Retirement Living Stocks on the Downslide

In 1982, American futurist John Naisbitt coined a term that found its way into the lexicon of investors worldwide – Megatrends. His book is entitled ‘Megatrends – Ten New Directions Transforming Our Lives’ and it didn’t take long for investing gurus to spot the potential of megatrends as a roadmap for buying stocks.  Globalization was a trend identified in Naisbitt’s book, but how do you invest in a process? How do you spot companies to benefit from this megatrend?
Today virtually every list of top megatrends cites the aging population as perhaps the most significant megatrend of all. Statistics tell us the greatest expenditures on healthcare kick in as people age. Yet not every senior will experience the same maladies or need the same pharmaceuticals. There is a universal certainty applicable to all seniors – they need a place to live.
It seems logical to assume that seniors would be eager to shed the homes in which they raised their children and lived most of their lives. Yet a 2011 study from the Australian Housing and Urban Research Institute claims most Australian seniors want to stay in their homes for as long as possible.
There are now seven near “pure-play” major stocks on the ASX providing living accommodations for seniors, with four catering to the lodging needs of healthier seniors and three providing skilled care to senior who can no longer take care of themselves.
According to the federal government, the fastest growing senior group is in the over 85 bracket.

Given the findings of the Housing and Urban Research Institute study, why would investors want to take a chance on a form of senior living most seniors don’t want.
The key phrase in the study’s conclusions is “as long as possible.” The number of seniors currently living in retirement communities that cater to the 65 to 84 age bracket is expected to double in less than a decade – from the current 184,000 to 382,000, with a projected increase in retirement villages that will not match the demand – from 2300 to 3000. Grant Thornton researched the retirement village sector for the Australian Property Council back in 2014 and found the kind of independent living characteristic of retirement villages delayed entry into the much costlier aged care facilities, saving the federal government around $2 million dollars.
Although the demographics in the chart above suggest investing in aged care operators could be the more attractive option, these companies are subject to the Aged Care Act of 1997 – federal regulations and payment standards subject to substantial change in the face of rising costs. The retirement village sector is subject to state and territorial regulations deemed less onerous in the eyes of some market commentators.
Investors are not breaking down the doors to jump in as only one of the four ASX listed “pure play” retirement living stocks has seen positive share price growth year over year. The following table lists the four companies along with recent price movement and three and five year average annual rates of total shareholder return (share price appreciation plus dividend payments.)

Virtually all stocks that stand to benefit from the aging population come with the spectre of the heavy-hand of federal and/or local government hovering around them. The largest retirement village provider, Aveo Group (AOG), felt the sting recently, following the 23 June release of a joint investigation launched by ABC’s Four Corners and Fairfax Media targeting Aveo, reportedly uncovering “exorbitant fees and complex contracts.”
By 3 July the ACCC (Australian Competition and Consumer Commission) announced a formal investigation into some of Aveo’s business practices deemed unsatisfactory by Senior Advocacy Groups. Chief among them is the unregulated industry practice of Deferred Management Fees (DMF), due to the operator as essentially an exit fee when the resident dies or moves on to aged care facilities or other living arrangements. In defense of DMF’s, they allow seniors more affordable access to retirement homes by collecting variety of fees at the end rather than at the beginning.
The fee is spelled out in the contract residents sign at entry, which the investigation found to be complex to the point of bewildering some residents. The DMF is calculated as a percentage of the purchase price on a sliding basis over the number of years of occupancy. Aveo’s fees can reach 40% of the resident’s original purchase price.
Given the guaranteed turnover and often short-time frame, DMF’s have proved to be a lucrative source of revenue and helps to explain the decision of the former FKP Property Group to change its name and its business model back in 2013. The new company, Aveo Group, began to sell off its non-retirement properties to focus exclusively on the retirement village market.
Within a year, the company had divested its residential assets and began acquiring existing villages and new construction sites. The retirement village sector in Australia is fragmented, leaving ample opportunity for Aveo and the other providers to grow by acquisition. Aveo’s current offerings have added short and long term aged care to their core independent living and assisted living units. Despite the recent sell-off, Aveo shares are still up more than 40% over the last five years. Here is the chart.

On 16 August, the company announced Full Year 2017 Financial Results, with net profit more than doubling, rising from $116 million to $253 million. Investors ignored both the scandal and the 5% decline in revenue, boosting the share price about 11%. In addition, the company announced major changes to its policies, including an eight-point plan to simplify its contracting procedure and to improve its pre-contracting disclosures.
Aveo has 91 villages and aged care facilities across Australia to meet a range of senior needs. Villages for seniors fully independent are supplemented by villages offering various levels of assistance. Traditional aged care facilities are supplemented by Freedom Care sites allowing spousal living, pets, and overnight visits from friends and family.
Ingenia Communities Group (INA) is another company that elected to expand its presence in retirement living. The company’s current portfolio of approximately 66 properties comprises two groupings – Lifestyle/Holidays and Ingenia Gardens.
The 21 Lifestyle Holiday Park sites offer caravan, camping, and cabin accommodations for seniors as well as families for short-term rentals.
Ingenia has15 Lifestyle Estates communities featuring affordable modular homes for sale, where the resident essentially buys the home and rents the land on which it sits – a land lease business model.
Finally, the company’s commitment to affordability is best exemplified in its rental units in 31 Garden Village communities across Australia. Residents can opt for additional services, including meals and home care packages from local caregivers, funded by the government.
Ingenia also manages and holds a 10% stake in higher-end Settlers Lifestyle communities, owned by Forum Partners, a global real estate investment and asset management firm.
The company reported Full Year 2017 Financial Results showing a 140% increase in total revenue along with a 33% rise in earnings before interest and taxes.
Like Ingenia, Eureka Group Holdings (EGH) emphasizes affordable living strictly through rental accommodations best suited for seniors on government rental assistance or modest pensions. Eureka functions as both operator of its own properties (25) and manager for properties owned by other retirement village providers (35).
Eureka is betting heavily on a growing number of Aussie seniors without the financial resources needed for the land lease (buy the home, rent the land) model offered by most other providers. The Australian Bureau of Statistics states that 77% of single people over the age of 65 rely on pensions as their primary source of income. The company has entered into a partnership with Blue Cross – a non-profit provider of health care services for seniors in aged care and community centers as well as in-home service. Eureka residents in Queensland properties now have access to services from Blue Cross, in their own rental units.
The company has been pursuing an aggressive “buy and build” strategy over the past five years, rewarding investors handsomely along the way. Eureka is still at it, acquiring four new villages in FY 2017. However, the strategy is costly as the company now has about $50 million in debt, as of the most recent quarter, against less than $5 million cash on hand with gearing at 67%. Nevertheless, Eureka may be the smallest ASX retirement village provider, but the company’s total shareholder return exceeds the rest. Despite a rough year in 2017, the Eureka stock price is still up over five years.

Lifestyle Communities Limited (LIC) operates a relatively modest number of villages – 13 – all located in Victoria. The company began in 2003, focusing on the 50 and over bracket ready to downsize. Lifestyle operates on a land lease model, with all Deferred Management Fees capped at 20%, much lower than their competitors.
The company listed on the ASX in 2007 and the share price over ten years is up 200%. For the last five, the price is up 350%.

The company’s 50 and over business model attracts working and semi-retired people as well as seniors over 65. Lifestyle has grown both rental income (from land lease payments) and net profit in each of the last three years. For FY 2017 profit rose 34% while rental income was up 24% and income from Deferred Management Fees was up 64%.
For investors interested in this sector but wary of pure plays, there are two broadly diversified companies operating in the retirement village space.
The Stockland Corporation (SGP) is a diversified property group that develops, owns, and manages industrial and business parks; retail centres; office complexes; and residential communities along with its retirement villages.
For even greater diversification, consider LendLease Group (LLC), an infrastructure and property group, international in scope. LendLease is involved from the design phase through funding and construction to ownership and management. Projects range from major urban developments to commercial and retail centres to apartments to healthcare facilities, along with retirement villages.
Both companies have seen solid stock price appreciation over the last five years.

Analysts are bullish on the pure play providers, with consensus BUY ratings on EGH, LIC, and INA, and an OUTPERFORM rating on AOG. A newcomer to the sector, Gateway Lifestyle Group (GTY), also has a BUY rating.