SUM - Summerset Group

[Bjauck]

Macquaries bullish on retirement sector and even raised their target for SUM (finally seeing the light of day). Even $6 is cheap...

Interesting to see they thought MET was at a higher discount to their target price - despite MET being invested more heavily in Auckland.

[stevevai1983]

I am very bullish about retirement sector after the recent SP significant drop for sector leaders. That's why i bought RYM SUM ARV at the same time.
People talk about house price too much, but in fact the real no.1 important measurement is occupancy rate. As long as they can maintain 90%+ occupancy rate they will be fine and make lots of money.
Their unrealized profit used some conservative assumptions: household price increase 1~3% only. This is very realistic. Also their discount rate is 11%, it's pretty high.

If the household price decline slowly for some years, they will still make lots of money. Their "revaluation gain" will still be positive although increase slower than recent years (recent years are abnormal anyway)
For SP, I don't know about short term or even mid term, but in long term they will go a lot higher.

[Lewylewylewy]

Lots of people saying that house prices don't matter. Seems like the equivalent of saying that dividend payout is the only thing that matters with shares.

Sorry, don't mean to pick holes, but I don't want someone who's learning the industry to overlook the effect of house prices.

[Vaygor1]

Lots of people saying that house prices don't matter. Seems like the equivalent of saying that dividend payout is the only thing that matters with shares.

Sorry, don't mean to pick holes, but I don't want someone who's learning the industry to overlook the effect of house prices.

If I may offer a slightly different angle LLL... The vast majority of those that entering into a retirement village no longer need a home. They need at-hand support, assistance and care. Having a house becomes secondary, which is why some (a lot?) of people sell up to enable the retirement-unit move in.

The price one pays to move in to a retirement village is a function of supply and demand, and the demand is becoming so much that competition to enter is getting fierce. So if it gets to the point where selling ones house doesn't provide enough capital to get in, then those people will simply miss out.

Even so, the above scenario is unlikely to occur in the short term at least, because the current difference between the average house price and the average retirement-unit occupancy advance is substantial. Average house prices would need to drop by over 20% before the break even point and a 20% drop has not occurred in NZ history as far as I recall. Here is a graph I have on hand that goes back over 35 years to 1981. I can go back further if you like, but will need to search for it.

Attachment 8622

[Bjauck]

RYM's underlying profits went up during the last cooling off period in house prices.

[Vaygor1]

RYM's underlying profits went up during the last cooling off period in house prices.

As far as I am aware, that is indeed true.

[Beagle]

If I may offer a slightly different angle LLL... The vast majority of those that entering into a retirement village no longer need a home. They need at-hand support, assistance and care. Having a house becomes secondary, which is why some (a lot?) of people sell up to enable the retirement-unit move in.

The price one pays to move in to a retirement village is a function of supply and demand, and the demand is becoming so much that competition to enter is getting fierce. So if it gets to the point where selling ones house doesn't provide enough capital to get in, then those people will simply miss out.

Even so, the above scenario is unlikely to occur in the short term at least, because the current difference between the average house price and the average retirement-unit occupancy advance is substantial. Average house prices would need to drop by over 20% before the break even point and a 20% drop has not occurred in NZ history as far as I recall. Here is a graph I have on hand that goes back over 35 years to 1981. I can go back further if you like, but will need to search for it.

Attachment 8622

Good post but there's these factors to consider.
1. House prices have already declined in both November and December 2016 according to REINZ data. This at a time when we have record immigration level's. Its looking increasingly likely that Winston Peters will have a major say in the forthcoming election this year and his views on immigration are well known. A major change in immigration policy could easily of itself have a dramatic effect on the demand side of the equation.
2. Its clear that interest rates have hit the bottom and we are now heading up. Many consumers are very highly geared and have become used too ~ 4.5% interest rates and ~ 6% interest rates could have a dramatic effect on the supply side of the equation.
3. There is major new housing supply coming to the market in Auckland over the next two years, only some of which is in the public domain in terms of known developments, (I'm certainly aware of two very large developments in the early stages of process at present).
4. All the above will at the very least probably have a material effect on the premium pricing the retirement sector developers have been able to achieve in a booming market as the margin between what people can sell their home for and what they pay for a new unit contracts. In my view most people expect to free up material capital as part of the downsizing exercise...world trip and a new car are par for the course for many people going through this process, (got to tick those things off their bucket list otherwise the process becomes somewhat less attractive). I maintain there is a consumer expectation that significant capital will be released from downsizing and without this the attractiveness of the process will be somewhat diminished for some. (Acknowledge most move in for lifestyle and support reasons). Less ability to sell at premium pricing obviously crimps their development margin and we know that's where these retirement companies really make their money.

I maintain the tailwind of rising house prices has been a material factor in the past but may not be in the future. That still leaves baby boomer population demographics and the resultant healthcare needs as strong prevailing tailwinds the sector will enjoy for at least the next twenty years. In my view the sector is presently about fair value taking into account the above mentioned factors. SUM probably a little underpriced. Last time I looked at this SUM was trading in the very late teens, about 19 forward PE based on underlying earnings and RYM early 20's forward PE.
Seems about right to me but SUM possibly worth almost the same as RYM's PE with their growth rate in recent years, (acknowledge RYM's stellar long term track record deserves true blue chip status so possibly should still command a one or two PE premium over SUM)

Finally as I am sure you recall but its well worth highlighting for newer investors, the last time we did have a significant decline in housing prices towards the latter part of the GFC RYM's share price got absolutely smashed, (despite underlying profit continuing to grow each year), evidence that fundamentals are almost useless in terms of being a SP driver if housing sentiment is extremely bearish.

There's enough risk to the housing prices in my view to remain cautious towards this sector until the new Governments immigration policy is known later this year and a wait and see approach with interest rates and the effect they'll have is also warranted in my view. Disc: I have no current position in the sector but may consider one later this year as risk factors become clearer.

[percy]

A question.
Has any poster, who has organised a parent,relation or friend, going into a retirement village ,or care, had to take the price of selling that person's house into the equation.?

[winner69]

RYM's underlying profits went up during the last cooling off period in house prices.

House prices down 7.8% in year to March 2009

Ryman underlying profit up 6% (on of their worst years ever)

Fair value adjustments were negative so NPBT was down 6%

A fall in houses ha some impact on Ryman financials

[Bjauck]

A question.
Has any poster, who has organised a parent,relation or friend, going into a retirement village ,or care, had to take the price of selling that person's house into the equation.?

Not quite yet. But my two pen'orth:
However whether the person is going into a licence to occupy unit or "into care" with the appropriate assessments vis a vis nursing home or rest home are different questions. "Into care" also involves different considerations if there is an independent spouse. Similarly it also depends if there is a family trust involved and how old and well established that trust is.

If there is no spouse involved, no family trust, and few other assets aside from the equity in the family home and perhaps a private annuity or private pension, then the price achievable for the family home would be very relevant when considering a licence to occupy. If the value of the family home is near or below the median value in the same area as the village, then there will be unlikely to be very much excess between SP and cost of the licence. Likewise the price achievable for the family home may effect how you plan to pay rest home fees and your eligibility for rest home subsidies.

For most Kiwis of retirement age their largest asset by far is the family home.