Good times ahead for Ingenia Communities
Ingenia Communities Group (ASX: INA) is a diversified real estate investment trust with a portfolio of assets covering lifestyle, tourism and retirement living. With a strong balance sheet, and tailwinds from rising domestic tourism and an ageing population, its future prospects look strong.
Australia’s closed border COVID defence has been key to the better health outcomes we’ve seen here compared to most other countries. It doesn’t look likely that our international borders will be opened up anytime soon, certainly if the politics of domestic border re-opening are an example of the hurdle rate required by State based politicians.
According to Deloitte Access Economics & Tourism Australia, Australians spent $65 billion on trips outside Australia in 2019 and with international travel off the agenda for a while there’s going to be some of this cash finding its way into other areas of the domestic economy not just in the next few months, but possibly for a protracted period.
So who are the beneficiaries of this scenario?
Followers of our blogs have seen us write up on select retailers and domestic auto exposures as key beneficiaries. Today we look at a stock that is a direct beneficiary through its domestic tourism exposure – Ingenia Communities, but also has longer term tailwinds driving its business.
Who is Ingenia?
Ingenia is a Real Estate Investment Trust (REIT) with a portfolio of assets covering lifestyle, tourism and retirement living earning rental income. It also has a development business that builds retirement living homes on its portfolio of 74 communities that it manages and operates. INA has a rental income base of $2 million per week spread over almost 7,000 sites. It has a development book spanning over 3,000 sites and is currently building 9 communities. In FY20 INA recorded revenue of $244 million and had $944 million of property on its books.
Ingenia and domestic tourism
INA has a portfolio of tourism assets, holiday parks with over 2,300 cabins, caravan and camping sites that offer almost 1 million room night equivalents per annum. The business was on track to have a strong growth year in FY20, 1H20 revenues were up 16 per cent, but of course COVID lockdowns hit in the final quarter of the year. Despite that, and bushfire impacts, the Tourism business performed well coming in only 5 per cent short of F19 revenues.
Looking ahead, whilst 1Q21 has no doubt been impacted by lockdowns, particularly in Victoria, earnings potential for the rest of FY21, FY22 and beyond looks strong. We think domestic tourism is positioned for a boom and INA’s assets are well positioned to capture value.
Specifically we think there is scope for considerable occupancy uplift from 55 per cent for tourism cabins (46 per cent for camp sites) observed in FY20, as well as price. Last year the average cabin in the portfolio was let out for $135 a night, that’s a mass market affordable price point, and if my family’s recent holiday planning is anything to go by it’s a bargain! Prices clearly have some room to increase in the current climate.
At INA’s 1Q21 update on 15 October, management reported that direct bookings at parks and across the group’s Ingenia Holiday branded website was up 50 per cent versus the same period in prior year. The outlook for occupancy and price look strong in FY21 and FY22, and those are two powerful drivers for profits. We don’t think cost structure needs to increase much to cope with increased occupancy, and obviously higher prices drop straight through to higher margins.
Demographic tailwinds = structurally growing market
The boom from the expected uplift of more spending on domestic holidays is one part of INA’s equity story. But the biggest driver for earnings and long-term value creation is in the retirement development book, and the long-term rental income growth this drives. Here INA’s portfolio is riding some strong demographic tailwinds.
Today there are around 80,000 additions to Australia’s over 65s population a year, in five years the pool of 65+ Australians will be growing at more like 130,000 per annum. That’s a rapidly growing pool of seniors, some of which will be considering that “downsizing” move to a retirement living community.
Residential housing outlook supports near-term growth
The stability of the residential house prices in Australia is a key enabler for the retiree community to make the downsize move, as it involves selling the family home to invest some of the proceeds on a new retirement community home on the coast, and have enough funds left over with which to enjoy life. Given the recent fall in domestic interest rates, and the outlook (as recently articulated by the RBA) that rates stay low for the foreseeable future, we think this strengthens the domestic housing market, affording more and more senior Australians to make that lifestyle move.
Well positioned and INA’s unit economics offer strong returns
Today INA estimates that it has around 15-20 per cent market share in the supply of homes in retirement communities that serve this growing market, that’s a healthy market share position from which to benefit from these structural growth trends. INA has a development ready portfolio of 3,000 sites that positions INA well to capture this growth.
And it’s profit dense growth. Last year INA developed and settled on 325 retirement living home sites, with an average value of $430,000, it’s a very profitable business generating some 45 per cent gross margins and is INA’s highest return on capital in its wholly owned portfolio of around 20 per cent.
Earnings upside, visible near-term drivers, balance sheet strength and long term growth tailwinds
We think INA has scope to outperform earnings expectations near term (Tourism), and the drivers are in place over the medium (interest rate settings) to long term (demographic tailwinds) for sustained earnings growth. Having recently raised $178 million of equity in May, there is the added kicker of $370 million of cash and undrawn debt that is also available to management to acquire more sites and communities, which should add some inorganic growth into the portfolio over the next couple of years.
Time for a holiday.
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Gary is the Portfolio Manager of the Montgomery Small Companies Fund – a small-cap Australian equity fund investing in 30 to 50 high quality, undervalued small and emerging companies with strong growth potential. The fund invests outside the ASX100.