Real Estate

Two stocks to benefit from growing demand for retirement accommodation

By Market Index
Fri 30 Sep 22, 12:42pm (AEST)
Woman in hammock
Source: Unsplash

Key Points

  • Goldman Sachs expects Lifestyle Communities to deliver EPS compound annual growth rate of 21% over FY22-25
  • Ord Minnett has initiated coverage on Ingenia Communities (ASX: INA) and Lifestyle Communities (ASX: LIC)
  • Both stocks offer retirement accommodation within what are referred to as lifestyle communities

With the size of Australia’s ageing population outstripping demand for retirement accommodation, Ord Minnett is attracted to the long-term growth prospects of two listed players within this space, Ingenia Communities (ASX: INA) and Lifestyle Communities (ASX: LIC) and recently initiated coverage with a Buy and Accumulate recommendations respectively.

To the uninitiated both stocks offer retirement accommodation within what are referred to as lifestyle communities.

Also referred to as land lease communities, over 55s communities or lifestyle resorts, this retirement accommodation is designed to leave its residents with more of their hard-earned money to spend living the lifestyle they’ve always dreamed of.

Due to a myriad of factors, including a more affordable entry price-point, the appeal of community living post covid isolation, the elimination of the need to pay stamp duty and other council rates, these lifestyle communities are growing in popularity across Australia.

How do these lifestyle communities work?

The unique buying model and ownership structure of lifestyle communities typically differs from traditional house and land purchases and retirement villages.

The single biggest difference is that residents own their home, but not the land it sits on, which is leased from the operator under a residential site agreement.

As part of the lease, residents get access to the community facilities and amenities for a weekly site rental fee.

While the site fees in a lifestyle community tend to be higher than those in a retirement village, unlike the latter, there is no exit fee.

With that said, let’s take a closer look at these two stocks.

Ingenia Communities

Underpinned by a strong domestic tourism business and its land lease community operations offering continued growth, Ord Minnett expects Ingenia to outperform its peers.

The broker’s $5.11 price target offers 29% upside to the current price.

At the full year FY22 Ingenia delivered underlying profit of $87.9m up 14% on the previous year, on revenue of $338.1m, also up 14%.

Management noted that while 90% of future development pipeline is now located in Queensland and high growth coastal/regional markets, its 40 East Coast holiday parks are “benefitting from buoyant domestic travel demand.

With multiple projects commencing in FY23, the company is targeting 2,000 - 2,200 settlements over the three years to end FY25.

Ingenia Communities share price snapshot

While FY23 guidance looks strong at the earnings (EBIT) level (30%-35% growth) at the earnings per share (EPS) level 5%-10% is below UBS's forecast of 13% and market consensus sitting at 14%.

As a result, the broker retains a Neutral rating and price target $3.92.

While Goldman Sachs is also Neutral rated on Ingenia, the broker’s $6.00 target price offers 39% upside to the current price.

Despite the increasing pace of greenfield development and pent-up demand from the holidays business, the broker cites sustained and significant falls in residential house prices in the company's catchment areas, and higher building costs as underlying risks.

Lifestyle Communities

Despite the more limited upside, Ord Minnett believes the stock’s meaningful re-rating reflects the sector’s leading growth and returns profile.

The broker’s target price of $18.31 offers 18% upside the current price.

At the full year the company’s underlying profit was up 69% $61.4m and new home settlements increased from 255 in FY21 to 401 in FY22.

Lifestyle Communities share price snapshot.

The company is planning to deliver 1,400 to 1,700 new home settlements between FY23 and FY25, up 30% on the previous three-year settlement range.

Based on the company’s pricing power to continue recycling all operating and capital costs from the development of its communities, Goldman Sachs believes Lifestyle is one of the most attractive business models in its small and midcap-coverage universe.

Despite the elevated construction costs and rising interest rate environment, the broker has a high degree of confidence in the business model and rates the stock a Buy with the target price of $25.75 offering 42% upside to the current price.

Over the medium-term, the broker believes the accelerating development pipeline, growing rental/DMF revenues, and favourable exposure to more affordable markets should underpin an EPS compound annual growth rate (CAGR) of 21% over FY22-25.

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