Anal incontinence must be bloody awful.
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Yeah so it's more about the rest of the paragraph before what you have highlighted.
Page 64 only deals with 'PPE' property not investment property,
'Following initial recognition at cost, completed owner occupied freehold land and buildings and land and buildings under development are carried at fair value. Independent valuations are performed with sufficient regularity to ensure that the carrying amount does not differ materially from the assets’ fair value at balance date. Any depreciation at the date of valuation is deducted from the gross carrying value of the asset, and the net amount is restated to the revalued amount of the asset. In periods where no valuation is carried out, the asset is carried at its revalued amount plus any additions, less any impairment and less any depreciation incurred since the date of the last valuation'.
'A property under construction is classified as land and buildings within property, plant and equipment where the completed development will be classified as such and as investment
property where the completed development will be classified as an investment property. Fair value measurement on property under construction is only applied if the fair value is reliably measurable. Where the fair value of property under construction cannot be reliably determined the value is the fair value of the land plus the cost of work undertaken. Property under construction classified as land and buildings under development is revalued annually and is not depreciated'.
'Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are expensed to the Consolidated Statement of Comprehensive Income during the financial period in which they are incurred'.
So for the PPE property section, a lot of the revaluations are based on the progression of construction and this is very conservatively estimated.
For the investment property it is different again and detailed in another section.
Thanks to SR for posting the transcript. It sounds like there was a testy exchange with Aaron which started with this question:
It appears as if Aaron caught Brent & Kathryn on the hop, but the numbers can be broken down like this:Quote:
Aaron Ibbotson
[snip]my first question is on what I would call core debt, I'm not sure what you would call it, but basically, the difference between what you highlight as development assets and net debt.
So a year ago, you had $600 million of development assets and $550 million, call it, of net debt. Now you still got $612 million over development assets, but $630 million of net debt, call it. So there's a quite material increase and particularly, in the second half, there was a big jump.
So I'm just trying to understand your view of this and how you expect this core debt to develop as you potentially, depending on what the market does, sell down some of your inventory. Is this quarter that's going to continue to sort of creep up, this difference between these 2 numbers?
FY23:
- OCA FY23 presentation page 14 had a graph showing development debt of $446m (Aaron quoted $550m) and 'development assets' of $600m.
- Development debt last year was made up of bonds of $225m + the development facility of $221m.
- Development assets included land $112m, assets under construction $114m + unsold stock of $374m.
Note that the Corporate facility is excluded from the development debt calculation given that was used to fund the 'as built' acquisitions Remuera Rise & Bream Bay. Also note that 'development assets' includes the book value of 'Investment property under development' per note 3.1 and the book value of the column 'Freehold Land and Buildings Under Development' per note 3.2 plus the valuation of new unsold stock. The numbers reconcile ok.
Two issues I can see straight off with this graph is that I suspect some of the undeveloped land at Bream Bay is included in the assets, but has been excluded from liabilities, so there is a potential mismatch. In addition, the book value of the development assets includes fair value revaluations, which were never paid for using debt. But that is a technical observation to which we can turn a blind eye for now. But the point OCA are trying to make is they are showing they have assets that are worth this much that are either being developed or have been recently completed and are available for sale, and we only have this much debt on them. Fair enough.
So now we understand the numbers on that graph that Aaron was referring to.
FY24:
- OCA FY24 presentation page 14 had a graph showing 'development debt' of $534m (Aaron quoted $630m) and 'development assets' of $612m.
- Development debt this year is made up of bonds of $225m + the development facility of $309m.
- Development assets included land $112m, assets under construction $147m + unsold stock of $353m. These values reconcile to assets under construction.
I suspect what caught them on the hop was the numbers quoted by Aaron were not quite right. But in answering such a question, you never 'guess' as to what the answer is. You defer until you have the numbers in front of you. And you certainly don't verbalise the musing that go in your head when you hear such a question. Notice Brent did handle the subsequent question correctly:
Back to Aaron's first question. What actually happened is 'development debt' increased by $88m but 'development assets' only increased by $12m during the year. This is what Aaron wants to understand - what is this gap of $76m? Notice Aaron thought it might be due to wholesale devaluations of unsold stock which was not the case. And I suspect it has nothing to do with transfers between the Corporate and development facilities given the balance on the Corporate facility remained unchanged (happy to be proved wrong).Quote:
We're happy to sort of answer that question, and we're happy to make it available for others, so can we take that off-line so that we can actually do the maths that you've just done to actually provide the right response?
This is typical of the sort of question and/or analysis you get when you look at half the picture. An answer eventually came out that there were deferred settlements on some new sales plus other musings. This is what I can see when we look at a few different numbers:
- Firstly Accounts Receivable increased from $109m to $125m which would account for *at least* $16m. In the transcript we heard new sales must pay down the development facility. As the AR balance increases, then the development debt facility is not repaid. This $16m is further proved by comparing new sales volumes x average sale prices, to the actual receipts for new ORAs during the period.
- This is a surprise to me that OCA are offering care suite ORAs 'on tick' per the urgent needs comment and also the 10% deferred settlements. But it is what it is.
- The reason I say 'at least' $16m is because we do not know the split of new sale receivables versus resale receivables. In addition, receivables in excess of 12 months increased by $10m during the year - some of that could also be from sales of new stock.
- Also, note that the cost of 'other assets under development' increased in value by $33m.
- Lastly, under the 'completed investment property' section in note 3.1 there is $60m of capitalised expenditure that was not transferred from 'investment property under development'. Last year this figure was $5m. I suspect that $60m was also paid for using the development facility but it is not showing up under the 'development assets'. They mentioned the ability to shuffle funds between facilities - maybe this is that.
Adding all this up: $16m in AR + $33m other assets + $60m capitalised directly - $21m reduction in new stock = $88m which more than explains the 'gap' of $76m.
Conclusion: explained / solved. Not an issue.
Kathryn: where shall I send my bill? :)
Good post Ferg, and logically laid out.
But how do we test/verify the various assumptions you have made?
1. Inclusion/exclusion mismatches for specific assets and liabilities.
2. Impact of fair value revaluations on book values.
3..Accounts Receivable increases and deferred settlements affecting development debt.
4. Unaccounted capitalised expenditure and fund shuffling.
Excellent post Ferg and I agree with your analysis as well as how they handled it on the call. I also did not recognise the numbers Aaron was highlighting, particularly the development debt. And his line of questioning made it seem like he didn't really understand the accounting. Where was he suggesting the money had disappeared to?
Absolutely the right thing to do is not get into an argument with an analyst or tell them you think their numbers are wrong. Sort it offline and make the answers available to all shareholders.
Now there was another comment you made in your post that I would like to highlight and encourage everyone to think over very carefully as I think it perfectly highlights something that a lot of people are missing.
'the book value of the development assets includes fair value revaluations, which were never paid for using debt'
The best way is to;
Get the Summerset IPO document and read that in its entirety.
Read all of the Summerset Annual reports and pay very particular attention to the notes to the financial statements, study the way the numbers move over the years particularly between the three statements.
Get the Oceania IPO document and study it in its entirety
Read all of the OCA reports and follow the same process as you did with Summerset.
Along the way while you are doing this work, stop often and ponder the economics and the nuances that are outside of the financial statements.
Read the Focused compounding analysis that ValueNZ posted
Study the Sharetrader SUM forum from 2011 through 2014.
Meet up with someone on Ferg or Mav's level of understanding of these businesses and spend a day or two talking it over and getting them to explain anything you don't understand after already having undertaken the work above.