The Lifestyle Communities share price is down 50% in 8 months – time to buy?

This ASX share gives exposure to ageing demographics and it’s half the price it was in October 2021.

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Key points

  • Lifestyle Communities owns a growing portfolio of affordable living locations for Aussies
  • The company's rental income is growing organically by at least 3.5% per annum
  • Lifestyle Communities’ share price has fallen heavily in the last several months

Investors may be wondering if the Lifestyle Communities Limited (ASX: LIC) share price is an opportunity after a near 50% drop since its 52-week high in October 2021.

There are plenty of businesses that have fallen in value over the last several months as investors get to grips with inflation and rising interest rates.

With some heavy declines out there, is this now an opportunity to buy some of these ASX shares such as Lifestyle Communities?

Firstly, let’s look at how the company operates.

What Lifestyle Communities does

The business is based in Victoria. It “develops, owns and manages affordable independent living residential land lease communities. It has 26 residential land lease communities under contract, in planning, in development or under management”.

The business says that it wants to create an amazing lifestyle for homeowners and sustainable returns for shareholders.

By building a portfolio of communities, the business is creating a growing ‘annuity’ income stream. In the first half of FY20, it generated $11.4 million in site rental fees. This increased to $12.3 million in the first half of FY21 and $14.5 million in the first half of FY22.

The company points out that its annuity income will continue to increase through new home settlements, rental increases, and resales of existing homes. The site rental fee is indexed at the greater of CPI inflation or 3.5% per annum. The weekly site fee is approximately 20% to 25% of the aged pension after receipt of Commonwealth rental assistance.

The homes are typically priced at between 75% to 80% of the median house price in the target catchment.

It also receives deferred management fees (DMF) which increase at 4% per year and are capped at 20% of the resale price. There were 68 resales in the first half of FY22, generating $4.7 million of DMF.

How does it choose locations?

The company says it undertakes a detailed vetting of each potential site and looks at the following criteria: land prices and location, population demographic, local amenities, public transport options, future development plans and competition, and ESG factors.

Lifestyle Communities is focused on Melbourne and Geelong growth corridors. The company pointed to a number of benefits to Melbourne and the surrounding area.

It said that Melbourne has “flat topography” which increases site choice. Multiple communities can be built in each growth corridor. Forward planning has created large areas of serviced zoned land in each catchment. These factors make Victoria the “greatest growth opportunity” in the company’s eyes.

Is the Lifestyle Communities share price a buy?

The company is rated as ‘neutral’ by the broker UBS, though it has fallen further since then. The price target is $17.75 which implies a possible rise of around 50%.

The broker likes the ageing demographics that Lifestyle Communities is exposed to, with its ability to produce growth over time. UBS also points out that approximately half of the sales come through referrals, which is a positive sign.

But it may be worth noting in the company’s FY22 first half result that its net debt was $273.5 million and the ratio of net debt to net debt plus equity was 40.6%, up from 36.4% in the prior corresponding period. It could be interesting to see how that plays out with the rising interest rates. But, as mentioned, the Lifestyle Communities share price has halved over the last several months.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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