OCA - Oceania Group - retirement villages

[Bjauck]

Forbar’s opinion summarised is that the OCA express coach bus to increased profits is further delayed, with government laying down even more underfunding road spikes, but when it eventually arrives it will be a super-luxurious char-a-banc with state of the art care models.

[Beagle]

Annual Review.

Positives
1. The new acquisitions at Remuera and Bream bay are the stand out positive feature of 2022 as the Remuera acquisition in particular is highly likely to be underlying eps accretive and there's plenty of room for future development at Bream Bay.
2. That together with negotiating more funding headroom for future acquisitions is a material and notable achievement for 2022.
3. The review of the development portfolio and planning to achieve an increased build rate going forward is also a good positive.
4. Enduring another year of Covid without any material slippage in underlying eps of just a fraction under 8.0 cps is a satisfactory result considering the extremely challenging environment both on an operating level as well as in a political environment that's clearly unhelpful to the sector.

Negatives
1. The longstanding issue with staff costs rising much faster than operating revenue continues and in fact has got worse this year than ever before.
Total employee costs compared to last years annualized figure are up a staggering 12.65% substantially worse increase that the systemic long run average of 7-8% increase per annum.
2. The repayment of the wage subsidy of $1.8m is completely illogical considering the Govt's systemic underfunding of basic care services and is a very poor decision in my opinion.
3. Even backing out the wage subsidy repayment staff costs increased 11.3% against Rest Home and hospital care fees only up 5.3%.
4. Importantly Government funding is unchanged on the year !
5. Staff costs in total amounted to ~ 67% of all revenue received and importantly the increase this year in human resource ate up 91% of all the increase in gains made from the increases in premium rooms and DMF fees so the long run trend of staff eating ostensibly all the gains from the business transformation process over the years continues unabated.
6.Underlying eps of just on 8.0 cps for 2022 by my calculations in real inflation adjusted terms, (inflation is a serious matter now), is now 17.5% lower than in 2018, the first full year.
7. From my review of the financial statements other costs in the business are also rising at a pace that's concerning.
8. Delivery of new units in 2022 was disappointing, the second year in a row.

Notes from the analysts call on Friday afternoon
1. Direct Covid costs of $2.5m in FY22 are unlikely to repeat in FY23. Comments were made that there was also indirect Covid costs but no explantion was offered as to whether they might repeat.
2. Remuera Rise average age of residents 83.6 years, sounds like 1 resident has vacated already and the apartment will be marketed at about $500K more so management are confident this will be eps accretive and that their assumptions around that are conservative
3. Good cover on fixed price construction contracts right through to December 2024 (which was a very pleasant surprise !)
4. Actively looking for greenfields development sites and some softening in land prices has been observed.
5. An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.
6. There may be many more care suites for sale than are officially on the books as vacant. Its would appear there are a large number presently being used as PAC rooms. I confess I was getting a bit sleepy towards the back end of the hour long analysts call after spending all morning deciphering the dog's breakfast accounts so please take the total number of units for sale expressed as 450 in the conference call as an indicative number at this stage. I am 99% sure that's the number I heard which is really concerning because that's a whole year's worth of stock. Mav is looking into this with the CFO, and will provide more detail in due course.

Outlook
1. Its one thing to state a new goal of 300 units and another to achieve it. Achieving it in FY23 should be a foregone conclusion with 113 care suites in Milford deferred from last year, (so its really only 187 units in FY23) but I will believe it when I see it in FY24 and beyond.
2. From my 5 year review its clear there is very very little money in care, nothing in basic care and very modest returns from premium care and care suites and notwithstanding the vitally needed pivot towards more building and acquiring more independent living units OCA will be saddled with an extremely high level of their business model being in care which accords a very low return on capital employed for the foreseeable future.
3. The Global shortage of care and nursing staff and fierce competition for them and demands for ever increasing pay rates for the risky work involved are not a situation I foresee changing any year soon. Expect a continuation of multi year trend of staff eating the vast majority of all gains from DMF and premium care revenue increases.
4. The political environment is extremely unhelpful, actually hostile to OCA both from a funding perspective and residency for care and nursing staff with this Govt in its "infinite wisdom" making it less attractive to come here than for staff to go to Australia. With care and nursing staff (nurses up to a whopping $30 an hour more) able to earn substantially more in Australia I expect the recent opening of the borders to exacerbate the staff shortages not help the situation.
5. Fixed price construction costs locked in on projects through to Dec 2024 confers a material advantage compared to others in the sector.
6. 300 units this year sounds impressive but a heck of a lot of them are care suites which appear to have very limited pricing power in a high inflation environment.
7. The Helier should provide a boost in earnings as its sold down in much the same way as the Sands did in 2018 and they might get back to underlying earnings in real inflation adjusted terms in FY24 of about 10.7 cps which while being a 27% increase from this year is still a no growth scenario in real terms since the underlying eps of 2018...so 6 years without any real growth in underlying earnings and that assumes they actually make 10.7 cps in FY24 which is not a certainty.
8. Its very important to note that this woke Govt's review of the retirement village sector remains as something pending and who knows what they might do ?
Its clear I am nowhere near as positive as Maverick and Ferg.
Will they be able to grow earnings from FY24 onwards...only time will tell.
In the meantime for those who want to make a much quicker pivot towards independent living units there are SUM clear alternatives with a long proven track record of strong earnings growth and much better cost control discipline.
9. OCA are cheap and they are cheap for many good reasons and not the least of them is a proven inability to grow earnings despite a booming real estate market for the last 5 years.
10. Its very clear the tide is going out very fast in the real estate sector and the approximate halving of sales volumes recently reported is going to make it much harder for all companies in this sector to execute sales as the vast majority of incoming residents need to sell their home first.
11. I expect extremely challenging real estate and political conditions for the balance of 2022 and for as long as this woke Government is in power the headwinds are most fierce in this sector for OCA.
12. The outlook globally with almost all central banks rapidly winding back stimulatory settings also provides a very challenging backdrop for the market and I remain of the view we are in "Bear" market conditions.

If a Labour Greens Maori coalition get a third term, which they might, run for the hills.

My rating Underweight / Underperform Disc: Will retain a modest stake for now and see if the shares somehow get a lift and go from there.

Others will have a different view and that's fine. DYOR.

[justakiwi]

Why not just get right out Beagle? There honestly doesn't seem to be much about OCA that you really like. Not being a smart arse, just saying it as I see it. OCA has always been, and always will be, focused on care. You knew that when you got in, as did we all. Some of us hold for that very reason. But care is clearly not something you comprehend well, and is not an area you are interested in, either personally or as an investor.

So why do you continue to hold? Just take your money and go invest it in a company you are interested in, and one you have actual faith in. Because OCA is clearly not that company for you.

Negatives
1. The longstanding issue with staff costs rising much faster than operating revenue continues and in fact has got worse this year than ever before.
Total employee costs compared to last years annualized figure are up a staggering 12.65% substantially worse increase that the systemic long run average of 7-8% increase per annum.
2. The repayment of the wage subsidy of $1.8m is completely illogical considering the Govt's systemic underfunding of basic care services and is a very poor decision in my opinion.
3. Even backing out the wage subsidy repayment staff costs increased 11.3% against Rest Home and hospital care fees only up 5.3%.
4. Importantly Government funding is unchanged on the year !
5. Staff costs in total amounted to ~ 67% of all revenue received and importantly the increase this year in human resource ate up 91% of all the increase in gains made from the increases in premium rooms and DMF fees so the long run trend of staff eating ostensibly all the gains from the business transformation process over the years continues unabated.
6.Underlying eps of just on 8.0 cps for 2022 by my calculations in real inflation adjusted terms, (inflation is a serious matter now), is now 17.5% lower than in 2018, the first full year.
7. From my review of the financial statements other costs in the business are also rising at a pace that's concerning.
8. Delivery of new units in 2022 was disappointing, the second year in a row.

Notes from the analysts call on Friday afternoon
1. Direct Covid costs of 2.5m in FY22 are unlikely to repeat in FY23. Comments were made that there was also indirect Covid costs but no explantion was offered ass to whether they might repeat.
2. Remuera Rise average age of residents 83.6 years, sounds like 1 resident has vacated already and the apartment will be marketed at about $500K more so management are confident this will be eps accretive and that their assumptions around that are conservative
3. Good cover on fixed price construction contracts right through to December 2024 (which was a pleasant surprise)\
4. Actively looking for greenfields development sites and some softening in land prices has been observed.
5. An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.

Outlook
1. Its one thing to state a new goal of 300 units and another to achieve it. Achieving it in FY23 should be a foregone conclusion with 113 care suites in Milford deferred from last year, (so its really only 187 units in FY23) but I will believe it when I see it in FY24 and beyond.
2. From my 5 year review its clear there is very very little money in care, nothing in basic care and very modest returns from premium care and care suites and notwithstanding the vitally needed pivot towards more building and acquiring more independent living units OCA will be saddled with an extremely high level of their business model being in care which accords a very low return on capital employed for the foreseeable future.
3. The Global shortage of care and nursing staff and fierce competition for them and demands for ever increasing pay rates for the risky work involved are not a situation I foresee changing any years soon. Expect a continuation of multi year trend of staff eating the vast majority of all gains from DMF and premium care revenue increases.
4. The political environment is extremely unhelpful, actually hostile to OCA both from a funding perspective and residency for care and nursing staff with this Govt in its "infinite wisdom" making it less attractive to come here than for staff to go to Australia. With care and nursing staff (nurses up to a whopping $30 and hour more) able to earn substantially more in Australia I expect the recent opening of the borders to exacerbate the staff shortages not help the situation.
5. Fixed price construction costs locked in on projects through to Dec 2024 confers a material advantage compared to others in the sector.
6. 300 units this year sounds impressive but a heck of a lot of them are care suites which appear to have very limited pricing power in a high inflation environment.
7. The Helier should provide a boost in earnings as its sold down in much the same way as the Sands did in 2018 and they might get back to underlying earnings in real inflation adjusted terms in FY24 of about 10.7 cps which while being a 27% increase from this year is still a no growth scenario in real terms since the underlying eps of 2018...so 6 years without any real growth in underlying earnings and that assumes they actually make 10.7 cps in FY24 which is not a certainty.
8. Its very important to note that this woke Govt's review of the retirement village sector remains as something pending and who knows what they might do ?
Its clear I am nowhere near as positive as Maverick and Ferg.
Will they be able to grow earnings from FY24 onwards...only time will tell.
In the meantime for those who want to make a much quicker pivot towards independent living units there are SUM clear alternatives with a long proven track record of strong earnings growth and much better cost control discipline.
9. OCA are cheap and they are cheap for many good reasons and not the least of them is a proven inability to grow earnings despite a booming real estate market for the last 5 years.
10. Its very clear the tide is going out very fast in the real estate sector and the approximate halving of sales volumes recently reported is going to make it much harder for all companies in this sector to execute sales as the vast majority of incoming residents need to sell their home first.
11. I expect extremely challenging real estate and political conditions for the balance of 2022 and while Labour is in power.
12. The outlook globally with almost all central banks rapidly winding back stimulatory settings also provides a very challenging backdrop for the market and I remain of the view we are in "Bear" market conditions.

If a Labour Greens Maori coalition get a third term, which they might, run for the hills.
My rating Underweight / Underperform Disc: Will retain a very modest free carry stake.

[Beagle]

With the original float we were "sold" a story that the care suite model would generate significant returns on capital. It was sold in such a convincing way that many of us were lead to believe that return would be higher than for independent living units. We all sat around 4 1/2 years ago at an Auckland meeting drinking and toasting our pending success, "Oceania you can't have too many" We all believed the story we had been told. I think its now clear we were sold a pup.

Earl Gasparich also told us in the January 2021 analysts call that staff costs would rise in the future in line with increases in Government funding. Its clear he really had no forward visibility on this their biggest cost at all. Its a shame he's not around to face the music...I would have given him a real roasting at the forthcoming annual meeting about that !

Its clear the shares are very depressed in this pup at this point. Who knows, they might announce a couple more acquisitions this year and we might get a bounce to $1.25 at some stage. In the meantime the downside is probably fairly limited (barring a major exogenous shock) and the 4.3% yield is better than i am getting on cash.

In short JAK, there's probably a more opportune time for me to invest my capital SUM where else. For what its worth, if it were not for the recent acquisition, the pivot towards ILU and the increase in the build rate I would do exactly as you suggested.

[winner69]

Beagle said - An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.

Jeez that's really bad ....a 1-2% increase in selling prices ..... really bad

My tracking of the realised gains per resale (care plus ILU) doesn't make good reading - like below -

F2017 $83,795
F2018 $94,056
F2019 $85,446
F2020 $71,380
F2021 $92,335
F2022 $88,316

Making on average less per resale now than years ago.... maybe care suites are the issue .... who knows

Just one of the several things that don't seem to stack up (in my mind anyway)

A

[justakiwi]

As I noted in my post, I was not being a smart arse. I am genuinely puzzled as to why you continue to hold OCA, when there are other companies (particularly in the same sector) that would be a far better fit for you. I was simply asking, why persevere with OCA when it does not appear to meet your needs? No real need to reply though because I'm pretty sure I know the answer.

Not unpacking it any further for you JAW. I make my own decision in my own time. Its clear the shares are very depressed at present. If you'd like to offer me $1.25 for my stake I am all ears.

[winner69]

From that Forbar report - OCA one of our most preferred stocks in the NZ market
We consider OCA one of the most attractive risk rewards across NZ.

I see that Forbar are doing really well in the stock picking competition -- 5th in todays update



Just as well they didn't include OCA in their top 5 picks ---- would have been further down the leader board lol

[bull....]

beagle killed the rally

[Beagle]

As I noted in my post, I was not being a smart arse. I am genuinely puzzled as to why you continue to hold OCA, when there are other companies (particularly in the same sector) that would be a far better fit for you. I was simply asking, why persevere with OCA when it does not appear to meet your needs? No real need to reply though because I'm pretty sure I know the answer.

I changed my mind and decided to give you a proper answer, see #12844 above.

[justakiwi]

Thank you!

I changed my mind and decided to give you a proper answer, see #12844 above.