OCA - Oceania Group - retirement villages

[Beagle]

Probably a good approach seeing as they tend to revert to ‘Comprehensive Income’ when things don’t look too good at the NPAT level

But then again that will confuse those who just want to look at ‘Continuing Operations’

Yeap, they were dead keen to highlight "comprehensive income" last year when interestingly, no other company in the sector took that approach. I suppose they think they're a special case ?

[Beagle]

Comprehensive Income is the profit measure that flows most directly through to NTA changes and has some merit as a yard stick for retirement village operators, especially for Oceania during this chrysalis stage of their life cycle. It reflects valuation increases in their $442 m of PPE assets which is not captured by other profit measures. The downside being that it does let them off the hook a bit in terms of sales performance.

OCA has tremendous potential to create value and like SUM and RYM is a long term hold for me. Surely we will see strong sales at the Sands in this result. If the sales and marketing team can't sell that location on the beach and in the village in a great North Shore suburb then they should think about alternative career paths.

You can't have it both ways. If we start looking at comprehensive IFRS income for the other companies in this sector we again have one that stands out as the cheapest, SUM with over $1 per share. RYM again look over priced on that metric.

Regarding the Sands and its salability, agreed its a fabulous location but like all large developments close to the water there are the units with lovely sea views and those without. Would you go on a cruise ship and book an inside cabin just because its cheap ?

[Beagle]

How deep to dive into this can of worms on a Sunday...not very is the short answer. Some background for others who won't have the same level of understanding you obviously do.

At their core these are property companies, although it could be argued a lot of OCA's operational profit comes from care.
International financial reporting standards (IFRS) require all property companies to include fair value gains on all property in their financial results for the year.
Each year all the companies in this sector obtain valuations of their assets to determine the change in net asset backing and this is included in IFRS or comprehensive earnings.

It is a general accepted accounting principle (GAAP) that a profit is not such until its realised. Obviously the revaluation of units is not realised, (only those units actually resold during that year or developed and sold are realised and form part of underlying earnings) and for common area buildings like recreation or community areas it will never be realised, unless the village as whole is sold outright.

My view is that RYM started this whole thing and set the standard of underlying earnings being the benchmark in this sector. The main principle of underlying earnings is that they're the earnings realised during the year and in my view this gives the most accurate picture of progress made during the year as its encapsulates the realised or real profit made.

For sure IFRS profit is also important in as much as it gives a view of forward earnings, much of the IFRS valuation gains will be realised at some point in the future and the difference is known as embedded value and often expressed as embedded value per unit.

The problem with using IFRS earnings is, not only does this recognise earnings that are not actually earned yet, you also get wild swings in earnings from one year to another. Another problem is it picks up the increase in the value of common areas and buildings that it is highly likely will never be realised.

This is best illustrated by looking at MET's earnings for 2018 and 2019.
In 2018 their IFRS profit was $125.1m and underlying profit $87.5m
In 2019 their IFRS profit was just $39.2m (Auckland property declined) but underlying earnings were $90.5m. They had embedded value of a whopping $288,000 per unit.

I maintain it is grossly inaccurate to say the entire actual earnings of MET for the 2019 year were just $39.2m when it is plain that they actually earned and realised far more than this during the year. Likewise with 2018 IFRS profit, claiming they has earnings for that year of $125.1m gives a disingenuous view of their real earnings.

The low IFRS profit is probably something that's going to unduly influence the forthcoming appraisal report of the company when I would argue it shouldn't given the huge embedded value and the fact that the Auckland market is rebounding fairly well at present.

My opinion is underlying profit is the best measure we have but I pay close attention to embedded value per unit gains each year as this gives a valuable guide to future realisable profit from resales.

In my opinion, OCA needs to conform its model to underlying profit as the primary measure of its profitability if it wants to find wide acceptance and support within the investment community.

My previous comment about NTA difference was tongue in cheek and follows on from other comments I have made previously about how OCA's financials are a very difficult read even for accountants and experienced professional investors like myself.

[Snow Leopard]

Maybe, just maybe, it is not the last profit number that is important.

Nor the so called NTA.

Think lateral like a crab

[Beagle]

Market is always forward looking for sure but embedded value per unit and the companies track record of development and their margin are useful guides to forward profitability as is the length of their track record. Proven thoroughbred or promising filly that might fall at the next hurdle, lay your money down and place your bets...

[Maverick]

That was a very impressive post back there Beagle explaining the accounting concepts to those uninitiated with retirement reporting. I'm sure those that are prepared to put in the effort of understanding these companies will benefit a lot from it.

At the risk of muddying things further, I have a different concept of " embedded value" as I think you do.

I understand that you are saying EV is basically "capital gains".(ie. future profits)
My view of EV is the sum of the "remaining portions of the DMF contracts" (also future profits, to me this also supports why they report as individual EV's per unit).

Wikipedia says EV is essentially future profits not relised yet but are coming and is a contrived concept made initially to measure insurance policies, technically we both could be right. ..I think I am righter though.(" that's pretty arrogant considering the company I'm in"- Topgun quote by the way)

Anyhow, as you have said, how deep does one bother to go on a Sunday......beer time mate.

[Beagle]

"You can be my wingman anytime mate"

[winner69]

Excellent synopsis of different profit measures Beagle. Although you may have to hand your bean counters badge in if you are not subscribing to the official IFRS bean counting view of the world.

Beagle is a Accountonomist so entitled to use what any measure that he deems appropriate

[Maverick]

Maverick,

"That was some of the best flying I've seen to date - right up to the part where you got killed."

Love your work and feel we are on the same page on OCA. However, there is no connection between Embedded Value and DMF. DMF income will be recognised in both Underlying profit and IFRS profit/Comprehensive Income in the year it is earned (every year in accordance with the contract for each individual ORA). Embedded Value is the difference between valuation and the amount the current resident paid for the ORA (i.e. it is all capital gain not DMF).

Hey hey Mogul welcome to the forum,
I accept capital gains is part of embedded value but The way I read it, unrealised DMF is also almost half of EV . The way I see it both you , Beagle and myself are all partially right.

Check out this link(OCA FY 19 report)
http://nzx-prod-s7fsd7f98s.s3-websit...084/304090.pdf
then go to page 29(bottom right corner )

It states,
"embedded value includes :
-92.3m of DMF cash flows to be realised and
-115.6m of resale gain"

I know this post is will bore the socks of any readers but if I'm still wrong I'm willing to hear it.

EV doesnt actually mean that much too me as part of my analaysis of OCA ( as long as its increasing) but I may as well get it straightened out for good learning.

[winner69]

Now we all know about Underlying Earnings, Comprehensive Income, NTA and Embedded Value we must be a lot wiser

So us OCA a good investment

I like the thing NAV (NEt ADJUSTED VALUE) that Oceania use .....was $1.14 per share las