OCA - Oceania Group - retirement villages

[bull....]

You’d think so but it appears as if care suites are on cap rates

They not very clear when explaining things

it doesnt really matter how they value them.
i being part of the market would say if the product involves future cashflows then they should be valued using a discount rate

[Balance]

And banks now worried about the reckless lending they did a few years ago when rates were low

Fingers in the dyke.

The bankers are nursing many problem and defaulting loans out there, receivership and liquidation being last resort.

But to be fair to them this time, many of the problem loans of developers are from second tier lenders who typically charge interest rates of 5% or more than the banks.

[Snoopy]

I thought I gave you this link at the time:
https://propertymetrics.com/blog/dif...discount-rate/
If you still think a cap rate and a discount rate are the same thing, then you are barking up the wrong tree.

The 'discount rate' is a much more sophisticated concept that the 'capitalisation rate'. There are sophisticated and less sophisticated ways of calculating it and I notice that the reference article says:
"Typically, the investor’s required rate of return is used as a discount rate, or in the case of an institutional investor, the weighted average cost of capital (WACC)."

Now as you are aware the 'weighted average cost of capital' can become quite a complex calculation involving a balance between the 'cost of equity capital' and the 'cost of fixed interest capital' that also involves historical share price volatility over a time period. Despite all that sophistication, such a calculation becomes nonsensical as a predictive tool if interest rates suddenly change or the volatility of the underlying share investment changes relative to how the market behaves. Because of these limitations, I don't use the WACC calculations myself. I would much rather use my own judgement to 'pick a number'. Yes I realise this technique will sound crude to some readers. But I put it to those readers that doing a whole lot of sophisticated calculations using questionable input assumptions is just another version of crude, hiding under a blanket of haughty mathematics.

With a no growth assumption, often the discount rate number I pick is my sought after yield.

So while you are correct to say that the 'capitalisation rate' and 'discount rate' are not the same thing, I do need to point out that for some investors in some circumstances they can be the same number. And that is why in some contexts investors use these terms seemingly interchangeably. Technically they are wrong to do this of course. But in a practical sense, looking at the return calculation at the end of the day it doesn't affect the calculated present value valuation result.

SNOOPY

[bull....]

The 'discount rate' is a much more sophisticated concept that the 'capitalisation rate'. There are sophisticated and less sophisticated ways of calculating it and I notice that the reference article says:
"Typically, the investor’s required rate of return is used as a discount rate, or in the case of an institutional investor, the weighted average cost of capital (WACC)."

Now as you are aware the 'weighted average cost of capital' can become quite a complex calculation involving a balance between the 'cost of equity capital' and the 'cost of fixed interest capital' that also involves historical share price volatility over a time period. Despite all that sophistication, such a calculation becomes nonsensical as a predictive tool if interest rates suddenly change or the volatility of the underlying share investment changes relative to how the market behaves. Because of these limitations, I don't use the WACC calculations myself. I would much rather use my own judgement to 'pick a number'. Yes I realise this technique will sound crude to some readers. But I put it to those readers that doing a whole lot of sophisticated calculations using questionable input assumptions is just another version of crude, hiding under a blanket of haughty mathematics.

With a no growth assumption, often the discount rate number I pick is my sought after yield.

So while you are correct to say that the 'capitalisation rate' and 'discount rate' are not the same thing, I do need to point out that for some investors in some circumstances they can be the same number. And that is why in some contexts investors use these terms seemingly interchangeably. Technically they are wrong to do this of course. But in a practical sense, looking at the return calculation at the end of the day it doesn't affect the calculated present value valuation result.

SNOOPY

the discount rate used when the property market was humming would have been a lot larger number than what should be used now. Also a softer number should be applied to take account of the lumpy ness of rollover cashflows

[Snoopy]

Therein lies the issue. Per Lyall's amended quote from Snoopy it assumes the properties were valued using cap rates, whereas OCA properties were valued using discount rates. I see Snoops has edited his post, but using a different metric in an amended quote from a different country etc is not the criteria I would use to eliminate a potential investment per the original post.

The author (Snoopy speaking through Lyall) acknowledges the varying metrics:

real estate prices ...[snip]... are valued on the books ... at cap rates

versus

the assets that underlie OCA are priced [on public markets] with a cost of capital reflective of NZ equities in general, which is a cost of capital that bears no relation to the cost of capital private buyers of prime A-grade real estate are subject to

Just to bring this discussion back into context....

The issue of using 'capitalisation rates' (current yield) or 'discount rates' (a sum of all future cashflows discounted back to a present value) is at the heart of the discussion on valuing OCA. At this point I think it is worth pointing out that implicit in the 'discount rate' argument is that cashflows at OCA will grow significantly in future years. I say this because if cashflows were not to grow, this means the earnings yield becomes 'steady state'. And if you pick the discount rate to match the steady state yield, then that means that result of your discounted cashflow future accumulation calculation should exactly match the present day 'capitalisation rate'. IOW whichever method you use you will get the same answer. So whether you are working on a 'capitalisation rate' calculation or a 'discount rate' calculation, it does not matter.

The problem with valuing a property developer (and I am thinking about OCA as such) is that you can look at such a company from more than one perspective. For example:

'Vision a' / Focus on the present day where you have a growing business with an impressive pipeline of future cashflows, that will be valued on a multiple to reflect the future prospects OR
'Vision b' / Focus on a steady state vision, where all the development pipeline is complete and the massive future income base is discounted back to a present day value using an appropriate discount rate.

The issue is that in 'vision a' you have a lower cashflow and a higher valuation multiple (because of the company growth prospects) but in 'vision b' you have a much higher cashflow but a lower multiple (because all of the growth in building out the properties has finished). But 'vision a' and 'vision b' are actually different ways of looking at the same property development company. Once you realise this, it becomes clear that the answer (valuation of OCA) must be the same whichever vision, a or b, you choose.

Pre the retirement village valuation price correction, the sharemarket was pricing some of these RV operators on an unlimited growth path. But with higher interest rates, uncertain development costs, some discretionary timing for villa residents to enter the RVs fed by a volatile property market, and high company debt levels -based on previous unlimited runway of growth assumptions-, the banks have cried 'enough' on the unlimited growth model. Thus the new way of valuing an RV operator is either 'Vision A' or 'Vision B'. Yet some shareholders are still wedded to the old ways and want to have the cashflows of 'Vision B' valued on the multiples of 'Vision A'. IMV this is no longer possible and this is why some investors expectations on the future value of the likes of OCA are unrealistic in today's market. You can value your investment as either a 'vision A' or a 'vision B'. But you cannot mix and match your assumptions between the two visions.

The next point to clarify is the difference between value (what the sharemarket is prepared to pay for your assets) and cost. 'Vision B' will always be valued by the market at a discount to asset backing. This is because completed housing can never provide an income return that is satisfactory for sharemarket income investors based on house building costs. This means that the further along the development path to completion these retirement villages get, the greater the discount to asset backing Mr Market will give such listed assets. Long term, I would expect this discount to settle at 50% (which means a 3% property rental yield on cost translates to a 6% market yield for sharemarket investors). The great news for OCA shareholders is that we are already there. So I do not predict more long term pain. However, the counterfactual to this is that I predict little long term gain either. Sure share values will tick up as the long term development pipeline continues to roll out. But those investors in the retirement sector that do best, IMV, will be those investors that have to put the least cash, either via cash issues or a DRP, or the compulsory DRP (when a company decides not a pay a dividend at all), back into the company. The problem as I see it: Any 'real cash' put back into the company will be immediately revalued to 50c in the dollar by Mr Market. And there is no quick mechanism for shareholders to get their cash back at dollar for dollar rates.

So now I complete the long circle by returning to the subject of this post. If a company is growing, as OCA is, then using a discounted cashflow valuation will produce a higher share price valuation than using present day earnings yield - this is true. But if the cash reinvested, either by retained earnings or via a cash issue, is immediately discounted to 50c in the dollar by Mr Market (as it must be to retain a competitive earnings yield with other outside of the industry sharemarket participants), then the benefits of that higher cashflow being recognised largely evaporate - from the point of view of the OCA shareholder.

SNOOPY

[Daytr]

Not that simplistic.

Developers go broke because of the weak state of the market (poor sales and low demand) and/or they have overpaid (like OCA) for land & development costs are too high.

Land becomes cheaper as is already happening out there. Next lot of developers take over.

Many tradesmen out there now desperately looking work on the next project so they are starting to reduce their rates.

What you suggest takes time, a lot of time.
We have a big shortage of housing, less houses being built will see prices rise.
It is that simple.

[Ggcc]

What you suggest takes time, a lot of time.
We have a big shortage of housing, less houses being built will see prices rise.
It is that simple.

The big difference is the the majority of houses getting purchased now are entry level first home buyers. These might go up quickly, but the average 1.5 million plus houses around NZ will take a while to increase. That was mentioned by an article I read about 1 month ago by a mortgage broker. Of course it is one persons opinion, but it made sense to me. I am amazed at the amount of people who are cashed up loaded individuals looking at buying 2 million plus houses in Napier.

[mike2020]

Ggcc, do you think that is anything to do with insurance payouts?

[X-men]

Stop discussing this dog. 2 years downtrend....no news from the sheet management....what a depressing 🐶

[Snoopy]

Stop discussing this dog. 2 years downtrend....no news from the sheet management....what a depressing ��

On the contrary. If you want to learn, you will learn a lot more from share buys that do not go to plan than those that do. Now is exactly the right time to be discussing OCA.

SNOOPY