Here is the argument that OCA shareholders will never be able to cash out at net asset backing for the OCA shares they own. That discount to asset backing for all periods bar the freakish circumstances of near zero borrowing rates during Covid, is destined to remain at 50% of NTA, or thereabouts, forever.
"The discount to asset backing has a lot to do simply with the way the assets are packaged from an asset class standpoint, and the different costs of capital that apply to different investor constituencies and asset classes. New Zealand's cities and their super-prime real estate prices, which include those city sited retirement complexes, are valued on the books (and in the real world by house buyers) at cap rates as low as 3% (and often closer to 2% net of costs and tax). In a world with low (in historical terms, not compared to the Covid period) interest rates, this is not an unrealistically low yield for super-prime assets with favourable trends in rent revisions, A-grade tenants, long lease terms (for the lifetime of the tenant in the case of the retirement villages), and an income stream that is inflation protected (in the long term anyway, when rights of occupation roll over). Even a modest pace of 2% annual rental growth (below historical averages) would generate all-in after-tax returns of some 4%, which with inflation protection, is very attractive relative to bonds and other high-grade debt."
"However, the issue is that active equity managers - who are the natural buyers of OCA stock - are not bench marked against cash and high-grade bond returns, or even high-grade real estate. OCA, as a listed company, is part of the "listed equities" bucket, and the performance of the institutions that purchase OCA are therefore bench marked against equity market indices, rather than cash or bonds or property prices. The average stock in New Zealand is currently priced with an expected return of perhaps 8%, which is another way of saying the cost of (listed) equity in NZ is currently about 8%. If equity managers were to buy OCA and realise only a 4% return (which they likely would if the stock was priced at 1x book), but the index was to generate 8% pa, it would be of little benefit to the fund manager to argue to their clients that the returns are low risk and quite attractive relative to fixed income. The clients would say, we allocated you money to get "equities exposure", and you're only up 4% and the market is up 8%, and that is not satisfactory performance. Because OCA is part of the "listed equities" bucket, it is expected to deliver "listed equities" returns of 8%."
"Consequently, listed on public markets, the assets that underlie OCA are priced with a cost of capital reflective of NZ equities in general, which is a cost of capital that bears no relation to the cost of capital private buyers of prime A-grade real estate are subject to. Because OCA's underlying assets generate only perhaps 4%, this requires the stock trade at about one half of book value."
The above is adapted commentary from our former esteemed forum member Lyall Taylor.
https://lt3000.blogspot.com/2020/07/...flywheels.html
Except Lyall was not talking about OCA, but a stock called 'Hong Kong Land' (HKL), which owns super prime real estate in Hong Kong and Singapore. All I did was take out the references to HKL, substitute OCA and voila! Lyall's logic resonates with me, despite the commentary being ostensibly about a different listed stock in a different property and stock market.
Originally Posted by Bjauck
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