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Gateway Pays Up For Expansion

Small Caps | Mar 20 2018

Gateway Lifestyle has ventured into the South Australian market, acquiring two established estates central to its long-term strategy to grow rental income.

-Brokers suggest full price paid for the sites
-Acquisition should improve overall asset quality
-Further asset recycling expected


By Eva Brocklehurst

Gateway Lifestyle ((GTY)), a provider of retirement communities, has acquired two established manufactured home estates (MHE) for $45m, to be funded by debt as well as the issue of $3m in shares to the vendors.

The location is in South Australia and the company's rationale is to improve its overall portfolio quality, expanding from its core east coast location. Settlement is late in FY18 and the company expects no material impact on earnings in FY18.

In aggregate the sites have 555 long-term lots, of which 488 are occupied and 67 are approved development lots. Development sales remain active.

CLSA acknowledges the company is providing a platform for further growth, which is consistent with a long-term strategy to grow rental income. Yet, the broker believes the company has paid a full price for a new market, with an implied price of $81,000 per lot.

CLSA estimates an initial and stabilised yield of 5.8% and 7.0% respectively. The broker forecasts FY19 accretion of 1.4% and maintains an Outperform rating and $2.24 target on the stock.

In theory, Shaw and Partners, which maintains a Hold rating and $2.21 target, expects the transaction will be accretive to earnings in FY19, given the yield spread over the company's 3.9% cost of debt. Yet, management has plans for further asset sales so the broker does not assume there will be a meaningful upgrade to the FY19 outlook.

Asset Recycling

UBS agrees further asset recycling may offset the earnings benefit, although the acquisition should improve overall asset quality. The broker has a Buy rating and $2.30 target. Gearing is expected to remain within the target range of 25-35%.

Based on a rental rate in line with the company's average, as details are not been provided, UBS estimates incremental rental income of $3.7m from the asset.

The broker considers the price paid is full, assuming $50,000 per vacant lot and a 70% operating margin that implies a cap rate around 6.3% on the operating assets. UBS also expects these assets will be able to achieve rental growth of 3-5% per annum.

On a built-out basis, which converts the development sites to rent paying sites, Macquarie suggests the cap rate improves to 6.55%. The broker notes this is below the 7-7.5% rate of the current mature portfolio, which reflects a combination of several factors such as tight pricing in direct markets, conservatism in the stock's valuation and the better attributes of these sites versus average assets.

The broker agrees the transaction is further evidence of the company's intention to acquire either mature sites or development sites, as opposed to converting sites, noting in February the company divested two non-core conversion assets for $18m and acquired a greenfield site for around $38,000 per lot.

Macquarie does not factor this transaction into forecasts, anticipating further non-core asset sales that will limit accretion and maintains a Outperform rating and $2.14 target.

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