No brainer - just keep borrowing and keep hoping that property values can only ever go up.
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No brainer - just keep borrowing and keep hoping that property values can only ever go up.
https://media.tenor.com/KhtaBX-rWXIA...o-laughing.gif
If retirement sector consolidate first while paying off debt, then there's hope in this sector. I saw somewhere that they can pay off debts by taking some steps over the coming 5 years. Sector need a turnaround. After reading this thread I,am really confused. I thought retirement village is a simple business that I can understand.Only way I can understand is by looking at it's balance sheet. I am looking forward to monitor their balance sheets, debt level and cash flow.
I see the largest entry in that reconciliation statement is the DMF or 'deferred mangement fee'
"The deferred management fee is recognised on a straight line basis over the longer of the term specified in a resident’s ORA or the average expected occupancy. The expected periods of occupancy are based on historical Group averages, for the relevant accommodation they are estimated to be 7 years for units, 5 years for apartments and 3 years for care suites from the date of occupation."
However, at the portfolio level the DMF can never be settled. Because as soon as one departing resident 'pays up', another embarking resident takes their place and it is the new occupants management fees that are deferred. So OCA is destined to have a perpetual book of 'deferred management fee' debt on the balance sheet which is never collected because it cannot be collected while OCA runs villages accommodating live residents. Yet the DMF is funded from unit occupier capital, and is not varied according the the services the unit occupant receives. So it looks to me like the DMF is a 'capital charge in drag', which makes it, in effect, part of the float in my eyes. SR disagrees though.
The stark truth of OCA is that day to day expenses (and development expenses) are paid for by borrowings that never reduce, because of the company's growth plans. There is no shame in this. It is how the business plan is designed to work. The only issue is as interest rates go higher, the borrowings compound faster. And if OCA's great friends the bankers don't like it, then they can suggest OCA raise more capital to set off against the ever rising borrowings. The potential problem here is that due to the poor cashflow generation of the OCA model, new equity can only be raised at a discount (crashing the NTA of the shares post capital raising) both of the assets built by shareholder equity and the float. So greatly expanding your whole asset base with the float, -while possibly having to shore it up later with a share issue discounted to the float enhanced net asset value- looks to be a risk that those espousing the float as 'great free development opportunity' did not consider. IOW the float can act as a leveraging force 'both ways'.
SNOOPY
Sell those 2.5 billion of assets for what they reckon they are worth and repay debt and give the float back to its rightful owners and pay the bill they’d have about $1 billion left
But nice people from Macquarie might come along and say here make it easy for yourself and take our $700k and Liz would say yes that’s a good idea
And then Macquarie can repeat the process