OCA - Oceania Group - retirement villages

[Daytr]

Well said Muse, I don't necessarily agree with your entire synopsis, however you put forward valid points of view.

The cashflow of operations I agree have been done to death, but many of the faithful continue to believe that the deteriorating performance in this area doesn't matter which I have found quite incredible.

The DMF made is now pretty much fully offset by the day to day losses of running the villages etc. Costs have ballooned, particularly labour costs and fees haven't kept pace.

[ValueNZ]

Issue 1) Overhead Costs. Let's assume the book value of NTA is correct and thus fair market value. But the value of those assets comes along with a large and growing overhead cost base that isn't capitalised into those reported figures. Dumb analogies are often useful ones so lets say there is a house that has an official property value of $1m. But in purchasing that house you must also be obliged to pay $60k (growing briskly each year) to some over inflated management company and locked into perpetuity. Sure - on a strict property value basis it may be worth $1m but surely its not worth that once the impact of its management contract is considered. You'd want to take the PV of those overhead costs (or simply apply a multiple to them) and add that to NTA if one was determined to look solely at NTA as a value determinant.

Muse you have to look at the NET cash generated from those assets. And not just the profit, but the interest free non callable loans that allow the business to grow incredibly quickly.

Issue 2) Returns on Equity. OCA's returns on equity are poor on any basis; the various statutory npats (reported/comprehensive) or the reasonably bogus underlying earnings. Again - dumb analogy - but lets say an equity investor has a cost of equity of 10% (nice round #), and an asset has a return on equity of (say) 5% (these are just strawman numbers before anyone gets worked up). There is no way the marginal investor who sets the market price would pay book value for an asset producing approximately half of his/her required return all things equal. They would just pay the appropriate discount to NTA to true up their cost of equity. Adopting that framework into the real world, they would also make an adjustment based on the realistic level of compounded growth that asset could achieve in the future. The discussion around the float being an asset ignores the truth that in its present liability form it enhances the ROE. Returns on equity would be substantially worse if they were removed from the analysis. A second devils advocate argument would be the ROEs are deminished because a lot of capex has been put in place but hasn't been given the time to earn (and will in the fullness of time). That I have some sympathy for but that's likewise been the case for a while.

I do agree with the premise that businesses that don't generate a sufficient return on equity should have a low P/B. But that only applies to businesses that generate a long run low ROE. The retirement village sector has historically produced very high returns on equity for the simple reason that they have access to huge amounts of costless float. It's hard to tell whether we'd see that level of profitability again, but the margin of safety is so great at 51c that we should earn a decent return from here regardless.

[Balance]

Muse you have to look at the NET cash generated from those assets. And not just the profit, but the interest free non callable loans that allow the business to grow incredibly quickly. And management has used the so-called interest free loans and ever more debt to load up on ever mopre expensive and non-profitable developments.

I do agree with the premise that businesses that don't generate a sufficient return on equity should have a low P/B. But that only applies to businesses that generate a long run low ROE. The retirement village sector has historically produced very high returns on equity for the simple reason that they have access to huge amounts of costless float. It's hard to tell whether we'd see that level of profitability again, but the margin of safety is so great at 51c that we should earn a decent return from here regardless. Same comment as above.

Still the same old 'float' blah blah blah.

[Daytr]

Still the same old 'float' blah blah blah.

And the term loans, but apparently they aren't loans, but when they want them to be loans, they are loans. 🤣

They forget about the asset they have provided to the tenant for free! No rent. Why?
Because it's a sale not a loan.
A sale of the right to use the unit for the duration.

[Cupsy]

superfluous to requirement

[Daytr]

I thought the ORA was a refundable occupation licence payment, that gives the group a legal right to set-off any amounts owing by the resident. And its not provided for free as there is a DMF cost (and potentially other costs).

Sure there is a DMF at the end, but they aren't paying rent.
What would the rent be over the average 7 years? Let alone the interest cost of not receiving that rent as you go?
So technically neither the 'loan' nor the occupation is free. They do however subsidize each other I suppose.

[Cupsy]

superfluous to requirement

[Daytr]

The balance of the occupation licence payment is held "free" for the duration is it not? (no interest is payable on that money [Ora less dmf] as far as i am aware), the DMF and other payments I assume are similar in value to what could be earned in rent (haven't confirmed that though).

Yes I think you need to check that.

[Cupsy]

superfluous to requirement

[allfromacell]

Average rental return is around 4.5% per year isn't it? approx 30% over a 7 year period?
Paid up front with the ora model.
(Some one orrect me if I'm wrong)

Yes plus a 10% P.A weekly fee, should be a bit more than expected rental yeild.