SUM Summerset Group

[Basil]

I think SUM management have executed exceptionally well ever since they listed but the headwinds in the sector are too strong at present.

We're probably at the bottom of the interest rate cycle and to me its really telling that real estate has not in any way responded to the downcycle in interest rates.  That in many parts of the country its lost more than 30% of its real inflation adjusted value in a strong interest rate downcycle indicates to me its was horrendously overpriced at the peak of the market in 2021 but its also speaks of structural issues in the economy and N.Z.'s relative attractiveness as a place to live.  I like living here but the economy has been awful for a very long time and I can understand why bright young people are leaving for better prospects overseas.

With inflation and interest rates headed up I can't at this stage see what the catalyst is for the 5 year property malaise to end ?  In fact I think the outlook for the real estate sector is quite daunting.  Stock level's at 10 year high's and interest rates headed up do not make for many happy outcomes for vendors.  I think the share price of companies in this sector is very closely aligned with real estate prices and that's why despite SUM's management executing extremely well the share price is drifting.  They really need to prove up their Australian development model.  I see that as a key catalyst for a rerating but that's not going to happen overnight and in fact it might take them several years and its not certain they can execute there as well as they are doing here..

The lack of cash flow the sector generates is concerning and the very low unimputed dividend yield leaves me still feeling pretty cold.   That said, if SUM did get down to approx 50% discount to NTA I might be tempted.  About $7 as mentioned by A.I. would be tempting but if things get that bad there's probably more tempting opportunities to be had with better yield.  Time will tell.    Investment in this sector is a capital gains game.  If real estate is not going up in real terms the share prices are not going up, its that simple.  I'm keeping my powder dry at this stage.

[Playa]

I think SUM management have executed exceptionally well ever since they listed but the headwinds in the sector are too strong at present.

We're probably at the bottom of the interest rate cycle and to me its really telling that real estate has not in any way responded to the downcycle in interest rates.  That in many parts of the country its lost more than 30% of its real inflation adjusted value in a strong interest rate downcycle indicates to me its was horrendously overpriced at the peak of the market in 2021 but its also speaks of structural issues in the economy and N.Z.'s relative attractiveness as a place to live.  I like living here but the economy has been awful for a very long time and I can understand why bright young people are leaving for better prospects overseas.

With inflation and interest rates headed up I can't at this stage see what the catalyst is for the 5 year property malaise to end ?  In fact I think the outlook for the real estate sector is quite daunting.  Stock level's at 10 year high's and interest rates headed up do not make for many happy outcomes for vendors.  I think the share price of companies in this sector is very closely aligned with real estate prices and that's why despite SUM's management executing extremely well the share price is drifting.  They really need to prove up their Australian development model.  I see that as a key catalyst for a rerating but that's not going to happen overnight and in fact it might take them several years and its not certain they can execute there as well as they are doing here..

The lack of cash flow the sector generates is concerning and the very low unimputed dividend yield leaves me still feeling pretty cold.  That said, if SUM did get down to approx 50% discount to NTA I might be tempted.  About $7 as mentioned by A.I. would be tempting but if things get that bad there's probably more tempting opportunities to be had with better yield.  Time will tell.    Investment in this sector is a capital gains game.  If real estate is not going up in real terms the share prices are not going up, its that simple.  I'm keeping my powder dry at this stage.

Totally agree with your views on the housing market, more and more houses I see are for sale by negotiation or priced now which is always a sign.
  Is there any way to short the NZ housing market?

[mike2023]

Totally agree with your views on the housing market, more and more houses I see are for sale by negotiation or priced now which is always a sign.
  Is there any way to short the NZ housing market?

Yes, sell your house at auction ASAP and let the lawyers hold your monies in trust accounts.
Good luck, there's an enormous number of camper options out there this time of year. Better living everyone.

[winner (n)]

Can't really be worried about sales progress at Summerset

Remember 'challenging times' abound they say

You cannot view this attachment.

[Basil]

https://www.nzx.com/announcements/470509
Crickey, I know I've said it before but my goodness, this business is run like a very well oiled Swiss watch.
If it weren't for the pathetic unimputed dividend yield and headwinds with real estate I'd be a holder at this price again but that's just me and my profile as a semi retired investor.  Maybe an opportunity coming up for younger investors who are unconcerned by the low yield to build a position for long term capital gain ?

[Dolcile]

Tbh Basil, I'm tempted.  At $9 p/share SUM is now down 30% since the 52 week high.  It is just very hard to buy in the midst of such a strong downtrend.

[Basil]

Shares have down a round trip to nowhere in the last 6 years, was $9 when I sold out in early 2020.
Mind you, houses have also done a round trip to nowhere, probably backwards over the same timeframe.
The chances of this being a coincidence are extremely low and you're dead right to be concerned about buying in a downtrend. 

[entrep]

This might be in your $7 buy zone soon, much sooner than expected, Basil. Wild!

[entrep]

This might be in your $7 buy zone soon, much sooner than expected, Basil. Wild!

To add to this, and please correct me if I am wrong, but to someone with the timeframe to wait, could buying at $7.xx be like buying HLG and TRA at the lows/bargain prices of years ago?

To me, SUM seems like a best in class, extremely well run and managed company, like TRA and HLG. The setup seems similar.

[Dolcile]

The issue I have with the RV sector is, they haven't demonstrated a credible story on how / when they are going to deliver meaningful cash back into investors pockets.   

[Clearasmud]

To add to this, and please correct me if I am wrong, but to someone with the timeframe to wait, could buying at $7.xx be like buying HLG and TRA at the lows/bargain prices of years ago?

To me, SUM seems like a best in class, extremely well run and managed company, like TRA and HLG. The setup seems similar.

Personally I wouldn't touch until it bases.
I had a tour of a Summerset down here in February and was amazed at the high asking prices.
I had a feeling sales were slow.

[Basil]

I agree with all of the posts above but my concern is around the lack of cash flow at an operational level from villages. I think they need to move to 30% dmf fees, the same as the rest of the sector, ASAP.

Hallenstein Glasson and Turners have proven they can get great compounding sustained growth over a long period of time while still maintaining excellent dividends to shareholders so this must beg the question why can't Summerset do the same ?

In recent years we've seen the unit asking prices creeping up as a percentage of the surrounding suburbs house prices now to such an extent that often there is very little difference between a two-bedroom independent living unit and house in the same suburb. Obviously that growth in unit prices relative to house prices cannot keep going indefinitely is it raises severe affordability issues for new incoming residents.

Therefore as I see it, in the future unit prices will be very closely related to house prices and with house prices stuck in an endless malaise the likelihood of interest rates hiking up again, I fail to see how asking prices  of the retirement village units can rise meaningfully from here.

The huge unknown is how profitable are these retirement village companies in an era where prices just stay flat for an almost endless period of time.

To me this industry has always been built upon the presumption that house prices go up quite a bit faster than inflation and that's simply not happening any more and may not happen again in our lifetime.

Somerset is a very well-run company, frankly I think some people are mad to own OCA or RYM over this, but the headwinds for the sector are just simply too strong. The government are squeezing care costs to the point where there's no money in it, villages at an operational level are break even at very best and the whole business model hangs on reselling units for more than the original occupier paid.  If that presumption is no longer the case it would appear there are fundamental cracks in the business model of these companies.

I expect the share price to closely follow what's happening with house prices and at this stage it would appear the share price could stay in the same malaise that house prices are stuck in for many years to come.

That brings me back full circle to the inadequate yield. If the company can't pay a decent yield and the share price is not going up, I don't see a good case to own the shares.

I can't indulge myself in the retirement lifestyle I want to enjoy based on NTA no matter what the size of the discount to NTA. I.e. you can't eat NTA.

Will the industry change in the future and go back to the high growth model it once was in the golden era for the sector,. I cannot say. I cannot see that far ahead but one thing is for sure. There are a heck of a lot more companies trying to find gold in the sector than there was when Ryman started and Summerset followed them. First and second mover advantage has long gone.

Show me the money ! Pay me a 5% dividend that grows over time and I'll seriously consider buying back in.

[Dolcile]

Good post Basil.  The other question I have is why can Radius generate an adequate return and dividend from care, but SUM etc can't?

[Basil]

Good question and I don't have an answer.

My contention is that without capital gains the retirement village sector is broken.

For example invest a million dollars in summerset and you are effectively investing into one independent living unit.  10 years later sell it for 1 million dollars and what have you made?. On the face of it you've made 250,000 dollars dmf fees but I believe most of that gain is gobbled up in the fact that villages are not covering their operational costs and dmf fees are subsidising village operational costs. Your stock turn is once every 10 years and you have probably made almost nothing after paying for village operational losses over the years.

 Invest that one million dollars into Turners and over that same period of 10 years you would have turned that stock over profitably more than 100 times or invested in Hallenstein Glasson you would have turned that stock over more than 60 times at a 60% gross profit margin. Just let that vast difference in stock turn rate sink in and you will realise why the business model at Turners and HLG is vastly more capital efficient, profitable and cash flow rewarding than SUM. In the context of this, the level of discount to NTA at SUM is a red herring and almost completly irrelevant.

[entrep]

Thanks all, ran everything through my AI advisor:

Updated View at $8.50
The price has now fallen 38% from the 52-week high and trades at a 38% discount to NTA. The Q1 operational update was strong, yet the stock kept falling. That tells you the market doesn't care about operations right now — it's repricing the sector structurally.

The Forum Commentary Deserves Serious Engagement
Basil and Dolcile are raising the most important question about this investment, and it's one that my original memo arguably didn't weight heavily enough:
"Without capital gains on resales, is the retirement village business model fundamentally broken?"
Let me walk through this honestly.
The capital efficiency argument is real. Basil's comparison to TRA and HLG is directionally correct even if imperfect (you shouldn't compare property to retail directly). The core point stands: SUM ties up enormous capital (~$800k per unit) that turns over once every 7-10 years. A retailer turns inventory dozens of times per year. The cash return on capital employed at SUM's village level is genuinely poor — completed villages generated just 5.3% CFEO return on net assets in FY25, and only 1.1% across the whole portfolio.
The operational cash flow problem is structural, not cyclical. Village and care fee receipts of $220m don't cover village supplier and employee payments of $238m. This isn't a one-off — it's been the pattern for years. DMF and resale gains are subsidising operations, not providing a return on top of them. Basil is right about this.
The business model does depend on nominal house price growth. SUM's entire embedded value of $1.9 billion — the future resale gains and DMF — assumes units can be resold at prices that generate meaningful margins. If house prices are flat in nominal terms for a prolonged period (let alone declining in real terms), those embedded gains compress. Management lifted prices 2.7% in FY25, but that was against a backdrop where surrounding house prices only rose 0.8%. That gap can't persist indefinitely.
The "you can't eat NTA" point is valid for income investors. At $8.50, the dividend yield is still only ~2.9% unimputed. For retirees or income-focused investors, this is simply not competitive versus term deposits at 4%+ or REITs yielding 6-8%.

What's Changed in My Assessment
I'm lowering my conviction level from "attractive" to "interesting but requires higher risk tolerance." Here's why:
1. The macro has deteriorated further since my memo.
Long-term rates rising (not just short rates flat), fuel/geopolitical uncertainty adding a new headwind, and Australian institutional appetite for NZ weak. The catalyst for re-rating is further away, not closer.
2. The structural critique has more merit than I initially gave it.
I focused too much on the NTA discount and underlying earnings trajectory, and not enough on the fundamental question: what is a fair multiple for a business that generates minimal free cash flow, pays a sub-3% unimputed dividend, and depends on nominal house price growth to make its embedded value real?
3. The downtrend is accelerating, not stabilising.
From $12+ to $9.32 to $8.50 in weeks. Clearasmud's anecdotal comment about high asking prices and slow village sales, if representative, suggests the Q1 sales numbers may be masking pricing pressure. Technical support at the $9.26 level identified by one poster has already broken.

Revised Valuation Framework
At $8.50:

P/Underlying Earnings: ~8.7x (cheaper, but what's the right multiple for no-free-cash-flow growth?)
P/NTA: 0.62x (massive discount, but Basil's point — what's NTA worth if you can't monetise it except through more development that consumes more capital?)
Dividend yield: 2.9% unimputed
EV/Underlying EBITDA: ~12x (est.)

The bear case is now more plausible: If you apply a "mature, low-growth, capital-intensive" framework rather than a "growth compounder" framework, a PE of 8-9x on earnings that aren't backed by free cash flow could actually be fair value, not cheap. This is Dolcile's point — until SUM demonstrates it can return meaningful cash to shareholders, the discount may be deserved rather than an opportunity.
The bull case still exists but requires more patience: If you believe (a) house prices eventually recover in nominal terms, (b) St Johns sells down successfully generating material cash, (c) gearing declines as guided, and (d) care ORA conversions lift care EBITDA to $40-50m over the medium term — then $8.50 will look very cheap in hindsight. But all four of those need to happen, and the timeline is uncertain.

The Honest Summary
Your friend in finance, Basil, and Dolcile are all circling the same truth: SUM is operationally excellent but the business model has a structural cash flow problem that the market is now pricing in. The stock could be a great long-term investment if house prices recover and the business matures into better cash generation. It could also be a value trap if the NZ property market stays flat for another 3-5 years and the company keeps reinvesting every dollar it generates.
At $8.50, the risk-reward is more balanced than at $9.32. You're paying less, but the reasons for the decline are partly structural, not just sentiment. I'd want to see one or more of the following before building a meaningful position:

Evidence of St Johns sell-down momentum (Q2/Q3 settlement data)
Gearing declining at the 1H26 result (August 2026)
NZ house price stabilisation with genuine transaction volume recovery
Technical basing pattern rather than continued freefall

If those trigger, you'll probably be buying at $9-10, not $7-8 — but you'll be buying with confirmation rather than hope. For someone with a very long time horizon and genuine tolerance for further downside, accumulating a small position at $8.50 is defensible. But this is no longer the "compelling risk-reward" I described at $9.32. It's a more nuanced situation where the bear case deserves equal weighting.