OCA - Oceania Healthcare

[winner (n)]

Good story in NBR (if you can access)

Should allay some fares

https://www.nbr.co.nz/investment/wer...-oceania-boss/

And a cool photo of our brent at work

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[BlackPeter]

I have tried to make a conscious effort to rise above some of the personal attacks on here but its challenging at times when some get annoyed with their losses and look to blame shift on to me.

By way of further clarification.  Firstly, it's been an extraordinary year in the markets with extreme volatility unlike anything I have seen bar the initial onset of Covid in 2020 and the GFC. The OCA report in late May 2022 bitterly disappointed me, just like the current print really disappointed others.  I never get emotional about stocks any more, it's a numbers game for me pure and simple and if I sense risk to my capital, I am very quick and proactive about taking action to mitigate or eliminate that risk.  I've been refining my ability to sense reward, risk and corporate B.S. for over 40 years but I still get caught out now and again as does anyone else.  Staring like a possum at the approaching headlights of a runaway train is not something I am into doing, it almost always ends very badly. 

I always post very promptly after exiting a position and always make a very fulsome effort to explain why in very fulsome detail and am cognisant that some follow my lead so I go to great lengths, (often to the extreme dislike of remaining holders), of effort to very clearly articulate why I have entered or exited positions. 

If people want to follow me in or not that's their decision. I don't ask for followers, so they are free to choose whoever they follow, me or anyone else or their own nose for a feed.  All I expect is that for those that follow me, if you keep holding after I have clearly articulated why I have exited, you own that decision for yourself and don't blame me if the custard hits the fan.  Once in a blue moon I very occasionally allow myself the luxury of wondering how many people I have helped over the years.

Back to OCA - Its good to see the ferocity of the care cost headwinds are not increasing further but they remain very strong for the foreseeable future and OCA is obviously far more exposed than other sector participants.  I believe the brokers are not understanding that care suites are not finding good market acceptance.  A clue to how much better the market appears to be receiving the fully refundable deposit scheme that RYM runs for care facilities can be seen in RYM's recent accounts for those that want to do the legwork and go looking for it.

Not sure its helpful, but I try ...

Every stock has at any time risks as well as opportunities attached to it.

Many of us tend to see just the opportunities when the stock goes up and to emphasize just the risks when the stock goes down, basically amplifying the trend. It's just part of being human (or canine?) to suffer from a mixture of confirmation bias plus group think.

Some of us have a investor perspective (focussing on long term trends) and others have a trader perspective (focussing more on the near future). Both views are absolutely valid, but it is useful to know which of these views the other side of the discussion occupies.

Some of us try to express a balanced view (and no, I don't mean like the so called poster in the other forum) and others give at any time their unfiltered views - expressed with authority. Sometimes it might be worthwhile to think about how a post might be interpreted by a public we don't really know.

We should all contribute our unique views ... this is what forums like this are about, but repeating even a valid issue in isolation again and again might not be as useful ... and some might consider it as rubbing salt into their wounds.

I think at times we all could try to be a bit more balanced and specific - and sometimes we all could be as well a bit more considerate of others.

Anyway - I agree that everybody needs to read the forum rules - and clearly, given that nobody is allowed to give advice here, it is everybody's own decision whether they buy, sell or hold. At any time.
 

[snapiti]

quite often there is a disparity between how the company wants it's result and future outlook perceived when compared to a changing macro back drop.
Always pays to have ones BS radar working well

[winner (n)]

May as well put up the updated EPS trend chart. Just as well earnings don't matter - it's the story that counts.

EPS based on Underlying NPAT since listing. Middle part of chart may be a bit wonly because they changed Balance Dates and the Definiition of Underlaying NPAT (made it a bigger number so the numbers around 2017/2018 may actually be understated on a true comparative basis)

Underlying NPAT is just a guess anyway - the Oceania definition 'Underlying Profit is a non-GAAP measure of financial performance and considered in the determination of dividends. The calculation of Underlying Profit requires a number of estimates to be approved by the Directors in their preparation. Both the methodology and the estimates may differ among companies in the retirement village sector.'

For what its worth here's my chart. I dare not comment

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Attached Images Attached Images

[winner (n)]

quite often there is a disparity between how the company wants it's result and future outlook perceived when compared to a changing macro back drop.
Always pays to have ones BS radar working well

That is so right snapiti

A lot not said by them

Love Brent being quoted in NBR as saying 'We're starting to see the market copy us' .... seems a pretty egotistical character this Brent

[snapiti]

off topic I know,
I got a mate who runs a medium sized business, always wants poeple to think the business is running well.
He has everyone on contract and was telling me that 30% of his staff were not renewing their contracts. Certainly gave me the impression he was keen for them to renew.
Interesting I know one of these staff members and they told me all the staff were interested in renewing their contracts but the boss did not have enough work for them.
Portrayed perception versus reality.

[Basil]

May as well put up the updated EPS trend chart. Just as well earnings don't matter - it's the story that counts.

EPS based on Underlying NPAT since listing. Middle part of chart may be a bit wonly because they changed Balance Dates and the Definiition of Underlaying NPAT (made it a bigger number so the numbers around 2017/2018 may actually be understated on a true comparative basis)

Underlying NPAT is just a guess anyway - the Oceania definition 'Underlying Profit is a non-GAAP measure of financial performance and considered in the determination of dividends. The calculation of Underlying Profit requires a number of estimates to be approved by the Directors in their preparation. Both the methodology and the estimates may differ among companies in the retirement village sector.'

For what its worth here's my chart. I dare not comment

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Attached Images Attached Images

A picture says a 1000 words, thanks for that.
Well that muddies the waters even more doesn't it.  One of the many things they don't tell you is that if you took out the one-off $1.8m wage subsidy repayment from the previous corresponding period underlying earnings this period would be lower still.   If as they are suggesting, there are material differences in the methodology between different retirement companies on the measurement of underlying earnings maybe we should be more focused on statutory earnings which were just 1.6 cps or maybe my time tested and successfully used shortform earnings calculation of just focusing on the change in NAV from one period to another is the best way of measuring total comprehensive earnings (which was down 4 cents a share this period).  As you say, underlying earnings involve significant amounts of internal estimation are therefore little more than a "hopefully", educated and professional guess.
Think I will stick with my short form total comprehensive earnings methodology after all the change in NAV encapsulates the change in the total asset position of the company from one period to the next.

Seeing as they state that their methodology of underlying earnings is "considered in the determination of dividends" doesn't that suggest the reduction in dividend from 2.1 cps last year to 1.9 cps this year means underlying earnings per share may have actually declined ?...i.e. the directors are normalizing the $1.8m care subsidy repayment last year compared to this year but paint the situation differently in their presentation materials. 

To me, ignore all their positive talk, (especially the almost endless ESG nonsense), and ask yourself why the dividend has been reduced? That's a very good place to start thinking about this most recent result.
.
Brent opining "bragging?" about other companies copying their care suite concept implies it's been successful.  At any point in their presentation materials do they tell shareholders how many unsold care suites they have ?  If not why not ?  Other companies are quite transparent about how many unsold units they have. 

Is there any detailed material on why they have put a whopping 10 retirement villages on the market to sell or do they just sweep this "minor" issue under the carpet like its nothing and wax lyrical about their 1 pending flagship village at the Helier ?  I reckon these guys take the old cliche "accentuate the positive and eliminate the negative" to a whole new level.

To me, the reduction in dividend tells you all you really need to know about whether this company is growing earnings or not.  The dividend is down ~10% and the company's earnings are going backwards mainly because they can't sell their mountain of hundreds of unsold care suites.

Don't shoot the messenger, I am just interpreting their complex financials' as I see it.

[Waltzing]

https://www.youtube.com/watch?v=f3jdbFOidds

[Plata]

I think the dividend reduction is less about whether or not earnings have grown and more about retaining capital as the LVR creeps up and interests rates rise. As for unsold care suites, occupancy on the care segment is something like 92% which doesn't indicate to me there are hundreds unoccupied as you suggest. If you add in the PAC beds/suites then sure there does look to be hundreds of beds/suites that are not occupied via an ORA. Is that a problem? Maybe. The other thing to keep in mind is they are demolishing stuff all the time and they have to stick the now homeless occupants in another unit. I am not sure how they classify that situation though, is the unit they move to classed as occupied? The more brownfield development there is the more this situation can influence occupancy %

[Basil]

If you add in the PAC beds/suites then sure there does look to be hundreds of beds/suites that are not occupied via an ORA. Is that a problem?

Clearly, It depends on what daily rate you're getting as a PAC charge and what the occupancy rate is.
From the presentation their EBITDA margin on care including PAC charges is 12%, (same level as PCP) but down from 19% when they listed.
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/OCA/402826/384013.pdf

The result was headlined Care Suite Premiumisation delivers results.  Yes its delivered a result but its a flat result and occupancy is actually down from 92.5% to 91%.  I believe most of the brownfield development has already been completed.
http://nzx-prod-s7fsd7f98s.s3-website-ap-southeast-2.amazonaws.com/attachments/OCA/402826/384010.pdf

How is their strategy successful for shareholders when everyone else, (better facilities for residents, more pay for staff, management and directors) is doing better (which makes their mantra "believe in better" seem appropriate), except for the inconvenient truth that shareholders get a 10% haircut with their dividend ?  Does that seem fair ?  Its not the first time their dividend has been cut either.

[Plata]

https://www.oceaniahealthcare.co.nz/aged-care-pricing

According to the website, all beds (premium+standard) are on PACs with the care suites on ORAs. So I'm not so sure the PAC revenue is useful to indicate problems with selling ORAs.

[Basil]

https://images.oceaniahealthcare.co.nz/wp-content/uploads/2020/11/09181641/Oceania-Premium-Accommodation-Charges-Final.pdf

PAC charges are quite inexpensive, (these rates are the latest available ones from their website).  I guess it begs the question why anyone would bother with Care suites if you can get a premium room for a very modest daily charge ?  Also letting out Care suites under a PAC at say $40 a day extra = $14,600 per annum whereas if they sell that care suite (average price about $315K), they get 15% of that in the first year = $47,250.  That's a difference of over $30,000 in the first year.  Multiply that by (my estimate) 440 unsold care suites and that's $20.68m revenue gone begging.  If only they could sell their care suites at even half the rate they're building them...
I guess all the unsold care suites explains why their cash flow is down so much this half too.  Cash flow is the lifeblood of business.

[Plata]

If there are 440 unsold care suites that would be a pretty significant part of their portfolio. How have you come to that estimate?

[Basil]

Thanks for asking because I had to look back on the last analysts call i had time to listen too ~ 6 months ago, notes posted in the other place on 23 May 2022.

Negatives
1. The longstanding issue with staff costs rising much faster than operating revenue continues and in fact has got worse this year than ever before.
Total employee costs compared to last years annualized figure are up a staggering 12.65% substantially worse increase that the systemic long run average of 7-8% increase per annum.
2. The repayment of the wage subsidy of $1.8m is completely illogical considering the Govt's systemic underfunding of basic care services and is a very poor decision in my opinion.
3. Even backing out the wage subsidy repayment staff costs increased 11.3% against Rest Home and hospital care fees only up 5.3%.
4. Importantly Government funding is unchanged on the year !
5. Staff costs in total amounted to ~ 67% of all revenue received and importantly the increase this year in human resource ate up 91% of all the increase in gains made from the increases in premium rooms and DMF fees so the long run trend of staff eating ostensibly all the gains from the business transformation process over the years continues unabated.
6.Underlying eps of just on 8.0 cps for 2022 by my calculations in real inflation adjusted terms, (inflation is a serious matter now), is now 17.5% lower than in 2018, the first full year.
7. From my review of the financial statements other costs in the business are also rising at a pace that's concerning.
8. Delivery of new units in 2022 was disappointing, the second year in a row.

Notes from the analysts call on Friday afternoon
1. Direct Covid costs of $2.5m in FY22 are unlikely to repeat in FY23. Comments were made that there was also indirect Covid costs but no explantion was offered as to whether they might repeat.
2. Remuera Rise average age of residents 83.6 years, sounds like 1 resident has vacated already and the apartment will be marketed at about $500K more so management are confident this will be eps accretive and that their assumptions around that are conservative
3. Good cover on fixed price construction contracts right through to December 2024 (which was a very pleasant surprise !)
4. Actively looking for greenfields development sites and some softening in land prices has been observed.
5. An analyst asked if they could detail the price increase that had been applied for care suites and the response was 1-2% (in a year real estate went up circa 20%) The analyst was so surprised he asked again if that figure was right and the CFO assured everyone it was. You could have cut the air with a knife, I think everyone was genuinely shocked, I know I was ! Its clear OCA have very little if any pricing power with care suites.
6. There may be many more care suites for sale than are officially on the books as vacant. Its would appear there are a large number presently being used as PAC rooms. I confess I was getting a bit sleepy towards the back end of the hour long analysts call after spending all morning deciphering the dog's breakfast accounts so please take the total number of units for sale expressed as 450 in the conference call as an indicative number at this stage. I am 99% sure that's the number I heard which is really concerning because that's a whole year's worth of stock. Mav is looking into this with the CFO, and will provide more detail in due course.

The number 450 was never rebutted by Maverick or anyone else.  Analysts were shocked by the number as was I.  Note this is not disclosed in their presentation that I can see but all other retirement companies are happy to disclose the numbers of unsold units.  Maybe ask yourself why ?
Since then they have built another 127 care suites this half and sold 61 "units", not all of which will be care suites, I assume somewhere about 40 were.

So again, thanks for asking because my revised estimate is 450 unsold care suites at the start of the period+ 127 built, less ~ 40 sold = 537 estimated unsold care suites (some of them will be occupied under PAC) as at 30 September 2022.  Their total care suite stock is 972 (page 5 of the presentation) but by my estimate well over half are unsold.

Notice how in point 1 of the notes from the May call they said there was about $2.5m of Covid costs that would be non-recurring in FY23, (estimate $1.25m per half year period), and the $1.8m Covid wage subsidy repayment in 1H FY22 was also non-recurring so that's about $3m in non-recurring costs incurred last period more than this one and yet reported underlying profit is up just $2.2m.  In other words, strip out the non-recurring expenses from the previous corresponding period and underlying profit this half has gone backwards in normalised terms by $800K and also there's millions more shares on issue under the dividend reinvestment program so underlying earnings per share in nominal terms have gone backwards and in inflation adjusted terms (with inflation running at over 7%) real inflation adjusted earnings per share have gone backwards quite significantly.

No worries thought because in their presentation, (page 5), they have plans to build another 700 care suites in the pipeline and are going to gear up with more bank debt to expand their development pipeline in a falling real estate market.  What could possibly go wrong ?

Three questions I think holders need to ask themselves.
1. Why is the share price right back at the IPO price it listed at 5.5 years ago ?
2. Is what they are trying to do really working for shareholders ?
3. Would I not be better off in any of the other retirement village companies that have a well proven track record of growing earnings ?

[Plata]

Giving it a try myself, info from recent half year and this https://images.oceaniahealthcare.co.nz/wp-content/uploads/2020/11/09181641/Oceania-Premium-Accommodation-Charges-Final.pdf

2.7 million of premium PAC revenue in the half

60% of care portfolio is "premium care beds or care suites" therefore 40% are non premium care beds. There are 1652 care beds and 972 care suites in total. To my understanding all care suites are considered premium. Therefore of the total care portfolio of 2624 bed/suites, there are 1050 regular beds (40%). This indicates OCA currently has 1574 premium beds and care suites, or 602 premium beds and 972 care suites.

602 premium care beds in portfolio, assume premium charge is very upper end of possible range at $40 per day (inc gst) so ~$35 per day to OCA. 602x35x182.5 = $3,845,275 Obviously this is too high. If we assume all PAC care revenue is derived from premium beds (none from suites), the average premium daily charge per bed is $24.6 per day. This is in the upper half of the range looking at the minimum and maximum daily charges on their website. To reach that PAC revenue, either my daily charge guestimate is roughly correct OR it is an overestimate and PAC revenue is being supplemented by care suites that have failed to sell via ORA. Time to figure that out...

Report page 53 indicates $32.5 million in care suite DMF is contracted at this stage. I'm not as sure of this part, but a further $4.2 million comes from care suites in villages that are "held for sale". Average sales price for a care suite over the last 5 years look like something around $240,000, starting closer to $200,000 in 2017 and shooting up to $300,000 region in recent times.

Total contracted ORA money from care suites (inc villages held for sale) is $216,617,000. At 100% care suite ORA uptake, that suggests an average sale price of $233,675. Taking Basil's estimate of 440 unsold care suites, leaves 487 care suites. If that were true, the average sale price for the suites that did sell would be $444,798. This is well in excess (>40%) of the average sale prices achieved historically, even in recent times. As such I find it hard to believe this number is even remotely close.

Lets compare the total contracted ORA money to the contracted DMF, the DMF is 16.9% of the total contracted ORA money. ORA DMF is 10% year 1, 20% year 2, 30% year 3 onwards. Getting 16.9% indicates there are likely more 1 year old ORA contracts than 3 year old ORA contracts, probably something like Year 1 > Year 2> Year 3+. The portfolio of contracted ORA suites is likely skewed to a more recent date of sale (younger ORAs = more recently sold). Between 2019 and now, average sale prices for ORA care suites started at $241,000 in 2019 and increased steadily to $311,000 in the most recent half. Based on my previous workings, I think a reasonable average sales price for the currently contracted ORAs is closer to $280,000. To achieve a total contracted ORA money from care suites (inc villages held for sale) of $216,617,000, 774 care suites must have been contracted at this price point leaving 153 without an ORA.

Of course, I'm not an expert on this stuff so I may have made some mistakes here. I'm using a lot of averages which are could be a source of error as not all suites are priced at the average. But based on the above, I do not see how there could be more than 200 care suites without an ORA at this time.