Real estate investment trust Ingenia Communities (INA) is a specialist retirement living REIT that is well-placed to benefit from Australia’s ageing population.
Ingenia runs a $224 million portfolio of real estate that includes rental villages, deferred management fee villages, manufactured home estates across Queensland, New South Wales, Victoria, Tasmania and Western Australia, and three New Zealand student accommodation buildings.
Formerly known as the ING Real Estate Community Living Group, Ingenia was hived off in February 2011 after ING announced that it would exit its Australian real estate investment management activities. In March 2012 the fund was re-branded Ingenia Communities.
Ingenia operates 29 rental villages under the Garden Villages brand, located across the eastern seaboard and Western Australia. These villages accommodate more than 1500 residents. The trust’s deferred management fee (DMF) villages are branded Settlers Lifestyle: this comprises five deferred management fee villages and four villages in the process of being converted from the rental to deferred management fee model. These villages are located in Queensland, New South Wales and Western Australia and accommodate more than 950 residents.
In the DMF model, the property title remains with the village operator and the resident lives in the unit under a life lease. The resident then pays the DMF when they leave.
The newest brand, Active Lifestyle Estates, launched mid-year, covers Ingenia’s latest expansion, a very promising move into manufactured home estates (MHEs).
Manufactured homes are stand-alone structures, usually two-bedrooms, that cost about $200,000. Ingenia’s strategy is to buy caravan parks and tourist villages in areas with a large and growing over-50s population,
and place manufactured homes on the sites, so as to specialise in the ‘affordable accommodation’ end of the retirement living market.
Ingenia says the MHE expansion will both build scale in its portfolio and increase its exposure to cash-producing seniors living communities: in this way, the MHE portfolio is expected to become a key driver of earnings and cashflow growth. Ingenia does not consider a MHE property unless it can achieve an unleveraged internal rate of return (IRR) of at least 15%. The yield to Ingenia on the manufactured homes is in the order of 10% and there is scope to boost this significantly through development profits. Also, not building the homes itself means much cheaper expansion.
Ingenia started buying MHEs in New South Wales in March, and the portfolio has expanded to ten properties, funded by a $21.2 million institutional share placement in June and a $61.7 million rights issue in September. Both capital raisings were strongly supported, reflecting investor support for Ingenia’s move into the MHE sector.
In FY13 Ingenia made a net loss of $10.3 million, but this was mainly due to a $17.5 million foreign currency accounting reclassification related to its exit from US businesses, a legacy from ING days. More pertinently, profit from continuing operations for the year was $2.8 million, up 95% on the previous year. Ingenia declared a final distribution of 0.5 cents a stapled security.
Ingenia 2013 Annual Results Presentation
For FY14, broker CIMB Securities forecasts a distribution of 1.5 cents in DPS. At the moment the distribution yield is 3%, but Ingenia chief executive Simon Owens wants to lift this to 5%. This will be based on the fact that the rental and MHE portfolios now account for 55% of Ingenia’s total portfolio by value, supporting a growing recurrent cash yield, which will underpin future acquisitions, development activities and distributions to security-holders.
In 2014 Ingenia expects to sell its legacy New Zealand student accommodation business. The portfolio currently comprises 359 units within three properties, with 15-year leases with Wellington tertiary institutions, and also offers budget short-stay accommodation during the summer university break. Ingenia says a sale could raise up to $40 million.
Ingenia has had an excellent year: the stapled security price has risen from 26.7 cents at the end of 2012 to 47.5 cents currently. Volume of trading has surged, too, which could be explained by one of two reasons. The first is that on September 20, Ingenia became a constituent of the S&P/ASX 300 Index – as such, it has to be owned by index funds and exchange-traded funds that track this index. The second is that a predator realises the excellent job that Ingenia management has done turning this business around from the ING days and positioning it in an important growth area of the Australian property market – a position strongly supported by demographic trends. As the population over the age of 70 is increasing at about 3% a year, the demand for Ingenia’s product is high.
