OCA - Oceania Group - retirement villages

[Beagle]

I suspect most posters here are pretty well just waiting at this point for the January HY1 result to see for themselves if the point of inflection has indeed been reached and what it materializes as. I've personally got nothing to do now apart from sit on my hands until then.

Sooooo…..just for mental occupation, I've been exploring the effect of these heafty property price rises (currently HPI 15% yoy) and what net effect that will have on the OCA bottom line.

Firstly , there is a huge difference between monetising profit on house price rises from being a direct landlord compared to owning a piece of a retirement village. The landlord can only access this capital gain on the sale of the house. He can not put the rent up just because his asset is now worth 15% more as the rent limit is capped by affordability of the tenant, therefore increased cash return is tied more to wage inflation and less to the new value of the house.

Whereas the DMF structure does fully capture the HPI rises in cash because the incoming resident sells the family home at the new market rate and then pays the new market rate of the OCA unit. Therefore the new DMF price is directly tied to the HPI. Any OCA price increase will always be affordable as the new resident will have the same ratio of increased wealth to pay with.

Then moving on to how much HPI increase flows to the OCA bottom line. It gets tricky here because there are loads of effects intertwined.
For example;
-New sales profit margins are affected disproportionately greater than the HPI rise itself as any dollar earned extra is pure profit as there are no extra costs to earn it. (it also doesn't costs any more to build stuff which is now selling for more).
-Resales margins are also disproportionately higher as noted above.
-Both new and resale downstream DMFs are now also higher.

Enter the spreadsheets…..It turns out it's surprisingly easy to model different HPI assumptions as all the s/sheet cells are already set up interconnected to each other making the above considerations automated. FWIW , until now I had assumed a general 2% HPI going forward even though it has historically been about 3.5% average the last few years, just to stay conservative.

The result turns out simple and consistent;
For each 1% HPI rise equates to about 1% increase in underlying earnings, thereafter about 0.6% for the following 3 years as the increased DMF effect washes through.

So with the HPI increase currently at 15% that implies if OCA was to put in a "no growth" year of $50m underlying once again then this time it would now actually be $57.5m and the following 3 years about $53m.
This simple scenario is based on house price rises alone to demonstrate the net effect. There is no consideration for;
New deliveries ,
high “catchup “ sales volumes from FY 20, completion only finalised post lockdown in FY 21,
inflection points,
or multiple other things which are also currently in play.

Of course this fully applies to all the other village operators too. It's easy to see why SUM is so popular right now being biggest beneficiary by having the most empty stock available to capture this wave.

As previously stated I also have the HY1 forecast at about 12cps (annualized underlying ) inline with Beagles. I acknowledge this estimate seems ridiculously high given OCAs results to date but however I try to fault the numbers and assumptions, this result still sticks.

There is absolutely no doubt in my mind the result is going to be VERY impressive.

Thanks Mav.

I feel increasingly confident based on real estate prices and volumes sold we're in very good shape with our forecast.

[Waltzing]

ok not usually in on a sunday evening whatching local Tv1.

reports of 250 thousand kiwis returning from world wide over next 2 to 5 years.

house prices?

[Beagle]

ok not usually in on a sunday evening whatching local Tv1.

reports of 250 thousand kiwis returning from world wide over next 2 to 5 years.

house prices?

Ballistic !! We can't build houses that quickly. Demand will vastly outstrip supply.

[Greekwatchdog]

Already is outstripping supply. Good grief telephone numbers...

[Beagle]

In an interesting coincidence a couple of weeks ago I had a good chat with the PWC partner that used to be in charge of the OCA audit, (very bright guy).
His comment was these retirement companies are mainly an asset play and with OCA you're only paying a very modest premium above asset value especially after the very strong year we've had in the market. Of his own volition and without any prompting from me he brought up my pet subject of Ryman's premium to NTA, (last time I looked it was about 3x NTA) and shared his thoughts that's it's much harder to get a decent return out of property when you're paying so much for goodwill.

Reading between the lines I gathered he would be happy to own OCA if he could. Partners of PWC are not allowed to own shares in companies they audit, (perceived and possible real conflict of interest).

Anyway...for what his comment is worth its worth noting now that MET has gone ARV trades at the lowest premium to the last reported NTA at 40% and OCA is 43%. SUM is more than double NTA and RYM just over triple.

[Waltzing]

Yes just read the herald article on it....

yikes in this very very quiet corner of the golden tri angle one can only here the sound of cows and some horses...but it appears in the quit towns and city of these tiny islands the herald reports with statement like ..

""It's by far the biggest month that we've ever seen and I think part of that is that the banks are under pressure, there's lots more people seeking advice. It's huge numbers, unprecedented numbers nobody's seen before around everything to do with housing"

prehaps we dont have enough OCA and we should be selling assets in other sectors as soon as they return to cost price ... getting close..

i being to think MR B might see his above 2 dollars and then skys the limit?

I was thinking prehaps the partner has a family trust and he can own them at a hand off distance.

my fav read is a 1995 research document on advance trusts in the ACA library... not sure its still on the accounting societies research archives but its worth a good read.

[Beagle]

Family trust may breech the associated persons test of conflict of interest rules that I believe the big firms have as a condition of their terms of audit engagement.
https://www.nzherald.co.nz/business/...FD66XAMS3QN7E/ Paywalled article
Nub of it is...nothing is going to stop this real estate market going up.

[peat]

I was thinking prehaps the partner has a family trust and he can own them at a hand off distance.

wow, do you really think that would be ok?
Arent you a trustee yourself?

Perhaps you should consider doing some structured professional development so as to ensure you fully understand your responsibilities.

[bull....]

I suspect most posters here are pretty well just waiting at this point for the January HY1 result to see for themselves if the point of inflection has indeed been reached and what it materializes as. I've personally got nothing to do now apart from sit on my hands until then.

Sooooo…..just for mental occupation, I've been exploring the effect of these heafty property price rises (currently HPI 15% yoy) and what net effect that will have on the OCA bottom line.

Firstly , there is a huge difference between monetising profit on house price rises from being a direct landlord compared to owning a piece of a retirement village. The landlord can only access this capital gain on the sale of the house. He can not put the rent up just because his asset is now worth 15% more as the rent limit is capped by affordability of the tenant, therefore increased cash return is tied more to wage inflation and less to the new value of the house.

Whereas the DMF structure does fully capture the HPI rises in cash because the incoming resident sells the family home at the new market rate and then pays the new market rate of the OCA unit. Therefore the new DMF price is directly tied to the HPI. Any OCA price increase will always be affordable as the new resident will have the same ratio of increased wealth to pay with.

Then moving on to how much HPI increase flows to the OCA bottom line. It gets tricky here because there are loads of effects intertwined.
For example;
-New sales profit margins are affected disproportionately greater than the HPI rise itself as any dollar earned extra is pure profit as there are no extra costs to earn it. (it also doesn't costs any more to build stuff which is now selling for more).
-Resales margins are also disproportionately higher as noted above.
-Both new and resale downstream DMFs are now also higher.

Enter the spreadsheets…..It turns out it's surprisingly easy to model different HPI assumptions as all the s/sheet cells are already set up interconnected to each other making the above considerations automated. FWIW , until now I had assumed a general 2% HPI going forward even though it has historically been about 3.5% average the last few years, just to stay conservative.

The result turns out simple and consistent;
For each 1% HPI rise equates to about 1% increase in underlying earnings, thereafter about 0.6% for the following 3 years as the increased DMF effect washes through.

So with the HPI increase currently at 15% that implies if OCA was to put in a "no growth" year of $50m underlying once again then this time it would now actually be $57.5m and the following 3 years about $53m.
This simple scenario is based on house price rises alone to demonstrate the net effect. There is no consideration for;
New deliveries ,
high “catchup “ sales volumes from FY 20, completion only finalised post lockdown in FY 21,
inflection points,
or multiple other things which are also currently in play.

Of course this fully applies to all the other village operators too. It's easy to see why SUM is so popular right now being biggest beneficiary by having the most empty stock available to capture this wave.

As previously stated I also have the HY1 forecast at about 12cps (annualized underlying ) inline with Beagles. I acknowledge this estimate seems ridiculously high given OCAs results to date but however I try to fault the numbers and assumptions, this result still sticks.

There is absolutely no doubt in my mind the result is going to be VERY impressive.

good reasoning , like i was saying much earlier on the thread do up the shi..ers and sell them for more. basic property play and in a hot market as now as you mention you can now sell the re-no's for much more at a stable cost input. there should be some re-valuation gain backs this half as well which should inflate the result as well. dividend should go back to normal levels at least.

[peat]

nice post Mav

Just focusing on the DMF tho.
Are you assuming much benefit to the company from the DMF.
The DMF is a percentage of the original purchase price. hence by the time it is collected it is based on an out of date number .
On their website it is actually referred to as a Facilities Fee - correct? It is deferred but runs at 10% per year cumulating to a max of 30% after 3 years.


Isnt this allocated to maintenance of the dwelling though. In which case it is money in and money out unless the fee paid can buy more maintenance than is required. I guess at 30% (lets assume most stay that long) it will cover 3 years of maintenance easily enough. but say they live there 6 or 7 years, will there be any benefit from the payment as it is capped at 30% of the original price (now very outdated) and will most likely be fully spent on refurbishing the unit.