Aveo Group (ASX:AOG)

Geoff Grady
CEO
Market Cap (AUD): 1.23B
Sector: Real Estate
Last Trade (AUD): 2.13 +0.01 (+0.47%)
Tab Bar

1. About

Aveo is a leading and trusted owner, operator and manager of retirement communities across Australia. Aveo's philosophy is underpinned by a commitment to grow with older Australians by inspiring greater living choices. The Company currently do so for 13,000 residents in 93 retirement villages across Australia. Aveo also manages and develops a diversified $700 million property portfolio. Over 30 years, Aveo's portfolio has grown to one that encompasses retirement, residential, commercial, industrial and mixed-use property assets. The company derives its revenue from property development and retirement village development and management services. Aveo Group is administered by its head office in Sydney, New South Wales. The stapled entities are traded on the ASX as a single security under the code of AOG.

The Group's portfolio includes:

  • Retirement - Construction and management of retirement villages and independent living units
  • Land Subdivision - Supply of land for development
  • Property Development & Construction - Development and construction of residential property, including master-planned residential communities and apartments, and commercial, retail and industrial property
  • Funds & Asset Management - Management of portfolios of income received from properties

2. Business model

 

The Group operates the following divisions:[1]

 

Divisions

Revenue  ($’M)

% of Revenue

% of Profit/ (before Int, Tax, Dep & Amort)

Profit drivers[2]

Retirement Established Business

$134.0

31.8%

51.0%

  • The total Retirement revenue increased by 56% in FY18 to $600.7 M, driven by higher contributions from the Development and Care and Support Services segments. Aveo recorded total retirement sales volumes of 974 units, down 22% from FY17
  • In the Retirement Established Business, the realised average transaction price point continued to grow, up 12% to $442,000, which resulted in higher average DMG/ CG amounts per transaction
  • Revenue growth for Care and Support Services was offset by upfront costs of the new Durack and Newstead aged care facilities

Retirement Development

$3.5

0.8%

17.4%

Retirement - Care & Support

$12.4

2.9%

1.2%

Non Retirement

$271.3

64.4%

43.3%

  • Change in profit contribution primarily related to lower numbers of land lot sales
  • Presales remains at 47% (183 presales out of 385 lots)
  • Change in profit contribution primarily related to lower numbers of land lot sales
  • The decrease in the capitalised interest and amortisation adjustment was driven mainly by a reduction in Non-Retirement sales (lower capitalised interest in cost of sales) and increased development activity (increase in capitalised interest)

Non allocated items

$0.1

0.0%

(12.9%)

N/A

3. Strategy

 

Key strategies include:[3]

 

Aveo has successfully delivered on its FY18 retirement strategy targets. It remains focused on furthering its position as the leading and most innovative seniors living provider to deliver further growth and value:

  • the sales rate is expected to return to normalised levels i.e. over 10%;    
  • Aveo is on track to deliver 418 major development units in FY19;           
  • it is focused on selling new units and reinvesting capital into development and growth; and         
  • it is also focused on continuous improvement and innovation to provide better living options for senior Australians.

Based on current market conditions, the Directors confirm FY19 EPS guidance of 20.4 cps. The Group is targeting an FY19 full year distribution amount based on a payout range of 40% - 60% of underlying profit.

4. Markets

 

The Group operates in markets including:[4]

 

Industry (Australia)

Industry Revenue (2018)

Growth Rate

Retail Property Operators

$23 billion

6.0% (annual 13-18)

Office Property Operators

 $43 billion

11.3% (annual 13-18)

Commercial and Industrial Building Construction

$39 billion

5.0% (annual 14-19)

5. Competition

 

Major competitors include:[5]

 

  • Devine Limited (ASX: DVN)
  • Finbar Group Limited (ASX: FRI)
  • Hohsui Corporation (TYO: 1352)
  • Tohto Suisan Co., Ltd. (TYO: 8038)

6. History

 

1991[6]   

Group was established

 

2002   

Acquired by Australian Retirement Homes

 

2003   

Green community devt on Sunshine Coast approved

 

2004   

New acquisition held

 

2005   

Completed acquisition of Mulpha Norwest Pty Limited

Launched Unlisted Core Plus Fund

Acquired 14 Retirement Villages

Acquired $15 million industrial site in Campbelltown

 

2006   

Acquired Retirement Village Portfolio

 

2007   

Announced Currumbin Valley acquisition

Completed of acquisition of Zig Inge Group by RVG

 

2008   

Completed of acquisition of Newstead Riverpark

 

2012   

FKP completed the acquisition of RVG Management Rights

 

2014   

Aveo Group sold apartment complexes

Sold residential development sites at Gasworks, Brisbane

Aveo Group acquired two retirement sites with an end value of $380 million

 

2015   

Aveo extended its care initiatives

 

2016   

Acquired Freedom Aged Care

Aveo increased its interest in RVG to 73%

 

2017   

Aveo sells Gasworks Plaza in Newstead, Brisbane for $248.4 million

7. Team

 

Board of Directors[7]

 

Seng Huang Lee – Non-Executive Chairman

Geoff Grady – Executive Director & Chief Executive Officer

Diana Saw – Non-Executive Director

Jim Frayne – Non-Executive Director

Walter McDonald – Non-Executive Director

Eric Lee – Non-Executive Director

Kelvin Lo – Non-Executive Director

 

Management Team

 

Geoff Grady – Executive Director & Chief Executive Officer

David Hunt – Chief Financial Officer

Gary Kordic – Executive General Manager, Developments

Darren Sonter – Head of Care

Paul McAlpine – Head of Sales and Marketing

Justin Lorenz – Head of Community, Northern Region

Angela Buckley – Head of Community, Southern Region


read more

8. Financials

 

2018 Full Year Results Presentation

 

Financial Year 2017/18 (ended 30 June):[8]

 

Divisions

Revenue ($’M)

% Change

Profit/(Loss) (before Int, Tax, Dep & Amort) ($’M)

% Change

Retirement - Established Business

$192.9

18.9%

$61.1

17.2%

Retirement - Development

$0.2

(94.3%)

$79.0

213.5%

Retirement - Care & Support

$41.7

236.3%

$0.8

(52.9%)

Non Retirement

$190.5

(29.8%)

$50.5

(19.5%)

Non allocated items

N/A

(100.0%)

($21.5)

(15.0%)

Total

$425.3

(5.4%)

$169.9

17.4%

9. Risk

 

Major risks include:[9]

 

There are a number of risks that could affect the Group’s future performance. These include:

  • A downturn in the Australian property market could reduce growth in average transaction price points and consequently average DMF/CGs. This risk is partly mitigated by the Group’s introduction of the improved Aveo Way contract terms.    
  • Such a downturn could also reduce the Groups’ ability to sell its retirement and non-retirement developments. This risk could be partly mitigated by the Group reducing the rate of development.        
  • Development margins could be affected by construction delays and cost increases. Wherever possible, the Group controls this risk through fixed price contracts and by including early completion bonuses and/or late completion penalties in its construction contracts. The Group also carefully monitors development progress through regular management review.     
  • The Group may experience difficulties in executing its strategy to improve revenue from the Established Business by expanding the Freedom product offering to existing Aveo villages.

 

Interest rate risk

Interest rate risk is the risk that the fair value of financial instruments or cash flows associated with instruments will fluctuate due to changes in market interest rates, resulting in an adverse impact on financial performance. The Group’s exposure to market interest rates relates primarily to the Group’s borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group manages this risk exposure by using a range of financial instruments to hedge against changes in interest rates and maintain a mix of fixed and variable debt. The level of debt is disclosed in note 6. The Group primarily manages this risk exposure through entering into derivative instruments (primarily interest rate swaps), in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount. The level of derivative instruments required to manage interest rate risk is dependent on Group gearing. The Group presently has no interest rate hedges. Consequently, at 30 June 2018, none (2017: none) of the Group’s drawn debt denominated in Australian dollars was at a fixed rate of interest. Debt denominated in United States dollars carries a fixed interest rate. The impact of an increase or decrease in average interest rates of 0.75% (75 basis points) at reporting date, with all other variables held constant, is shown in the table below. This level of sensitivity was considered reasonable given the current level of both short-term and long-term Australian interest rates.

 

Foreign currency risk

Foreign currency risk arises as a result of having assets denominated in a currency that is not the Group’s functional currency (balance sheet risk) or from transactions or cash flows denominated in a foreign currency (cash flow risk). Balance sheet risk can affect net tangible assets whereas cash flow risk is more likely to affect potential equity distributions or other cash requirements such as the repayment of debt. The Group has no significant concentrations of foreign exchange risk.

 

Credit risk

Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet contractual obligations, with the maximum exposure being equal to the carrying amount of these instruments. Credit risk arises from the financial assets of the Group, which may include cash and cash equivalents, trade and other receivables, available-for-sale financial assets, financial assets at fair value through profit or loss and derivative financial instruments. It is the Group’s policy that all customers who wish to trade on credit terms are subject to credit verification procedures, including an assessment of their independent credit rating, financial position, past experience, and industry reputation. Risk limits are set for each individual customer in accordance with parameters set by the Board. These risk limits are regularly monitored. For third parties with extended term debt, credit checks are obtained and, in some instances, the receivable is secured by registered mortgage. In addition, receivable balances are monitored regularly with the intention that the Group’s exposure to bad debts is minimised. The Group’s cash management policy is to maintain cash in a highly liquid and low risk portfolio with investments made in high quality, short-term money market instruments to ensure the preservation of capital at all times. The granting of financial guarantees also exposes the Group to credit risk, being the maximum amount that would have to be paid if the guarantee is called on. As the amounts payable under the guarantees are not significantly greater than the original liabilities, this risk is not material. The Group manages concentrations of credit risk by limiting the maximum exposure to any one financial institution, which varies according to its credit rating.

 

Liquidity risk

Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s objective is to achieve continuity of funding and flexibility, due to the dynamic nature of the underlying business, using bank overdrafts, bank loans, finance leases and committed available credit lines, in addition to other sources of funds. The Group regularly reviews existing funding lines and assesses future requirements based upon known and forecast information provided by each of the business units. This assists flexibility by matching profiles of short-term investments with cash flow requirements and assists in timing the negotiation of credit facilities. Cash forecasts are prepared for review by the CFO and for presentation to the Board as appropriate. In order to ensure that the Group is able to meet short-term commitments (i.e. less than 12 months) and has sufficient time to plan and fund longer term commitments, forward commitment tests must be satisfied unless exemptions are approved by the Board. Management monitors the maturity and amortisation profile of all debt facilities on a regular basis and reports these to the Board. The CFO presents a refinancing plan for the approval of the Board well in advance of material debt facilities maturity. The current weighted average debt maturity is 2.1 years (2017: 2.8 years). The refinancing after reporting date discussed at note 6(b) extends the 2018 weighted maturity to 3.0 years.

References

  1. ^ Annual Report 2018, P. 93-94
    https://www.listcorp.com/asx/aog/aveo-group/news/annual-report-to-shareholders-1983252.html
  2. ^ Annual Report 2018, P. 05-06,44
    https://www.listcorp.com/asx/aog/aveo-group/news/annual-report-to-shareholders-1983252.html
    Investor Presentation 2018, P 34
    https://www.listcorp.com/asx/aog/aveo-group/news/fy18-results-presentation-1951093.html
  3. ^ Annual Report 2018, P. 45
    https://www.listcorp.com/asx/aog/aveo-group/news/annual-report-to-shareholders-1983252.html
  4. ^ http://www.ibisworld.com.au/industry/default.aspx?indid=1894
    http://www.ibisworld.com.au/industry/default.aspx?indid=1893
    http://www.ibisworld.com.au/industry/default.aspx?indid=1827
  5. ^ https://quotes.wsj.com/AU/XASX/AOG
  6. ^ https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=881891 https://www.asx.com.au/asx/statistics/displayAnnouncement.do?display=text&issuerId=3944&announcementId=473764&documentDate=2002-03-28&documentNumber=146039
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    http://www.asx.com.au/asxpdf/20160418/pdf/436l00vygd7ymk.pdf
    https://www.listcorp.com/asx/aog/aveo-group/news/aveo-sells-gasworks-plaza-newstead-brisbane-248-4-million-1765794.html
  7. ^ https://www.aveo.com.au/investor-centre/corporate-governance/board-of-directors/
    https://www.aveo.com.au/investor-centre/corporate-governance/executive-leadership-team/
  8. ^ Annual Report 2018, P. 93-94
    https://www.listcorp.com/asx/aog/aveo-group/news/annual-report-to-shareholders-1983252.html
  9. ^ Annual Report 2018, P. 44, 97-98
    https://www.listcorp.com/asx/aog/aveo-group/news/annual-report-to-shareholders-1983252.html