Aevum's active retirement

Soaring stock prices, rampant speculation and sweeping takeover activity '” it sounds like the junior mining sector, but it's the retirement sector that's alive with corporate activity in late 2006 and ASX-listed Aevum is at the centre of the action. The Sydney-based company, with close to 2000 units and capitalised at $170 million, listed back in late 2004 and has already survived a takeover attempt by listed rival Primelife Corporation.

Earlier this week the group reported strong annual results, with income up 27% and profits almost tripling (up 174%) to $13.4 million.

Moreover, the results did not fully reflect a major strategic change at the company. Aevum previously had up to a third of its revenues in aged care, but after the purchase in recent months of retirement village assets from both the Moran group and the Sakkara group, it is rapidly becoming a pure play retirement village company.

That may well be smart strategic move because it is the low-margin aged-care business that has tripped up rivals such as DCA, now subject of a takeover from private equity group, Pacific Equity Partners.

Owen will not concede it, but with roving predators Macquarie Bank, Babcock & Brown, Primelife and the acquisition-hungry MFS in the sector, it is very much a case of “acquire or be acquired” in the retirement village business. Earlier this month, the Sunnycove group also entered the fray making a bid for the struggling Village Life group and even Owen has the massed ranks of B&B, Primelife and MFS on its share register through a consortium called Prime Living Trusts with a 20% stake.

So far Owen has managed to keep ahead of the pack, but how long can he survive?

The interview

James Kirby: We’ve seen a remarkable amount of speculative activity in your sector. You have had a takeover offer. Similarly, you have taken companies over yourself. Is there something of a land grab happening in the retirement sector at the moment?

Simon Owen: We’re definitely going through a consolidation of the industry at the moment. There’s a number of new institutions and investment banks who have moved into the industry or are looking to do so and similarly some of the larger property groups like Stockland are also looking to move into the sector.

Now three of the largest operators in this sector '” Babcock & Brown, MFS and Primelife '” in a joint venture hold about 20% of your company. Does that limit your growth options in any way?

No, that group through the Prime Living Trust own a bit under 19%. That doesn’t limit our growth in any way. We have a very cordial relationship with them but we’re progressing down our own growth plans and they’re doing likewise.

So is it a case of acquire or be acquired in the retirement sector at the moment?

Look there is a lot of consolidation going on at the moment and the two recent acquisitions that we’ve made have given us a lot of scale but it’s really about '¦ it’s not growth for growth’s sake. We’re looking for profitable growth, which will deliver our shareholders with long-term earnings per share and dividend growth.

Now a competitor of yours in this area, DCA, was one of the most highly regarded companies in the sector until very recently when it had a series of setbacks. Then it immediately found itself subject to a takeover offer, so it seems you can’t make a mistake at the moment in your business. Is that true?

I think it’s not just in our industry. It’s in any industry at the moment that people who don’t deliver are punished very quickly. We’ve got a tremendous portfolio of assets. Our businesses are performing very well and the challenge is to continue to deliver on what we’ve achieved in the year that’s just finished.

Now you had an IPO in 2004 so you’re just a two-year-old company. What are the realistic chances in this market that you’d still be around as a stand alone company in five years time?

To be fair, that’s not something that I really focus on '¦ about whether we’re going to exist or not. We’ve got a growth plan. We set out in our prospectus that we wanted to grow to 2000 units by 2009. We’re almost there. We’ve got a great pipeline of low-risk organic opportunities and we’re also looking at some other acquisitions. So, you know, we’re continuing to grow and it would appear that we’ve got the support of all of our shareholders.

You have about 2000 retirement units on the books at the moment. Can you give us some idea what that means in the overall size of this sector?

Well, I guess firstly I’d like to differentiate that of the 1606 units that we currently own and operate we actually own those, whereas at Primelife often they only manage them so there’s a significant difference there between what we’ve got and what they’ve got. Second, the industry, while it is undergoing a lot of consolidation at the moment, there’s around 1400 retirement villages in Australia owned by around 1100 people, so there’s still tremendous opportunity for roll-up and acquisition opportunities. It’s true that there’s not going to be a lot of the larger portfolios coming on to the market because a lot of those have already gone but there’s certainly many three and four-village operators out there at the moment and that’s where we’re really focusing our effort.

Now you often say, Simon, that Aevum is the biggest “pure play” in the retirement sector. What do you mean by that?

What I mean by pure play is that we’re the largest retirement village operator on the Australian Stock Exchange, so groups like FKP are clearly larger than us but retirement is only a very small part of their portfolio. With the recent acquisition of the Sakkara Villages, we’re the largest for-profit operator in New South Wales and that sort of scale gives us the opportunity to broaden our marketing expenditure across a wider range of units. It also delivers our residents the benefits of increased purchasing power.

To get to this point as a $170 million market cap, you’ve raised a considerable amount of capital to finance your growth. What sort of return on equity do you have at this time?

OK, return on equity is not where we want to be. I mean, longer term we are aiming for 12–15% return on equity. The return on equity is around 9–10% at the moment. We will continue to improve that through delivering on the organic growth pipeline that we’ve got at the moment. With the Sakarra acquisition, for instance, we’ve picked up 133 development approvals. There’s some further land that we’ve got available for development and we’ve also got a development application in at our largest village in Sydney, the Cardinal Freeman facility in Ashfield, where we have 11 acres (4.45 hectares).

In your annual results, which were released this week, it showed that revenues at Aevum were mixed. One third of your revenues, being in aged care, were actually in decline. How will you rectify that situation in the year to come?

Aged care is a very tough business to operate. The margins are declining. Your revenue line is set by the Commonwealth but your cost base is set by the market. Aged care is a very important part of our business and it gives us a lot of pricing power for our retirement villages but moving forward we’re clearly going to focus more on the retirement living sector.

So from your point of view, as a managing director of one of several companies actively competing in this very rapidly consolidating sector, how do you see the sector panning out in the years to come?

I mean, we’re going through a period of consolidation and it’s likely that there’ll be perhaps three or four dominant players that will emerge and we’re clearly trying to ensure that Aevum is one of those players. We really differentiate our business that our business can be traced back to the 1860s when we were the Hibernian Friendly Society and we believe that caring for our residents gives us a clear point of differentiation. It will be interesting to see how the acquisition landscape pans out over the next 12 to 18 months. We’ve certainly got a very strong pipeline of growth ahead of us.

Thank you very much for talking to Eureka Report.

Thank you very much.