Could retirement communities be a long-term winner for these 3 companies?

The property and investment company FKP Property Group (ASX: FKP) has announced that it plans to become a developer and operator of only retirement living housing, and will be selling off non-retirement assets to formalise the strategic direction it is taking.

Currently, about 20% of its total revenue comes directly from its retirement business segment, and about 52% comes from residential communities. It has investments in commercial, residential and industrial property, but it explained at its AGM how it will start to exit those, and reduce its debt to levels more in common with retirement development companies.

To make the changeover real for the company and its customers, it proposes to change the company name to Aveo Group, in keeping with the Aveo brand name it uses for its retirement communities. Another move announced at the AGM was to reinstate paying a dividend/distribution payment, which was altered in 2009, reducing the dividend from 31 cents a share in 2008 to 2.45 cps.

Retirement communities should be a growing business for several decades since the Baby Boomer generation is now entering retirement age. Aveo Healthcare (ASX: AEH) is a separate company licenced under FKP Property Group, and operates retirement communities under the Aveo brand in southeast QLD.  It reported a $3.88 million loss after abnormal charges on revenue of $25 million in 2013, and has a gross gearing of 146%. Its book value per share of $2.34 is slightly above its $2.11 share price.

Ingenia Communities (ASX: INA) is a $342 million developer and operator of retirement communities, and it is expanding its portfolio of future property sites by buying such properties as tourist/camping parks that  are usually in scenic places that people enjoy, making them attractive to retirees who want a simple life.

It was able to lift up its net earnings before abnormal charges from $1.4 million to $2.3 million in 2013, but that is still way down from the levels it was at in 2007 when it made $86 million. By focusing on the retirement communities business, it may be able to launch a turnaround if it can pick up the development sites cheaply, and fund their development. At the end of October, its share price hit a new yearly high of $0.53, yet because of its very thin o.6 cent per share earnings, its price-to-earnings ratio is 84.

Foolish takeaway

People wanting to retire may want to sell off the family home, and downsize into an easier lifestyle. Others, out of sheer necessity and inadequate retirement funds, may be forced to do the same.

Companies like these want to specialise in this growing demographic, and through specialisation plan to command a premium for their service. You will need to give them extra review because development costs a lot at the beginning, and with customers who potentially have limited funds and little future earnings power, it will remain to be seen if these businesses will make enough a satisfying return.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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