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My mate thinks he is a smart businessman. After building a house he lets people stay in it rent free (that's not smart!). The occupants lend him their money with which he can build another house and he does not have to beg the banks to borrow all the money he needs or pay their stupid interest rates. Over the last 20 years it worked out better than he could expect from reaping capital gain (that is smart). The trouble is he got over-confident thinking he can continue the model to the moon forever, now having to downsize.
Capital gain isn't part of my equation and the business doesn't need it to do well
For obvious reasons the long term return on property is zero, some exceptions but even those cannot compound much faster than GDP.
You have a massive misunderstanding of the business model. Your mate is in fact smarter than hell, his tennants pay him the rent in advance!
Now I've tidied up all my work after reporting season, just for fun I thought I would see where OCA might roughly be, should it stop reinvesting in more land and developments, and just call it a day and finish their current pipeline.
Here's the parameters.
A. All values are at today's expenses and revenue rates.
B. No allowance for resales is included. I am fully in agreement with Sailor Rob that average house price movements simply reflect inflation of the era, no more. There is no real profit. This is a concept that most won't accept. History demonstrates property resale profits simply match inflation in the long run. So RESALE PROFIT is just inflation proofing of the assets- incredibly valuable for the long term investing aspect…but it isn't profit.
C. Clearly, no new sales margins
D. Villages are all completed and sold down to normal occupancy rates over the next 8 years.
E. I don't know what corporate costs will be as many staff won't be needed. I have retained the current expense ratios for this exercise which will no doubt be too high.
So in about 8 years when all this is finished and sold what are we left with?
Underlying Profit should be around $71m ( to compare today's annual unpat with resales removed is $31m - but this obviously includes new sales profit).
To make the numbers real simple… 2032that's $10c EPS + inflation value. So again, because this concept is so important, the $.10c is ON TOP OF inflation.
Here's the kicker …2032 …OCA now has no debt and a $2.4B cash float !
If OCA were to achieve a return of 5% net on this free cash float that's $.20c EPS extra! Yep , 200% more than what they will be making on their properties.
The only 2 questions to ask;
- What would you pay for a share making $0.30 EPS ( that is inflation indexed) ?
- What kind of mega industry would want to buy this return and access to this source of cash the most?
You can love or hate Sailor as much as you like but he is the one correctly banging on about the “float” , trying to get people to see the ultimate real value of these companies.
He's right , these future numbers are incredible and have feck all to do with what nurses are paid.
Yep there is no question that in NZ from 2003 to 2007/8 and from 2014 onward that average price movements exceeded inflation (or reported inflation at least) BUT this is not the long run, lets see how these periods fit into the long run. They came about from multiple expansion of 3 x debt to income to 8-10 times, this cannot keep happening and can also mean revert.
If you take a group of random home sales from the 80's or 70's in any NZ location and compare to today even with the historically anomalous periods described above, you will see they compound at roughly inflation, so without the recent multiple expansion you'd be deep in the hole.
Look at European data sets where we have 500 years of history... Obviously over 500 years something non productive cannot compound faster than inflation.
Same in US cities.
There can be profit if you can time the very short periods where prices exceed inflation, and after say 7 years of this everyone forgets and thinks it goes on forever...
Rymans float is humungous …heaps more than Oceania’s
Do Mav’s exercise on Ryman …wow wow wow …incredible
An incredible important concept, that under the scenario you paint here the float would slowly turn into CASH that would have NO restrictions at all and could be invested in Equities or as I have highlighted before just get invested in bonds or term deposits - any small return at all would be massive to the equity holders.
It's not about the size of the float.
It's the ratio of float to equity.
Instead of being a dork why don't you think carefully through what Mav has highlighted here and critique it properly?
Perhaps the takeaway could be that Ryman is the better investment - you'd have to do a bunch more work to figure that out, but yes they all have a similar model.
Daniel Gladis, one of the world's greatest investors, once told me there were two companies he followed in NZ, one of them was Ryman.