Thanks Serendipity. Where is this information regarding the...

Thanks Serendipity. Where is this information regarding the insurance for legal and settlement costs?

It seems like a lot of peoples investment thesis is based off the large discount to NTA. It is important to look at what makes up those assets and confirm whether you are OK with their value on the books. The gasworks sale was positive, however I believe there is a reasonable chance (~30%) of a negative revaluation of the retirement village assets that make up 90% of their assets on the balance sheet. This would substantially reduce the NTA.

- Firstly, it is important to understand that the retirement village assets are valued using discounted cash flow (ie. based on future cash flows) rather than via a direct comparison approach (ie. comparison to what other similar assets have sold for on the open market).
- The cash flows used in the valuation models are based on the current contracts in place. Therefore, a contract in place that extracts higher exit fees and capital gains upside on turnover, will lead to a much higher valuation than a contract that has lower exit fees and does not partake in any capital gains on turnover. The valuer simply plugs their estimate of these values into their model and discounts the cash flow back. (Also important to note that their model assumes a continual 4% increase in property prices...regardless of where we are in the cycle)
- The Aveo Way contracts that Aveo has been rolling out since 2014 are great for Aveo. On turnover, Aveo gets 50% of any capital gain upside and an exit fee of 40% of the initial purchase price. These numbers feed into the discounted cash flow model.
- The 2017 Annual Report even mentions that "The Gain in NTA was helped by....an increase in the asset valuation of the retirement portfolio as better contract terms were recognised".
- Aveo is already having to alter its Aveo Way contract. Money back guarantee periods, no make good on departure, no sales commissions if Aveo is the sales agent, 10% discount for a relocation. These updated Aveo Way contracts will flow into new valuations.

If either of these class actions get up (especially the Maurice Blackburn one regarding unconscionable contracts), the damages cost will be insignificant. The revaluations pushing up Aveo's NTA would revert significantly.

Simply put, Aveo's NTA is largely based on the Aveo Way contract in its current form. Any significant negative change to that contract (some of which they have already had to enact due to the negative press) would flow through to the NTA over future valuations of the retirement assets. The current discount to NTA may not be real.

Would like to hear thoughts regarding this.