting groups together so Christchurch, the city of Christchurch, they’ve had about 140 general practitioners who worked independently and I convinced them all to work collectively and to take on the budget for the laboratory services and the budget for the pharmaceutical services. And that with education we would work as a cooperative and we saved over three years about $40 million, which we then put back into free care for people who are terminally ill and more immunisations taken. So I was quite comfortable with the communication. You know, getting doctors together is regarded as a bit like herding cats. So it’s difficult to get them to agree to things. So this I think attracted John and Kevin, but we were constrained for capital.

The Two Founders of Ryman

[00:15:45] Rob Vinall: Yeah, and let me just stop you there. So you had the two founders which were Kevin Hickman and John Ryder?

[00:15:52] David Kerr: The “Ry” and the “Man.”

[00:15:53] Rob Vinall: So that’s where the “Ry” and the “Man” comes? And but it sounds like from pretty much the very earliest days you were sort of involved in the company. And when would this have been, roughly?

[00:16:07] David Kerr: This would have been the early ‘90s and they were known as the cop and the accountant and there was a bit of a– in all countries, those sort of class systems and things and they were a wee bit flashy, deemed a little bit flashy for some of the established people in the city. And so there was some negative commentary about them, but they had enormous energy and determination, and they were entrepreneurial, so they wanted to grow the business more, and capital is constrained. And so in 1997, they said we should do an IPO, float on the NZX.

[00:16:50] Rob Vinall: How many villages would they have had at the time?

[00:16:53] David Kerr: This would have been of the order of six or eight, all in the South Island. And so we sat through these sessions with potential investors. And the moment we use terms like deferred management fees and licence to occupy, these are things that we can explain to you.

David Kerr, what is Ryman Healthcare?

[00:17:14] Rob Vinall: Before we get into that, which I want to get to, because I know there’s a lot of people here who probably don’t even know what Ryan does. Now we know who you are and how the company got started. What is Ryman for someone who’s who hasn’t heard of the company?

[00:17:34] David Kerr: Ryman buys bare land. It gets consent to build and then manages the building of a village which will have independent living. It’ll have service departments which are assisted living if you like. It’ll have a rest home, which is higher levels of assistance. It’ll have hospital care and it will have what we call special care units, which is a dementia facility, so we build that end to end.

Ryman buys bare land. It gets consent to build and then manages the building of a village which will have independent living. It’ll have service departments which are assisted living if you like. It’ll have a rest home, which is higher levels of assistance. It’ll have hospital care and it will have what we call special care units, which is a dementia facility, so we build that end to end.

[00:18:07] Rob Vinall: Yeah, you have these integrated villages, which is quite unusual in the industry.

[00:18:13] David Kerr: That’s right, so the continuum of care that I referred to a few moments ago is the point of difference. And in New Zealand, nobody else did it. Now there are other parties doing it. In Australia, in Victoria, where the company’s very active at the moment. There is very little competition in terms of providing that continuum of care.

[00:18:33] Rob Vinall: I remember when my own grandparents needed to go into care, and you have a lot of companies which are focused on just one aspect of it. So when you’re sort of reasonably healthy, they might offer you a service department, but then the question is, what happens when the health deteriorates, which is you know it’s going to happen. I think that the wonderful thing about Ryman is that you’re reasonably fit and healthy and want to live an independent lifestyle. You can go into an independent living unit and no matter what happens, you’re going to be taken care of.

[00:19:04] David Kerr: Exactly. So we focus on the average age of entry to an independent living unit is 79 years. And the average age of entry to a care end of the spectrum is about 85 years. So we focus not on a lifestyle decision as such. It’s not somebody downsizing from their home because the children have left the nest. It’s somebody who has needs in an unspecified manner, be they loneliness or be they health-related needs. And so our focus is much more at that end of the spectrum.

Culture of Ryman

[00:19:44] Rob Vinall: So one point of differentiation is this continuum of care, but I know the way that the patients are treated. The culture of Ryman is also a very important part of the offering, so maybe you can describe that.

[00:20:00] David Kerr: Culture is always quite difficult to describe, isn’t it? But maybe if I sort of give you some thoughts about what is the driving thinking, in terms of the residents, the whole plan is to retain their dignity and their privacy and to excite them to exceed their expectations and so that’s a big part of our plan, always.

[00:20:31] Rob Vinall: So they stay engaged with life and live longer.

[00:20:33] David Kerr: That’s right, the evidence around loneliness is about the same as smoking 15 cigarettes a day. So we provide a central facility where there’s entertainment. There are happy hour drinks, there are pool tables, there’s music, there are all sorts of stuff going on. I was approached at an opening some years ago by this man who said I want to speak, I want to speak and I felt I’m losing control here, but he stood up. He said I feel like I’ve died and gone to heaven. This is marvellous. So I was able to breathe again.

But the reality is that many people will have been on their own for several years, and it will have been a struggle. So yes, we work hard to light them, and we like to give them core determinations. We’d like to give them financial certainty because as you get old, financial certainty is important. You can’t cope with the unexpected cost generally, and so that’s a big part of the offering.

So yes, we work hard to light them, and we like to give them core determinations. We’d like to give them financial certainty because as you get old, financial certainty is important. You can’t cope with the unexpected cost generally, and so that’s a big part of the offering.

And then if I could just track into the staff for a little bit. We had a strong commitment from the very beginning around staff being trained, and in fact, a whole training programme for carers was developed which Ryman developed and then we gave to the sector as a trust so that all of the sectors could utilise the training skills that we had developed because we felt that the whole sector could raise up standards.

So if you train people well, we pay them in the upper quartile, always of any group and put your faith in them. You know, trust them and let them make decisions at the front line. Because with healthcare you can’t have all the decisions made behind. You’re going to make the decision there and then when you’re with the person.

Number of Ryman villages in New Zealand and Australia

[00:22:26] Rob Vinall: Yeah, and how many villages do you have now in New Zealand?

Maybe you can talk about Australia?

[00:22:35] David Kerr: It’s about 40 in New Zealand there’s, forgive me if the numbers are not exactly right, and eight or nine operational in Victoria, State of Victoria and about 15 sites under development across the place.

[00:22:53] Rob Vinall: It’s become a huge company from these modest beginnings.

[00:22:59] David Kerr: Indeed. Yes.

[00:23:02] Rob Vinall: It must have been exciting to be part of that journey.

[00:23:04] David Kerr: It was very exciting and but there are some sentinel moments that I recall particularly, moments when we had pressure. So Christchurch, New Zealand had a very bad earthquake a decade ago, where a number of the villagers were damaged and suddenly the builders from other cities who had built villages for us came flying down in their cars and trucks and white panel vans to help us rebuild, the staff families came and helped us get things going again and this was all a function of the philosophy that Kevin had, which was you must have long-term relationships and relationships where all parties get what they want out of the deal.

And so, we have still today the kitchens are made in Christchurch and sent to Australia. Many of the suppliers of our soft furnishings are Christchurch based and they send them to Australia. So we have we try to build long-term relationships which are mutually beneficial. And there’s no argument about quality. There’s no argument about the time of delivery. So some of those things play to our getting through things like the earthquake and like the GFC and those sorts of things that we’ve been challenged.

[00:24:27] Rob Vinall: Yeah, I think. I think there’s a sort of goodwill you’ve created with staff, and suppliers, and it’s not something you see in a balance sheet, but it’s a value which is there.

[00:24:38] David Kerr: Absolutely. I was pleased to see a week or so ago that an independent party assessed the company in terms of its ethical standards. And so this is the UK business ethics tool that was applied to the company and the company was one of a very small number on the NZX that got 10 out of 10. And I was pleased to see that because to me, that’s what makes you sleep straight and bed at night, doesn’t it? So the companies got high ethical standards and I think things like the earthquakes and the coronavirus catastrophes that occurred and the GFC show that the company has still got agility despite being quite big.

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David Kerr, how the villages are financed?

[00:25:27] Rob Vinall: Yeah, so many of the people here won’t have seen one of your villages. I’ve been fortunate enough to visit many of them. They look like a luxury Country Club, except there’s a Bowling Green as opposed to a golf course in the middle. So you have beautiful free-standing houses or in some cases large apartment blocks. A large village centre, so, but these things are expensive, so explain maybe how the build of the villages is financed.

[00:26:00] David Kerr: Okay, so the land is acquired and then the build takes place, and the aim of the company is to achieve a development gain on the first sale, so the development gain usually between given that we manage the build and manage the procurement is usually of the order of 25%. So a sale is then made. It’s not a sale because the company remains the owner of the built form, but a licence to occupy is sold. So there’s a 25% gain and the average independent living unit at the moment is the licence to occupy sales at around $1,000,000. So when you buy that licence to occupy you enter into an arrangement. You have a 90-day cooling-off period. You can pull out if suddenly you change your mind, but you enter into an arrangement around a deferred management fee, which is 20%. And it’s 4% on entry to the village and then 4% each year for the next four years. And that is what you won’t get back. So after five years, you would get back. $800,000. After 10 years you’d get back $800,000. So there’s a fixed deferred management fee which we accrue as a gain on an annual basis.

[00:27:33] Rob Vinall: And it’s a win-win for everybody because you receive the occupancy advance. So you effectively get the cash out of the village so you can build a new one. And from the perspective of the resident they have financial security.

[00:27:48] David Kerr: That’s right, and so we do all the maintenance. There’s no sales commission or anything, and there is the property at 10 years or whenever the person moves out is refurbished completely at the company’s cost and then it is sold again. So the benefit of house price inflation, which we might talk about a little bit at the moment, but it sort of a long run would be 4 to 5% per annum. So instead of selling it for $1,000,000 after five years, you might sell it for 1.15 or $1.2 million on which she then charged a deferred management fee of 20%. So you can see there’s a sort of a bit of a wave built. In addition to that, you pay a weekly fee and that weekly fee is of the order of about $200.00 per week and that covers window cleaning. It covers your rates. It covers all the other sorts of stuff, but that is fixed. That never goes up if you’re there 20 years, you’ll still only pay whatever you paid on entry to the village. So this is to do with the financial certainty that people like when they’re in that age group. Fair explanation?

David Kerr on purpose

[00:29:11] Rob Vinall: Yeah, that makes perfect sense and I know “purpose” is a very important part of why you work. So maybe you could talk.

[00:29:21] David Kerr: About that, yeah, well, the purpose. The purpose is what unifies and motivates people, isn’t it? And so we generally have been blessed with staff who are enormously motivated towards, we’ve all got grandparents, and so we all can identify with looking after our grandparents and then our parents and then at my age you start thinking about yourself. So good enough for mum. And then there’s a few dots and maybe Dad. If Dad survives because men, obviously, don’t live quite as long, it is sort of the mantra that we preach and we encourage all our staff to think about well, was that interaction with the person on the telephone good enough for an interaction with your mother? And so that is the strong driver. Basically, we are committed to looking after older people in their final years and retaining their dignity and enjoyment in life.

View on why the market has taken a negative view of the company

[00:30:25] Rob Vinall: Great. So if we fast forward to the present, Ryman was a company that suffered somewhat from COVID. COVID is fortunately behind us now, but if I look at the last 12 months the stock price has gone down, and I think the companies had one or two problems. So what is your view on why the market has taken a more negative view of the company?

[00:30:47] David Kerr: Okay, well, you’re absolutely right. Ryman coped with COVID extremely well and we had everybody turned up to help sort that out. In essence, we decided we were just going to listen to experts, not to the government and we just did exactly what our experts told us to do and that involved quite a significant expenditure which the board said, no, no, you do what you do, what you need to do to look after residents. That’s the most important thing, so there was no how much is that going to cost discussion, and I was proud of everybody for thinking like that.

So we invested heavily in things like the staff were paid additional payments for being on shifts and residents were given meals and parties in a box and all manner of things. Basically to make them manage through the lockdowns because of the lockdowns was the biggest challenge. So Victoria, which is this Australian state in which we operate was locked down for six months. And that caused a significant challenge for our construction team because the rules in Victoria were that you could only have 25% of your construction workforce on the ground at any time.

Well, that’s very challenging. It’s 25% of your painters and 25% of your concrete layers like it was a massively challenging thing, so there were six months of lockdown. In Auckland, New Zealand, which was locked down for three months, similar sorts of challenges and Auckland, Victoria amount to about 50% of the company’s portfolio going forward. So it was a big challenge for us to manage the lockdown and add to that the complexity of older people feeling the safest place was at home with the door shut rather than coming and visiting a village and finding out whether they want to move into a unit. So there was a dramatic reduction in our ability to transact and that caused that was a hiccup we never foresaw.

[00:33:03] Rob Vinall: But when you did the right thing, right?

[00:33:05] David Kerr: We did the right thing. We did the right thing with associated financial challenges, but at the same time, we are building at 15 different sites at the moment. And if you just take a rough figure of $100 million at each site invested, there’s $1.5 billion of debt effectively accounted for. And some of the sites are the most wonderful sites, such as the ones that you may have seen Rob. But they are complex and they are multi-storey towers and you cannot sell anything until you finish the very last unit at the very top of each tower, and so they’re multi-storey towers complex and they have been designed, I’d suggest as much as five or six years ago and five or six years ago, the provision of care to people who actually needed intense care like hospital-level care or dementia care was profitable.

So the company made 1/4 of its profit from sales of occupation rights. A quarter from the development gain from between build and sale price. A quarter from care and 1/4 from the weekly fees. And so there were all these legs of income. But over the last five years, the New Zealand government, less so the Australian government have felt these care companies are making lots of money we don’t need to put the fees up and so care has become an unprofitable, significantly unprofitable activity which is a big challenge for us in terms of our purpose and our commitment to care. Because you can’t just move somebody out and say, well, you’re on your own now.

So a number of changes have been undertaken to try and address that in the last… Would you like me to describe that?

[00:35:11] Rob Vinall: Yeah, sure. Go on.

[00:35:12] David Kerr: So effectively we’ve reduced the number of care beds. So we worked out, how many care beds do we need for this village with so many independent living units? How many care beds do we need? And let’s not build more than that, because we used to build a full care facility, only build what we need for our village. The second opportunity is that we’re actually looking to charge a deferred management fee on a room because the room is, it’s a room with an ensuite. It’s just like a mini apartment, so we’re looking to make some changes like that to try to recover the return on capital from building a full care facility. So those sorts of things take time to flow through.

[00:35:55] Rob Vinall: Yeah, it sounds like a transitory problem that you have a solution for them.

[00:35:59] David Kerr: We do, but one has to be very mindful that some of our residents are there, and we gave them certainty on day one. We can’t, in year four, somebody says now we’re going to change your arrangement, and some of them are delighted to live beyond the changes, and some of them have been there 10 and 15 years. And this is marvellous, but we obviously can’t change the rules for them until they move on.

Property Market

[00:36:28] Rob Vinall: Yeah, what about the property market? Obviously, it’s been very hot for a very long time in New Zealand and Australia, the market seems to be turning down now. What is the impact of that?

[00:36:38] David Kerr: Yeah, so the property market in New Zealand has been hot for a long time, partly because of limited land, partly because of population growth, partly because of low-interest rates, but the biggest factor in New Zealand has been the taxation arrangements, so there is no capital gains tax. So if you buy a house as an investment for $1,000,000 and you sell it two years later for $1.5 million. You’ve got half a million dollars, no tax. So that is driven by very significant house price inflation. So the house price inflation for the 18 months to November ‘21 was 40.5%. And in Australia less so, it was around 20%, but that is very significant inflation in an 18-month period. Since then, there’s been enormous discussion about house price inflation dropping away and house prices dropping, and this plays of course, to one of the reasons for the current share price.

[00:37:43] Rob Vinall: Because you make the money through the development gain and on the resale of the apartments.

[00:37:48] David Kerr: That’s right. Exactly. So house price inflation has come back in New Zealand. It’s come back about 12 to 17%, but it was on a 40 to start with, so it was unreal. It’s an unreal number. In Australia, 20% up and around 7% back. And it seems to be flattening and the clearance from auctions is clearance of sales is occurring steadily now and prices have seemed fine. The biggest change has and for entry-level homes rather than the sort of homes that we find our residents have. So when we go to an area, we look at the value of the residential homes in the area. We look at the percentage of people who have mortgages and something like 85% of the people in the geographical areas we go to have no mortgage and we price the unit. So the example I gave was $1,000,000. We price it so that, in fact, it’s only ever 80% of the value of their home. So that gives–

[00:38:57] Rob Vinall: The idea is from the sale proceeds of their own home, they have some money left over.

[00:39:00] David Kerr: They come out with some cash, and they feel good. Now the interesting thing is that currently there’s a lot of negative sentiment about house price inflation. There’s a lot of commentary about interest rates, and then when analysts look at the debt level of the company at about $3 billion on equity of around 12, I think, they say, or it worries me this is a massive problem. It is a problem. Don’t get me wrong, but it is not a problem which cannot be addressed. It’s a problem partly of perception and sentiment because $3 billion is a very large number for a New Zealand company, but not for other companies. But for a New Zealand company, it’s a very large number.

But when you consider that interest rates have around, I think their official cash rate in New Zealand is around 5% at the moment and it looks like it’ll flatten off at the most. It’ll go to 5.25 or 5.5 and interest rates in Australia are already peak regarded as peaking now, so interest rates are going to come back. It’s not impossible given that 50% of the debt is fixed for the next couple of years anyway. In terms of interest rates. But there is a negative sentiment towards the sector, which is hard for me to understand, and I think it’s partly because of the profitability on the property side that the sector has.

Ryman in the future

[00:40:37] Rob Vinall: So much for the present. Looking to the future. Forty villages in New Zealand I think five open ones in Australia. Many more in the land bank. If we look sort of five, ten or more years into the future, where do you see Ryman in the long term?

[00:40:55] David Kerr: Right, well, some work done a couple of years ago led me to think that we could have easily 25 to 30 villages in Victoria. And Victoria, as I mentioned earlier, the competition is not mature at all, so we could have as many villages as that. One of the challenges that the company has is that from the moment of deciding to go to a geographical area until we actually are able to sell something, it’s sometimes five years and then to complete the village, seven to eight years. So it’s quite a long gestation period. So to go beyond Victoria, the logical state to go to next would be New South Wales, which is immediately adjacent. My belief is that that needs to be started to be thought about now. Quite a lot of effort has gone into building a management team in Australia and one of the mistakes we made early on was we managed Australia from New Zealand this is not. This is not a way to build strength and unity of purpose. But we now have a very efficient management team and they contributed about 50% of the underlying profit in the first half. So I would see another state as being the next logical step.

[00:42:18] Rob Vinall: And beyond Australia?

[00:42:21] David Kerr: I don’t know. I was approached a few years ago by, oh no, maybe 18 months ago by a Spanish company that had real estate, who said that if Ryman would tell them the model, they would provide the land. We’d do 50-50 partnerships. I quite like Spain, but we decided that there’s a great danger in spreading yourself too thinly and I think we’ve already probably done that as a company spread ourselves but thinly and we just need to steady things up a bit.

What’s next for David Kerr after Ryman

[00:42:57] Rob Vinall: Absolutely. And for you, personally, I know being chairman of Ryman was probably almost a full-time job and you’re practising GP at the same time. Now, that at least the Ryman part has fallen away, what are your plans?

[00:43:13] David Kerr: Well, I’m I think I better chicken and find out from Debbie what my plans are. No, look, being with Ryman was the most exciting and wonderful experience going to a village and being accosted by an older person and said, now, listen, you’re the chairman and I didn’t like that dessert I had last night, or can’t you do something about the quality of the wine? And having those wonderful interactions with older people and being a GP, you learn to read the death notices in New Zealand like I do, just find out whom I did do well, whom I didn’t, and so often the death notice, this will give positive comments to our villages and our village managers. I don’t know whether they do that in Europe, but in New Zealand, they actually say these things and so it’s a very rewarding experience so I didn’t mind the time. I loved it.

[00:44:14] Rob Vinall: But your own plans, how are you going to fill up your time?

[00:44:17] David Kerr: Well, I’m still a director of a couple of operations and a private hospital. And there’s a charity, the city mission, that I’m a trustee for, which looks after people who have fallen on hard times and that sort of thing.

[00:44:34] Rob Vinall: Okay, it sounds like you’re going to be busy. I think we’ve got about 10 minutes left. Should we take a few questions from the audience?

[00:44:39] David Kerr: Absolutely, yeah.

[00:44:41] Rob Vinall: I don’t see my mic assistance here, so I probably carry the mic around. I can see that. Oh, there they are. I’m sorry. I didn’t see you come.

Will the village be good enough for David Kerr?

[00:44:58] Speaker 3: Hello, you’re still very busy I gather, but will the village be good enough for you?

[00:45:06] David Kerr: Yes, every village. It was improved in ways and that’s the sort of another mantra we’ve always had, what didn’t we do quite well enough? So a good example is that we built exercise rooms in some of the villages about eight years ago and now the exercise rooms have to be twice as big because so many people do yoga, they do Tai Chi, do exercise. So will the village be good enough for me? Yes, it will. Absolutely. That’s not been a personal motivation, but it of course it’s the way in which you think, isn’t it? You know, how would I feel?

David Kerr on buying back shares

[00:45:44] Speaker 4: Hi. I would like to ask if you are not planning to buy back your shares and current lowest price-to-book ratios.

[00:45:53] David Kerr: Look, given that I’m not on the board. It’s not possible for me to comment on what the board might or might not be doing. I think that many parties are sitting on the sideliners thinking that there will be a capital raise, and that’s depressed the share price. It would be nice if the company found itself in a position to say that is not going to happen or it is going to happen so that some clarity could exist, but it’s not something that I have any knowledge of. Look, I’m a net buyer of shares in the last month or so, so it’s all I can say. I am as surprised and distressed as any other shareholder would be.

[00:46:50] Speaker 4: Thank you.

[00:46:57] Speaker 5: Hi and thank you for being here. I understood and maybe wrongly that you buy land without planning permissions and then you get these planning permissions. How can you make sure that you will?

[00:47:10] Rob Vinall: Yeah, I can’t hear it either.

Planning permission

[00:47:14] Speaker 5: The question is, I understood that you buy land without planning permissions and then you get these planning permissions and you build. How can you make sure that you will get planning permissions?

[00:47:28] Rob Vinall: The question is buying land without planning permission.

[00:47:30] David Kerr: Yeah, so before we buy the land, we obviously relate to the local territorial authority and debate with them. What are the chances and that sort of thing? So there’s a spectacular piece of land on the Mornington Peninsula and Victoria called Mount Eliza where we met with the Council and said we would like to buy this land to build a village and they were very supportive and so we bought the land within a month or so there’s an election and the Council changed completely. And that has given us about six years of grief, and we’ve just before Christmas we got consent finally. But having to go through a legal process. So we usually can get consent. It’s just how quickly and but it is always done after a lot of debate and discussion before we acquire the land. Often the trick is to actually get the consent and then to start the building and then to go back and try and enlarge the consent or added to it, so that’s something that we’ve learned over the years, but no, it’s not done without great care.

So we usually can get consent. It’s just how quickly and but it is always done after a lot of debate and discussion before we acquire the land. Often the trick is to actually get the consent and then to start the building and then to go back and try and enlarge the consent or added to it, so that’s something that we’ve learned over the years, but no, it’s not done without great care.

[00:48:39] Rob Vinall: And I think it’s fair to say you get a better price from the seller if it’s not contingent on having consent.

[00:48:44] David Kerr: That’s right, so traditionally we would buy from a seller who didn’t maybe appreciate the value proposition. But as the company’s got bigger and its rip name has been bandied about more and more, we have people coming to us and it’s going to be interesting over the next year to 18 months because there’s construction activity is starting to decrease and construction cost inflation is starting to decrease. That’s traditionally a time when the land will start to become available at more advantageous prices. So it’ll be a big discussion for the board. I would imagine how much capital are we going to put into land versus standing up the balance sheet, so yeah.

[00:49:32] Rob Vinall: Oh, there’s one question from the internet.

David Kerr on the competitive advantage of Ryman’s developments side

[00:49:33] Nate: Yeah, just one question from the live stream. Could you talk a little bit about how you’ve built a competitive advantage on the development side relative to a pretty crowded field with private equity developers, and other competitors, and how that advantage might change in an environment? Like this where capital has become scarce, and the demand picture has changed?

[00:49:55] Rob Vinall: Where in the competition to buy land while you’re potentially a better buyer of land than, say, private equity or the other types of developers?

[00:50:09] David Kerr: I don’t know that I can easily answer that question. I’m sorry. I think that often in the early days, we would buy bits of land that didn’t have appeal to other operators. It would be beside a cliff or it would be near a railway station, or there be something that made it less desirable and we would then work to build something that’s desirable out of that. Some of the big Auckland sites that I mentioned a moment ago are complex and wonderful. They’re going to be wonderful generators of income over the medium to long term. They were sites which were unaffordable to anyone other than a company like Ryman, which could generate a capital gain from it.

The basic philosophy in the early days was that we needed to build the village and get out without leaving any capital in there. That was the fundamental philosophy, and so then you go on to the next one that hasn’t been possible in the last five to seven years because care has been so poorly funded so the capital cost of building the care facility kills that. We were able to do that in terms of the independent living units. We recycle capital completely, but we leave money on the table around the care and that’s why the option to use a deferred management fee for the care beds or a refundable accommodation deposit is another term that’s used for the care beds being looked at much more closely.

[00:51:45] Rob Vinall: OK, thank you.

Does Ryman pre-sell?

[00:51:48] Speaker 7: The way I understood you earlier was that you finish the complete town before you start selling units. Wouldn’t it be possible to either sell off the plan or make model units and sell them before they’re actually finished to reduce the amount that you need to take on?

[00:52:05] David Kerr: Yes, I probably didn’t explain myself well. We do pre-sell. We pre-sell from the time we have the plans and that gives us some certainty. In fact, we pre-sell before we even have the plan sometimes and that gives us some certainty as to how the village is going to go. The dilemma is that when construction cost inflation is the way it is. You pre-sell at a price and then you actually complete the village, it’s at a different price. So how much you pre-sell is a very important decision for the company, particularly when the construction cost inflation is high. So yeah, I may have misled you the way I described it before.

[00:52:47] Rob Vinall: Yeah, and I think, typically the incoming resident is selling their own property to move in so they can only pay once they can physically move in, right?

[00:52:58] David Kerr: Exactly. So those of you who’ve looked at the sort of result from the first half there was $500 of contracted sales not settled, and so these are people who’ve contracted to come into the village, but they haven’t paid because they haven’t sold their home because days to sell have gone out because house price, half price negative sentiment exists. So there’s quite a lot of money that as contracted but hasn’t actually been delivered.

[00:53:31] Rob Vinall: Got it. I think we got time for a couple more questions as one note from Alex.

Competitive intensity

[00:53:36] Speaker 8: Could you talk about the competitive intensity? There’s no obvious barrier to entry besides a lot of capital. I know a lot of people out there have tried to replicate what Ryman did, some less successfully than others. Can you talk about what that history has been like and maybe what the state of play is today?

[00:53:58] David Kerr: Yeah, so in the early days there was no competition and that was delightful. Most enjoyable. But then a number of other operators started up, and so Ryman roughly has, say, 12,000 beds. And 50% of those have a care component. Somerset, which is the fast follower. I don’t think it’s an offensive way to describe them, but they have 6000 beds, but they have 17% of care beds. And I struggle to see how they can give the promise that we give our potential residents that this is your address. This will always be your address. You do not need to worry. You will receive whatever key you need, so I struggle to see how other operators can give that promise.

And there was a sort of an early nearly commitment that we entered into that I would be reluctant to forego. I’m happy to forego dividends and things like that, but I think that the commitment to a residence is such a powerful tool. And I sometimes have looked at the marketing budget and I wonder whether the best marketers are actually the residents. So often their neighbours are next door in an independent living unit. So I think that they are extremely powerful marketers. So the journey with competitors was at no competitors to start with. There are no competitors effectively in Australia currently, but there are Somerset, Oceania, Avida, number of good operators. But they’re unable to make the promise we make.

How powerful is Ryman in New Zealand, David Kerr?

[00:55:47] Rob Vinall: So how, how powerful is the Ryman brand in New Zealand? I’m sure most people here won’t be familiar with it.

[00:55:51] David Kerr: So it’s been the most trusted brand for about the last eight or ten years on surveys and that’s a wonderful tribute to the staff and to the way in which the companies operated. So, I think that gives a level of resilience. So in terms of resilience, the company is the most trusted brand, and is a highly ethical company, addressing the financial challenges in ways that have already been described to some of you and I can talk about it some more. But the fact that we create this gap between what we sell the occupational rights for and what the resident gets for their home. And noting also that we are going over the next 10 years since the massive transfer of wealth from the generation who are going to be residents that they have more than their home. They have a holiday house they have. They have equities. So the scope exists quite clearly for us to not have to retreat, so we haven’t had to reduce prices at all.

[00:57:11] Rob Vinall: Yeah, that’s fantastic and a good note to end on. David, thank you so much for making the journey here with your wife Debbie. I hope you enjoy the rest of the weekend. You’ve kindly offered to hang around and meet with the investors here. So thank you very much for that.

[00:57:27] David Kerr: Thank you for the invitation, Rob.


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Tilman is a very enthusiastic, long-term investor. Over the last years he has taught himself important investing concepts autodidactically. He tries to combine a positive climate and environmental impact with his investments.
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