The high cost of retirement in Australia, and the sheer number of people set to retire as the population ages, present funding challenges for retirees, governments and the community. Businesses that can provide scalable retirement accommodation solutions for the mass market should prosper. We see this as an investment theme and search for stocks which benefit from it.
Over the last six months we’ve become increasingly interested in GTY with the fall of its security price below value and this week we initiated a 2% position by buying 3,087 shares on 21 February at $1.94 and 2,768 shares today at $2.02. Our average cost base is thus $1.98. Our FY17 valuation, currently under review after yesterday’s 1H17 result, is $2.37.
GTY operates in the Manufactured Home Estate (MHE) sector of the broader aged accommodation industry, providing affordable community living to people over 55. Established in 2009 and listed on the ASX in 2015, GTY today owns and operates 54 MHE communities in Australia.
Investment thesis – key points:

  • Well-placed in structural growth industry: Australian aged care accommodation industry is forecast to grow at 5.2% per annum over the next five years
  • GTY provides a strong value proposition: Home equity release for underfunded retirees
  • Strong balance sheet: Provides considerable scope for organic and acquisitive growth
  • Growing, high-margin development business coupled with strong annuity rental income: Once a sale is made, the property subsequently generates weekly income into perpetuity
  • Rent escalation has averaged 4.5% per annum since 2009: Business has embedded growth
  • Expansive growth runway: GTY has 1358 MHE sites in the development pipeline
  • Capable management that own a significant stake in the business: Founder and CEO Trent Ottawa is a significant shareholder
  • Offering a 5.6% yield at our cost base of $1.98: Backed by recurring rental income streams
  • Sufficiently undervalued to offset risks: Our FY17 valuation of $2.37 is under review
  • GTY is an investment grade ASX200 company with a strong growth profile, backed by sound financials and a motivated management team.

 
What is a MHE?
MHEs are residential communities where residents own their manufactured home and lease or license the right to occupy the site from a MHE operator or land owner such as Gateway or Ingenia (ASX:INA). Residents typically buy their manufactured home from the MHE operator and then make rental payments to the operator to occupy the site.
 

Source. Gateway Lifestyle
Who is a typical MHE resident (customer)?
The typical resident of a MHE 65-75 years old, though for GTY the average age of entry is 65 years while the average tenure is ~12.5 years. Most residents receive some form of age pension and rent assistance from government. The main motivation to move into a MHE is to release capital from an existing residential property to support independent living in retirement. Residents are also looking to maintain the ability to live independently in a community of like-minded residents.
 
How Gateway Generates Revenue
GTY generates development earnings by selling manufactured homes and receives rent for the sites thereafter. The group has limited exposure to cyclical tourism earnings streams and no exposure to mining accommodation. The home sales cycle before earning rent is:
 


Source. Gateway Lifestyle
GTY has already succeeded at acquiring mixed-use tourist parks and sub-optimal MHEs and subsequently exploiting multiple conversion and/or expansion opportunities. This ultimately acts to increase the quality, density and value of the property as the annuity like income stream increases considerably. GTY’s typical conversion is illustrated below:

Source. Gateway Lifestyle
We think the value proposition offered by Gateway to its target ‘value’ market of retiring Australians is compelling. This slide from GTY’s 1H17 result presentation shows the income and asset profile of MHE residents:

Source. Gateway Lifestyle
This is a supportive environment for retiring Australians to unlock some of the value stored in the family home to partly fund their retirement. Subject to tax and pension asset test considerations the strategy makes sense not only from an ‘equity release’ point of view but also from an income perspective.
 
Downside risks to this investment:

  • Material downturn in house prices reduces the appeal of MHEs as the amount of equity released from sale of family home reduces
  • In this scenario the time to sell new manufactured homes would extend as days on market of the family home increases
  • Low barriers to entry and the risk more operators bidding for the same sites would increase acquisition costs
  • A further effect of the above is development margins would likely compress as MHE operators sharpen pricing to attract new residents
  • As is common to any developer, omnipresent risks include planning delays, construction issues and cost overruns
  • Regulatory/legislative risk, though ultimately government has incentives to support providers that encourage the release of home equity to help fund retirement, as this takes some of the load off the taxpayer.

GTY is a stapled security comprising a share in the company that manages the communities and a unit in the trust that owns them. The distribution cycle differs from ordinary companies that pay dividends after reporting in February and August. The record date for the distribution in respect of the half ended 31 December was 30 December and the distribution was paid today. So we were not eligible for that payment.
 
For more information on Gateway, view their website here.