By Gleb Kuznetsov (University of Queensland)
Overview of the deal
Acquirer: Brookfield Property Partners
Target: Aveo Group
Implied Equity Value: AU$1,243 mm bid
Total Transaction Size: AU$2,067 mm enterprise value
Closed date: 29/11/2019
Target advisor: Bank of America
After announcing a transition to focusing solely on retirement villages in 2013, Aveo generated strong growth and achieved targets until FY18. In June 2017 a Fairfax Media report into alleged malpractices at Aveo triggered public ire at the company and the retirement industry at large – resulting in a substantial decrease in demand. In September 2017, a Class Action was launched against Aveo, and the ACCC (Australian Competition and Consumer Commission) announced an investigation into Aveo. In September 2018, a Royal Commission into Aged Care was announced, adding additional uncertainty amongst stakeholders.
This coincided with the devaluation of Aveo’s portfolio following a downturn in the Australian residential real estate market. The provision of a ‘buy-back’ clause in its contracts saw numbers of units that had to be repurchased skyrocket (at a relatively high price), whilst the increased scope of newly developed units could not be filled. At the time of its last annual report, June 30th 2019, Aveo had AUD 756 mm locked up in buy-back and development stock whilst its gearing ratio was at the 30% covenant level and interest coverage and LVR were approaching covenant levels.
After Aveo began looking for a potential take-over in November 2018, Brookfield were reportedly the last interested investors prior to launching an uncontested offer of $2.195 per share on February 12th, 2019. The interest from Brookfield came only a month after it completed the acquisition of Australian Healthscope for AU$4 bn, highlighting a growing interest in the Australian market. The consideration consisted of a $2.15 offering per share in addition to a 4.5c dividend to be paid. A Scrip Consideration was also provided. Mulpha International BHD, a major stakeholder in Aveo since the early 2000s controlling 24.4%, was unwilling to fully part with Aveo and retained a 15.5% stake. Brookfield also retained many of Aveo’s experienced management team.
The offer came at a ~28% premium to the undisturbed closing security price of $1.71 as of February 12, 2019, with a targeted 100% take-over. It was unanimously approved and endorsed by the board before being accepted on August 14th, 2019. Brookfield financed the acquisition using self- and co-investor equity, as well as AU$1.04 bn of third party debt from a syndicate of ANZ, Bank of China and Barclays (AU$787.5 mm term loan and revolving facilities worth AU$254 mm).
Acquirer: Brookfield Property Partners
Brookfield Property Group (NASDAQ: BPY), a subsidiary of the Canadian alternative asset management firm Brookfield, is a real estate firm that holds a global portfolio across a diverse range of real estate asset classes. It has over US$500 bn AUM.
Foundation and Headquarters: Founded in 2013 with headquarters in Hamilton, Bermuda
CEO: Brian Kingston
Market Cap: US $3,855mm
Enterprise Value: US $93,665 mm
LTM Revenue: US $10,172 mm
LTM EV/Revenue: 9.2x
Target: Aveo Group
Aveo Group (previously ASX:AOG) is the largest retirement village operator in Australia. The group develops, owns and manages retirement villages in Australia. It currently has over 13,000 residents across 94 communities in Australia and an additional 5 communities in the US. Retirement communities provide an independent living situation for seniors, in a safe environment where the provider meets most maintenance needs. Whilst several additional services are offered, at its core, Aveo builds units for retirees, sells them, and then collects an ‘exit’ fee (normally a percentage of the purchase price) upon the unit being vacated.
Foundation and Headquarters: Founded in 1987 with headquarters in Sydney, Australia
CEO: Geoff Grady
Market Cap: AU$992 mm
Enterprise Value: AU$1,729 mm
LTM Revenue: AU$354 mm
LTM EV/Revenue: 4.9x
Projections and Assumptions
Short-Term Consequences and Transaction Rationale
For Aveo Group, the acquisition provided much needed liquidity, and the capital required to redevelop older assets and improve efficiency. The group posted an AU$221 mm loss for FY19, a massive drop from an AU$366 mm profit in FY18 and had fully drawn its A$600 mm debt facility. An analyst described the deal as the ‘best outcome from a bad situation’ for Aveo.
Brookfield acquired Aveo at a time when its share price was depressed by several coinciding factors. The offer was made a month after Aveo Group share price hit a 5-year low, given the Royal Commission announcement, slide in the real estate market and Class Action lawsuit.
The $2.195 offer (including 4.5c dividend) was at a 37% discount to its $3.50 NTA value of the shares. The NTA price does not account for several unallocated expenses and the additional capital expenditure required to operate the portfolio but still provides a nice safety-cushion for Brookfield.
The deal also follows Bruce Flatt’s strategy of growing Brookfield’s presence in Australia and New Zealand; coming on the back off the acquisition of Vodafone Group’s New Zealand business and Healthscope in 2018.
Australia has an ageing population demographic that is set to increase as the Baby Boomer generation retires. The last Australian census in 2016 showed that the 85+ population increased by ~141% over two decades. The population over 70 is forecast to grow by 3.4% over the next 5 years, one of the fastest in the world, and IBIS World predicts 6.6% annual growth in the retirement village industry revenue over the same period. Supported by higher government expenditure on aged health care, the retirement industry presents an attractive investment proposition to Brookfield, who now have industry expertise from Aveo and their own capital provisions for further development. The industry is also very fragmented and could provide opportunities for further consolidation.
Furthermore, Aveo offers the possibility of following Lendlease (ASX: LLC) in an expansion into the lucrative Chinese and Asian markets in several years. Aveo previously held a 30% investment and provided the management of an AU$326 mm ‘Tide and Health Campus’ near Shanghai. The establishment of a Chinese expansion before the likely future sale of Aveo Group should serve to bolster Brookfield’s return further.
Additional investment will be required by Brookfield to refurbish several villages, hopefully leading to a pick-up in sales of new and currently unoccupied units. At the time of the deal closing (prior to COVID-19) existing empty units and any new additions were set to benefit from a recovery in the Australian residential real estate market, driven by historically low interest rates and low numbers of listings driving prices up.
Risks and Uncertainties
A primary concern following the AU$1.3 bn acquisition is the reputational and regulatory risk of ongoing class actions against Aveo Group and the Royal Commission into aged care, whose findings are set to be published in November 2020. New business processes have been implemented, but the management team will face the task of rebuilding public confidence in the brand in the face of potentially harmful press headlines. The Royal Commission also has the potential to induce tighter regulation over the industry, restricting future expansion.
The state of the Australian residential real estate market provides further uncertainty. In addition to determining the value of Aveo’s portfolio, it also determines how quickly potential clients can sell their existing real estate to move into retirement villages. A weak real estate market, as seen in early 2019, limits the ability of some to afford retirement villages. COVID-19 is set to considerably weaken the Australian real estate industry in the foreseeable future.
COVID-19 has induced extreme volatility in many industries. The main concern for Aveo is the destruction of superannuation balances for those about to retire - creating a need for them to post-pone retirement, or preventing them from being able to afford Aveo. A likely recession in the near future will further delay revenue for Aveo, by temporarily prolonging the working age. The current credit crunch could also delay further development and expansion of Aveo by Brookfield in a heavily capital-intensive industry. However, the fund should have enough cash on hand to fund any expansion and should be able to obtain credit if needed, as demonstrated by recent debt raisings.