First NZ Capital makes case for Summerset, Metlifecare merger

The Poynton - Metlifecare Retirement Village in Takapuna. A merger would put Metlifecare and Summerset on firmer ground for a transtasman expansion, First NZ Capital says.

Merging retirement village operators Summerset Group and Metlifecare would put them on firmer ground in mounting a transtasman expansion as the domestic property market starts to fade, says First NZ Capital in a research note flying a kite for a tie-up.

"We raise the question of what a more benign property market might mean for capital appreciation in the medium term and highlight why the upside for investors in both Summerset and Metlifecare from a re-rate in Mergeco could be substantial," said FNZC research analyst Arie Dekker in a note.

Retirement village operators have been strongly supported by an upbeat property market, getting stronger prices for the sale of occupation rights to their units. However, recent data points to a slowdown in the sector after moves by the central bank to clamp down on the level of high loan-to-value ratio mortgages are starting to have an impact. Earlier this week state-owned valuer Quotable Value said growth in New Zealand property values continued to slow in September, staying below 5 per cent.

On Thursday, Summerset Group said its sales of occupation rights fell about 21 per cent in the third quarter, with a decline in both resales and new sales, although it said some settlements will be recognised in the fourth quarter.

Dekker said reasons to consider a merger include the benefit of combining Metlifecare's balance sheet strength, operating cash flows and significant embedded value with Summerset's more advanced development capability and landbank. He also noted a combined entity would create a "more credible platform" to follow Ryman Healthcare into Australia. "On Australia entry, we recognise the timeframes and capital required, but see the benefits of diversifying focus away from the competitive New Zealand market, where a large number of operators are competing on similar models."

Whereas the two operators on a standalone basis are looking to do three to four village equivalents per year in New Zealand, on a combined basis they might do two and look to build more quickly in Australia, he said.

"While SUM (Summerset) is considering a move into Australia, we think a combined SUM and MET (Metlifecare) entity would be able to more confidently approach this opportunity at greater scale than SUM could do on a standalone basis today, at least in the absence of capital raising to do so," he said.

The size of the opportunity and the perceived gap in the Australian market for 'continuum of care' offerings is a factor in the premium Ryman has been able to demand, he said. "Despite a long runway in New Zealand associated with an ageing population, we think Ryman investors have been attracted to diversification away from the New Zealand market," said Dekker.

Within the country, he said combining the assets of both companies would result in a meaningful New Zealand business with a significant presence in Auckland and provincial New Zealand. Dekker also noted there would likely be considerable synergies in combining support office functions and an ability to broaden the investor base with a second New Zealand investment option of large-scale and investor relevance.

Ryman continues to trade at a significant premium to a combination of Summerset and Metlifecare, he said. Ryman has a $4.65 billion market value, while a combined Summerset and Metlifecare would be worth $2.4b.

Dekker notes there are hurdles for investors to overcome in consideration of a potential merger, as Metlifecare investors are likely attracted to the company's strong balance sheet and may view the addition of Summerset's debt unfavourably. Summerset investors may have questions about Metlifecare's legacy asset base and the investment required there.

Ryman recently traded up 0.2 per cent at $9.60 and has gained 18 per cent so far this year. Metlifecare increased 0.2 per cent at $5.87 and is up 5.6 per cent this year, while Summerset was unchanged at $5.20 and has gained 11.1 per cent over the year.