LIC - FY21 Results
Lifestyle Communities FY2021 Result
Lifestyle Communities (LIC) is held in the ELMRI ANZ Conviction Fund, and reported full year results that were slightly ahead of consensus expectations with key metrics such as new home sales 255 (FY20 – 253) and resales (FY20 – 80) growing despite a very challenging year dominated by lockdowns. MD James Kelly commented that Covid had a considerable impact on consumer confidence of their target market which impact enquiries, lead times and subsequently sales.
The company provided strong FY22-24 guidance, with the new home sales of 1100-1300 and resales of 450-550 over the 3-year period. Additionally, LIC increased its debt facilities by $100m to $375, positioning the company to continue to take advantage of land acquisition opportunities and build out its development pipeline well into the future. These key metrics ultimately drive higher annuity rental and deferred management fee (DMF) income, as increased debt capacity allows for further land acquisitions which in turn drive increased settlements.
Opportunity
LIC benefits from a total addressable market that is growing as over 65’s become a larger part of the Australia’s ageing population. Land lease retirement communities also have low penetration rates with only ~2-3% of over 65’s currently living in these communities. Therefore we see strong demand from Australians looking to downsize in retirement being supporting of growth in the sector. They are supported by a strong reputation and also high internal referral rates from community members.
The company has a track record of excellent capital allocation and the business model is essentially self-perpetuating. LIC buys land, develops the communities, and then sells the properties that sit on the land, which is then rented back through site rental fees. Upon settlement of new home sales, this capital is then recycled into buying and developing new land and communities. They are currently able to develop two communities pa at the current rate of capital recycling, however with an expanded debt facility and capacity to buy new sites, we believe this can step up to a 3 communities pa run rate. Should the company be able to achieve this run rate, then this will in turn support further growth through increased settlements and rental income leading to increased borrowing capacity which is then applied to even more new communities.
Valuation Upside
As the number of communities and settlements grow, so to do the annuity rental income streams and deferred management fees.. These annuity income streams are valued at high multiples and key drivers of the companies valuation. Rental income from the sites are supported by increases of CPI or 3.5% pa, whichever is greater. Deferred management fees (DMF) are 4% pa for the first five years, capped at 20% on sale. These in turn drive further growth as they allow for greater borrowing capacity, driving further annuity steams, and so on.
With the company having a strong pipeline of existing land developments and an enhance borrowing capacity, that could facilitate an increasing pace of land acquisition, we believe there is scope for the company to deliver above consensus settlements / communities, which should drive a re-rating of the business.
Responsible Investment
Lifestyle Communities products and services have tangible social and environmental impacts through its provision of affordable and modern housing, addressing the inequality in housing options for Australia’s aging population. Customers moving into their communities are typically from Melbourne’s outer suburbs, middle-income individuals or couples with low superannuation / savings, and most of their wealth tied up in their existing home. LIC’s properties are typically priced at 75-80% of the target catchment area, allowing homeowners to free up equity in their home and fund a better quality of living in retirement, with reduced financial anxiety. Additionally the site rental fees that form part of the land lease agreement are approximately 20-25% of the age pension, and management fees are deferred and capped until the sale of the property.
Homes and communities developed by LIC have a net positive environmental impact through the design of smaller and more modern homes than the traditional housing stock found in their catchment areas. These smaller and more technologically advanced homes have lower energy use and GHG emissions. All communities developed since 2016 are all electric, meaning they will benefit immediately from the ongoing decarbonisation of the state grid, rooftop solar, and any community wide initiatives to install onsite micro grids with battery storage.
Moving forward, Lifestyle Communities has set a target to achieve net zero carbon emissions (Scope 1-3) by 2035. It plans to do this by enhancing the energy efficiency of the new homes it producers and also introducing greater community wide renewable energy initiatives. As an example, an upcoming development ‘Lifestyle Meridian’, will be the first solar powered community micro-grid with centralised battery storage, a feature we believe will become more common and a key part of their emissions reduction pathway.
This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).
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Past performance is for illustrative purposes only and is not indicative of future performance.