ARV - Arvida Group

Started by Plata, Jul 19, 2022, 12:22 PM

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Plata

New low today. Could it be because of the measly care funding increase on the table? A more interesting thing to consider is at what point could it be better to sell OCA and rotate into ARV...

kasper

Quote from: Plata on Jul 19, 2022, 12:22 PMNew low today. Could it be because of the measly care funding increase on the table? A more interesting thing to consider is at what point could it be better to sell OCA and rotate into ARV...
I see absolutely no point in rotating from OCA into ARV, the whole market excepting the likes of SPK is rubbish at the moment so new low nothing unusual.

Basil

#2
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/ARV/395444/374780.pdf

Page 4 shows the effect of the acquisition of villages last year driving down the percentage of care units and beds to just over 28%.  Not bad but SUM is lower so better positioned to weather the cost of care crisis.

Its important to understand that as of 31 March 2022 the ratio of care units to independent living units in OCA is 61:39.  61% care !!!!!  That leaves OCA really exposed to the absolute bludgeoning the Govt is giving to the care part of retirement sector's operations.
Below is a copy of a post I made on the other dreadful forum on why I sold out of OCA #12931 dated 27/05/2022.  I sold two thirds of my holding quite a while back averaging $1.40 and the rest in late May averaging $1.03.  Needless to say I am very pleased to be out.
QuoteOCA - Any is too many - I'm out !
I have finished my 5 years overview and a very brief synopsis is as follows.

The Float and Business Case
OCA floated on the premise that the new product called care suites would be transformational and generate far superior returns for investors.
As you can see from the presentation on page 19 http://nzx-prod-s7fsd7f98s.s3-websit...382/370976.pdf
the exact opposite of what was promised has occurred and returns on care have nearly halved from an EBITA margin of 21% to just 12%. Importantly returns were declining rapidly before Covid came along but its clear that Covid has exacerbated the issues.

Some of the reasons that explain this spectacular failure in execution of their business case as promoted at the time of the IPO appear to include:-
1. Rampant increases in the cost of human resources in the business with spectacular growth in employee costs from $103m when they listed to $156m last year an incredible 51.5% increase in staff costs.
2. A much slower increase in revenue growth from $171.8m to $231.1m over the 5 years period (34.5%).
3. Government underfunding has seriously undermined their business case and the premiumization of care hasn't worked.
4. Care suites have not met wide market acceptance and there are a total of ~ 450 unsold units inclusive of ILU units as at balance date 31 March 2022, a whole years stock. (Care suites are often initially let out as premium accommodation until they are sold, see footnote at bottom of page 31).

As a result of the spectacular failure of care suites and the systemic underfunding by the Govt of basic care (which and I am going off memory here was just on $100m in 2022 so is a huge part of their business model) underlying eps has declined from 8.60 cps in their first full year of listed operations in 2018 to 7.98 cps in 2022 and decline of 17.5% in real terms if you account for inflation.
As I have pointed out before the company has no pricing power with care suites which were only up 1-2% last year and have not kept pace with the real estate market.
Ultimately from personal experience with my Mum I believe customers are reluctant to commit to an ORA model when they don't know their longevity.

Looking forward to the next 5 years
I expect the cost of provision of care services to continue to experience rampant inflation pressures as a worldwide shortage of care and nursing staff causes huge issues with demands for more money and staff shortages. I also expect the Labour Government will play hardball with retirement village companies and continue to make them heavily subsidise care operations from other parts of their business.
This is going to cause an indefinite period during which OCA will generate very low and completely unsatisfactory returns from care.

So how long will it take OCA to execute their Pivot to independent living units so they represent more than 50% of the business model ?

Looking at page 31 and the PIE charts.
Its important to understand that currently the ratio of care to independent living units is 61:39
There are 1957 units in their development pipeline and 71% of them have already been designed and consented so it would be very difficult to change consented developments.
If they can execute at a sustained rate of 300 units per annum the pipeline will take 6.5 years to complete, a total of 11.5 years since they listed. (Please note that at the time of the listing we were told the business transformation would take 6 years)
As a result of a further 6.5 years of development they will end up with a care to independent living unit ratio of 55:45
In other words it takes a full year to move the needle one percent from care to ILU.

Conclusion
The business case upon which OCA floated has not worked. Its actually been a very poor failure in a period of strongly rising house prices, (DYOR on how much SUM grew underlying earnings in their first 5 years by way of comparison)
Care suites are not meeting wide market acceptance and OCA has no pricing power with them or basic care which combined is currently 61% of their business model.
Despite this they continue a heavy development pipeline of more care suites with most units in FY23 being care suites.

Its one thing to say you are going to pivot to independent living units but it would appear it will be 7-10 years before they have more ILU units than care, (barring major ILU village acquisitions which could somewhat speed up the process)

Seeing as this is an incredibly intense care focused business model and will be for the foreseeable future investors need to decide for themselves whether the intense cost pressures faced by those providing care services will abate anytime soon so that OCA will earn a materially better margin on its services. I think this is extremely unlikely as shortages of staff is a worldwide issue and Covid isn't going away anytime soon. Its very important to understand that even in 2028, (barring major acquisitions which might change the mix a little) OCA will still be predominantly a care based business operation.

People who believe that there is more money to be made in independent living focused business model's can execute their own pivot in less than a minute on the market, not the decade it will take OCA !

Going forward I think this will seriously underperform the others in the sector for the foreseeable future so I completed my exit from the company this week. I think the whole sector faces very serious headwinds for 2022 and potentially 2023 as well so I may remain on the sidelines for some time. In addition the Government review of this sector is very concerning and serious Government underfunding is highly likely to continue under Labour into late 2023 at least.

When the time is right I will invest the proceeds of my sell down in SUM with its well proven business model that has generated an average annual compound growth rate of 33% per annum since it listed.

I will leave you folks in peace on this thread now and conclude by wishing shareholders good luck.

I know some will hate my post and have counter points and that's fine. For the foreseeable future my time with OCA and debating it is over.
I certainly won't miss the headache's of interpreting their financial statements !

Basil

First preference in this sector is Cash.
then
SUM
ARV
RYM
OCA

Plata

ARV has way less care while maintaining continuum of care, and yet is priced quite similar to OCA. Do you hold ARV kasper? Do you think OCA will out perform ARV going forward, if so why?

kasper

Quote from: Plata on Jul 19, 2022, 01:08 PMARV has way less care while maintaining continuum of care, and yet is priced quite similar to OCA. Do you hold ARV kasper? Do you think OCA will out perform ARV going forward, if so why?
No I don't hold ARV only OCA and RYM, I think any of these stocks are a very good long term hold and because I make my decision based on an inside view of the sector I prefer OCA/RYM, if I had to go into care I would choose OCA and for the combo of care/independent living I would choose RYM.

Whacc

#6
Quote from: Basil on Jul 19, 2022, 12:50 PMIts important to understand that as of 31 March 2022 the ratio of care units to independent living units in OCA is 61:39.  61% care !!!!!  That leaves OCA really exposed to the absolute bludgeoning the Govt is giving to the care part of retirement sector's operations.


I'm not so emotionally invested in OCA as a stock that I really care, but interested to know why you think this "absolute bludgeoning" will be worse than the "absolute bludgeoning" that RV ILUs are going to take from the downturn in the housing market??

Buying into an ILU is a highly discretionary decision.  Most people in the target socio-economic demographic for the listed players will have a perfectly good [or more than perfectly good!] house, they can defer the decision to leave until they feel they're getting "full value" for it (whatever that concept is).

Care is non-discretionary.  If you're assessed for care then you objectively **NEED** care.
Premium care (i.e. with development margin, DMF, and resale gains) is still a reasonably profitable endeavour last I checked.

I'd rather have a portfolio of premium care fully occupied than a whole lot ILU stock sitting unsold.

kasper

Quote from: Whacc on Jul 19, 2022, 02:55 PMI'm not so emotionally invested in OCA as a stock that I really care, but interested to know why you think this "absolute bludgeoning" will be worse than the "absolute bludgeoning" that RV ILUs are going to take from the downturn in the housing market??

Buying into an ILU is a highly discretionary decision.  For most people that age they will have a perfectly good house, they can defer the decision to leave until they feel they're getting "full value" for it (whatever that concept is).

Care is non-discretionary.  If you're assessed for care then you objectively **NEED** care.

I'd rather have a portfolio of premium care fully occupied than a whole lot ILU stock sitting unsold.

OCA are reducing their care % as time goes on, will probably end up around 50% like RYM and care hasn't stopped RYM from having returned the most profit to shareholders since its inception than any other listed company in the sector when you take the share split they had into account.

BlackPeter

#8
Quote from: kasper on Jul 19, 2022, 03:02 PMOCA are reducing their care % as time goes on, will probably end up around 50% like RYM and care hasn't stopped RYM from having returned the most profit to shareholders since its inception than any other listed company in the sector when you take the share split they had into account.

Difficult to compare them from inception ... given that they all started at different (not comparable) times.

However - if I compare just the share value over the last 5 years, then the market treated OCA even slightly better than Ryman, and this despite OCA paying ways superior dividends. (Slightly) more capital gain plus more dividends - juicy!

OCA (the orange line) is clearly the better option... just look at the facts :) ;

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winner (n)

nice chart peter ..... but I prefer the SUM / OCA one

SUM is the blue line by the way

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kasper

Quote from: BlackPeter on Jul 19, 2022, 03:53 PMDifficult to compare them from inception ... given that they all started at different (not comparable) times.

However - if I compare just the share value over the last 5 years, then the market treated OCA even slightly better than Ryman, and this despite OCA paying ways superior dividends. (Slightly) more capital gain plus more dividends - juicy!

OCA (the orange line) is clearly the better option... just look at the facts :) ;

You cannot view this attachment.
Yes but what i was referring to was that RYM at its peak had returned around 55 times its initial investment for those long holders which is far superior to any other listed company in the sector and far outstripping even SUM by a country mile (And i highly doubt SUM will ever match it even given the same time frame)

Basil

#11
Quote from: Whacc on Jul 19, 2022, 02:55 PMI'm not so emotionally invested in OCA as a stock that I really care, but interested to know why you think this "absolute bludgeoning" will be worse than the "absolute bludgeoning" that RV ILUs are going to take from the downturn in the housing market??

Buying into an ILU is a highly discretionary decision.  Most people in the target socio-economic demographic for the listed players will have a perfectly good [or more than perfectly good!] house, they can defer the decision to leave until they feel they're getting "full value" for it (whatever that concept is).

Care is non-discretionary.  If you're assessed for care then you objectively **NEED** care.
Premium care (i.e. with development margin, DMF, and resale gains) is still a reasonably profitable endeavour last I checked.

I'd rather have a portfolio of premium care fully occupied than a whole lot ILU stock sitting unsold.


The market evidence is that OCA are the ones with a whole lot of care suites unsold...450 units unsold as at balance date, a whole years worth of sales.  The care suite thing hasn't worked as fully explained in the other forum.  Earnings growth is zilch with OCA and in the same period of time SUM have grown earnings by ~ 2.5 times and the results are presently graphically above in Winner's post.  The best guide to the future is the past.  SUM business model is working and OCA isn't and will continue to underperform as care cost growth outstrips funding costs.  The DMF thing for care suites is almost a red herring because they simply aren't selling in sufficient numbers to outstrip the care costs associated with running them.
OCA share price is in the doldrums for profoundly good reasons.  ARV not much better with an unproven CEO.

Over the last 5 years underfunding of care has ~ halved OCA's ROI in the care sector.  This looks set to potentially worsen with even greater level's of underfunding.  On the other hand SUM's ILU's have not kept pace with the growth in the real estate market and recent broker research showed that their current pricing was at a very low historical point relative to house prices.  Simply put they can capture huge embedded value in future resales and I believe they won't need to adjust their prices down whereas OCA have a LOT of unsold care suite stock they can't seem to sell and are locked in with heaps more consented care suite developments set for delivery in the years ahead.

RYM also now with an unproven CEO...first mover advantage and the supreme leadership excellence of Simon Challis are advantages they lost a long, long time ago.  I'd own ARV ahead of RYM.  Notice that all listed RV companies have relatively new unproven new CEO's except SUM.  Notice too that SUM has outperformed everything else under Julian and Scott's leadership in the last 5 years both in terms of earnings growth and share price growth.

Stick with the Winner but wait for the tide to change first !

Whacc

#12
Quote from: Basil on Jul 19, 2022, 04:52 PMThe best guide to the future is the past.  SUM business model is working and OCA isn't.

Well that's called hindsight bias and isn't necessarily true.

Do you expect HPI to continue as it has in the past in a rising rate environment, which we haven't seen for... 40 years?

Quote from: Basil on Jul 19, 2022, 04:52 PMOCA share price is in the doldrums for profoundly good reasons.  ARV not much better with an unproven CEO.

Com'on man, they're all in the 'doldrums' if you use 12 months ago as the basis.

Quote from: Basil on Jul 19, 2022, 04:52 PMNotice that all listed RV companies have relatively new unproven new CEO's except SUM

I don't disagree with the first half of that statement but I'm not entirely sure why you think Scoullar is 'proven'.  He hasn't been in the seat much longer than anyone else in the sector, if at all (only March last year).
So he's proven on the basis of 9 months of record HPI growth and all the embedded gains that occurred prior to that?

Quote from: Basil on Jul 19, 2022, 04:52 PM450 units unsold as at balance date, a whole years worth of sales

Are you including transferred residents in this figure?  If so I don't think that's fair criticism.  Those suites are not available for sale and are likely providing a positive earnings contribution (certainly compared to the counterfactual of opening a care facility empty).

I'm not even a cheerleader of any of these stocks, I just think this bogus rationale is pretty funny to observe.

Basil

#13
Scott  Scoullar was appointed CFO in 2014 and deputy CEO in 2018.
He has been deeply involved in the business for 8 years.  I know he is responsible for many of the pricing decisions on villages that have been driving the growth in earnings over many years.

I put a lot of stock on my FA analysis of underlying eps over a period of time, usually my starting point is a 5 year timeframe.  SUM is smashing it out of the park as it consistently has since it floated in late 2011 whereas OCA has no growth in underlying eps despite being listed for more than 5 years now.

I look at long term trends to see what's working and what isn't because they're usually very reliable indicators of what's going to work best in the future.  For example ARV has had very modest underlying eps growth in its time as a listed company and I think that's a pretty reliable indicator for the future.

OCA's unsold stock is straight from the most recent call.  They fill some of their care suites on a temporary basis with people paying a PAC until they can sell them under a DMF.  If you strip out the care suites being temporarily occupied in this manner you get 450 unsold units.  I think that's a really big problem.  There's another 113 being delivered this half at Lady Allum village in Milford.  I believe they have a real problem with market acceptance of the care suite model... but I sold most of my shares at $1.40 so what would I know...

My research based on known information at the last result shows they can only reduce their ratio of care suite to independent living units by about 1% per annum with their current consented pipeline, (barring other village acquisitions).
By 2028 they might get to 55:45 Care beds and suites to independent living units.
In other words OCA are front and central for many years to come when it comes to the impact of the Govt's underfunding of care costs.
Unless OCA radially change their business model and / or their future build program I think they will continue to perform in a "runt of the litter" manner in this sector.  They have a shocking track record when it comes to human resource costs growing at vastly higher than the inflation rate and I believe its a systemic issue going forward.  Maverick on the other forum in one of his last posts simply dismissed the seriousness of this issue with a statement to the effect that staff costs will come down at some stage.  I think this is just wishful thinking.  Objectively the long proven trend of OCA in that regard is deeply concerning as its basically halved their returns in the care sector since they listed despite all the much touted benefit's of their care suite transformation process.

Even on a cursory glance at OCA's presentations and reports you will read significant self congratulatory statements about how they're growing DMF this and EBITDA that and how they're doing so incredibly well on the ESG front.  There's nothing whatsoever on how costs are growing rampantly year on year every year or that underlying eps is in the doldrums and has been for years.

At the end of the day the market is a weighing machine and SUM companies are growing earnings per share nicely and others...oh dear...

 

Whacc

#14
Quote from: Basil on Jul 21, 2022, 12:29 PMScott  Scoullar was appointed CFO in 2014 and deputy CEO in 2018.
He has been deeply involved in the business for 8 years.  I know he is responsible for many of the pricing decisions on villages that have been driving the growth in earnings over many years.

It's funny because Jeremy Nicoll at Arvida followed **exactly** that same path but you specifically said  "ARV not much better [than OCA] with an unproven CEO".

Quote from: Basil on Jul 21, 2022, 12:29 PMI look at long term trends to see what's working and what isn't because they're usually very reliable indicators of what's going to work best in the future. 

It's not actually, that's why all investment advisors and wealth managers include the following statement in all their disclosures: "Past performance is no guarantee of future results"

Quote from: Basil on Jul 21, 2022, 12:29 PMMy research based on known information at the last result shows they can only reduce their ratio of care suite to independent living units by about 1% per annum with their current consented pipeline, (barring other village acquisitions).
By 2028 they might get to 55:45 Care beds and suites to independent living units.

My point is who cares?  ILUs are hardly a wonder product compared to care as I outlined previously.
They're in essence just a straight bet on the residential housing market.
If ILUs are such a fail-safe strategy then why was MET such an abject failure with 95%+ ILUs?

I'd prefer to watch the the next 6 months play out before making bold statements and aspersions on any given strategy.
I'm still a big fan having a mix of product and the full continuum of care model.