SUM Summerset Group

[Dolcile]

If SUM can get the EBITDA per care bed up to $25k then I think we are having a different conversation. 

At that point we have three aspects of the business all playing there part:

1. ILU's kicking off DMF that isn't absorbed by operations
2. Development business generating margin on sale OR if development slows then the liberation of investment capital
3. free cash flow from care

[Popeye]

SO what is the business model?  Lend us the money to build the place, give us 3% or so per annum to maintain ("manage") it, and we will throw in day-to-day operating expenses at cost, care costs at or below cost.  In return for keeping anything left over at the end.  Plus development margin, if any.  Or to give residents a pleasant place to live for the rest of their years at cost, in the hope of being able to cream a bit more cash off the new resident if the property market cooperates?

It may be a flawed business model, as it does not seem to work in a flat or slow growth environment no matter how well run the business is.  Despite all the free capital they all seem to end up weighed down with debt, and thus exposed to another environment factor, interest rates. 

Maybe a better model would be more based around the value proposition they are actually providing, which is a worry free living ecosystem tuned to the physical, financial and psychological needs of aging residents.  After all, this must why people move in, and why new buyers were prepared to hand over capital appreciation upside even during the boom years.  I would be more comfortable investing in an entity that makes their money from providing the living experience to residents, rather than from a ponzi scheme that only delivers if the real estate market booms.  To do this you would need to migrate to a fees structure that generates an ongoing and reliable bottom line from operations, even if this mean abandoning or attenuating the inherently risky capital appreciation upside.

However I dont see how the RV operators can easily get out of the model they have locked themselves in to, which is why I agree with the comments that NTA is meaningless in the context of a going concern, and until and unless there is consistent cash generation the investment case is more hope than anything, no matter how well run the business is...

[winner (n)]

I take it that the projeced doubling of NTA when the existing development pipeline  is
completed and sold is now just a pipe dream

Scott better keep quite aboutvthatvforcacwhile

ASM next week could be interesting in view of SUM being a dog stock these days

And also wondering if Kingfish will realise model broken and dispose of them.

[Basil]

Market appeared unimpressed by what was said at the ASM. Talk of house prices under one possible scenario doing nothing for 5-10 years obviously didn't help and would have come as a rude awakening for some shareholders. Closed at $7.99, multi year low.  Down ~36% from $12.40 year to date in less than 4 months. 

At times like this fundamental analysis takes a back seat to technical analysis in my opinion.  Wait for a confirmed bottoming pattern on the chart and a new uptrend to start.  That might not happen for quite some time, possibly years.  At ~ $5 it would be paying a ~ 5% and growing dividend yield.
For me its now a "show me the money story" for SUM.   Going down to under half NTA would not surprise me because there's so little return on assets.

Consider this:-
6 years ago SUM was $9, now $7.99.
9 years ago OCA listed at 79 cents, now 72 cents after raising capital at $1.30 several years ago.
12 years ago RYM was $8.50, now struggling at $2.09 after raising $2 Billion in capital
By comparison the property market peaked in late 2021 and has only been going down for 4.5 years.  The share price performance of these companies strongly supports my contention that the business model of these companies is basically broken.

I think the SUM board need to realise that the market is no longer "buying" the capital gains model.  RYM destroyed so much shareholder value over the last decade or so its completely trashed the sector for the others. The market says their business models are B.S., they don't work anymore. SUM says there's good cash flow, I say prove it and show shareholders the money and start paying a decent dividend otherwise the languishing of the share price could continue almost indefinitely.

[winner (n)]

Also said new deliveries for the year would be at the bottom of its guidance of 750-850 new units.

given the nature of the housing market and the rise in building costs that's probably a quite sensible approach

[Dolcile]

I'm getting tempted at current prices but the thing holding me back is trying to reconcile the analyst view of their prospect (and price targets) vs. what the market currently thinks.   

[Basil]

See post #348 above regarding technical analysis.  Very risky to buy in a downtrend.
Many analysts have been consistently wrong about this whole sector for many, many years with bullish price targets on RYM, SUM and OCA that simply have not worked out.  House prices and this sector are inextricably linked and I am more convinced than ever that there is no money to be made in this sector other than in a bullish housing environment.

Just a reminder that we have seen a once in a lifetime boom period for real estate that is extremely unlikely to repeat in the next few decades.  RYM was first to list in late 1995.   Since they listed general inflation from then to Q4 2021, (the housing peak) was just 70.6% but the housing index went up, (this is not a typo) 600.3%.  A typical house went from $150K to $1,050K in 25 years whereas inflation went up only 70%.  (Source Reserve bank inflation calculator and Reserve Bank Housing index calculator)  Baby boomers who invested in extensive property holdings early in life have made an absolute fortune but that game is also over.

But here's the catch.  All these companies lose truck loads of money on day to day village operations.  Their entire business model is based upon reselling the units for more than the previous resident paid for them, (in real inflation adjusted terms).  If housing persistently underperforms inflation, keeps going down in the real inflation adjusted terms, (which is far more likely than any other future scenario given the extraordinary outperformance in that boom 25 year period), then the business model of these companies doesn't work and they will never get a satisfactory return on assets and the net tangible asset backing is almost irrelevant,   Disc: No investment in this sector.

[BlackPeter]

See post #348 above regarding technical analysis.  Very risky to buy in a downtrend.
Many analysts have been consistently wrong about this whole sector for many, many years with bullish price targets on RYM, SUM and OCA that simply have not worked out.  House prices and this sector are inextricably linked and I am more convinced than ever that there is no money to be made in this sector other than in a bullish housing environment.

Just a reminder that we have seen a once in a lifetime boom period for real estate that is extremely unlikely to repeat in the next few decades.  RYM was first to list in late 1995.   Since they listed general inflation from then to Q4 2021, (the housing peak) was just 70.6% but the housing index went up, (this is not a typo) 600.3%.  A typical house went from $150K to $1,050K in 25 years whereas inflation went up only 70%.  (Source Reserve bank inflation calculator and Reserve Bank Housing index calculator)  Baby boomers who invested in extensive property holdings early in life have made an absolute fortune but that game is also over.

But here's the catch.  All these companies lose truck loads of money on day to day village operations.  Their entire business model is based upon reselling the units for more than the previous resident paid for them, (in real inflation adjusted terms).  If housing persistently underperforms inflation, keeps going down in the real inflation adjusted terms, (which is far more likely than any other future scenario given the extraordinary outperformance in that boom 25 year period), then the business model of these companies doesn't work and they will never get a satisfactory return on assets and the net tangible asset backing is almost irrelevant,   Disc: No investment in this sector.

OK - we heard that, and yes, if the only way for the industry to make money is house prices rising faster than general inflation, then I agree, the next couple of decades or so are unlikely to look great for them.

But more interesting then just assuming that companies just keep an old business strategy which stopped to deliver running for the coming decades - how difficult can it be for retirement companies to turn back to make money?

Clearly - there are people who like the service, have the money and they are prepared to pay. Looking at the population numbers, this number of people is increasing.

It can't be too hard to change the business model to something which pays for the cost - or reduces the cost? Not too hard to think about various ways to do that. Give people who are able to work a discount if they help (and reduce the cost for the village). Make the DMF more flexible (and maybe for longer timeframes still higher). Offer rent based alternatives - people pay per month (or whatever) including all costs - no need to pay in advance and lose afterwards the DMF.

If we need to do something different to keep this industry running when property prices slow down, then this can't be too hard - and I still think that the already established villages will find it easier to shift to a new model than new companies will find it to start (because the new companies need to pay for the NTA - 100%, and they first need to develop their networks!

[BlackPeter]

Remember the best exotic Marigold Hotel? Funny movie - but clearly, there are other ways to fund and run a retirement voillage then just a big payment in the beginning, enjoy the cruise - and another big payment at the end.

Maybe we just need to get more creative - or just increase the number of Bollywood movies we see.

[Basil]

It can't be too hard to change the business model to something which pays for the cost - or reduces the cost?

In theory, yes.  In  practice you have villages that are full of people on legacy contracts that will take on average a decade to wash through the old system which is especially problematic for RYM and OCA with their legacy models with fixed weekly fees for life.

RYM's new 30% DMF fee and higher weekly fees that increase every year will gradually go some way over time towards helping villages break even at an operational level.  ~ $120m cash burn for them at an operational level is a HUGE problem to overcome though.

SUM need to move to a 30% DMF model immediately in my opinion.  That's where the industry is now at and there's no need for them to be a price leader, their reputation, (just won readers digest most trusted brand) speaks for itself.

Yes overhaul the model further and when they do, the sector could be investable again, especially SUM.  Until then I will stay on the sidelines.

[Minimoke]

In theory, yes.  In  practice you have villages that are full of people on legacy contracts that will take on average a decade to wash through the old system which is especially problematic for RYM and OCA with their legacy models with fixed weekly fees for life.

RYM's new 30% DMF fee and higher weekly fees that increase every year will gradually go some way over time towards helping villages break even at an operational level.  ~ $120m cash burn for them at an operational level is a HUGE problem to overcome though.

SUM need to move to a 30% DMF model immediately in my opinion.  That's where the industry is now at and there's no need for them to be a price leader, their reputation, (just won readers digest most trusted brand) speaks for itself.

Yes overhaul the model further and when they do, the sector could be investable again, especially SUM.  Until then I will stay on the sidelines.

I didn't even know Readers Digest was still a thing. I dont think I have seen one of those in 40 years.

[Basil]

SUM seem proud of it https://www.summerset.co.nz/voted-NZs-most-trusted-retirement-village-brand/