OCA - Oceania Group - retirement villages

[Snoopy]

"How is OCA developing a retirement village along these funding lines a good deal for OCA shareholders?"



Again as a fictional example, purely for my own learning exercise (and more than likely wrong).........

Could I not argue, that it is a good deal for shareholders based on a growing asset base?? and hence growing float?? via ORA growth due to the growing assets??.

Yes you will get 67c out of the dollar today paid out as a dividend from cash (rather than the use of that cash being put toward developing more units).
but having the company continue the development along these funding lines you might get the benefit of;

a)-Selling the the shares you would get (as you have all-ready corrected for) 100/70*0.5=71.4c, 71.4-67/67=6.5% more???.
b)-If i were to use my fictional 10% growth rate from my last post, could I not argue that in this fictional scenario you would get
year1 ((100/70)*1.1)*0.5=78.5cents after one year.
year2 (((100/70)*1.1)*1.1)*0.5=86.4cents after 2 years
and after 7 years 71.4c*1.1*1.1*1.1*1.1*1.1*1.1*1.1=$1.39, 139-67/67=107.4% more??? (remembering this is a completely fictional example for learning purpose only, I have no idea what an appropriate growth rate could be, or indeed even if there should be one in the first place)

First of all Cupsey, thank you for taking up the challenge of answering my question.

Just to clarify for other readers what these numbers are that you are quoting represent: 71.4c (after 1 year), 78.5c (after 2 years) , 86.4c (after 3 years) ....

These numbers represent the 'cents in the dollar' able to be cashed out when you sell your shares, connected with the retained earnings being reinvested. They are not the cents in the dollar able to be cashed out from existing equity capital that you own within the company. That figure remains at 50c in the dollar.

1/ Latest reporting period being HY2024, as reported in November 2023 shows net assets of $1.017.3m on the balance sheet.
2/ On 6th December 2023 there were 724.155m OCA shares on issue.
3/ So NTA at the most recent balance date was $1,017.3m/724.155m = $1.40.
4/ At the end of business on 5th February 2024, the OCA share price closed at 70c.
5/ So the market was valuing OCA shares at half their asset backing: 70c/$1.40 = 1/2. Or put another way, the discount to asset backing was 50%.

If we look at the cashflow statement for HY2024, the difference between 'Receipts for New Occupation Rights Agreements' and 'Payments for Outgoing Occupation Rights Agreements' over the half year was: $105.214m - $38.578m = $66.636m. 30% of that figure will be the increment of the float. So the increment of the float is 0.3 x $66.636m = $20.0m That means another way of interpreting these figures is to say 'the float' increased by $20.0m over the period

However, and this is where it starts to get complicated, a second glance at the cashflow statement shows that net cash from operations was just $48.020m. That figure is less than the cashflow gain from rolling over the ORAs. Looking further up the cashflow statement you can see why. The receipts from residents care fees in cash are $30m shy of meeting the obligations for paying suppliers and employees. Of course OCA is not going broke because the 'Deferred Management Fees' (not a cash item) will make up the difference. But I think this cashflow statement should bring home the stark reality of operating a retirement village on a 'day to day' basis. The ORAs 'rolling over' are not wholly a cash cow. A large proportion of that ORA rollover cash is needed to subsidize the day to day running of the RV! Furthermore this 'problem' is not a 'one off'. It is ongoing. So those who think the capital gains on those ORAs will simply flow through to shareholders pockets in their entirety are just plain wrong. Instead I feel it is more correct to look at the increment of the float only up the the growth in operational cashflow as the gain. This means the net ORA cashflow gain is not $66.636m, but $48.020m. And it follows that the gain in the float was not $20.0m, but was 0.3x $48.020m = $14.4m. Don't get me wrong $14.4m, or $28.8m annualised is still a good number to be flowing the way of shareholders. But it may not quite be the 'Christmas has come early' gain that some think.

On a 'gain per share' basis this incremental $28.8m comes out as $28.8m/724.115m = 4.0cps, over an annualised 12 month period. But as I explained in the first half of this post, not all of this gain can be 'cashed out' by shareholders.

The amount that can be 'cashed out' at the end of the year is 4.0c x 0.714 'cents in the dollar' = 2.8cps

Let me reiterate, this is still good and still worth having. On a base share price around 70c, with no dividend being paid, this float top up alone represents a net yield of 2.8c/70c = 4%, equivalent to 5.55% as a 28% PIE gross tax return. And we have the expectation that, in the future, values will rise in line with government payouts to the oldies occupying these units as well. But I think given the kind of 'short term window' that Mr Market tends to look through, this IMV shows that at a share price of 70c OCA is trading roughly where it should be. There is no obvious 'bargain' to be picked up here.

I know this conclusion will be an anathema to some. But could it be that when all the ingredients of OCA are put together in a end of week 'Friday night fry up', that Mr Market has actually got the pricing right on this one?

SNOOPY

[Snoopy]

Dude, your argument is "Mr Market is discounting OCA shares, therefore this is bad for shareholders as if they sell their shares they only recieve x% back."

But dude, that's exactly why I am a shareholder, I only bought in because of the discount to intrinsic value...

The answer to your question is because it generates float, "free money" and a sh1t ton of it. OCA could make zero EPS for a decade and continue their float growth at 15-20% and shareholders will still do very well out of it by earning say 5% ROA from that point on.

In light of my last post, I think it is worth revisiting the latest balance sheet to be released which is the HY2024 result. That balance sheet shows a rise over the year of the ORA assets, with their value increasing to $935.726m. The previous half year result saw the ORA rights on the balance sheet at $870.476m. That is a good increase, but an increase of 7.5%. Good but nevertheless, well short of your 'expected float growth' of 15-20% p.a. ValueNZ.

You can look at these ORAs another way as well, adding on the ORAs of the assets held for sale being $15.548m (EOHY2023) and $15.737m (EOHY2024). If you add those onto the going concern totals, then the ORA rights sum to $951.463m at EOHY2024 and $886.024m at EOHY2023. That is a gain of 7.4% over the year. OK you can argue that the ORA assets 'being put up for sale' are transformational and not representative of the long term picture of the business. But I would also argue that these booked 'transformations' are taking longer to 'transform' than expected.

I would also argue that the float is not all 'free money' as you claim. Becasue the most recent cashflow statement shows that fully one third of it is required to top up the cashflow for the day to day operation of the business that allows, amongst other things, the staff to be paid.

Next you talk about the float money combined with the existing equity earning a 5% ROA going forwards from all those new villas being constructed. In my view this is also too optimistic. I would argue that the real figure would be closer to 3%. OTOH I don't think your expectation of a 5% return on these new assets, as a sharemarket investor, is out of line. But Mr Market can fix this for you. How to turn a 3% return into a 5% return? Easy! Just write down the value of those investment assets by 2%/5% = 40%. So all Mr Market is doing is writing down the value of those new assets you are building by 40% for you, and you are getting the return you require! And unfortunately unless building costs absolutely slump, the market write down of the underlying assets is set to continue indefinitely.

SNOOPY

[winner69]

First of all Cupsey, thank you for taking up the challenge of answering my question.

Just to clarify for other readers what these numbers are that you are quoting represent: 71.4c (after 1 year), 78.5c (after 2 years) , 86.4c (after 3 years) ....

These numbers represent the 'cents in the dollar' able to be cashed out when you sell your shares, connected with the retained earnings being reinvested. They are not the cents in the dollar able to be cashed out from existing equity capital that you own within the company. That figure remains at 50c in the dollar.



If we look at the cashflow statement for HY2024, the difference between 'Receipts for New Occupation Rights Agreements' and 'Payments for Outgoing Occupation Rights Agreements' over the half year was: $105.214m - $38.578m = $66.636m. 30% of that figure will be the increment of the float. So the increment of the float is 0.3 x $66.636m = $20.0m That means another way of interpreting these figures is to say 'the float' increased by $20.0m over the period

However, and this is where it starts to get complicated, a second glance at the cashflow statement shows that net cash from operations was just $48.020m. That figure is less than the cashflow gain from rolling over the ORAs. Looking further up the cashflow statement you can see why. The receipts from residents care fees in cash are $30m shy of meeting the obligations for paying suppliers and employees. Of course OCA is not going broke because the 'Deferred Management Fees' (not a cash item) will make up the difference. But I think this cashflow statement should bring home the stark reality of operating a retirement village on a 'day to day' basis. The ORAs 'rolling over' are not wholly a cash cow. A large proportion of that ORA rollover cash is needed to subsidize the day to day running of the RV! Furthermore this 'problem' is not a 'one off'. It is ongoing. So those who think the capital gains on those ORAs will simply flow through to shareholders pockets in their entirety are just plain wrong. Instead I feel it is more correct to look at the increment of the float only up the the growth in operational cashflow as the gain. This means the net ORA cashflow gain is not $66.636m, but $48.020m. And it follows that the gain in the float was not $20.0m, but was 0.3x $48.020m = $14.4m. Don't get me wrong $14.4m, or $28.8m annualised is still a good number to be flowing the way of shareholders. But it may not quite be the 'Christmas has come early' gain that some think.

On a 'gain per share' basis this incremental $28.8m comes out as $28.8m/724.115m = 4.0cps, over an annualised 12 month period. But as I explained in the first half of this post, not all of this gain can be 'cashed out' by shareholders.

The amount that can be 'cashed out' at the end of the year is 4.0c x 0.714 'cents in the dollar' = 2.8cps

Let me reiterate, this is still good and still worth having. On a base share price around 70c, with no dividend being paid, this float top up alone represents a net yield of 2.8c/70c = 4%, equivalent to 5.55% as a 28% PIE gross tax return. And we have the expectation that, in the future, values will rise in line with government payouts to the oldies occupying these units as well. But I think given the kind of 'short term window' that Mr Market tends to look through, this IMV shows that at a share price of 70c OCA is trading roughly where it should be. There is no obvious 'bargain' to be picked up here.

I know this conclusion will be an anathema to some. But could it be that when all the ingredients of OCA are put together in a end of week 'Friday night fry up', that Mr Market has actually got the pricing right on this one?

SNOOPY

Good post Snoopy but I doubt whether many will believe you …or want to believe you ……because they haven’t believed me when I’ve made much the same comments (with supporting data)

….but you might be accused of down ramping lol

[ValueNZ]

In light of my last post, I think it is worth revisiting the latest balance sheet to be released which is the HY2024 result. That balance sheet shows a rise over the year of the ORA assets, with their value increasing to $935.726m. The previous half year result saw the ORA rights on the balance sheet at $870.476m. That is a good increase, but an increase of 7.5%. Good but nevertheless, well short of your 'expected float growth' of 15-20% p.a. ValueNZ.

It's worth noting occupancy fell during that period... But who cares about what happened over a one year period? Not me.

If OCA finishes up their pipeline over the next 8 years and occupancy returns to normal, with no additional development OCA will have a ~$2.4 billion float at around a ~12% CAGR. Additional development could easily push this to 15%-20%. Yes, this is my expectation and preference that OCA continues building up pipeline, but I will still do very well if for whatever reason they decided to stop investing in more developments.

You can look at these ORAs another way as well, adding on the ORAs of the assets held for sale being $15.548m (EOHY2023) and $15.737m (EOHY2024). If you add those onto the going concern totals, then the ORA rights sum to $951.463m at EOHY2024 and $886.024m at EOHY2023. That is a gain of 7.4% over the year. OK you can argue that the ORA assets 'being put up for sale' are transformational and not representative of the long term picture of the business. But I would also argue that these booked 'transformations' are taking longer to 'transform' than expected.

No comment as no significant relevance to the OCA's value.

I would also argue that the float is not all 'free money' as you claim. Becasue the most recent cashflow statement shows that fully one third of it is required to top up the cashflow for the day to day operation of the business that allows, amongst other things, the staff to be paid.

Next you talk about the float money combined with the existing equity earning a 5% ROA going forwards from all those new villas being constructed. In my view this is also too optimistic. I would argue that the real figure would be closer to 3%. OTOH I don't think your expectation of a 5% return on these new assets, as a sharemarket investor, is out of line. But Mr Market can fix this for you. How to turn a 3% return into a 5% return? Easy! Just write down the value of those investment assets by 2%/5% = 40%. So all Mr Market is doing is writing down the value of those new assets you are building by 40% for you, and you are getting the return you require! And unfortunately unless building costs absolutely slump, the market write down of the underlying assets is set to continue indefinitely.

What happens to OCA's cash-flow statements when they eventually decide to finish all development, or slow down development? AKA stop investing to grow float.

SNOOPY

See above comments.

[Rawz]

ValueNZ it could be difficult for OCA to grow the float above your estimate of 12% cagr unless they raise capital. Their debt/(debt+equity) has gone from 17% in 2017 to 38% today as per Winners summary sheet. The balance sheet strength they once had has been fully tapped for all current/historic development. 40% leverage ratio is the magic number all the RVs are trying/told to stick under it seems

[Ferg]

My analysis/tracking of Oceania goes back to IPO days

I’ll share imy master sheet of key metrics …posted below.. [snip] Here’s what my table looks like for Oceania …..I think it’s rather cool

Thanks for sharing that winner and nice to see others putting in the effort to understand OCA. Is your 'operating profit' number a balancing figure? The reason I ask is two fold: 1) the additions to equity for revaluations for the last half year for PP&E are there on pages 15 & 17 at $26.6m which I can't see in your figures, and 2) the 2 x realised values for underlying NPAT are not part of the financial construction of closing equity, rather those are 'off book' values that are used to calculate uNPAT. Instead there is $47m change in FV per page 14 that is added to equity via retained earnings - but this is not the same thing as the 2 x realised gains presented in the uNPAT calc's. Although I note you have a figure of $45.7m for your FV change- I can't see where that figure has come from.

[Snoopy]

When I say our investor gets back 50c in the dollar, I am not talking about any particular time frame. That statement applies to any time frame you care to choose. However that 50c in the dollar applies to the current net value of assets at any particular present moment. Not to the value of dollars that were in the pot the day you started your investment. So in this way I am accounting for the growth in the ORA over time.

But for this to be true, wouldn’t the investor have to buy in and buy out in the same time period? Which is unlikely at best and therefore a non-real world way of looking at things?

No, I am talking about buying and selling over any time period. There are no restrictions either stated or implied. I guess if you wanted to buy in and sell out without taking into account the inflation of the Occupational Rights Agreement over the years, then 'yes' you would have to buy and sell in the same time period. But why would you want to restrict yourself by planning to do that?

But the underlying equity does go up with time, as you suggest Cupsey, I expect with the ability of the residents to pay, which will equate to the rate of inflation, or the rate the government entitlement payments increase.

Ok, so on this point, you are saying the equity is going up with a rate of inflation or the residents ability to pay (I would call this the capital gain on the existing assets?, much like a capital gain on your home), but additional to this as time goes by is the equity of new assets as they are developed and come online into the system.?? So the equity growth at least in theory would be at a higher rate than inflation and capital gains (or losses) alone??.

Yes, that is right. Any new equity directed to building new facilities will compound the rate of growth of the company over and above the rate of inflation PROVIDED that is, these new equity build returns exceed OCA's cost of capital.

SNOOPY

[winner69]

Thanks for sharing that winner and nice to see others putting in the effort to understand OCA. Is your 'operating profit' number a balancing figure? The reason I ask is two fold: 1) the additions to equity for revaluations for the last half year for PP&E are there on pages 15 & 17 at $26.6m which I can't see in your figures, and 2) the 2 x realised values for underlying NPAT are not part of the financial construction of closing equity, rather those are 'off book' values that are used to calculate uNPAT. Instead there is $47m change in FV per page 14 that is added to equity via retained earnings - but this is not the same thing as the 2 x realised gains presented in the uNPAT calc's. Although I note you have a figure of $45.7m for your FV change- I can't see where that figure has come from.

Thanks Ferg

Thinking behind structure is that I (and many others) see Oceania mainly as a property development company. Logic then is to separate out property stuff like gains on sales and revaluations from reported profits and call the rest Operating Profit being the profit from running villages and caring for people. So yes Operating Profit is a balancing number. I do appreciate that a few odd things pop up in their expenses and these are included in that number …so no ‘normalisation’

The income statement has total changes in fair value (don’t overlook the amount in Other Comprehensive Income) and after picking up what they report as Realised Gains (on resales and development margins) I assume the balance is unrealised gains (like the 45.7m you mention)

That’s how I track Oceania (and others) and it works for me. Glad you took an interest.

[Ferg]

Thanks Ferg

Thinking behind structure is that I (and many others) see Oceania mainly as a property development company. Logic then is to separate out property stuff like gains on sales and revaluations from reported profits and call the rest Operating Profit being the profit from running villages and caring for people. So yes Operating Profit is a balancing number. I do appreciate that a few odd things pop up in their expenses and these are included in that number …so no ‘normalisation’

The income statement has total changes in fair value (don’t overlook the amount in Other Comprehensive Income) and after picking up what they report as Realised Gains (on resales and development margins) I assume the balance is unrealised gains (like the 45.7m you mention)

That’s how I track Oceania (and others) and it works for me. Glad you took an interest.

You're welcome. I think the development valuation gains are being double counted given you are driving the total back to reported equity. You have included the 2 x realised lines which are not part of the derivation of the equity value as well as the unrealised $46-$47m value which is. This has the effect of inflating the 'operating loss' {edit: since retracted, so ignore that} given it is a balancing figure. Although that will be partly offset for the $26m you are missing on the PP&E revaluation {edit: it IS offset fully, not partly offset}.

Edit: for clarity - the derivation of equity per 1H23 is +$26.6m PP&E reval + $47.4m change in FV. Total is $74m. You currently have $15.4+$12.9+$45.7=$74m....whoops, so I stand corrected. Your $45.7m is also a balancing figure. All good - cancel that.....move along, nothing to see here....

Edit #2: on reflection despite the split not being 100% technically correct based on the financial entries for deriving reported NPAT & equity, it is an interesting way of looking at it nonetheless. In particular it now has me thinking about the $26.6m PP&E revaluation versus your balancing figure of $45.7m....

[winner69]

Ferg …. Remember a few years ago one of their presos gave us a lecture how we had to look at Total Comprehensive Income rather than reported NpAT because of the way they treated PPE (mainly care suites I think) depreciation in Income Statement but fair value adjustments in Other Comprehensive