Investment Matters

Company news: Aveo, Southern Cross Media

Aveo has been in the press this week; not in a positive way.

If you are interested in Aveo's response to the Four Corners / Fairfax report, please click here (and click on the PDF link).

The majority of the concerns raised relate to fees that residents have incurred or will incur, especially at exit.  There are really two key issues here that should be understood.

Firstly, most of the issues raised relate to 'legacy' contracts, for instance from when Aveo was the property group FKP, then focused on property development.  Aveo has actually been one of the leaders in the industry in relation to bringing in simpler and fairer contracts.  Three years ago they introduced a standardised contract called Aveo Way that provides much greater certainty for residents.  It removes any exposure to capital gains or losses (contrary to press reports) on their property and responsibility for residents to refurbish or make-good, and provides a guarantee to repurchase units with no loss to the former resident or their estate.

Secondly, there seems to be a fundamental misunderstanding (by both the residents interviewed and many reporters themselves) as to the Deferred Management Fee (DMF) model commonly used across the retirement sector.

DMF allows residents to pay only part of the cost of their unit upfront and the remainder at exit – thereby increasing the affordability of accommodation.  The fee in effect also compensates retirement operators such as Aveo for providing and running community facilities, as well as a reasonable profit on the services and capital infrastructure provided.  General maintenance, provision of food and other services are provided at cost; Aveo and other operators cannot legally make a profit from these under the DMF model.

The claims that Aveo is earning excess profit from fees is plainly wrong.  Investors are currently receiving moderate compensation for the capital they invest with a 6.3% ROA (return on assets) at FY-16, with the target to reach a reasonable 7.5% to 8.0% ROA by FY-18.

In a portfolio sense Aveo is now quite a small holding and therefore any performance impact is also small.  Longer term, we believe that these matters will subside, and we continue to view favourably the long-term dynamics and opportunity of both the sector and Aveo, notwithstanding that there may be some further regulation put in place.

***

In other news this week, the government announced it will remove TV license fees for FY-17, and it intends to introduce a spectrum fee from FY-18 (and this will be considerably less than the current license fees).  The is a direct positive benefit to Southern Cross Media, whose share price increased 7.1% on the day of the announcement.  Media reform measures are caught up in the senate.

360 Capital Group is proposing to take over the management of Asia Pacific Data Centres, a listed REIT which owns three data centre properties in Brisbane, Sydney and Melbourne.

Suncorp has (subject to regulatory approval and a vote of Tower NZ shareholders) acquired Tower NZ - a general and life insurance company with operations in New Zealand and the Pacific Islands.

The Centuria Industrial REIT (formally the 360 Capital Industrial Fund) has acquired an industrial property in Noble park (Vic), and is close to acquiring another in Bibra Lake (WA).  The company announced a small capital raising to assist with funding the acquisitions.  Whilst we are supportive of the acquisitions we elected not to participate in the raising.

South32 has suspended its Appin coal operations, amid concerns about gas exceedance at the mine.  The company has affirmed metallurgical coal production (including from the Appin mine) is on track to meet guidance for FY-17.