The Victorian Civil and Administrative Tribunal has ruled that the exit fee clause in Lifestyle Communities’ (ASX: LIC) contracts is void due to the precise fee being unclear. Exit fees are a portion of house sale fees, including capital gains. Lifestyle intends to appeal the decision.

Why it matters: Lifestyle Communities has over 4,000 contracts with customers, enabling the company to collect up to 20% of a resident’s house sales price on leaving the community. No VCAT orders have been made at this stage, and the firm has asked for VCAT orders to be paused while it appeals.

  • There is now heightened uncertainty and risk in what the outcome of the appeal will be, and we increase our Morningstar Uncertainty Rating to Very High, from Medium. The expected hit to our fair value estimate depends on the outcome of the appeal, ranging between $0 and $4.60.
  • In our bear-case scenario, the firm loses all exit fees from fiscal 2026, and reputational damage weighs on sales. Combined, this strips out about $4.60 of our fair value estimate, comprising: $3.30 from lost exit fees, and $1.30 from reputational damage.

The bottom line: We apply a 75% probability that no-moat Lifestyle Communities wins the appeal and can maintain current exit fees for existing and future residents at its land-lease communities. We downgrade our fair value estimate by 28% to AUD 6 per share.

  • About half of the downgrade is due to our weighted probability of Lifestyle losing its appeal. The remainder is from materially fewer new home sales in fiscal 2026 and 2027. We cut our sales by 300 units over this period, to about 330. This lowers rental earnings, with fewer houses collecting rent.
  • This VCAT ruling surprised us as well as the market, sending shares down almost 40%. Nevertheless, we believe the appeal is likely to be successful. We can think of many instances of contracts where the final cost is not known at the outset of the agreement.

Lifestyle Communities to appeal Victorian Civil and Administrative Tribunal ruling on exit fees

Lifestyle Communities’ earnings comprise land lease property sales and rent collection. It collects rent on about 4,000 land lease sites across over 20 land lease communities in Victoria, Australia. Its strategy is to build communities in Victoria’s coastal and outer metropolitan areas. Following significant land acquisitions over the past few years, Lifestyle has a pipeline of about 2,500 new dwellings and 18 sites currently in development or planning. All target the over-50s population and leverage the positive theme of an aging population and rising cost of housing.

In a land lease, the resident owns their premanufactured home and pays rent for the land their home occupies. It appeals to customers who have most of their net wealth tied up in their homes and depend on downsizing to free up wealth to fund their retirement years. We estimate almost all Lifestyle residents receive an age pension, and the rent for land and facilities is about one-fourth of the age pension after rental support.

Lifestyle is one of the few land lease firms charging a deferred management fee. Although allowed in Victoria, it is restricted or not allowed elsewhere in Australia. With a DMF, a resident pays up to 20% of the property sale price when they leave the community. In turn, a home in the community is cheaper at the outset. This appeals to cash-strapped retirees who wish to free up more equity in their homes to fund their retirement years.

In mid-2024, Lifestyle came under the spotlight after national media coverage concerning a group of homeowners claiming the DMF is unlawful and wishing to have it overturned in the Victorian Civil and Administrative Tribunal. We believe the DMF is allowed, and their cases are unlikely to be successful. Nonetheless, the media coverage was scathing, and we expect reputational damage to result in reduced house sales over the near term, compared with company targets before the media coverage. Management is considering its strategy, and we think the most likely outcome is two pricing options: with DMF or not. We support this strategy, which makes it easier to compare prices with non-DMF communities while maintaining it for customers who prefer it.

Bulls say

  • The aging population and increasing cost of living provide high demand for affordable retirement housing.
  • Government policy is supportive of land lease living through eligibility of rent assistance for most residents, and exemption from some taxes.
  • Lifestyle’s substantial property portfolio supports a doubling of homes paying rent over the next decade.

Bears say

  • Competition in the land lease space means the firm must pay up for high value land.
  • Reputational damage from recent negative media attention is likely to result in fewer new home sales in the near term.
  • Competition from large-scale property developers is likely to weigh on sales price growth.

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