Resthome operator Arvida says its care beds will provide steady cash flows for investors

Arvida, the retirement village operator planning to raise $80 million in an initial public offering, said its high proportion of care beds provides steady cash flows that will enable it to pay investors a healthy quarterly dividend and help fund new developments after listing.

The company formerly known as Hercules issued a prospectus yesterday for an IPO covering a planned mega merger of 17 privately-owned retirement homes that has taken 12 months to pull together.

Chief executive Bill McDonald said a key difference in its portfolio to other operators in the sector was the high proportion of care it provided with 852 care beds representing 54 percent of the portfolio and half of its 450 serviced apartments also provide care. That meant stronger cash flows and loss volatility in earnings than the retirement village side provides which would allow them to pay out between 60 to 80 percent of underlying profit, he said.

That should result in an indicative cash dividend yield of between 4.2 percent and 4.7 per cent in the 2016 financial year. Based on current earnings forecasts, Arvida intends paying a first dividend of about $2.3 million in late May 2015 for the first financial quarter ending March 31.

Arvida's average age of entry for residents is 82 years, seven years above the NZ industry average. It will be the second largest listed provider of aged care behind Ryman on listing, though the unlisted Bupa Care Services is larger. In overall revenue terms, Arvida will rank behind Ryman and Metlifecare in the listed retirement sector but ahead of Summerset.

The shares will be priced in a range of 85 cents to $1 apiece with the final price being set through a bookbuild ending on Friday and list on the NZX will take place on Dec.18. Existing investors, who include a number of All Blacks, will hold around 60 percent of the company after the IPO. These shares will be subject to escrow arrangements until May 31, 2016.

The idea of the merged retirement group was started by the late Grant Adamson and then carried on by board director Michael Ambrose with due diligence carried out on around 40 resthomes. This was narrowed to 19, and then another two didn't make the final cut, McDonald said.

CBRE has valued the portfolio at $227 million, with two thirds of it held in the South Island.

Some $70 million of the offer proceeds will be used to repay debt while $5.25 million is earmarked for facility investors and $4.35 million to cover the offer costs.

Chief financial officer Jeremy Nicoll said after the IPO Arvida would have low debt of around $7.8 million and has a $40 million bank borrowing facility that would enable it to carry out planned brownfield developments and any new acquisitions. The brownfield developments in various stages of completion will see another 200 to 250 care beds and units or $9 million worth added to the portfolio by 2016.

Chairman Peter Wilson said there had been a number of approaches from other resthome operators keen on joining the group and while Arvida did want to improve its geographic spread, any acquisitions would wait until the chief executive was comfortable with how the integration had gone. "We'll do nothing in the near term but after six months it could be different," he said. "Any consolidations would need to be earnings accretive."

The financial information in the prospectus shows the company is forecast to make a loss of $1.4 million in the 2015 financial year on revenue of $59 million. When the costs of the offer and aggregating the resthome portfolio are excluded, the prospectus says, underlying profit for the 2015 financial year would be $4 million, rising to $13.3 million in the 2016 financial year. The underlying profit figures exclude unrealised gains from property revaluations and no synergy benefits of merging the group of resthomes have been factored into the forecasts as Wilson said these will be incremental.