What is the value of resource consent ?
Caught up with a bit of background reading over the weekend and reflected a bit on a clients activities with trying to get consent over the last 18 months or so with the Environment court, (spent a seven figure sum on a wide range of consultants, planners and experts as well as lawyers, court fees e.t.cc. and might as well have beaten his head against a brick wall).
Reflected on the Boulcott site drama, bought in 2014 and still no consent.
What started all this reflection was this comment by CEO Mr Gibbons of Colonial Motors in their annual report, (he's been around for a very long time so always good to read really experienced people's opinions)
"The time frame to get any form of facility upgrade or new build continues to stretch out. Initial planning and then the approvals process - resource and building consents - is becoming more complex with Councils countrywide applying the rule book to minute detail. Discretion and judgment are no longer a known language and independent expert reports in all area's are part of the process"
I suspect this just keeps getting worse and worse from what I have witnessed my client experience.
One major point of difference we all know is that OCA's primary form of expansion over the next 7 years or so is going to be brownfields developments which are much easier to get planning consent to expand / modernize and redevelop that a greenfields development from scratch.
What an amazing contrast with some of the other players in this sector, here we have a company with (as reported in its annual report 61% of the next 7 years of developments already consented) and as updated at a recent New Zealand shareholders presentation now at 65% consented and others are struggling to get consents and there may be some uncertainty as to whether they can for some sites.
Interestingly, as reported in the annual report OCA delivered 131 Units and care suites last year but "Resource consents were obtained across three facilities comprising 457 units and care suites over the year" so significant consenting far in advance of the build rate occurred over FY18.
In the presentation that accompanied the annual results OCA said their NTA inclusive of expenditure on sites to date was $1.04 and my interpretation of that is that total is the sum of money expended on the development and consent process to date on top of the current valuation of properties plant and equipment.
A few thoughts I'd like to share.
I believe the historical cost of obtaining consents is FAR less than the cost of trying to endeavor to get these consents today or in the future. There is significant unrecognized embedded value in consents already obtained in my view. Call it intellectual property if you like.
Speaking of IP, there is a very good moat with this company. You don't build up arguably the most enviable clinical care track record overnight, this takes a VERY long time an d none of that IP is showing on the balance sheet.
The consents substantially de-risk this company going forward.
On another topic its not all good news. It looks like the tax losses carried forward from previous years won't be able to be carried forward into FY19 as with the Maquarie sell down it would appear the loss carried forward rules won't be met so the company may have to start paying some tax in regard to FY19 earnings. Its impossible for me to speculate at what rate as other sector players involved heavily in village development pay very little tax but OCA does have quite an established care bed book so there looks likely to be some tax which will may dampen down FY19 profit growth relative to FY18. That said the company is on track to complete 272 units this year vs 131 last year so that's more than double last years development book. The effect of this however could be very good for yield investors as with the company paying about 55% of underlying net profit after tax the company in the near term may be able to impute their dividends.
If they pay 5.5 cps in dividends fully imputed for FY19 up from 4.7 cps unimputed this lifts the gross yield to potentially 5.5 / 0.72 = 7.64 cps and on $1.20 this gives a gross yield of 6.4% which is the best in this sector by quite some margin !..and of course there's more growth in dividends to come.
The other thing about this company's business model compared to the others is the much faster churn rate of apartments and care suites and the 30% retention model.
This augers very well for the future of shareholder returns. Care suites by value are much lower than independent living apartments so care needs to be taken in assessing the overall churn rate by average value of the unit. Apartments are about every 5 years according to Earl Gasparich at the recent aforementioned investor briefing and care suites about 2.5 - 3 years. By average value I think the average churn, (once the redevelopment of all their existing facilities is completed in due course) is somewhere just a little over 4 years, probably the quickest in the industry by a wide margin
Overall my assessment is the market is undervaluing the company and not fully appreciating that the substantially consented future development book considerably de-risks the company relative to its peers and is not fully recognizing the future earnings power of the company due to its faster turnover of units.