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  1. #13361
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    Well spoken !
    Quote Originally Posted by Biscuit View Post
    Yes, its easy to point at recent high and say you should have sold. The number of times I sold down "over-priced" FPH shares, I could kick myself in retrospect. Have never regretted selling a crappy company though. For me, I focus more on what I think about the company. Own good companies and stay away from bad companies and don't worry about the share price so much. OCA seems like an ok company with good growth prospects. I'll sell when I think that is no longer the case.

  2. #13362
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    Reserve Bank now predicting up to 20% house price fall from peak

    https://www.stuff.co.nz/business/129...fall-from-peak
    one step ahead of the herd

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    Hey team,

    Is anyone with accounting knowledge able to explain why development margins aren't included in reported net profit after tax already?

    Could it be because they are accounted for in fair value increases?

    Screen Shot 2022-08-18 at 9.00.42 PM.jpg

  4. #13364
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    Quote Originally Posted by X630 View Post
    Hey team,

    Is anyone with accounting knowledge able to explain why development margins aren't included in reported net profit after tax already?

    Could it be because they are accounted for in fair value increases?

    Screen Shot 2022-08-18 at 9.00.42 PM.jpg
    I believe you have answered your own question
    om mani peme hum

  5. #13365
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    Quote Originally Posted by X630 View Post
    Hey team,

    Is anyone with accounting knowledge able to explain why development margins aren't included in reported net profit after tax already?

    Could it be because they are accounted for in fair value increases?
    Development margins (and realised resale gains) will not be found in the traditional P&L. This method is used by all RV operators.

    Development margin is determined by comparing the value of the ORA sold to the cost of completing the construction of that asset. This happens outside of the P&L and Balance Sheet. Likewise realised resale gains are also not to be found in the traditional P&L and Balance Sheet - these are determined by comparing an ORA sale to the value of the previous ORA sale for that same asset.

    This all happens off the books. This is why the RV companies then present an "underlying earnings" P&L which takes into account these off book values and to reverse out anything else that either is not underlying, or gets in the way of the resale gain/development margin calculation.

    The RV then periodically reviews its entire portfolio of assets; some of which were recently sold, most were not resold recently but are still occupied by residents, some may be recently vacated and others are newly built and are unsold. With the help of a valuer, and taking into consideration the subset of properties that had an ORA sale and a bunch of rules around occupation, the RV then revalues it's portfolio.

    You might ask why do these realised gains not appear in the P&L?

    The RV never actually sells the asset - they sell the right to use it hence you won't see any revenues or gains in the traditional P&L (aka "comprehensive income statement"). If you follow these simplistic journal entries it make sense:

    1) Build the asset:
    Dr Investment Property (Balance Sheet)
    Cr Bank/Payables/Loans (B/S)

    2) Sell the ORA:
    Dr Debtors/Bank (B/S)
    Cr ORA Liability (B/S)

    Off Book:
    Development Margin = ORA Liability - Investment Property Cost for that asset
    Realised Resale Gain = Latest ORA Liability - Previous ORA Liability for the same asset

    3) Year End Revaluation:
    Dr Investment Property (B/S)
    Cr Fair Value Adjustment (P&L)

    That is basically it. So the development margins and resale gains are (sort of) a subset of the fair value adjustment . They are actually more of an input into the revaluation process. They are not a transaction that hits the P&L when an ORA is sold. Weird I know. Given the asset was not sold, but the right to use it was, it is actually a financial arrangement and non-taxable. Hence the reason we see profits and dividends from RV's but there are no imputation credits given the low (or no) taxes being paid.

    Management Fees is a whole other beast which can be explained another time.

    Hopefully that helps.
    Last edited by Ferg; 22-08-2022 at 07:11 PM. Reason: typos

  6. #13366
    …just try’n to manage expectations… Maverick's Avatar
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    Quote Originally Posted by Ferg View Post
    Development margins (and realised resale gains) will not be found in the traditional P&L. This method is used by all RV operators.

    Development margin is determined by comparing the value of the ORA sold to the cost of completing the construction of that asset. This happens outside of the P&L and Balance Sheet. Likewise realised resale gains are also not to be found in the traditional P&L and Balance Sheet - these are determined by comparing an ORA sale to the value of the previous ORA sale for that same asset.

    This all happens off the books. This is why the RV companies then present an "underlying earnings" P&L which takes into account these off book values and to reverse out anything else that either is not underlying, or gets in the way of the resale gain/development margin calculation.

    The RV then periodically reviews its entire portfolio of assets; some of which were recently sold, most were not resold recently but are still occupied by residents, some may be recently vacated and others are newly built and are unsold. With the help of a valuer, and taking into consideration the subset of properties that had an ORA sale and a bunch of rules around occupation, the RV then revalues it's portfolio.

    You might ask why do these realised gains not appear in the P&L?

    The RV never actually sells the asset - they sell the right to use it hence you won't see any revenues or gains in the traditional P&L (aka "comprehensive income statement"). If you follow these simplistic journal entries it make sense:

    1) Build the asset:
    Dr Investment Property (Balance Sheet)
    Cr Bank/Payables/Loans (B/S)

    2) Sell the ORA:
    Dr Debtors/Bank (B/S)
    Cr ORA Liability (B/S)

    Off Book:
    Development Margin = ORA Liability - Investment Property Cost for that asset
    Realised Resale Gain = Latest ORA Liability - Previous ORA Liability for the same asset

    3) Year End Revaluation:
    Dr Investment Property (B/S)
    Cr Fair Value Adjustment (P&L)

    That is basically it. So the development margins and resale gains are (sort of) a subset of the fair value adjustment . They are actually more of an input into the revaluation process. They are not a transaction that hits the P&L when an ORA is sold. Weird I know. Given the asset was not sold, but the right to use it was, it is actually a financial arrangement and non-taxable. Hence the reason we see profits and dividends from RV's but there are no imputation credits given the low (or no) taxes being paid.

    Management Fees is a whole other beast which can be explained another time.

    Hopefully that helps.
    Outstanding work Ferg, Thanks for the expert run down.
    Obviously this "arrangement" assists the cash flow for OCA at the company level but the IRD dont miss out on the dividend part that hits my bank account.

  7. #13367
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    Quote Originally Posted by Maverick View Post
    Outstanding work Ferg, Thanks for the expert run down.
    Obviously this "arrangement" assists the cash flow for OCA at the company level but the IRD dont miss out on the dividend part that hits my bank account.
    You're welcome! And too right.....the IRD never miss out.....they get you one way or another.

    I can't wait to see the financial impact of these "arrangements" with the sales of the St Heliers development and the Remuera Rise acquisition. I imagine pricing for both will match the locale and prospective clientele which bodes well for future DMF. I like OCA's target marketing and boutique approach. There is nothing "exclusive" about being in a village of 500.....

  8. #13368
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    Thanks Ferg, really appreciate that explanation.

    I was having a hard time understanding how the underlying earnings page in every annual report looks so profitable (when underlying earnings is meant to exclude capital gains) whereas the P&L statement says the company is losing money if you remove fair value gains (eg the screenshots below). The idea that a lot of the income doesn't show up in P&L helps to explain it.

    On a side note: I'm still a bit wary of taking underlying earnings at face value given they add back care suite depreciation (removing this from underlying profit decreases UP by ~15% to 48.3m). For my own profitability models, I'm removing care suite depreciation from underlying earnings.


    Screen Shot 2022-08-22 at 6.24.55 PM.jpgScreen Shot 2022-08-22 at 6.24.47 PM.jpg

  9. #13369
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    Whilst my answer was not totally correct it was simple.

    Ferg's answer is not totally correct either and has confused the heck out of everyone.

    So just read the accounts including the notes carefully.
    Follow the cash flow.
    om mani peme hum

  10. #13370
    …just try’n to manage expectations… Maverick's Avatar
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    Got to love the SUM report that came out today. The commentary on the industry experience is simply outstanding.

    Their build margin of 28.1% for their main product of villas is worth consideration. This must be almost a record margin and they achieved it in such difficult circumstances such as skyrocketing construction costs , labour and materials shortages……and in a falling property market.

    So back to OCA…..
    SUM has achieved this high margin while they are able to produce and pre sell their villa product 4 -5 times faster than a typical OCA apartment block. SUM are working far more with current prices of materials and labour. Whereas OCA has a very slow build time /sell down time that spends 5-7 years to being sold down (generalised) . OCA is currently sitting on a large number of near finished deliveries and currently have a significant amount of new apartments available to sell . Much of these costs already paid for years ago.
    What I’m trying to say Is OCAs new build costs are going to be more historic than SUMs . If SUM can achieve such high margins in these modern times then that bodes very well for OCAs margins for their upcoming new sale margins.

    Consider how much OCA would have to pay for the Helier now if they had to buy that land and start building on it today. (They broke dirt about 4 years ago and will be delivered this Autumn). Not a single sale has been possible yet so ALL of the last boom will be captured in those 79 new apartments next year.
    OCAs Achilles heel for share holders has been how slow it has been to transform its old buildings to new but this has accidentally become a positive as it will capture the modern sell prices that have significantly risen during those long years, while a portion on costs are from years ago. They will capture this value gain on the first new sale rather than the first resale.

    SUMs comments and high margins are a very strong indicator of what’s ahead for OCA as it is now well into its apartment delivery and sell down phase.
    Last edited by Maverick; 23-08-2022 at 08:44 AM.

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