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Why Lifestyle Communities Limited is this fund manager’s top holding

I’m a fan of shares that can point to an underlying tailwind that will boost the business in the long run. One of the biggest tailwinds out there is the ageing population trend, where more Australians are reaching retirement age. The number of over-65s is predicted increase by 75% over the next two decades.

There are a whole host of shares that could benefit from the ageing demographic, Mirrabooka Investments Ltd (ASX: MIR) may have identified one of the best ideas.

Lifestyle Communities Limited (ASX: LIC) is 5.2% of Mirrabooka’s portfolio, making it the biggest position.

Mirrabooka is one of the top performing listed investment companies (LICs) that focuses on mid-cap stocks. Over the last seven years its pre-tax NTA average return per annum has been above 10%. Therefore, Mirrabooka knows a good stock when it sees one.

Lifestyle Communities has been operating for around 15 years in the state of Victoria. It says that its mission is to ‘enable working, semi-retired and retired people over the age of 50 to live an independent life of luxury for a truly affordable price’.

Homeowners at Lifestyle Communities own their own home and lease the land on which the home is located, for a weekly site fee. That fee is approximately 20% of the Age Pension after receipt of the Commonwealth Rental Assistance.

The lease is a 90-year lease to provide security of tenure and residents are protected by the Residential Tenancies Act. On average, there is a release of approximately $129,000 of equity upon sale of the old home according to Lifestyle Communities.

By the end of FY17 there were 1,626 occupied home sites under management. The site rental fee is approximately $173 per single and $200 per couple per week per home. The site fee is indexed at the greater of CPI or 3.5% per annum. Gross rental income for FY17 was $13.8 million. The gross rental increased by 24% compared to FY16.

There’s also a deferred management fee, which is calculate as a scaled percentage of the re-sale price. This scaling is capped at 20% of the re-sale price after five years of ownership. This produced $4.1 million of revenue in FY17, an increase of 64% on FY16.

The rest of the revenue for Lifestyle Communities comes from the proceeds of selling homes after constructing them. The gross profit for this segment was $15.6 million, an increase of 32%.

The whole arrangement seems to be very profitable for Lifestyle Communities, with net profit after tax (NPAT) growing by 34% and earnings per share (EPS) growing by 43% during FY17.

The balance sheet also improved with gearing reducing from 25.6% to 21.8% in FY17 and cash increasing from $3.352 million to $3.653 million.

The dividend increased from 2.5 cents per share in FY16 to 3.5 cents per share in FY17, an increase of 40%.

Foolish takeaway

Lifestyle Communities could be one business that benefits greatly from the ageing population. It’s trading at 21x FY17’s earnings with a grossed-up dividend yield of 0.9%. I’m not going to buy shares, but I’ll be interested to follow the business’ progression as the population ages further.

One of these shares could be an even better way to play the ageing demographic trend.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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