Revaluation and possible Aveo demerger from parent FKP

Countering these profitable operations they then wrote down the value of their total retirement portfolio by $225M. Why so? Well, in February parent FKP announced it was reviewing the demerger of the Retirement business from their property development business. They state the “review indicates that by utilising FKP’s integrated retirement sector skills and experience, there are significant opportunities for the Group to further integrate health services with accommodation in its retirement portfolio” and it “expects to grow its existing retirement development pipeline to generate stronger cash flow...”.
They currently have negligible health services but holds a 21% stake in RVG (the ex Macquarie Bank joint venture fund) that in turn holds 43% of NZ listed Metlifecare, which has a strong continuum of care model. Given Aveo has an average resident age of 82, they are talking of incorporating the continuum of care in their existing and future villages.
So again, why the revaluation down by $225M? A possible reason is the demerger which will require a market revaluation. Each year the Aveo portfolio has been revalued up at the director’s discretion by 5%, while other operators have been holding steady or marking valuations down. FKP has now employed Deloitte to do an independent valuation; their advice is just a 3% growth this coming year, then 3.25% next year, growing to 4.5% in 6 years time. They also advise the average tenure will increase from 9 year to 10 years – perhaps because of the provision of care. (Given the average Aveo entry age of 78, retirement villages must support living longer)! They have maintained the discount rate at 12.5%.
In summary, with close to $150 million in new, buyback and under construction stock sitting there plus $61.5 million in stagnant DMF income, there is plenty of cash upside to offer in a demerger. Add the fact that their villages average 22 years of age in mainly metro locations, they are prime redevelopment sites. Lots of upside as the market comes back.