Aveo Group (ASX: AOG) entered into an agreement with Springfield Land Corporation to develop a seniors living campus at Health City, Greater Springfield in Queensland over the next fifteen years. The group is responsible to build up to 2,500 new seniors housing units and other health and integrated facilities which would be known as Aveo Springfield. On the other hand, AOG already has a pipeline to develop more than 2,800 retirement village units for the next five years. The group is planning is slowly ramp up its production from 62 units in fiscal year of 2015 to 553 units in fiscal year 2018, and more than 1,800 units in FY19.


Development Delivery estimation (Source: Company Reports)
 
Based on its 5,000 residents survey conducted last year, the group had revised its contracts by addressing the needs of its residents.  Aveo group has been focusing on the customer requirements and developing its products accordingly. AOG now offers a 21 day cooling-off period and a 90 day settling-in assurance, decreasing the concerns to the residents on selling the property during their way out. The firm does not charge marketing fees or selling fees, and the residents need not have concerns on refurbishing their units.

Meanwhile, Aveo group intends to generate a return on its retirement assets in the range of 4.3%-4.7% in the current fiscal year, 6% to 6.5% 8% for the next fiscal year and achieve over 8% by fiscal year 2018. As a part of its strategy, Aveo intends to improve its present retirement village results, while developing more retirement villages in the future. 


Improve ROA with growing retirement business (Source: Company Reports)

To achieve its development target, the group is realizing most of the fund from its non-retirement portfolio and intends to realize around $800 million over time, to invest in its retirement growth projects. Aveo group is disposing around $585millionof non-retirement assetsduring FY15. Accordingly, approximately $225 million would be used for the working capital investments in the retirement portfolio, while $40million per annum would be used for retirement asset acquisitions (resulting into a total of $160 million). Moreover, AOG wants it’s gearing ratio to be in the range of 10%-20% and allotted the capital accordingly. Meanwhile, Aveo terminated its outstanding $150 million of interest rate swaps in May. This termination along with reducing floating interest rates had helped the firm to decrease its weighted average cost of debt from 5.8% per annum at 31 December 2014 to 4.0% per annum at present. As a result the annual cash interest expense was decreased by approximately $7.5 million.  In addition, AOG forecasts weighted average cost of debt to decrease below 4.0% by 30 September 2015, driven by the Milton project completion and compensation of the $108.5 million project finance facility, which would be reflected during the first quarter of FY16.


Capital recycling from non-retirement assets (Source: Company Reports)
 
AOG rose its holding in the Retirement Villages Group (RVG) fund from 23.3% to 38.7% in May. The group bought additional 15.4% holding for a price of 24.75 cents per security, which is a 12% discount to RVG’s NTA per security at 31 December 2014. The group estimates the transaction to achieve earnings per share neutrality by FY16. The entire transaction was worth over $55.8 million, with the group paying a cash of $10.9 million and issued securities worth $44.9 million to the exiting RVG investors. The management reiterated that it would be maintaining its target gearing range of 10% - 20%, as approximately 19.6% of the entire transaction value was cash funded. Aveo Group is the fund and asset manager of RVG, with RVG having 29 retirement villages across greater Melbourne and Sydney, as well as comprises a total of 3,436 independent living units and serviced apartments.
 
Outlook

Aveo group focuses mainly on retirement village sector deriving over 65% of its earnings from this business. The group has a significant competitive advantage in the retirement village sector as most of the other firms in the related field in Australia do not concentrate on this sector.AOG is also seeking to strengthen its presence in New South Wales and Western Australia. We believe that the group has the ability to deliver its retirement village targets and pursue further acquisitions given its solid balance sheet. The stock has generated a year to date returns of 28.7%, and is well positioned to deliver growth further.
Based on the foregoing, we reiterate our “BUY” recommendation on the stock at the current levels of  $2.76.

---

Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people.Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376).The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation.Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product.The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd currently hold positions in:  BHP, BKY, KCN, PDN, and RIO. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations.
Copyright
Copyright © 2014 Kalkine Pty Ltd ABN 34 154 808 312. No part of this website, or its content, may be reproduced in any form without the prior consent of Kalkine Pty Ltd.
Kalkine is a trading name of Kalkine Pty Ltd ABN 34 154 808 312, which holds Australian Financial Services Licence No. 425376.