Retirement living stocks to benefit from ageing population

Investing in stocks set to benefit from long term trends is a strategy favored by many. While some trends do not materialise as anticipated, no one can deny the demographics of ageing populations.

In Australia the 2011 census indicated there are currently some 3.7 million Australians over the age of 65, comprising around 16% of the total population.  By 2050, that percentage is projected to rise to 23%, with an even more surprising prediction of over 50,000 Australians living beyond 100 years old.

The following chart appeared in a 2010 study on challenges facing Australia to 2050 from the Treasury Department.

The long term trend is two-fold.  There will be more people in retirement and they will live longer.  The Health Care Sector would appear to be the most obvious beneficiary from this trend.  Analysts are also touting property stocks specialising in housing for seniors.  Some claim seniors en masse will flee their large homes in a frenzy of “downsizing” of epic proportions.

At least for the moment, it appears a large segment of boomers would prefer to stay where they are. The Australian Housing and Urban Research Institute commissioned a study entitled “What Older People Want”, conducted between 2007 and 2009.  The principal author of the study, Dr. Bruce Judd of New South Wales University, concluded that “what most older people want is to remain in their homes for as long as possible.”

As part of the study participants were asked what housing options they would consider in the event they began to need assistance or became disabled.  The following chart shows their responses.

A more recent study released by the National Seniors Productive Ageing Centre came to a similar conclusion – a large number of Australian Seniors prefer to remain living in homes with three or more bedrooms.  The Federal Government’s Productivity Commission estimates that by 2050 more than 3.5 million Australians will make use of “aged care” services each year, with 80% of those services based in the community, not in residential aged care facilities.  “Ageing in Place” is a government-backed initiative designed to encourage seniors to receive in-home care.

So does all this mean the long term favorable trend for developers of senior living accommodations is unlikely to come to fruition?  Surveys such as the one in the Judd study cited above allow multiple responses and measure opinion, not action.  Note that while staying in their homes was the preferred choice, more than 50% of the respondents indicated they would “consider” each of the three choices involving moving to specialised senior residential housing.

While healthcare stocks seem to be the less risky choice, there are some who point to a lack of affordable alternatives for seniors burdened by pension rules.  The government’s Productivity Commission in November of 2013 issued an Ageing in Australia Report which supported “equity release schemes for older Australians, which “help seniors to use the wealth in their home and spend on age-appropriate housing and services.”  Prior to the report AMP Capital announced in August 2013  an additional investment in its aged care operation, Domain Principal Group (DPG), which has seen been renamed Opal Aged Care

In his conclusion of the “What Older People Want” study Dr. Judd commented on the importance of recognising that “some older people will want to move and/or downsize, whether this is for lifestyle, health/ability or other reasons.” The question is how many.  There are property developers who believe there will be enough to generate revenue and profit.

The following table lists seven ASX property stocks with ongoing operations in senior residential care and living.

The two biggest players here both offer the safety of diversification to investors.  Stockland Corporation Limited (SGP) is currently Australia’s largest diversified property group with interests in industrial sites and office buildings, retail centres, and residential communities and retirement living villages.  The company could become substantially bigger as it has an offer on the table to acquire rival Australand Property Group (ALZ).  However, a competitive bid is now on the scene and Stockland has stated it will not raise its offer.  However, the company has been offloading assets and is now reportedly considering selling 11 villages at a potential price between $60 and $70 million dollars.  These villages are in more affordable areas, in contrast to Stockland retirement properties in mid-city locations.  The company insists the retirement operations are a growth business and Stockland remains committed to the business.

In the Half Year 2014 Results announced in February showed a 5% profit increase, with the largest increase – 42% – coming from the Retirement Living sector.  Stockland recently signed a partnership agreement with Opal Aged Care to take over the four aged care service facilities at Stockland retirement properties.

Lend Lease Group (LLC) is a broadly diversified property and infrastructure group operating in Australasia, Europe, the Middle East, and the Americas.  The company is fully integrated, offering services from funding and development to construction and management.  Projects include hospitals, bridges, roads, commercial and retail building, and residential communities.  Lend Lease operates about 70 retirement communities in Australia and New Zealand and has a substantial presence in the United States as well.  Offerings here include retirement village homes, apartments, and “serviced” apartments including meals and maintenance.  The company’s mixed use and residential communities are a larger part of the business than the retirement villages. Analysts are largely bullish on LLC, with a consensus Overweight rating and seven analysts with Buy recommendations.  Stockland also has an Overweight consensus rating with five analysts recommending investors buy the stock.  Both companies have rewarded long term shareholders.  Here is a five year price movement chart for LLC and SGP.

AVEO Group (AOG) is more of a pure play in the retirement living sector.  The company was formerly known as FKP Property Group, changing its name in November 2013.  The company also embarked on a major change in its business model. Aveo had been operating in commercial/industrial and residential property development and construction as well as retirement, but is now selling off non-retirement assets to focus exclusively on that sector.  The company operates 75 retirement villages across all five states.

Aveo claims to offer more choices in living accommodations both in location and cost.  Locations range from city to suburbs to resort style coastal properties.  The company offers independent living units and serviced apartments in its villages along with aged care and short term respite care services.

The outsized gearing level of 123% listed in the table dates back to 31 December 2013 has been drastically reduced to around 36% due to asset sales and a successful capital raise.  This was included in AVEO’s Half Year 2014 Results announcement, which also revealed a drop in underlying profit from $23.6 million in the Half Year 2013 to $19.2 million.  However, management guidance called for Full Year NPAT to exceed 2013 Full Year levels.  Aveo only has three analysts covering the stock, with one recommending Buy and 2 at Hold.  A two year price movement chart for AOG would seem to indicate investors like the company’s decision to transition into a retirement living pure play.  Here is the chart.

Japara Healthcare Ltd (JHC) got off to a fast start after its recent IPO but faltered over concerns about healthcare cuts in the federal budget.  Japara has 35 aged care facilities and 4 retirement complexes throughout Victoria, South Australia, New South Wales and Tasmania.  The budget cuts impact the company’s residential aged care facilities.  On 13 May the company’s shares went into a trading halt while management analysed the impact of the budget cuts.  The following day the company stated the reduction in the payroll tax supplements to aged care providers would be offset by other supplements and “additional revenue” for FY 2014 and as such management was standing by its financial performance projections for FY 2015 as stated in the investment prospectus.

Investors liked what they heard and the stock price rallied but on 26 June the government announced a further cut to providers of Dementia care.  Management responded with the admission the cut would have an impact on revenue, but that initiatives to offset this were underway.  This time investors took a dimmer view and the share price fell again.  Here is a price movement chart for JHC since it debuted on the ASX.

Japara has three analysts covering the stock; one at Buy; one at Hold; and one at Underperform.  The consensus EPS estimate calls for a rise from $0.09 in FY 2014 to $0.11 in FY 2015.

Ingenia Communities Group (INA) is another pure play provider of retirement living accommodations, with an emphasis on choice and affordability.  For the upper echelon, Ingenia offers its “Settlers” Portfolio nine residential communities across Western Australia, Queensland, and New South Wales.  Its “Garden Village” portfolio includes rental properties in 34 villages across Australia.  Finally, its “Active Living” villages are comprised of less expensive manufactured homes and feature an extensive array of activities for more active seniors.

Ingenia investors also saw the price of their investment drop in response to federal budget changes but the price quickly recovered.  The company’s track record is impressive, rewarding investors with total annual average shareholder returns of 60% over five years and 62% over three years.  Here is a five year price chart for INA.

Lifestyle Communities Limited (LIC) operates only in Victoria with eight communities and around 1460 home sites already in use or under development.  The company’s claim to offer truly affordable housing is supported by its lend lease business model where the senior customer buys the home, but leases the land for 90 years, giving LIC a stable ongoing revenue stream.  The Deferred Management Fee payable at the time the home is resold is capped at a maximum of 20%, lower than many other retirement communities.

The company’s properties offer a wide range of activities including those suitable for healthier and more active seniors.  Lifestyle’s Half Year Results reported in February were outstanding.  Revenue increased 72% and NPAT was up 174%.  The share price is up over 100% year over year and more than  200% over five years.  Here is a five year chart.

Eureka Group Holdings (EGH) is a property management company with two apparent subsidiaries.  Eureka Care Communities operates 35 retirement villages offering rental units for seniors on pension and rental assistance.  Village Care operates as a contract management company for retirement villages.  Eureka has no analyst coverage and no company website.  Yet the share price rose from $0.03 on 11 July 2013 to $0.14 last week, an increase of 300%.  This is a tiny company, thinly traded with an average volume of around 10,000 shares per day.  The company has been around awhile and its three year annual average rate of total shareholder return is a respectable 14.9%.  On 7 July the company announced it was purchasing 50 villages it was managing for $3.6 million.  Earlier in the year Eureka acquired two additional senior rental communities with a successful capital raise and funding approval from National Australia Bank to finance the acquisitions.

The company reported its 2014 Half Year Results on 28 February with a 19% drop in revenues and a 12% drop in profit.  The results had little immediate impact on the share price. The investors who are following this stock are apparently impressed with the company’s aggressive acquisition strategy of moving from managing to owning.  Here is a six month chart for Eureka.