Not-for-profit ain't necessarily so...

Many people are attracted to the idea of living in a retirement community operated by a not-for-profit (NFP) organisation because the purchase contracts will be more reasonable. But is this necessarily the case?

The retirement home sector has traditionally been dominated by the NFP sector, such as church groups and charitable associations. Over the last decade the sector has attracted significant interest from “for-profits” such as investment banks and property companies, to the extent that more than half of the retirement villages in the country are now owned by the for-profits.

I think you could safely say that that the NFP’s were originally motivated by a strong sense of “mission” in building their portfolios of retirement village assets. In fact, the much-maligned Deferred Management Fee scheme was created by the NFP sector, who discounted a property by 20-30% off the market value to allow the struggling retirees to purchase a unit, and then made the discount back via the deferred management fee when the resident departed the complex.

Today however, there is little difference between the purchase contracts offered by NFP’s and for-profits. Both use deferred management fee schemes with great effect to their bottom lines. Some NFP’s do allocate a portion of their community to subsidised housing, although this is not common.

It is hard to make a generalisation about the best owners/operators of retirement villages, as they are all very different. On one hand it would seem that NFP’s would have your best interests at heart because they are, well, not-for-profit. However NFP’s do try and make money from their operation to (I assume) fund other social ministries supporting the community that don’t make money.

It could also be argued that NFP’s are not as efficiently run as for-profit organisations and they certainly wouldn’t attract the same quality of executives as a Lend Lease, AMP or Stockland. The larger listed companies are also very sensitive to adverse publicity and are likely to be more responsive to resident concerns.

As a very general rule, we would recommend finding answers to the following questions when selecting your village owner/operator:

• Does your owner/operator have a strong balance sheet (ie, no more than 30% debt as a proportion of their assets)?
• Is retirement living their core business?
• Are they in the retirement living business for the long term?
• Is there a corporate/head office structure dedicated to retirement living sitting behind the village management?
• Are they too focused on expanding their portfolio by developing new communities?

The recent takeover bid for listed retirement village owner Aevum by Stockland has thrown renewed interest onto the consolidation occurring in the retirement living sector. But is this consolidation a good thing or a bad thing?

In my opinion consolidation is good for the retirement living sector.

By way of background, up until 15-20 years ago, the retirement living sector was dominated by church groups and benevolent associations. The industry today is a very different beast and now only around half of all complexes are owned by the not-for-profits or benevolent institutions. The “for profit” corporations entered the market in the mid 1980’s, but withdrew following the property crash of the late 80’s early 90’s.

The late 90’s early 2000’s saw the re-entry of corporations, to the extent that between 2000-2008, most acquisitions of retirement villages or retirement village portfolios in Australia was completely dominated by listed property trusts and institutional investment vehicles, most of whom had not previously been active participants in the sector. This included listed property companies such as Aevum, Lend Lease Prime Life, Becton, FKP, ING, and Stockland; and institutional investment vehicles including the Retirement Villages Group (RVG), and the AMP Capital / Meridien joint venture. As a result of the Global Financial Crisis, these organisations have ceased their buying and are now focusing on managing their villages and new development pipelines.

The not-for-profit sector had been largely left behind in the orgiastic feast of consolidation over the later part of the last decade. However the planets have now aligned for this group, with current market conditions favouring those who had missed acquisition opportunities and are now actively expanding their portfolios. Private developers and owners who sold out to institutional buyers in the previous cycle are re-entering the market and are expected to again amalgamate large portfolios.

The entry of profit-focused companies into the retirement living sector has been good for the industry as a whole. “For-profits” have brought a level of professionalism, sophistication and market responsiveness that had been lacking with the domination of churches and other not-for-profit groups in the sector. As a buyer’s agent that communicates with retirement villages on a regular basis, I am often frustrated by the lack of disclosure and competence of retirement village sales staff.

Here are my reasons why I think consolidation is good for the sector:

1. The exit fee model under which most retirement homes are sold in this country requires a village owner with a strong balance sheet and/or a large portfolio, due to the volatile nature of the cash flows from this kind of business. The large “for profit” operators are conservatively geared (now!) and can provide balance sheet stability.

2. The larger retirement village owner/operators are typically listed on the ASX. This implies that the general public can access a pretty good level of transparency of the company’s financial situation, whereas with private and not-for-profit operators you never know how strong or precarious their financial situation is.

3. Large, listed retirement village owner/operators are extremely averse to negative publicity as this can adversely affect their share price. This makes them a little more motivated to resolve disputes with residents so they don’t end up as the headline story on A Current Affair. It is also easy for disgruntled residents to acquire shares and front the company’s directors at general meetings.

4. Larger organisation are able to pay their executives more money and, in theory, should therefore attract a better quality of manager.

5. Larger operators should be able to discount their stock in the lean times to make sales, knowing that they can make it back on the subsequent re-sale of the unit – smaller operators are hesitant or unable to do this.

6. Larger operators can provide better systems and training for village sales staff and managers.

7. Larger operators have less chance of going broke, preventing situations like this where retirement village residents live in fear of being turfed out of their homes.

What do you think? Do you agree with me?