Originally Posted by
Ferg
Wise words.
I still say "patience my dear fellows, patience".
The more I look at the OCA accounts the more I am peeling away the layers of the onion (no easy task, but I am getting there). Underlying profit is trying to strip away IFRS impacts and focus on what is close to cash accounting based on activity. Looking only at the property side for now given that seems to the focus of this thread, building a new facility adds nothing to underlying profit per se. It is the sales of those new builds that adds to underlying profit (and of course resales). Whereas a new build adds to reported NPAT through revaluations, as in this complex cost "x" to build but it is now worth "y" under IFRS. Much like the brownfield developments are worth "x" when purchased, but are worth "y" once they are consented for multiple units etc. OCA has multiple layers of revaluations, but none of which matter for underlying earnings.
Given the relatively healthy development margins over recent years (where "y" is consistently higher than "x"), and the demand for such facilities seems insatiable, I view the risk to new build margins and the flow of sales as relatively low. Increased construction costs will result in higher property values and I expect Management will do what they can to control costs. This plus resales should maintain underlying profit. Yes there is a signalled dip in new build margins as the mix between cities and regions changes, but population density + demand suggests the mix may change back AND the impact may be insulated somewhat by high resale margins. Keep in mind resale margin is the difference between the new ORA value and the ORA value paid by the previous tenant.
Given the average tenure for units is 7 years and apartments is 5 years, resale margins are calculated versus these old values. Would someone like to check the maths - what are the compounded growth rates for property over the last 5 and 7 years? If some residents are currently living longer than expected due to the pandemic health initiatives, this merely pushes out the resale by a year or more, which will still result in a higher resale value than that tenant paid. Hence I come back to patience my dear fellows, patience. Resale margins are here to stay...but that is not all...
In addition, a higher overall ORA value results in a higher Management Fee given it is a % of the ORA. A higher ORA value means higher deferred management fee (DMF) income for OCA. Whilst these are accrued onto the Balance Sheet according to the ORA contracts, they are released to the P&L based on expected occupancy durations. So a growing "deferred management fee" on the liability side of the Balance Sheet is a GOOD thing. I say it is good because it is not a liability that will ever crystallise through a cash payment, rather it is revenue that has not yet been put into the P&L. Not all reported liabilities will result in a cash outflow for a business. And this growing balance is evidence of higher future DMF revenues (see * below).
In summary more developments = more activity, and inflation + time = higher values; more activity times higher values = higher revenues and profits for OCA. This is what I call the snowball effect. OCA have multiple snowballs in play, where each is at a different stage. Some snowballs take 8 years to extract full value. As to how the developments are funded, and the potential impact on EPS which Beagle touched on, will have to wait for another day.
*Homework: check out the concept of "embedded value" in the OCA annual and interim reports.
That said, if you want a faster return on your money then maybe follow JBMurc's mining picks on the ASX! (not investment advice).