OCA - Oceania Group - retirement villages

[mistaTea]

The best way is to;

Get the Summerset IPO document and read that in its entirety.

Read all of the Summerset Annual reports and pay very particular attention to the notes to the financial statements, study the way the numbers move over the years particularly between the three statements.

Get the Oceania IPO document and study it in its entirety

Read all of the OCA reports and follow the same process as you did with Summerset.

Along the way while you are doing this work, stop often and ponder the economics and the nuances that are outside of the financial statements.

Read the Focused compounding analysis that ValueNZ posted

Study the Sharetrader SUM forum from 2011 through 2014.

Meet up with someone on Ferg or Mav's level of understanding of these businesses and spend a day or two talking it over and getting them to explain anything you don't understand after already having undertaken the work above.

But Ferg has done all of that and still made a number of assumptions…

[SailorRob]

Below are the Revenue and net profit figures for SummerSet from 2013 through 2023.

The reason I have used SUM is that nobody is challenging the business model like they are with OCA

What you all need to ask yourselves is how can net profit be higher than total revenue for a decade, AND for it to be true and accepted by the market.

These businesses are not easy to understand and the accounting is very complicated, which is forced on them by the rules. The conventional rules are not made for businesses like these.

Some things to think about, the inter relation between the operating business and the development business, the relationship between CAPEX and the cash flow statement and the OPEX and the income statement. Think about how the development margins are displayed and recognised on the income statement.

And finally and most importantly, think about the biggest reward and the very golden Goose - the ORA money is totally invisible on the income statement. You will never see this as profit, only the DMF and even then only as it's recognised/accrued. You will see the benefits of having this money appear over time through the income statement but in a convoluted way.

I will be blunt here, most people on this forum have no business owning this company, the accounting is extremely complex and the model is not easy to understand as we see here every day.


Revenue 45, 54, 68, 86, 100, 137, 154, 172, 202, 237, 270

NPAT. 34, 54, 84, 145, 239, 214, 175, 230, 543, 269, 436.

[SailorRob]

But Ferg has done all of that and still made a number of assumptions…

None of the small assumptions change the bigger picture - that he is comfortable the points raised by Aaron are not material.

[bull....]

Thanks to SR for posting the transcript. It sounds like there was a testy exchange with Aaron which started with this question:



It appears as if Aaron caught Brent & Kathryn on the hop, but the numbers can be broken down like this:

FY23:

• OCA FY23 presentation page 14 had a graph showing development debt of $446m (Aaron quoted $550m) and 'development assets' of $600m.
• Development debt last year was made up of bonds of $225m + the development facility of $221m.
• Development assets included land $112m, assets under construction $114m + unsold stock of $374m.

Note that the Corporate facility is excluded from the development debt calculation given that was used to fund the 'as built' acquisitions Remuera Rise & Bream Bay. Also note that 'development assets' includes the book value of 'Investment property under development' per note 3.1 and the book value of the column 'Freehold Land and Buildings Under Development' per note 3.2 plus the valuation of new unsold stock. The numbers reconcile ok.

Two issues I can see straight off with this graph is that I suspect some of the undeveloped land at Bream Bay is included in the assets, but has been excluded from liabilities, so there is a potential mismatch. In addition, the book value of the development assets includes fair value revaluations, which were never paid for using debt. But that is a technical observation to which we can turn a blind eye for now. But the point OCA are trying to make is they are showing they have assets that are worth this much that are either being developed or have been recently completed and are available for sale, and we only have this much debt on them. Fair enough.

So now we understand the numbers on that graph that Aaron was referring to.

FY24:

• OCA FY24 presentation page 14 had a graph showing 'development debt' of $534m (Aaron quoted $630m) and 'development assets' of $612m.
• Development debt this year is made up of bonds of $225m + the development facility of $309m.
• Development assets included land $112m, assets under construction $147m + unsold stock of $353m. These values reconcile to assets under construction.

I suspect what caught them on the hop was the numbers quoted by Aaron were not quite right. But in answering such a question, you never 'guess' as to what the answer is. You defer until you have the numbers in front of you. And you certainly don't verbalise the musing that go in your head when you hear such a question. Notice Brent did handle the subsequent question correctly:



Back to Aaron's first question. What actually happened is 'development debt' increased by $88m but 'development assets' only increased by $12m during the year. This is what Aaron wants to understand - what is this gap of $76m? Notice Aaron thought it might be due to wholesale devaluations of unsold stock which was not the case. And I suspect it has nothing to do with transfers between the Corporate and development facilities given the balance on the Corporate facility remained unchanged (happy to be proved wrong).

This is typical of the sort of question and/or analysis you get when you look at half the picture. An answer eventually came out that there were deferred settlements on some new sales plus other musings. This is what I can see when we look at a few different numbers:

• Firstly Accounts Receivable increased from $109m to $125m which would account for *at least* $16m. In the transcript we heard new sales must pay down the development facility. As the AR balance increases, then the development debt facility is not repaid. This $16m is further proved by comparing new sales volumes x average sale prices, to the actual receipts for new ORAs during the period.
• This is a surprise to me that OCA are offering care suite ORAs 'on tick' per the urgent needs comment and also the 10% deferred settlements. But it is what it is.
• The reason I say 'at least' $16m is because we do not know the split of new sale receivables versus resale receivables. In addition, receivables in excess of 12 months increased by $10m during the year - some of that could also be from sales of new stock.
• Also, note that the cost of 'other assets under development' increased in value by $33m.
• Lastly, under the 'completed investment property' section in note 3.1 there is $60m of capitalised expenditure that was not transferred from 'investment property under development'. Last year this figure was $5m. I suspect that $60m was also paid for using the development facility but it is not showing up under the 'development assets'. They mentioned the ability to shuffle funds between facilities - maybe this is that.

Adding all this up: $16m in AR + $33m other assets + $60m capitalised directly - $21m reduction in new stock = $88m which more than explains the 'gap' of $76m.

Conclusion: explained / solved. Not an issue.

Kathryn: where shall I send my bill?

i dont think arron got it wrong
is it not pg 15. 612m of development assets and pg 16 net debt of 637m what aroon is talking about? the development assets dont cover the increase in debt

[winner69]

Hi Winner,

As per the red txt, can you point me to where they highlight total comprehensive income? I thought they highlight 'Underlying earnings' which is a totally different thing.

Thanks in advance.

SR

Even the other day in the results release it was put first -

Total Comprehensive Income of $70.5m and Net Profit after Tax of $31.5m for the year ended 31 March 2024 were 104.3% and 104.5% higher than the prior corresponding period of $34.5m and $15.4m respectively.

And they have at times educated punters as to what it means like in that graphic I posted yesterday

Usually a bigger number than NPAT so why not skite about it.

Yes they do Underlying Earnings as well but you get the feeling they prefer Underlying EBITDA more

It’s the Oceania way of doing things …put out heaps of metrics ..helps the obfuscating

[kiwical]

I will be blunt here, most people on this forum have no business owning this company, the accounting is extremely complex and the model is not easy to understand as we see here every day.

I don't get this statement. I have investments in many companies I don't fully understand. Personally I don't think it's necessary to have a nuts and bolt deep understanding of every nuance of a business. If that were true I doubt anyone would invest in anything. My main reason for buying OCA is the ageing population. Simple as that for me!

[Bikeguy]

“My main reason for buying OCA is the ageing population. Simple as that for me![/QUOTE]”

Seems like a pretty fair opinion to me, no one escapes this (aging) and it’s a fundamental driver of these businesses

[Ferg]

None of the small assumptions change the bigger picture - that he is comfortable the points raised by Aaron are not material.

That is correct.

Given the convoluted nature of the accounts I set aside some time once a year to fully reconcile the OCA accounts so that I know what is going on. I did that last night. I start with the Opening values on the Balance Sheet and then process every debit and credit for every line (plus some more) by processing the values from the P&L, the cash flow, various notes and the presentation. This allows me to 'prove' the closing values on the Balance Sheet. It's no small task hence my closing quip to Kathryn. I do it to see what has been going on behind the scenes and if there are any accounting 'funnies' that concern me.

Addressing mistaTea's question these statements are not assumptions: $60m capex coded directly to investment property which is not a 'development asset', $33m capex on dev assets and negative $21m reduction in new stock. These 3 alone add to $72m, versus $76m to be explained. The last 2 items are known to directly impact dev debt per statements made by OCA. If someone wants to prove how the other $60m capex was funded then I'm all ears but it is a very safe assumption this was funded by dev debt if you analyse the numbers. As an aside (and the BS / sniff test), it is business 101 to use long term debt to fund long term assets so it makes sense. Based on the flow of debits and credits, and the requirement for new sales to repay dev debt, the last $4m must be sitting in accounts receivable, although I suspect the actual value is higher given other factors. And if it's not that then it's not material to answering the question.

I often see people jump to conclusions (online and in the real world) and assume something is incorrect based on their not understanding something. I hope the professional analysts are not starting from that position. It's a shame OCA couldn't answer it succinctly because it is not a good look - but it wasn't helped by Aaron quoting the wrong numbers. But OCA did not help by departing from the historic norm and using dev debt for non dev assets and not explaining that clearly enough.

[Ferg]

i dont think arron got it wrong
is it not pg 15. 612m of development assets and pg 16 net debt of 637m what aroon is talking about? the development assets dont cover the increase in debt

'Development assets' is a specific measure used by OCA per the reason I outlined. To compare just the movement in that to the movement in total or nett debt is only looking at half the picture. If you follow the numbers I posted and the references, you will see the $60m of capex coded directly to investment property was (inadvertently) omitted by Aaron. So whilst he might not be 'wrong' with the numbers he quoted, he was 'wrong' with the comparison he tried to make.

[Balance]

“My main reason for buying OCA is the ageing population. Simple as that for me!

”

Seems like a pretty fair opinion to me, no one escapes this (aging) and it’s a fundamental driver of these businesses[/QUOTE]

Fair opinion indeed but it's the equivalent of saying that everyone has to eat and that's a good reason to invest in growing food?