Demand for land lease residential community living is roaring ahead, and Lifestyle Communities is at the forefront of the sector. LIC has updated its guidance and as a consequence, we are upgrading our recommendation to Buy.
LIC now expects to deliver 390-405 new home settlements in FY22f. The company will also deliver 140 150 resale settlements that attract a DMF (deferred management fee). Additionally, 322 new homes have sold and are awaiting settlement, an increase from 252 reported as at 31 December 2021.
The three-year guidance is unchanged but is beginning to look conservative. LIC had previously upgraded its longer term 3-year forecast for settlements at its FY21 result announcement. The range of 1,100-1,300 and 450-500 settlements and resales respectively is under threat from the strong current cadence and acceleration in the development pipeline.
The recent Leopold land acquisition is quickly taking shape. On the Bellarine Peninsula, just east of Geelong, Victoria, LIC secured land that is being developed into 160 sites. Civil work has already been completed suggesting the timeframe to settlement will be significantly shorter than other developments. This will boost the total portfolio by about 3% and maintains the FY22 development pipeline above 2,200 sites.
The Leopold acquisition also serves to highlight LIC’s ability to secure land off-market that caters to the sea changers and tree-changers. This theme will underpin LIC’s expansion into regional Victoria. Rising interest rates are hurting cap rates for the sector, but there are offsets. A fair proportion of the recent slide in LIC’s share price can be attributed to an expansion in the cap rate applied to LIC’s rental streams. But there are several factors working positively for LIC in this regard, including a supply/demand imbalance, capital inflows to the sector (new market entrants), government backing of rental payments through the Aged Pension, substantial equity release for homeowners and no debt funding of purchases.
Investment view
LIC management is focused on delivering a product that drives a high referral rate. This is certainly the case in existing communities, and it is helping to expose a very big target market to the value proposition of land lease community living. The recent share price fall is not a reflection of the very solid fundamentals that support the investment concept here. We raise our recommendation to Buy.
Risks to investment view
The acquisition, development and settlement of properties may not achieve expectations. The resale of properties might not achieve the anticipated turnover or deferred management fees expected. Demand for land lease communities might not be as high as expected, depending on competition, or other factors.
Recommendation
We have upgraded our recommendation to Buy from Hold.
