What do you like about the stock?
We are attracted to GTY for several reasons, however, the primary reason is the strong tailwinds from the ageing population in Australia. The population of over 65 year olds is set to double between 2005 and 2021.
Given this backdrop, we have long been attracted to the retirement sector and have already had several successful investments in the last seven years (AOG, INA, LIC and AVE – bought by Stockland).
Amongst the listed peers, GTY stands out as it offers an affordable mobile home retirement product with the weekly rental providing investors with strong and predictable annuity revenues. In this sense, it is most like Lifestyle Communities (LIC). However, with GTY, you are not restricted to greenfield developments (as you are with a LIC).
Gateway is aggressively consolidating the sector, providing strong earnings accretion in the process. Given this focus on acquisitions, you need a quality management team, who not only stay disciplined when assessing acquisitions but can also manage an expanding portfolio.
We believe the team led by chief executive Trent Ottawa provides this as well as the strong board led by chairman Andrew Love overseeing major decisions.
Finally, the valuation at the initial public offering (IPO) was very attractive, priced at 11.8 times forward earnings, a large discount to both peers and the market.
We also liked the fact that Ottawa (which holds 5% of the company) did not sell any stock in the float and has not since.
How is it better than its competitors?
Location is everything in this business and GTY has many villages in attractive coastal locations close to major population centres.
This attracts residents and boosts returns to shareholders, given the high occupancy levels typically experienced. Many of these quality sites are hard to replicate so the restricted supply provides a natural competitive advantage. For example, there is very little chance of similar retirement parks being built near Gateway’s Sydney or Brisbane locations, given tight planning laws and high land values.
What do you like about its management?
The management team is experienced, having been involved in the retirement park sector since 2007. It also brings strong financial discipline to all acquisitions, given its background in accounting.
This is important, given that the management team is focused on consolidating the industry and acquisitions will be continuing for many years. Yet the team manages to combine this with an ability to manage the parks in the friendly and hands on manner needed to keep the residents happy.
Importantly, I have visited several parks without head office management present and have found a consistently high quality of management at the park level. In this sense, the management style runs from the chief executive down throughout the company.
Where do you see the value?
The value in Gateway is in the growing rental annuity. Underpinning this is the quality of the land on which the homes are located. As a result, we continue to undertake extensive site visits of both Gateway and competing villages to ensure the quality and exclusivity of each location. I have included an example of a site visit I made to the Valhalla retirement village, which is owned and operated by Gateway.
The village is one of the highest quality that I have seen and well located near Lake Macquarie on the Central Coast. Importantly, the quality of the new stock being delivered to incoming residents (example in the photo) is also amongst the best I have seen.
How long have you held the stock?
After several months of due diligence and site tours, we acquired the stock in the IPO at $2.00, with the listing occurring in June 2015. We have held the stock ever since and bought more shares on market, lifting our stake to 7.7% of the company.
What is your target price on the stock?
We tend to look at valuation relative to the market and on this basis we think it approaches fair value around $3.00, where investors will be getting close to a 5% dividend yield. However, this valuation does not take into account future acquisitions or approval for more developments on the existing land bank – on our conservative numbers this lifts the valuation to $3.30. As these opportunities are announced, we will adjust our valuation accordingly and therefore I can see a situation where more accretive acquisitions continue to push the valuation higher and all the time the annuity revenues continue to grow.
At what point would you sell it?
We typically look to sell stocks when they move well past what we see as fair value, based on the information we have at the time.
The other development that would cause us to sell would be any signs management is overpaying for acquisitions or if strategy differs materially from what we think is a very sensible strategy, as outlined at the IPO.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
Our fund, the Perennial Value Smaller Companies Trust, was up 13.5% net of fees in 2015, 3.3% above the ASX/ S&P Small Ordinaries Index. Gateway contributed to about a third of this excess return, despite only being listed mid-way through the year.
Is it a liquid stock?
The pleasing thing about Gateway Lifestyle Group is that with a market cap of $700 million, there is plenty of liquidity versus other small cap investment opportunities. This liquidity was enhanced when the stock was introduced to both the S&P 200 and 300 index in September 2015.
Gateway Lifestyle Group (GTY)
Source: Yahoo!7 Finance, 11 February 2016
Andrew Smith is a small cap portfolio manager and equities analyst with Perennial Value Management.
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