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Why this fund manager owns shares of Gateway Lifestyle Group

I’m always intrigued by what shares the largest investment managers in Australia invest in. One of the largest fund managers in Australia is wealth company IOOF Holdings Limited (ASX: IFL).

I’d expect IOOF to have a long-term investment focus, which is why I’m not surprised to see that it is a substantial shareholder of Gateway Lifestyle Group (ASX: GTY). IOOF declared today that it owns almost 11% of Gateway’s shares.

Gateway’s aim is to create and operate Australia’s largest portfolio of residential land lease communities that inspire a better lifestyle for independent active over 50s, underpinned by large land holdings.

Most investors will be aware of the ageing demographic tailwind, which should boost Gateway in the long run. I like Gateway compared to some of its peers because it has simple resident contracts and no entry or exit fees (which are called deferred management fees).

Gateway boasts of providing affordable and sustainable living solutions, which provides the business with steady & predictable income and strong cashflow.

In FY17 Gateway grew its long-term rental revenue by 25% and increased its operating earnings before interest, tax, depreciation and amortisation by 11%. Management also revealed that net tangible assets per security increased by 24.4% in FY17.

Gateway could be an excellent slow-and-steady grower because of its embedded rental increases. The increase is set at the greater of CPI or 3%-5% each year. In FY17 the business achieved a 3% rental increase. The current long-term average weekly rent remains below estimated rental assistance threshold according to Gateway.

Management believe that there a number of macro economic drivers for the business. One third of Australians are forecast to be over 55 by 2040, 77% of Australians over the age of 65 receive some form of government pension, only 1% of retirees live in land lease communities and it will be 30 years before most individuals fully benefit from a mature superannuation guarantee.

Foolish takeaway

Gateway is trading at 16x FY17’s distributable earnings per security with a distribution yield of 4.47%.

It’s targeting growth of 7% of distributable earnings in FY18, which seems decent for its reasonably cheap valuation. I’m going to keep my eye on Gateway, it could be worth a buy.

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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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