The list price doesn't effect the serviced apartments, but the DMF (deferred management fee) units.
Built it and they will come, but the incremental cashflow that makes this really worthwhile business only comes after 10 years approx. If prices are reduced by 6% one year, it only gradually effects the net present value (NPV) of the portfolio as old residents drop off and new ones on lower prices come on.
Additionally if the list or selling prices are reduced by 6%, the underlying value of the retirement division's assets owned by FKP can still increase. This might be because they can increase the new departure fees - which feeds into the NPV of the portfolio. For example if residents are staying a year longer on average they can (say) increase the DMT cap from 30% to 40% (of initial price), and/or they can increase the annual DMT increment from 3% to 4% (and so go from 30% of the initial value to 40%, or they can reduce the yearly rate slightly, but increase the cap as a percentage - which works out easier to sell to older residents??? For resales they share the lower resale price with the seller (a CG is shared 50/50).
Also if they get the occupancy up from 93% to 96%, or just build and sell more (therefore more deferred fees coming down the road) - then they add considerable value as well.
Also they can decrease the number of years between refurbishment of the units and have the resident be required to pay for this (then share the capital gain 50/50 on the eventual sale).
(Also they can sell lower quality or smaller homes obviously ;-))
Trick is - they still need to sell them, and there are lots to choose from. Most retirees are not stupid and will weigh up the costs etc. Still many people will go for a lower entry cost and higher exit cost (stuff the inheritance) if they are short of cash to enter. Trick is, can you reduce the list price and gain a commensurate increase in other fees to make up for it on a DCF valuation basis?
Which leads to the problems with owning these villages. You still need to wait for the "nearly free" money.
FKP Price at posting:
$1.33 Sentiment: ST Buy Disclosure: Held
