OCA - Oceania Group - retirement villages

[Champion]

Hi All, this is my first time posting on this forum and I am an absolute beginner as an investor in share (and businesses). First of all, thank you for all the information and sharing of your knowledge here, it has been great reading the posts on this forum.

I am learning to read the annual reports. I noticed that in the OCA report, it has something like 'Change in fair value of investment property' as one of the income, and it was like 34m in 2017 and 1.6m in 2018. May I ask what it is actually? Is it just based on valuation of the property, and not actual cash income? Is this specific to business related to property investment? I guess if this is the case and the income is not realised until things are sold, so it is just income on paper?

Apology for asking such basic questions. Thanks for your help!

[BlackPeter]

Hi All, this is my first time posting on this forum and I am an absolute beginner as an investor in share (and businesses). First of all, thank you for all the information and sharing of your knowledge here, it has been great reading the posts on this forum.

I am learning to read the annual reports. I noticed that in the OCA report, it has something like 'Change in fair value of investment property' as one of the income, and it was like 34m in 2017 and 1.6m in 2018. May I ask what it is actually? Is it just based on valuation of the property, and not actual cash income? Is this specific to business related to property investment? I guess if this is the case and the income is not realised until things are sold, so it is just income on paper?

Apology for asking such basic questions. Thanks for your help!

Hi Champion, welcome to the forum!

And yes, you are right - the change in fair value is just a "paper gain" unless realized. These revaluations however are not confined to property companies (other companies have to value as well every year their stock and assets, be that wine, honey, milkpowder, "goodwill" or - in this case - real estate.

How else would you find out what a company is worth? Paper gains are still "real" as long as a company could realise them. Take it some other way - if the asset value of a company is $2b, than you might be prepared to pay more for it than for the same company when the asset backing was only $1b. And if this increase from $1b to $2b happened during a certain period, than the company just had an additional $1b as "income".

If a company makes say $100m by selling widgets but leaves the money in a bank account (instead of "realizing its value and spending it) - would you call this just a "paper gain" as well?

[Champion]

Thank you BlackPeter for explaining. I am not sure how the valuation is done (I have briefly read through the notes) but in residential property, valuations done by registered valuers are often very inaccurate (+/-20% at its best?) so if it is similar then basically the actual profit of the company could vary significantly for a real estate related business. And I would think that in terms of dividend payment a rise in asset value will not (and should not) be paid out? And if I read the reports correctly, if we take away the increase in asset value (capital gain) then the business is actually not very profitable (including other retirement villages not just OCA)?

Is it true that it is not that easy to find out how much each care unit costs to run and how much income it is bringing in (excluding asset value)? Or is it just me not understanding how the financial statements should be read? I would think that is the most important information to know?

Thanks again!

[winner69]

Thank you BlackPeter for explaining. I am not sure how the valuation is done (I have briefly read through the notes) but in residential property, valuations done by registered valuers are often very inaccurate (+/-20% at its best?) so if it is similar then basically the actual profit of the company could vary significantly for a real estate related business. And I would think that in terms of dividend payment a rise in asset value will not (and should not) be paid out? And if I read the reports correctly, if we take away the increase in asset value (capital gain) then the business is actually not very profitable (including other retirement villages not just OCA)?

Is it true that it is not that easy to find out how much each care unit costs to run and how much income it is bringing in (excluding asset value)? Or is it just me not understanding how the financial statements should be read? I would think that is the most important information to know?

Thanks again!

Often it’s better to look at presentations to understand the business rather than the accounts

Your care question . Oceania made $11,000 odd ebitda per bed for the last half year. See page 29
http://nzx-prod-s7fsd7f98s.s3-websit...805/294060.pdf

[Champion]

Thank you winner69, exactly what I am after!

[Beagle]

Welcome to the forum Champion. Unfortunately you have chosen one of the very hardest sets of financial statements, (of any of the listed companies I follow) to try and get you head around.

I suggest at this stage the best thing for you to do is concentrate on the underlying profit the company is making and its underlying earnings per share as in this sector that's how the shares are compared.

For what its worth I have recently trimmed my expectations for underlying profit for OCA to a range of $50-60m for Fy19. Why such a wide range ? Its impossible to know how many of the units that the company says will be built in FY19 will be sold this year because a lot of the "delivery to market" is scheduled to happen in May 2019, the last month of the financial year.

I am expecting underlying profit growth in FY19 to be quite modest but we should see good growth in FY20. Long term I love OCA's business model but its well worth noting that its going to take another 5 years for them to transition their model over to mostly selling based on the occupation right agreement model. Good long term hold as part of a well diversified portfolio.

[BlackPeter]

Thank you BlackPeter for explaining. I am not sure how the valuation is done (I have briefly read through the notes) but in residential property, valuations done by registered valuers are often very inaccurate (+/-20% at its best?) so if it is similar then basically the actual profit of the company could vary significantly for a real estate related business. And I would think that in terms of dividend payment a rise in asset value will not (and should not) be paid out? And if I read the reports correctly, if we take away the increase in asset value (capital gain) then the business is actually not very profitable (including other retirement villages not just OCA)?

Is it true that it is not that easy to find out how much each care unit costs to run and how much income it is bringing in (excluding asset value)? Or is it just me not understanding how the financial statements should be read? I would think that is the most important information to know?

Thanks again!

Sure - valuations are guesswork, given that they try to predict what a current but not existing buyer would pay for the property. And who knows - tomorrow they might discover some contamination and the property loses 50% of its "worth" - or somebody finds out that they really need this estate - and the value doubles.

Estimating the value of a property is easier if there are plenty of comparable properties around (which are on the market), but even this is less likely with typical retiremet properties. Still - so far nobody found a better way to establish the "real" value ;

Easy to find out how the business is doing without the property gains. Most companies call this "underlying profit" - and so does OCA. However - this measure is not standardised (i.e. its up to your research to find out what is in and what is out) - and comparing companies based on their underlying profit is often comparing apples and pears ...

If you don't trust them and want to do it yourself - just remove the revaluation gain from the balance sheet and the income statement - and recalculate afterwards whatever (modified) ratios you use ;

[Champion]

Hi BlackPeter, thank you so much for the explanation, that is very helpful. And thanks Beagle, I enjoy reading your posts and insights.

BTW, I do own a very small amount of OCA share for long term hold. I feel I just need to start investing (even just a little) to really learn, instead of just keep watching the market and researching. Thanks again.

[winner69]

Hi BlackPeter, thank you so much for the explanation, that is very helpful. And thanks Beagle, I enjoy reading your posts and insights.

BTW, I do own a very small amount of OCA share for long term hold. I feel I just need to start investing (even just a little) to really learn, instead of just keep watching the market and researching. Thanks again.

Researching and understanding companies always a good practice.

You’ll be amazed how much you learn about the world in general.

No matter how your investments go you will be all the wiser for the experience

[Maverick]

Hi BlackPeter, thank you so much for the explanation, that is very helpful. And thanks Beagle, I enjoy reading your posts and insights.

BTW, I do own a very small amount of OCA share for long term hold. I feel I just need to start investing (even just a little) to really learn, instead of just keep watching the market and researching. Thanks again.

Hi Champion....If you are just starting and in it for learning you might be better to buy a simple animal like HLG. At current prices you might pick up an easy 20% profit shortly and they really are a simple structure. OCA has multiple levels to it. To just begin with , whats the difference between a villa , apartment , care suite and care bed? Then add a refurbishment and a redevelopment? (easy when you`ve figured it out but very confusing at the onset)That`s not even finance stuff. Too many concepts to get your head around when starting from scratch.