OCA - Oceania Group - retirement villages

[SailorRob]

i dont even understand how these bonds work if the bid is .078 what does this mean ?

Same as any bond anywhere in the world.

[BlackPeter]

i dont even understand how these bonds work if the bid is .078 what does this mean ?

Yes, its a bit confusing, but the 0.078 means that you buy the bonds at a 7.8% interest rate.

[jagger]

A friend bought some recently (a lot) and got that yield so it's really available. I will talk to them and review the other issue as well.

It does make some sense as you have a potential for a very large capital gain in a declining rate environment, a gain on the market realising that there are no solvency issues or you just hold and do pretty well anyway.

Have your cake and eat it.

Will respond with my findings.

If you bought these bonds today then capital gains would form a large proportion of your return even if rates stayed unchanged.

The bonds are trading at a discount because prevailing rates are higher than the coupon. The closer you get to maturity, all things equal, that discount will gradually dissipate (i.e. capital gains will accrue).
That's how yield to maturity works.

[winner69]

Yes, its a bit confusing, but the 0.078 means that you buy the bonds at a 7.8% interest rate.

Like you pays $80.47 for a $100 worth of bonds. Get $2.30 per year in interest through to Oct 27 and if Oceania still around you then get the $100 face value

In theory that’s a return of 7.73% pa if NZX done sums right

[jagger]

Like you pays $80.47 for a $100 worth of bonds. Get $2.30 per year in interest through to Oct 27 and if Oceania still around you then get the $100 face value

In theory that’s a return of 7.73% pa if NZX done sums right

Correct, you don't "buy a 7.8% interest rate"

You're buying:
i) 2.3% interest rate (i.e. the "coupon"); and
ii) the paper at a discount to its face value (i.e. price of $80.47 compared to face value of $100).

The two together result in a yield to maturity of 7.73% p.a. if you bought today and held to maturity.

[SailorRob]

SailorRob, you have piqued my interest in the OCA010 notes, with a maturity date of 19/10/2027 with a coupon rate of 2.30%.

I see there is a quote on the market today for someone wanting to acquire some bonds for a rate of 7.8% (!). But nothing on the sell side, so no-one wants to take up such a 'generous' offer. It does make the whole exercise seem a bit hypothetical. Might be interesting if some liquidity did emerge though!

The other issue you would have if you acquired such bonds is that they would fall under IRD 'financial arrangement' rules. I was digging around on the IRD website for some 'worked examples' on this topic and found this:

https://www.taxtechnical.ird.govt.nz...20211123023345

There is a worked example in that bulletin. But you may need an accountant to understand it, as I don't believe all the steps are fully explained. I will wait with interest on your report back, when you have had a chance to go through the material.

SNOOPY

Ok they got theirs through ASB securities, depending how many you want you may have to wait. They got 200k worth and took 2 weeks.

Ultimately it's the same as buying shares but less liquidity. I see about 50,000 of the 20's have sold today.

If you want hundreds of thousands worth then maybe a broker can find a seller behind the scenes, but to buy via Jarden or whatever you just put your bids in and wait.

As for the tax doc, that's just a simple DCF model where you solve for the net present value to be zero and thus determine the discount rate.

That discount rate is used to determine the income for the tax year. I wouldn't get to bothered about that, the tax is exactly the same, you just pay it on $1 of income the same way as the next $1.

It's just a simple way of calculating the income by determining a yield.

[SailorRob]

If you bought these bonds today then capital gains would form a large proportion of your return even if rates stayed unchanged.

The bonds are trading at a discount because prevailing rates are higher than the coupon. The closer you get to maturity, all things equal, that discount will gradually dissipate (i.e. capital gains will accrue).
That's how yield to maturity works.

Correct, what I mean is a further gain (or 'faster') on a perceived risk change or a market rate change.

[SailorRob]

Like you pays $80.47 for a $100 worth of bonds. Get $2.30 per year in interest through to Oct 27 and if Oceania still around you then get the $100 face value

In theory that’s a return of 7.73% pa if NZX done sums right

Very unlikely they will still be here to pay back the $100.

Bankruptcy seems almost certain.

[SailorRob]

But yes the bonds are there and available in hundreds of thousands of dollars worth at the quoted rates of return.

[jagger]

To help you out with that math Winner , my running totals have the NEW stock on hand 1.4.2023 ( with out resale volumes which we don't know) as follows;
4 villas at $537k
167 Apartments at $1.2m
335 cares suits at $337k
Total new stock on hand = $315 m

The new stuff attracted 39% new margin 2HY2023 while the resale attracted about 22%.

The reason why resale margins appear low is because they have high volumes of care suites which turnover every 2.5 years . So less time for capital gain to accrue.

Also of note is that the new stock value of $315m includes $113m of care suites. A lot of these c/s are grandfathered so will only become available for sale onto the market as the possibly quite healthy residents depart over a longer time period.

The other thing is the Helier is the tail wagging the dog here . Its sales rates and margins are unpredictable with any certainty at this point.

Suffice to say there should be about $315m x .39% = $123m flow onto the P+L over the next few years where the normal NEW sales margin ( excluding resales ) is about $33m per annum.

Anyone who can`t see the value here or still considers things too risky ( after SUMs report today) would be more suited to managed funds. I have very rarely seen such obvious value over my many years of investing.

Agree with everything except assuming the 39% development margin is a new normal.

39% is a high water mark for development margin.
I mean, there's a chance we see 39% with The Helier etc but based on past performance but I wouldn't bank on it being the 'norm' or a baseline assumption.
Oceania have always guided to the long term 'norm' being more like 20-25%. I'd probably conservatively assume that in any forecast and consider anything more to be potential upside.

To play devils advocate on value, the market isn't concerned anymore about 'underlying profit' and 'development margin'.
These two metrics have been shown to be the emperors clothes with valuation focus in the sector squarely shifting to free cash flow generation.
Any speculation about takeovers etc etc needs to look at value through the free cash flow lens because that's going to be the prime concern of any potential purchaser, especially anyone in the private equity world.