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A Broker's PreView - Summerset

Overview: Summerset’s development of new villages and units is continuing in earnest. Summerset remains NZ’s third largest retirement village operator and second largest developer, with more than 3000 residents in over 2000 units across New Zealand.

Pros: Summerset’s expansion is accelerating, with the company on target to deliver 300 units this year, solid growth from the 261 they achieved in the 2014 financial year. On Tuesday, the Company announced strong sales figures of 78 new sales and 47 resales for the first quarter of 2015.

This strong sales growth is indicative of the demand for units in New Zealand. This demand is expected to increase as our population ages, particularly with the demographic bottleneck known as the Baby Boomers on the retirement horizon.

Summerset is well placed to take advantage of this demand, as they are sitting on over 6 years worth of developable land. Their portfolio includes 11 completed villages, 9 villages with continuing development, and 3 proposed villages in Ellerslie, Lower Hutt and Casebrook.

Along with developing stand alone units, Summerset has been careful to include care beds in their development plans. This allows them to offer residents the continuum of care, meaning that most of their needs can be met on-site as their needs change, a key demand of many residents.

Cons: Development risk looms as house prices begin to plateau in some areas. Any material drop in house prices will have dire consequences to all aged care providers as the value of their stock would drop concurrently. This is particularly relevant for those retirement village operators involved in heavy development.

The impact of a drop in house prices will hit Summerset in numerous ways. As mentioned above, the value of their stock will also drop, hurting the asset backing of the company. Any drop could also see a change in retirees’ decision making, with some perhaps delaying the move to a retirement home until prices recover. Those that do sell will have less to spend on the units, driving down the price Summerset could expect to receive from their development, obviously crimping margins.

To put in bluntly, the other major risk that retirement operator’s face is the prospect of retirees living longer. From an investor’s perspective, the lower the turnover, the less unit resales the company can achieve, leading to fewer deferred management fees and gains on resales (if we assume property prices continue to rise).

Price performance: Summerset’s share price was down 15 percent in 2014, but has recovered to be up 25 percent in 2015.

Investment outlook: Summerset is reasonable value, as long as we continue to get older and property prices keep it together.

*A Broker's View is written by Grant Davies, Investment Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.

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