After 2 unsuccessful attempts, Stockland has finally entered into a binding Sale and Purchase Agreement to sell its Retirement Village business to EQT Infrastructure (EQT) for $987m.
The disposal price represents a ~1.9% discount to Stockland’s December 2021 book value of $1,006m and marks an end to the long and challenging story for Stockland.
The challenges for the sector began 10 years ago when residents entering Retirement Villages began to complain about aspects of the financial arrangements they were entering including the large Deferred Management Fees (DMF) that were paid when the resident leaves the village, in addition to a significant share of the capital gain. Stockland were amongst many in the industry who had arrangements of this nature. In a significantly rising real estate market, some residents who had sold out of the village were left with insufficient funds (after the payment of the fees and capital gain) to fund their move into a higher care facility. Negative press began to swirl around the sector leading to lower margins for Stockland.
Stockland attempted to sell the business in 2015 and in 2018 but were unable to find a buyer at the right price. At that stage Stockland had $1.8bn in funds employed in the sector covering 65 established villages and over 9,600 units.
In 2018, Stockland revised their contracts to give residents of choice of a higher DMF fee and no sharing of the capital gain by Stockland, or the existing model. The new model helped but competing Groups in the Land-Lease Retirement Village space became more attractive given their lack of exit fees. Stockland now favours the land-lease model and in 2021 acquired Halycon for $620m as a platform to roll out the alternative model village into the Stockland communities.
Stockland kicked off the latest process to offload the traditional business in late 2021 with the appointment of Jarden and E&P Corporate Advisory.
It is not clear how many groups participated in the process.
Under the terms of the agreement, EQT will acquire Stockland’s portfolio of 58 established Retirement Living villages,10 development projects underway and in planning, along with the associated management platform. As a result of the transaction, over 300 employees will transfer to EQT with the business.
To facilitate and support an effective transfer of the business and its people, Stockland will continue to provide administrative support in areas such as finance and technology for an agreed period post completion of the transaction under a Transitional Services Agreement.
CEO and Managing Director of Stockland, Tarun Gupta, said “I am delighted that we have found a strong Retirement Living owner and operator to acquire Stockland’s Retirement Living platform. EQT is a purpose-led organisation with a well-established track record in healthcare, aged care and retirement living. We are confident that EQT will be the right custodian for the residents and employees, and are well placed to support the continued growth of the high quality Retirement Living platform. We have an accomplished and dedicated team in our Retirement Living business, who will transfer to EQT at completion of the transaction. They continue to be focused on providing the best possible care and resident experience across the portfolio. The announcement today does not impact on any of the arrangements with our residents. It will be business as usual for our residents, noting on completion they will have a new partner with significant experience in running industry leading retirement living villages. The transaction also demonstrates that we are executing on the strategy announced in November 2021 to refocus our Communities business and reduce our capital exposure to Retirement Living.”
Partner and Head of Asia Pacific for EQT Infrastructure, Ken Wong, said: “From the outset we’ve been very impressed with the team and the first-rate retirement living portfolio Stockland have built. Stockland Retirement Living is a clear leader in the Australian retirement living space and we are excited about working together as we transition the business toward a standalone platform that continues to develop and operate high-quality retirement villages. With an aging Australian population and increased need for specialised care, we are excited to have the opportunity to use our significant global experience in the sector to enhance the range of services provided to current and future residents of Stockland’s villages.”
The sale of the Retirement business is expected to result in a taxable capital gain for Stockland. The exact quantum of the gain will not be able to be determined until after completion of the transaction. Stockland currently has carried forward tax losses that are expected to be sufficient to cover the anticipated capital gains tax on the sale of the Retirement Living business.
Receipt of proceeds from the transaction is expected to result in a proforma 5% reduction to Group gearing prior to redeployment of proceeds toward Stockland’s ~$37bn development pipeline.
Completion of the transaction remains subject to approval by the Foreign Investment Review Board. The transaction is expected to settle in late FY22.
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