Summerset (SUM): A New Zealand Retirement Village Developer with “Float”
Member write-up by: André Kostolany
Investment Horizon: 5+ years | Market Cap: 1,494MM NZD |
Type: Compounder | Net Debt: 348 NZDMM |
Target Upside: 150% (ability to compound 20%+ p.a.) | Price/Net Tangible Assets: 1.95x |
Country: New Zealand | Price/Underlying TTM EPS: 18.0x |
Industry: Senior Living | Price/IFRS TTM EPS: 6.8x |
- Summerset (SUM) is a retirement village developer and operator. It has created 20% CAGR in shareholder value since its IPO in 2011 and is just entering an accelerating growth period
- Summerset’s operating model is that it operates its retirement villages and provides care to residents at very thin margins of 3-5%. In return residents are inherently selling Summerset a free call option on real estate/entry fee appreciation as well as providing Summerset with interest-free float
- Summerset is currently trading at around 1.95X Price/net tangible assets, 6.8x NTM IFRS EPS and 18.0x NTM Underlying EPS while generating a 14.3% ROE, providing a wide margin of safety to its intrinsic value. Summerset will grow at a minimum of 18% p.a. to leverage demographic tailwinds. There is some downside protection through the highly conservative assumptions CBRE uses for appraising Summerset’s real estate
Key Thesis Points
- Call Option on Real Estate/Entry Fee Appreciation
- Float: The business model inherently generates a large amount of float, which finances the majority of development costs for new retirement villages and provides leverage to the above-mentioned call option
- Demographic Tailwinds: New Zealand is now entering a demographic sweet spot for Summerset, brought about by accelerating aging trends
- Understated Book Value: Accounting conventions, coupled with CBRE’s highly conservative valuation depress book value but also “bake in” rapid future book value appreciation
Industry
- Summerset is a New Zealand based retirement village operators
Source: Ryman Investor Presentation 2017
- As shown above, there are five other large retirement village operators in New Zealand (Ryman, Metlifecare, Bupa, Oceania and Arvida). The top six operators have around 65% market share and are continuing to grow their market share at the expense of smaller operators at about 2% p.a. This report focuses on Summerset due to the combination of inexpensive valuation, quality and scale
- Operators face a tradeoff between focusing on independent living and senior care. Summerset falls more heavily on the independent care end of the spectrum, a business that more closely resembles that of a hybrid real estate developer plus property manager
- Ryman is the largest and highest quality operator with about 18.5% market share of the retirements units market in New Zealand whereas Summerset has a market share of 11%.
- Summerset eventually plans to expand into Australia. Australia has a larger number of smaller competitors including publicly listed Japara Healthcare, Regis Healthcare, Ingenia Communities, Stockland and Aveo
- Over time, the New Zealand retirement village industry has tended to consolidate. I believe the same will happen in Australia due to the advantage that large float and cheap access to capital markets confer upon larger players
Source: Metlifecare Presentation
- Summerset sells three types of apartments: Villas, independent living units and serviced and memory care apartments. Villas require a higher