OCA - Oceania Group - retirement villages

[mistaTea]

Snoopy me ol’ mate, I get the feeling that most on here don’t get (or want to get) what you are saying

Aren’t you just answering why are OCA shares always so ‘cheap’ / ‘undervalued’ …ie share price doesn’t represent a ‘true’/‘realistic’ value …and you add that this is unlikely to change

Yes he has provided a possible if not plausible explanation as to why the shares are valued the way they are.

But Christ Almighty you would have thought he sh1t the bed the way people are responding!

[mistaTea]

Looking backwards you can say that Mr Market must have been an irrational drunk. But having lived through those Covid-19 times, I am not so sure. At the time of OCA hitting 40c, Covid-19, the more deadly original strain, was rampant in other parts of thew world, There were no vaccines, nor medical treatments available and refrigerated containers were being stacked with Covid dead bodies in the United States. So it was quite conceivable that if Covid-19 had become established in NZ in those early days, entire retirement villages could have lost all of their residents, while it would be a battle for the staff to remain well enough to operate them. That means 40c for OCA might not have been irrational.

Likewise with interest rates near zero, even a meagre 3% return on assets was looking OK. So there was a very logical reason why retirement village shares might trade at near to NTA. It is only looking back on the situation when you realise that both the 40c and $1.60 Mr Market valuations were transient outlier scenarios. But they certainly did not feel that way at the time. My guess is that transient outliers aside, the value of OCA shares did not change much from that median value you pointed to of 68c. And is is probably still worth round about that figure today.

SNOOPY

Amen, always easy in hindsight but at the time the market values each stock based on expectations. When things are very uncertain, those expectations are set on the very conservative side. Quite rightly too.

There is always a reason for why the market values the business a certain way at a certain time. You just have to be curious enough to want to understand why.

Snoopy going to give winner a run for his money soon on great posts.

[Snoopy]

Oh man this is GOLD.

The Forrest.

The Trees.

All I can do is pray you're correct and one day my annual dividend is 100% of the share price and snoop dog keeps selling them to me.

This indeed may happen if the cashflow is good and the dividend keeps increasing in line with that. So how is that cashflow going? And what was it that happened to the dividend last time around?

SNOOPY

[SailorRob]

Amen, always easy in hindsight but at the time the market values each stock based on expectations. When things are very uncertain, those expectations are set on the very conservative side. Quite rightly too.

There is always a reason for why the market values the business a certain way at a certain time. You just have to be curious enough to want to understand why.

Snoopy going to give winner a run for his money soon on great posts.

Can you help me out and link me to one great post from winner?

Not taking the piss they may be on a thread I don't read but I can honestly say I've never read one.

[SailorRob]

This indeed may happen if the cashflow is good and the dividend keeps increasing in line with that. So how is that cashflow going? And what was it that happened to the dividend last time around?

SNOOPY

The cash flow is mind boggling.

So if the market simply keeps valuing it at the same discount to cashflow or assets... Then won't you by definition get the earnings return or the asset return?

They should never have paid a dividend agreed. That was epic stupid.

[SailorRob]

This indeed may happen if the cashflow is good and the dividend keeps increasing in line with that. So how is that cashflow going? And what was it that happened to the dividend last time around?

SNOOPY

No Snoopy it will never happen.... You won't find a sustainable 100% dividend yield. Market will reprice.

[Snoopy]

Snoopy me ol’ mate, I get the feeling that most on here don’t get (or want to get) what you are saying

Aren’t you just answering why are OCA shares always so ‘cheap’ / ‘undervalued’ …ie share price doesn’t represent a ‘true’/‘realistic’ value …and you add that this is unlikely to change.

Yes I (and Lyall) are saying that, as a rule, real estate investors in listed entities should be prepared to see their investments trade well below net asset backing. But there is something about 'the float' that concerns me as well. I get that the float is 'free capital' borrowed from generations of village occupants which OCA never has to pay back. Not only is the money free. The on going flow of residents actually increases the value of the float at each 'handover point' as property values rise. Yes I get all that.

What I am less sure about is whether this 'free money' is being reinvested wisely, in the context of OCA being a listed entity. Building project 'cashflow out' is real. Finished building valuations can be reduced at the stroke of a pen. And even if you follow all the accounting rules to the letter and all of your property values are ticked off by the auditor, if that Mr Market doesn't believe you, then your shares will get marked down. Then your banking syndicate, noticing the share price dropping, starts making noises about 'capital ratios' and maybe getting some new 'discounted equity' on board to shore up the company's capital position.

Long term, I don't think the OCA business model is broken, even if all business modelling might be improved with a tweak. But there could me a medium term issue, over say 5-7 years, where property values as constructed and on the books are overvalued. And there is no easy way out by balancing the 'cashflow in' side of the equation to relieve the issue.

I think the danger of going 'all in' to one company is that it can make an investor very one eyed about their investment position!

SNOOPY

[SailorRob]

Looking backwards you can say that Mr Market must have been an irrational drunk. But having lived through those Covid-19 times, I am not so sure. At the time of OCA hitting 40c, Covid-19, the more deadly original strain, was rampant in other parts of thew world, There were no vaccines, nor medical treatments available and refrigerated containers were being stacked with Covid dead bodies in the United States. So it was quite conceivable that if Covid-19 had become established in NZ in those early days, entire retirement villages could have lost all of their residents, while it would be a battle for the staff to remain well enough to operate them. That means 40c for OCA might not have been irrational.

Likewise with interest rates near zero, even a meagre 3% return on assets was looking OK. So there was a very logical reason why retirement village shares might trade at near to NTA. It is only looking back on the situation when you realise that both the 40c and $1.60 Mr Market valuations were transient outlier scenarios. But they certainly did not feel that way at the time. My guess is that transient outliers aside, the value of OCA shares did not change much from that median value you pointed to of 68c. And OCA is probably still worth round about that figure today.

SNOOPY

Yes, Covid could have turned all the buildings to rubble. Jacinda said.

Dude... You didn't need to look back to see 39c was ridiculous. Bloody hell.

[Ferg]

Thanks for your subsequent post Snoopy. Unfortunately the accounts are not easy reading and they do require a slow methodical approach.

I still don't see the justification for using different valuation methods for Investment Properties and Care Suites. That seems an unnecessary tweak to muddy the waters of two ostensibly similar income streams.

I agree with you on this. However, I wonder if OCA are confusing themselves with the phrase "capitalisation rate" (or we are confusing ourselves with the definition). While 'cap rates' are a quick and dirty way of looking at property yields, I don't think they have actually used this method for valuing care suite properties. Why? My guess is they have calculated the "capitalised value using a discount rate" and the phraseology was condensed into "capitalisation rate". Cap rates in excess of 5 or 10% in todays climate are rare, so I suspect the median 12.5% "capitalisation rate" is actually a discount rate plus as you noted it is very close to the discount rate used for completed investment properties. Besides, using a purely cap rate method is not IMO an acceptable method for valuing properties for such a large listed entity. The more appropriate method is to discount forecast future cash flows using a discount rate. And I would readily phrase the discount rate used to calculate the capital value of a stream of cash flows as a 'capitalisation rate' (being the rate at which they were capitalised), which as we know is not the same thing as a 'cap rate'. Hence the reason I think they are confusing themselves which is unhelpful. Useful link:

https://propertymetrics.com/blog/dif...discount-rate/

[kiora]

Retirement village operators are property developers and value accordinately

https://finmodelslab.com/blogs/valua...ment-valuation

"Challenges in Real Estate Development"

https://www.investopedia.com/ask/ans...evelopment.asp