Summerset (NZX:SUM) Sales Performance Investigation

There is a massive amount of research to do into retirement villages, as an investor and truthfully I find retirement villages a little mind boggling; not only do they adopt fairly complex business models, but there are so many different ways you can view the investment proposition.

I knew that I wanted to invest in a retirement village for the property exposure because aside from the large 4 bed home (which is ample for a single guy in his 30’s) I no longer have any exposure to property investment since divesting my rental properties a few years ago, but need to do more research before committing more than the few thousand bucks worth of shares I bought a couple of weeks ago.

I had a quick look into OCA and a chat with one of their finance employees a few years ago and decided that wasn’t for me, RYM seems expensive (though I need to do more research to confirm if any investment proposition reveals value there), and ARV’s share price had been going sideways for long enough for me to be disinterested in putting in the time to analyse the stock. I also have some background knowledge in SUM because I was a shareholder a few years back. I also like that they’re brick-and-tile buildings, and more of a property investment than some others (in my opinion).

Looking At Sales Performance

I recall reading on that a number of people seemed to be unhappy with the “growing stock” of new retirement units being delivered (which is industry lingo for “built”) but not sold. I wanted to allay such concerns in my purchase, which I have done based on stats from past and current annual reports. Specifically, I am largely happy that:

  • Despite the drop off in sales of new units, the percentage of new units that are unsold against the units delivered each year is not too bad. I would expect that a certain amount of free stock needs to be held so it can be demonstrated during the sales process. I would also expect that unsold stock would appear on the annual results presentation if a retirement complex had just been built and not yet available to sell (as I recall being suggested in one of the annual reports). This point is quite a matter of faith, but less so when considering the two bullet points that follow this one.
  • Despite some shenanigans from COVID19, Underlying Profit is still positive.
  • Profit from new builds continues to be positive.
  • They’re looking to be paying in line with the top payers of the industry for staff. I think this is a good thing given the increased difficulty getting nursing staff after immigration law changes. Also (anecdotally) I recall reading a comment from Couta (who is respected on the forum as being the man on the inside for retirement village stocks – though I don’t know to what level he is “inside”) on that many Summerset sales staff left to work for Ryman.

It is my hope that with increased fiscal stimuli from the government, including lower interest rates, we will see inflationary pressures in NZ that will help house prices, effectively reduce debt and make it easier for people to move into retirement villages.

Please find my limited, incomplete research numbers in the table below. I share this with you as it took some time to gather. Perhaps you might like to fill in the blanks in the comments below this article, to help others.

YearUnits Delivered (Built)New SalesResalesUnsoldTotal Number Of UnitsDevelopment Margin % (% Profit on new builds)Profit from new builds
Profit from new builds is estimated to be in the region of $43m to $55m for the year 2020

At the end of the most recent period, 266 resale units where unoccupied, which is 6.5% of the total number of units. This does not include the number of unoccupied new units. This number would have been heavily influenced by the COVID19 lockdown.

Probably more time needs to be spent analysing this share from different perspectives to try to understand how the market prices this stock. For example, what emphasis is put on the NTA vs Underlying Earnings? Understanding this would help ensure a better entry point to this stock, and make me more comfortable with the investment proposition on which I have bought and will buy in the future.


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