SUM Summerset Group

[Basil]

Very solid result underpinned by resales is my read on it. Superbly managed company.

[winner (n)]

Very very solid result underpinned by resales is my read on it. Superbly managed company.

Yep a very solid result

Full year new sales (not counting care conversions) up 16% on F24 and resales also up 16% on F24

Then on top of that there were 125 Care Conversions into new ORAs which must add a lot of overall value.

[Shareguy]

Good to see first signs of success in Australia after sluggish early sales at SUM's first Australian village at Cranbourne North. While they expect sales to improve it is very good to see that a block of 28 units at Chirnside Park already presold 50 percent,indicating a much stronger early demand than at Cranbourne.

Though it remains early days it gives encouragement that Summerset has its product-market fit right for Australia.

[ValueNZ]

Very solid result underpinned by resales is my read on it. Superbly managed company.

As per usual eh.

I've sold a ton of my OCA, gone 1/3rd OCA RYM SUM, which now totals about 45% of my portfolio.

[Dolcile]

ValueNZ, I'm curious why are you going to heavy on the retirement sector?

[ValueNZ]

ValueNZ, I'm curious why are you going to heavy on the retirement sector?

Balance sheets from heaven for ultra cheap. Think about what a dollar worth of stock in each of these companies gets you...

https://assets.ctfassets.net/hjeh5mvg3dxz/2G6NCEB1t9FOZhuph9onTl/967b64427a87f5b2a23d43dc4a4e9512/Summary_14_Year_Metric_Summary.pdf

How many companies in the world have grown like this...

[Basil]

Summerset have weathered the real estate downturn since the peak in late 2021 very well.  What's happened underneath the surface however is more concerning for long term capital gains.  Average ILU units as a percentage of average house prices in the surrounding suburbs have moved up a heck of a lot to  in some cases be 100%, raising questions of affordability going forward and whether ILU asking prices are realistic as the housing market softens further.

My own quite cynical view is that many bank economists are not much better than "house poodles" producing optimistic views on forecast house price growth to "sell debt".  Take what they say with a grain of salt.  The reality on the ground is that the steady grind down in prices, (especially in real inflation adjusted terms) continues.  https://www.interest.co.nz/property/136868/average-asking-price-residential-properties-listed-trade-me-property-sank-82500 
This is not the sort of environment where this sector thrives and the migration figures are not supportive of a trend change anytime soon.

[Dolcile]

Basil how do you feel about the listed commercial property sector comparatively ?

[Basil]

Basil how do you feel about the listed commercial property sector comparatively ?

No comparison really, chalk and cheese.  The retirement sector simply doesn't produce cash, even SUM only pay a ~ 2% unimputed dividend and that's only out of resale gains, (new village development margin all gets ploughed back into common area village facilities and operationally they lose money on most villages).  My thoughts on RYM and OCA are well known.

Many of the listed REIT's are trading at a decent discount to asset backing, are PIE's and for 33% taxpayers are yielding up to ~ 8% gross.  After years of deep recession I feel the commercial property sector is well placed to benefit from increased occupancy, decent ongoing rent reviews and the recovering economic situation.

I hold ARG 12% portfolio position and KPG, 14% both bought at prices materially south of here last year and yielding ~ 10% gross on my average purchase price.  Rightly or wrongly I treat my investment in these companies as a quasi bond / quasi bunch of rental properties.

I still believe that a decent chunk of the $160 Billion invested in term deposits will find its way into term deposit alternatives when those investments mature and top of the list for many investors is REIT's which are underpinned by property which I believe most people feel comfortable with.

I think last weeks reaction to the slight inflation miss is an overreaction.  0.1% lower annual print and everything would have been fine and dandy.  I reckon 0.1% is immaterial in the overall scheme of things and well within the margin of error / irrelevance.  e.g. the price of international airfares and accommodation, mentioned as being problematic in that print which rose steeply last year is completely irrelevant to a lot of people.

[Dolcile]

Thanks Basil, much appreciated. I recently taken exposure to a basket of REITs via the Kernel NZ Commercial Property Fund - and similarly I'm treating it as part of my bond allocation.   

One comment on the RV operators.   I'm wondering if the likes of SUM stopped developing, whether the cash flow would materially improve.  It seems a lot of the fcf is fuelling growth. 

[ValueNZ]

No comparison really, chalk and cheese.  The retirement sector simply doesn't produce cash, even SUM only pay a ~ 2% unimputed dividend and that's only out of resale gains, (new village development margin all gets ploughed back into common area village facilities and operationally they lose money on most villages).  My thoughts on RYM and OCA are well known.

Many of the listed REIT's are trading at a decent discount to asset backing, are PIE's and for 33% taxpayers are yielding up to ~ 8% gross.  After years of deep recession I feel the commercial property sector is well placed to benefit from increased occupancy, decent ongoing rent reviews and the recovering economic situation.

I hold ARG 12% portfolio position and KPG, 14% both bought at prices materially south of here last year and yielding ~ 10% gross on my average purchase price.  Rightly or wrongly I treat my investment in these companies as a quasi bond / quasi bunch of rental properties.

I still believe that a decent chunk of the $160 Billion invested in term deposits will find its way into term deposit alternatives when those investments mature and top of the list for many investors is REIT's which are underpinned by property which I believe most people feel comfortable with.

I think last weeks reaction to the slight inflation miss is an overreaction.  0.1% lower annual print and everything would have been fine and dandy.  I reckon 0.1% is immaterial in the overall scheme of things and well within the margin of error / irrelevance.  e.g. the price of international airfares and accommodation, mentioned as being problematic in that print which rose steeply last year is completely irrelevant to a lot of people.

If the sector doesn't produce cash, how has Summerset managed to grow assets at a 22% CAGR.

What you mean is they don't currently produce free cash flow.

But if you can plow capital into projects with a 20% + cash IRR that's exactly what you ought to do.

[Basil]

If the sector doesn't produce cash, how has Summerset managed to grow assets at a 22% CAGR.

Realised capital gains on resales has been reinvested in the business during the boom times, quite rightly but if the real estate market falls for a protracted period of time that source of funds eventually dries up.  2026 will be the fifth year in the row the real estate market has fallen in real inflation adjusted terms if the market is ostensibly flat this year which is my base case assumption.  The cash flow effects of the decline in real estate has been masked by SUM as their ratio of the cost of an ILU to a house in the surrounding suburbs has risen sharply from circa 70% to circa 100%.  That's a one time change that literally cannot be repeated for affordability reasons.

The whole sector has been built upon the assumption that licenses to occupy can be resold at a meaningful profit when the resident passes away but what if that's not the case in the future and resales in real inflation adjusted terms are no growth or at lower prices ?  People keep forgetting all the profits in this sector where built upon a time when real estate showed an unprecedented period of growth from 1996 to 2021 with prices growing at 5 times the inflation rate to a level that was completely unaffordable.     As I've said before, I think the golden days for this sector are over.

[ValueNZ]

Realised capital gains on resales has been reinvested in the business during the boom times, quite rightly but if the real estate market falls for a protracted period of time that source of funds eventually dries up.  2026 will be the fifth year in the row the real estate market has fallen in real inflation adjusted terms if the market is ostensibly flat this year which is my base case assumption.  The cash flow effects of the decline in real estate has been masked by SUM as their ratio of the cost of an ILU to a house in the surrounding suburbs has risen sharply from circa 70% to circa 100%.  That's a one time change that literally cannot be repeated for affordability reasons.

The whole sector has been built upon the assumption that licenses to occupy can be resold at a meaningful profit when the resident passes away but what if that's not the case in the future and resales in real inflation adjusted terms are no growth or at lower prices ?  People keep forgetting all the profits in this sector where built upon a time when real estate showed an unprecedented period of growth from 1996 to 2021 with prices growing at 5 times the inflation rate to a level that was completely unaffordable.     As I've said before, I think the golden days for this sector are over.

Far as I'm concerned gains on resales have never been higher at SUM. Partially this is because unit prices never hit those highs that residential housing did in 2021. Another is SUM is now a significantly larger company than it was in 2021. So resale margins will be lower than the boom times yep, which makes sense.

You talk about real inflation adjusted house price growth. This is not the right way of thinking about it when you borrow at 0%. What matters is the nominal growth in house prices.

[entrep]

Why is this getting smashed?

[Basil]

See the thread on possible refloat of MET.  I think the overhang will put pressure on the pricing of the entire sector until its dealt with.  EQT are "brave" to try and relist MET in the prevailing environment for the sector on the NZX.   They're probably sick of the pathetic return they've got on assets employed by MET and want to give others the "opportunity" to be involved.  I see it as an attempted "hospital pass"  Who wants to be left holding the baby with shitty nappies ?