OCA - Oceania Group - retirement villages

[winner69]

Snoopy: I thought that text looked familiar. Before scaring people quoting capitalisation rates of 3%....why not use the actual discount rates disclosed in the OCA annual report? Page 52 has the figures you are seeking.


Forever is a big call. That assumes required rates of return are always in excess of the discount rates used for property valuations. In light of the figures disclosed by OCA on page 52, that implies a required rate of return similar to what one would want from Central Africa or South America, or maybe even SML bonds.....so are you sure about "forever" given the comparative value is a function of 2 independent variables?

I see Summerset valuers use discount rates for investment properties and capitalisation rates for care units

Suppose it depends on the methodology used

[Ferg]

I see Summerset valuers use discount rates for investment properties and capitalisation rates for care units

Suppose it depends on the methodology used

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.

Edit: and the author 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

[winner69]

That good sales update from Summerset today has got the RV a roll with share prices up …like SUM +3.8% and ARV up 3.5%

Even Oceania has put on a cent to 76 cents

[Daytr]

But not as good a story as not pissing away my money on SKT, until it made me a a lot of money, unlike you who freaked out when it was finally recovering and incredibly, you sold at a loss. SKT is my best performing investment of 2023. How was it for you? I didn't need a broker analyst to tell me that.

The internet is a big thing with a long memory that you cannot and will not avoid, you have no interest in OCA that you have so far disclosed, just leveraging the investors who have more common sense and patience than you do.

So you held on to a loser & you got some of your money back and you use this as a basis to rubbish someone else.

And rubbish whole industries that you obviously really know little about. You choose to manage your own money, good for you.
Others don't for various reasons, perhaps they don't have the time, knowledge or experience or at an age where it suits them not to take too much risk. Within those funds choices range from aggressive & conservative so investors choices can also impact the returns.

The biggest issue I have with most fund managers in NZ is that they aren't fund managers at all but in a chain who are all clipping the ticket. They are merely brokers well at least for the offshore allocation.

An adviser here will take someone's money under their investment umbrella & then the funds generally will go to the likes of a BlackRock or Vanguard etc & they might even sub it out again to a smaller adviser.
However when your money is invested in some of these behemoths they can't be nimble.
And it's very hard for them to beat the indices by much as they are such a large players in those indices.

Good for you, your investment in SKT bounced back, but it's just ugly rubbing someone's nose in it. Have you never lost money on an investment? Its also nothing to shout about if this was your best investment in 2023.

Anecdotally here's a we tip for you though. Since SKT put their prices up, I know quite a few who have dropped their subscription. Me included.

Plenty of sport going back to free to air & long may it continue. Other streaming services much cheaper. In the other four streaming services I pay for cost in total not much more than the cost of Sky & that was just the Sports package.

Just to add, if you hung on to that dog SKT for so long & it's now your best performing stock, perhaps you should be looking into those fund managers you deride.
Unlike OCA the story changed significantly years ago.

[SailorRob]

Here is the argument that OCA shareholders will never be able to cash out at net asset backing for the OCA shares they own. That discount to asset backing for all periods bar the freakish circumstances of near zero borrowing rates during Covid, is destined to remain at 50% of NTA, or thereabouts, forever.

"The discount to asset backing has a lot to do simply with the way the assets are packaged from an asset class standpoint, and the different costs of capital that apply to different investor constituencies and asset classes. New Zealand's cities and their super-prime real estate prices, which include those city sited retirement complexes, are valued on the books (and in the real world by house buyers) at cap rates as low as 3% (and often closer to 2% net of costs and tax). In a world with low (in historical terms, not compared to the Covid period) interest rates, this is not an unrealistically low yield for super-prime assets with favourable trends in rent revisions, A-grade tenants, long lease terms (for the lifetime of the tenant in the case of the retirement villages), and an income stream that is inflation protected (in the long term anyway, when rights of occupation roll over). Even a modest pace of 2% annual rental growth (below historical averages) would generate all-in after-tax returns of some 4%, which with inflation protection, is very attractive relative to bonds and other high-grade debt."

"However, the issue is that active equity managers - who are the natural buyers of OCA stock - are not bench marked against cash and high-grade bond returns, or even high-grade real estate. OCA, as a listed company, is part of the "listed equities" bucket, and the performance of the institutions that purchase OCA are therefore bench marked against equity market indices, rather than cash or bonds or property prices. The average stock in New Zealand is currently priced with an expected return of perhaps 8%, which is another way of saying the cost of (listed) equity in NZ is currently about 8%. If equity managers were to buy OCA and realise only a 4% return (which they likely would if the stock was priced at 1x book), but the index was to generate 8% pa, it would be of little benefit to the fund manager to argue to their clients that the returns are low risk and quite attractive relative to fixed income. The clients would say, we allocated you money to get "equities exposure", and you're only up 4% and the market is up 8%, and that is not satisfactory performance. Because OCA is part of the "listed equities" bucket, it is expected to deliver "listed equities" returns of 8%."

"Consequently, listed on public markets, the assets that underlie OCA are priced 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. Because OCA's underlying assets generate only perhaps 4%, this requires the stock trade at about one half of book value."

The above is adapted commentary from our former esteemed forum member Lyall Taylor.
https://lt3000.blogspot.com/2020/07/...flywheels.html

Except Lyall was not talking about OCA, but a stock called 'Hong Kong Land' (HKL), which owns super prime real estate in Hong Kong and Singapore. All I did was take out the references to HKL, substitute OCA and voila! Lyall's logic resonates with me, despite the commentary being ostensibly about a different listed stock in a different property and stock market.

SNOOPY

Yes, you're missing something very major here though.

But as far as property companies such as Argosy etc... this is what I have always been saying. Assets are only worth what they can produce in cash capitalised at an appropriate rate...

OCA totally different for obvious reasons.

[Baa_Baa]

So you held on to a loser & you got some of your money back ...

Just to add, if you hung on to that dog SKT for so long & it's now your best performing stock, perhaps you should be looking into those fund managers you deride.
Unlike OCA the story changed significantly years ago.

Thanks for the encouragement, but not sure where you got the "held onto a loser", or "hung onto that dog SKT", perhaps your vivid imagination? I bought in for the first time when the chart confirmed the turnaround in financials, after doing my FA and deciding it would be a good investment, and waiting literally years for the bottom. My average is well below the current SP and including dividends, my total return so far is 22.8% pa.

[Daytr]

Thanks for the encouragement, but not sure where you got the "held onto a loser", or "hung onto that dog SKT", perhaps your vivid imagination? I bought in for the first time when the chart confirmed the turnaround in financials, after doing my FA and deciding it would be a good investment, and waiting literally years for the bottom. My average is well below the current SP and including dividends, my total return so far is 22.8% pa.

Well done, my bad made an assumption.

Good luck with SKT going forward, it will be interesting to see if they can hang onto those gains.

[SailorRob]

As we've been discussing why the pros are so crap I've been biting my tongue to bring up the resident former professional that once lived like a rock star punching out 100% plus year after year...

So you held on to a loser & you got some of your money back and you use this as a basis to rubbish someone else.

Wrong, perhaps you should understand what you're talking about before commenting. Go and read back thorough the SKT thread and you might learn Baa_Baas basis.

And rubbish whole industries that you obviously really know little about.

How is it obvious Baa_Baa knows little about the industry??

You choose to manage your own money, good for you.

Certainly is.


Others don't for various reasons, perhaps they don't have the time, knowledge or experience or at an age where it suits them not to take too much risk.

Too much risk! Hahaha...

Within those funds choices range from aggressive & conservative so investors choices can also impact the returns.

The biggest issue I have with most fund managers in NZ is that they aren't fund managers at all but in a chain who are all clipping the ticket. They are merely brokers well at least for the offshore allocation.

An adviser here will take someone's money under their investment umbrella & then the funds generally will go to the likes of a BlackRock or Vanguard etc & they might even sub it out again to a smaller adviser.
However when your money is invested in some of these behemoths they can't be nimble.
And it's very hard for them to beat the indices by much as they are such a large players in those indices.

Good for you, your investment in SKT bounced back, but it's just ugly rubbing someone's nose in it. Have you never lost money on an investment? Its also nothing to shout about if this was your best investment in 2023.

Again... Do you know the details here and the history? No.

Anecdotally here's a we tip for you though. Since SKT put their prices up, I know quite a few who have dropped their subscription. Me included.

He doesn't need your tips bro

Plenty of sport going back to free to air & long may it continue. Other streaming services much cheaper. In the other four streaming services I pay for cost in total not much more than the cost of Sky & that was just the Sports package.

Just to add, if you hung on to that dog SKT for so long & it's now your best performing stock, perhaps you should be looking into those fund managers you deride.
Unlike OCA the story changed significantly years ago.

Oh man it's good you stopped there

[Daytr]

As we've been discussing why the pros are so crap I've been biting my tongue to bring up the resident former professional that once lived like a rock star punching out 100% plus year after year...

About to head to bed. Thanks for that, it will get me off to sleep nicely.

[Snoopy]

Before scaring people quoting capitalisation rates of 3%....why not use the actual discount rates disclosed in the OCA annual report? Page 52 has the figures you are seeking.

From AR2023 p55

------------------------

Valuation of Freehold Land and Buildings

The valuation approach for the freehold land and buildings as at 31 March 2023 was an income capitalisation approach and/or discounted cash flow analysis supplemented by the direct comparison approach. The valuation is determined by the capitalisation of net cash flow profit/earnings before interest, tax, depreciation, amortisation and rent (“EBITDAR”) under the assumption a positive cash flow will be generated into perpetuity.

------------------------

My interpretation of this is that OCA properties are valued on an income capitalisation approach. The mention of discounted cashflow I believe is likely to refer to properties under construction or redevelopment. IOW properties to which no income is attached today, but from which a steady income will be expected upon completion in years to come. The 'discount rate' you refer to in AR2023 p52 is 14-20%, with an average rate of 15%. But I don't believe this has any bearing on the 'income capitalisation approach' that would be used for the valuation completed buildings (which is most of them).

A 3% return on a nine hundred thousand dollar house would produce an annual 'income before tax gross return' of 0.03 x $900k = $27,000, or $519 per week. What Lyall is saying is that this kind of return is not good enough for sharemarket investors. But if sharemarket investors buy that house at half price, then the yield on the new shareholder capital outlaid will double to 6%. Thus to our sharemarket investor purchasing units in this listed entity 'on market', the yield doubles to 6%, which sounds a more reasonable proposition.

I do not understand why you have brought those high discount rates into the argument. I don't think they are relevant.

Forever is a big call. That assumes required rates of return are always in excess of the discount rates used for property valuations. In light of the figures disclosed by OCA on page 52, that implies a required rate of return similar to what one would want from Central Africa or South America, or maybe even SML bonds.....so are you sure about "forever" given the comparative value is a function of 2 independent variables?

Again I don't accept an average discount rate of 15% as a basis for property valuation for completed OCA property. Perhaps rather than saying a 50% discount rate will persist forever (and putting that 50% number on it) what I should have said was: "A listed owner of residential property can expect to see the market value of their shares reduce so that the expected overall return from the shares purchased 'at the right price' on market closely matches the expected returns from most other listed shares in non-housing industries." This 'discounting effect' on listed residential property is structural and permanent.

SNOOPY