INSIGHTS

WEEKLY STOCK COMMENT: SUMMERSET

Roy Davidson, 9 February 2017

Summerset (SUM) is New Zealand’s third largest retirement village operator and the second largest developer. SUM designs, develops and operates retirement villages that offer specialised long-term managed care to the elderly.

Overview

Demand for retirement units and aged care beds is expected to increase substantially over the next 20 years. SUM’s villages combine flexible ‘home style’ living environments in villas/apartments on either a fully or semi-independent basis, with rest homes and hospitals that provide specialist care facilities. Residents acquire rights to occupancy in the group’s villages, and are repaid the sum invested, less accrued management fees upon departure. Occupancy rights to the units are then resold. Due to its integrated care, the group’s offering is largely ‘needs-based’ and targeted at the expanding over 75+ demographic. SUM’s track record of organic growth and developing villages that are self-funding upon completion, allows the group to rapidly recycle its capital, thus enhancing returns.

SUM’s retirement villages offer integrated aged care facilities with a range of levels of care, from independent villas and apartments, through to assisted living in care apartments, to rest home and hospital level care. Residents are able to access an increasing level of support and care within the village should their needs change. This continuum of care model is a key attraction for residents and leads to generally higher entry ages into the villages. The villages are designed to create a community atmosphere, including services and amenities like cafés, dining and bar facilities, hair salons, lounges, libraries and sports facilities.

SUM has put together a string of good results, providing confidence in the company’s ability to continue to create shareholder wealth as the business matures and gains scale. Most recently, the 1H16 result saw underlying net profit after tax rise 44% to $24.7m driven by rapidly rising development profits and resale margins.

While the prospect of falling house prices presents a material risk near-term, SUM provides exposure to a proven business model in a highly attractive sector. Like its more established competitor Ryman, SUM is able to recycle capital and fund future development from interest free loans from existing residents. While Ryman is the leader in the industry with a better operational track record, greater defensiveness and a more conservative balance sheet, SUM has made rapid progress recently and we see it as a strong complementary holding to Ryman.

Risks to SUM include; 1) falling house prices, 2) increased competition, and 3) development risks.