Purchase date – 16/2/2017
Purchase price – $2.01
The first stock of the week is Gateway Lifestyle Group. Gateway offers an alternative to the traditional retirement village by offering retirees the opportunity to design their own dream home for living in one of Gateway’s 53 retirement communities. These communities are primarily located outside major city centres and are targeted at retirees looking for a ‘seachange’. Once a retiree has designed their home Gateway will manufacture it for them, charging the retirees for the home but not the land underneath it – making it a much more affordable option. The house then becomes an asset owned by the retiree and they are able to bequeath it or the proceeds of its sale in their will, which will be an attractive factor for many potential residents.
Gateway’s retirement communities generate revenue in two ways. The first is through designing and constructing these homes for the retirees, and then secondly the retirees are charged a weekly rent for the use of the land and Gateway’s facilities. Per their 2016 Annual Report Gateway averages $100,400 profit per manufactured home and $140 in rent per week per resident. The business has undergone rapid expansion since listing on the ASX in June 2015. They acquired 17 new communities in the 2015-16 Financial Year and commensurate with this growth saw occupied sites rise from 1577 to 5623 between 30 June 2015 and 30 June 2016.
Whilst this growth is a positive indicator, one particular reservation Equity Mates has in investing in this stock is their levels of debt. They have $102 million in debt as of their 2016 Annual Report which is quite high for a company with a market cap of $600 million. The Australian market has a particular distaste for companies with high levels of debt and this debt level is something to be mindful of with potential interest rate rises (For as interest rates rise debt gets more expensive to service). However, not all debt is created equal and here at Equity Mates we like the fact that Gateway have acquired a number of sites to assert a dominant position in this industry and are hopeful that Gateway will now consolidate their position by turning these sites into active retirement communities with high occupancy rates.
At Equity Mates we see Gateway as a classic example of investing for the future rather than the moment. If you were to just take a snapshot of its current financials – $102 million in debt with cash flow propped up by a capital raising – you’d pocket your chequebook and walk away. However, as management are able to monetise their recent land purchases we should see significant revenue growth and a stronger financial position for the company. In FY2015 sales revenue was only $5 million, and that jumped to $113 million in FY2016 – so we can see management has been able to convert purchases into sales. Whilst perhaps a 2,160% increase is too much to ask for again, we’d expect those sales figures to continue trending in the right direction.
Moreover, the long term outlook for companies in the Aged Care space is particularly promising. The Australian Government’s 2015 Intergenerational Report predicts Australians over 65 years old will grow from 13% of the population to 18% by 2054. This 5% change is over 1 million extra retirees that will be seeking Aged Care services and Gateway stands to benefit from this increased demand.
So Aged Care will grow as a sector, but there will still be winners and losers within the sector. So the important question to ask is – why would retirees choose Gateway over other retirement living options?
Firstly, we see the ‘seachange’ angle as particularly attractive to a growing number of retirees. Both for the obvious reasons that attract anyone to a beach holiday, but also the significantly cheaper cost of living. Cost of living pressures are growing in major cities and this is especially felt by retirees. Importantly, the median superannuation balance for an Australian aged 60 and not yet retired is only $95,000 so cost of living pressures will be a significant factor in retirement planning. So ultimately, we see the fact Gateway offers retirees the opportunity to buy a house without having to pay for the land (similar to the retirement village model) in a picturesque location where the cost of living is far cheaper than in major cities will be attractive to many retirees.
Secondly, the opportunity to design your own home is unique. Whilst some may recoil initially at the thought of manufactured homes, recent manufacturing improvements have meant such homes now look extremely similar to site-built homes. However, what is particularly important for a retirement community is that manufactured homes allow retirees to design houses to allow them to ‘age in place’. This essentially means the design can take into consideration the unique circumstances or disabilities of the retirees’ designing it, as opposed to traditional retirement villages that are established buildings that need to be retro-fitted for each new occupant. For a more in-depth explanation, the US Government Department of Housing and Urban Development has produced a fact sheet that can be found here.
Most importantly, however, the long-term potential of owning the land these retirement communities is built on is huge. Gateway has the opportunity to work with partners throughout the health and business communities to make their retirement communities more attractive places to live whilst also increasing and diversifying their revenue streams. This includes partnering with nurses, pharmacies, doctors and occupational therapists to set them up in the communities or working with the business community to offer the retirees the goods and services that they are seeking in their retirement. In all, we see the potential for Gateway to offer quite idyllic retirement solutions that will appeal to a growing segment of the market as they seek refuge from the mounting financial pressures of retirement.
So in conclusion, whilst this company’s share price may be in for a volatile ride in the short term given their debt levels, potential for interest rate increases and the Australian market’s debt-averse thinking, we particularly like the long term prospects for Gateway. We think Aged Care is a space investors should want to be in and Gateway’s retirement community business model will be quite attractive to retirees and therefore has strong growth potential.