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My mate thinks he is a smart businessman. After building a house he lets people stay in it rent free (that's not smart!). The occupants lend him their money with which he can build another house and he does not have to beg the banks to borrow all the money he needs or pay their stupid interest rates. Over the last 20 years it worked out better than he could expect from reaping capital gain (that is smart). The trouble is he got over-confident thinking he can continue the model to the moon forever, now having to downsize.
Capital gain isn't part of my equation and the business doesn't need it to do well
For obvious reasons the long term return on property is zero, some exceptions but even those cannot compound much faster than GDP.
You have a massive misunderstanding of the business model. Your mate is in fact smarter than hell, his tennants pay him the rent in advance!
Now I've tidied up all my work after reporting season, just for fun I thought I would see where OCA might roughly be, should it stop reinvesting in more land and developments, and just call it a day and finish their current pipeline.
Here's the parameters.
A. All values are at today's expenses and revenue rates.
B. No allowance for resales is included. I am fully in agreement with Sailor Rob that average house price movements simply reflect inflation of the era, no more. There is no real profit. This is a concept that most won't accept. History demonstrates property resale profits simply match inflation in the long run. So RESALE PROFIT is just inflation proofing of the assets- incredibly valuable for the long term investing aspect…but it isn't profit.
C. Clearly, no new sales margins
D. Villages are all completed and sold down to normal occupancy rates over the next 8 years.
E. I don't know what corporate costs will be as many staff won't be needed. I have retained the current expense ratios for this exercise which will no doubt be too high.
So in about 8 years when all this is finished and sold what are we left with?
Underlying Profit should be around $71m ( to compare today's annual unpat with resales removed is $31m - but this obviously includes new sales profit).
To make the numbers real simple… 2032that's $10c EPS + inflation value. So again, because this concept is so important, the $.10c is ON TOP OF inflation.
Here's the kicker …2032 …OCA now has no debt and a $2.4B cash float !
If OCA were to achieve a return of 5% net on this free cash float that's $.20c EPS extra! Yep , 200% more than what they will be making on their properties.
The only 2 questions to ask;
- What would you pay for a share making $0.30 EPS ( that is inflation indexed) ?
- What kind of mega industry would want to buy this return and access to this source of cash the most?
You can love or hate Sailor as much as you like but he is the one correctly banging on about the “float” , trying to get people to see the ultimate real value of these companies.
He's right , these future numbers are incredible and have feck all to do with what nurses are paid.