Gateway Lifestyle Offers Potential In Affordable Homes

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-Large development pipeline
-High demand for seniors living
-Consolidation opportunity
 

By Eva Brocklehurst

Newly ASX-listed Gateway Lifestyle Group ((GTY)) is one of the country’s largest owners of manufactured home estates, with a strong growth profile.

The company offers an FY16 distribution yield of 6.1%, which compares favourably against its sector peers, considering the growth profile. Income comes from three primary channels: rents, sales of homes and commissions from the sale of third-party homes. The company is focused on converting short-term sites at its mixed-use estates into long-term sites. Development is specifically limited to sites on adjoining vacant land to leverage the infrastructure currently in place.

There are 36 estates in Gateway Lifestyle’s portfolio, with 4,046 tenanted sites that provide predictable rental income. Rents are non-seasonal and grow at a minimum of the CPI. An additional 2,172 sites are suitable for new manufactured houses so there is a substantial development pipeline over an eight-year period. Moelis estimates this may generate over $525m in revenue from manufactured homes which translates to around $210m in profit based on current prices.

Taking into account an under-geared balance sheet and likelihood of acquisitions, Moelis expects earnings growth of 12.2% into FY17. Distribution estimates are set at a 75% pay-out ratio, the mid point of the company’s target of 65-85%. Moelis initiates coverage with a Buy rating and $2.37 target.

An ageing Australian demographic makes for a significant increase in demand for affordable accommodation for seniors. Furthermore, a fragmented market structure is expected to provide ample opportunity for consolidation in the sector. Gateway Lifestyle is considered well placed in this respect, boasting considerable acquisition experience. Moelis expects management to deploy earnings accretive acquisition opportunities in the short to medium term. The company’s portfolio is spread across NSW, Queensland and Victoria. Manufactured homes are typically priced at 40-60% of the median house price in the area, which enables potential residents to sell their existing house and release equity to fund their retirement.

The company has also identified some opportunities for the future, including the sale of insurance and pharmaceutical products to residents, as well as leveraging the resident base to earn marketing revenue. Major competitors include Ingenia ((INA)) Hampshire Villages and Aspen ((APZ)), which appear to compete for existing parks on the eastern seaboard. Gateway Lifestyle does not operate either tourism or mining manufactured estates but is open to acquiring mixed-used villages with tourism sites, to the extent it is possible to convert these over time.

Risks centre on common themes such as a material downturn in the housing market in the localities in which the company operates. This may reduce the appeal of manufactured homes because of a narrower gap between the sale price of the existing home and the purchase of a manufactured alternative. There is also risk in developments with delays or issues with planning and regulations. Greenfield developments have the potential to adversely impact sales of manufactured homes and also the ability to increase rents.
 

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