OCA - Oceania Healthcare

[Basil]

I think its common knowledge that OCA have not been increasing their care suite prices in recent years, (despite a booming real estate market) because the demand simply isn't there to support price increases.  Demand appears to have been dramatically undermined by Ryman's far superior fully refundable deposit scheme.    I don't think any OCA shareholder wants to acknowledge that.  Head in the sand ?

More info here Ferg.  To be clear what I am talking about is RYM's RAD scheme undermining demand for care suites in other villages.
https://www.rymanhealthcare.co.nz/accommodation-premium.

I shared in more detail in post #56 in the retirement village thread why I think care suites are unattractive and not selling well...for your convenience I've quoted that below.  From the most recent call OCA had 450 unsold units as at balance date, a whole year's supply.  113 more care suites are scheduled to be finished this half at Lady Allum retirement village in Milford.  61% of OCA's units are care focused and my research shows based on consented pipelines of future developments they can only move the needle on average 1% per year from care to ILU's per annum, without further acquisitions.  Even in 2028 they will have approx 55% of their units focused on care.
Just adding a bit more colour to this debate, I accept there may be differences between the size of OCA's care suites and RYM's premium rooms and that OCA's care suites may have a kitchenette that RYM's premium rooms don't but there's no argument that RYM's care and facilities has been regarded as the Gold standard and the nature of their RAD scheme is far more compelling in terms of its flexibility and no loss of capital.
One of the biggest issues with people going into care is what is their life expectancy ?  I had a chat with OCA senior management about my Mum's situation and the first question I was asked was how long do you expect her to live.  Based on experts opinions on that it was clear a care suite at the Sands would have been completely inappropriate as an alternative as well as being to far for her elderly friends to come and see her.   
------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The first question to ask Plata is has OCA's huge experiment with care suites worked as a strategy ?
I would argue NO as there seems to be a very large pool of unsold care suites and its probably a growing problem.
Why do I think care suites are not attractive as a care option ?
1. Firstly they're inflexible.  You might pay say $350K and you will lose $35,000 if your parent dies the day after they move in, (minimum 1 year charge).
2. Your Estate won't get the residual value of the license to occupy back until they have resold that care suite, that could be a few months or a few years, who knows ?
3. There are plenty of other options, for example we knew our Mum was dying from terminal cancer and we found her a fabulous premium room in a brand new upmarket care facility in Whangaparoa that her specialist recommended and it cost her Estate $45 a day premium accommodation charge PAC...from memory all up it was about $7,000 for the 5 months she was in care before she went to be with God.  She enjoyed a great sea view, great facilities, good care and was very close to her friends and family.
4. Lots of other villages allow you to have a premium care room for similar or often less money including many of OCA's villages themselves, that's right OCA undermine their own care suite business model !
5. There are other schemes that don't cost anything and your Estate get's all the money back within 30 days, see the RYM refundable deposit scheme here https://www.rymanhealthcare.co.nz/accommodation-premium
This is what OCA are up against with their care suites.  With RYM's refundable deposit scheme, you lose nothing of the $350,000, you pay zero premium room charge and you enjoy RYM's well regarded standard of care.  To top it all off there's no waiting months or years for your Estate to be paid out.

The question you need to ask with the excellent lower cost and more convenient alternatives is who in their right mind would put say $350,000 into an OCA care suite and see between 10-30% of that gobbled up in license fees and then force the Estate to wait maybe years to be paid out ?  I put it to you and others that most people are not stupid, don't want to tear up money like that and don't want to put their kids through an endless wait for the Estate matters to be cleared up.

The whole care suite thing and its relative attractiveness has really come under serious attack with RYM's far more attractive fully refundable deposit scheme.  That's how I see it and that's why I think OCA, (despite keeping their care suites very cheaply priced and not seeming to have any pricing power with them) are really struggling to sell them.  That's one of the key reasons I sold out of OCA, the other is the huge rate of increase in their wages bill...lots of holes in that boat !

[Ferg]

Thanks for that.  That makes sense now.  I had seen your earlier post but missed the significance of the RAD.  What I take from that is the patient still pays the daily care fee, but if they want extras then there are 3 options of how that is paid; being weekly fees or RAD or a combination of the two.  I noticed also that settlements beyond 6 months start to accrue interest so RYM are also reliant on resales to repay the deposit.

Good for RYM if they can do that at no charge, but better for OCA if they can get away with doing it with a DMF.  The OCA care suite DMF is a scaled % each year charged monthly being 15/10/5% p.a., and the maximum amount payable is 30% which would require an occupation of 3 or more years.  One might argue OCA is not getting away with it given the number unsold.  However, unsold is not unoccupied which has been mentioned a couple of times now.  We don't know how many are unoccupied but the occupied suites are still earning care fees for OCA, at the same care weekly rate as RYM (notwithstanding the minor regional variations).

From 2017 to 2022 OCA disestablished 855 care beds, and developed/converted/acquired 612 care suites and 571 ILUs.  Care beds + care suites were 72.8% of total units in 2017 and are 61.3% in 2022 which was a reduction of 2.3% per year.  It appears your 1% p.a. is based on moving the 61.3% to ~55% per the pipeline over 6 years.  If care suites are not working, I would expect OCA to take corrective action by converting suites in the development pipeline to apartments, if that is possible.  Or by acquiring more ILUs which will shift that % faster - and they have signalled they wish to undertake more acquisitions.

I take on board what Whacc says and his intimate knowledge of the industry - it takes years to build capacity and there is a wave of demand coming.  Whilst filling suites with non-premium care patients may not be the most efficient use of capital, some could say the same of the RYM premium suites under a RAD arrangement.  OCA selling suites will depend on matching demand by location with available inventory versus alternative providers.  Not an enviable task for sure but I have faith the Board and Management know more about how this will play out than all of us combined.

[Basil]

From the call there was about 80 care suites being occupied as PAC which still leaves in the high 300's unoccupied.

15% DMF in the first year even if you only live 5 months so a premium $500K care suite at the Sands would have cost my Mum's estate $500K x 15% = $75,000 compared to the ~ $7,000 it did cost.  Wow, that's more than ten times the price ! 

My position is that no other company has a whole years stock unsold or anything remotely like that so the sales rate is worst in sector and objectively must be a major concern especially in tandem with the fact that OCA have not been increasing care suite prices despite booming real estate prices in recent years.
The numbers of unsold units tell me the market is not accepting care suites as an acceptable concept,  perhaps with the exception where people are not too poorly, want a kitchnette and expect to live a few years.

Ostensibly OCA's float was built around the premiumization of care with care suites and yet the ROI in the care sector of their operation has nearly halved since listing.  A failed strategy or are dramatically escalating staff costs and Govt underfunding the reasons ?  Maybe is a bit of all this ?  The numbers don't give me any confidence their strategy is really working.  Even Maverick concedes the real money is in ILU's and OCA have only 39% of them.

I think the first indication from OCA that the care suite concept is not really working well was their statement around the recent Bream Bay acquisition saying "we might add" some care suites or words to that effect.   It wasn't a convincing statement, reading between the lines it was almost like they were saying something like, gosh we're really pleased they're all independent units and they've sold well so far so we'll only add care suites if we have to to help the ILU's sell.

Each to their own.  Its clear I think that SUM's business model is more fit for purpose and Winner has posted a chart showing the relative trend of their share prices over time since OCA listed.  Its possibly worth noting that SUM have grown underlying eps ~ 2.5 times since OCA listed and OCA have barely moved the needle in their time on the market.  I'm sure holders would argue its all about the future for OCA.  Other companies business models position them to continue growing faster is how I see it.

Finally, it might be worth noting that ARV are getting into care suites too.  In their recent presentation I noted their care suites price relativity in the Auckland region was just 15% to the average real estate price.  They're not priced very confidently are they !   That tells you what they think.
28% care for them and 61% care for OCA and fierce and enduring headwinds with care costs.  Hmmm

[kasper]

All the concerns about care suites are just a myopic viewpoint IMO, over the longer term things will pan out just fine as the business continues to be driven by huge need. Lot of smart money is invested in this company just like it is in the others in the sector. SUM is a great company in some areas of its business just like OCA is but I don't see it doubling in price from here before OCA does.

[Basil]

Share prices follow earnings.  Earnings matter, that's the key difference between my investment approach and your's kasper.  SUM have a 10 year CAGR of 33%.  Just 3 years growth at 33% compounded means earnings grow 135% and support a share price more than doubling.

For the life of me I cannot see OCA's eps growth beating SUM's growth in the foreseeable future.  Its simply not a plausible expectation given the radical Government underfunding of care and OCA's huge exposure to care.

I sometimes wonder if SUM did a 10:1 split and their shares were $1.04 how much more attention they would get from retail investors ?  Certainly the institutions like them...interesting comments from Sam Dickie of Kingfish in their quarterly report yesterday.

Anyway, good luck to shareholders, its time I did something more productive.

[kasper]

Share prices follow earnings.  Earnings matter, that's the key difference between my investment approach and your's Kasper.  SUM have a 10 year CAGR of 33%.  Just 3 years growth at 33% compounded means earnings grow 135% and support a share price more than doubling.

For the life of me I cannot see OCA's eps growth beating SUM's growth in the foreseeable future.  Its simply not a plausible expectation given the radical Government underfunding of care and OCA's huge exposure to care.

I sometimes wonder if SUM did a 10:1 split and their shares were $1.04 how much more attention they would get from retail investors ?  Certainly the institutions like them...interesting comments from Sam Dickie of Kingfish in their quarterly report yesterday.

Anyway, good luck to shareholders, its time I did something more productive.

The market will decide based on its own drivers which are not clear cut nor based on pure number crunching at any given point, OCA has been the ugly duckling for a while but that doesn't mean it always will be ,anyway I reckon OCA will be $1.86 before SUM is $20.90.

[Basil]

When the TA looks better for SUM I'm more than happy to take that bet.

[Plata]

It will be interesting to see if the recent acquisitions start having some bearing on EPS, test out whether M&A crew at OCA really understand what the phrase EPS accretive means.

[Minimoke]

Share prices follow earnings.  Earnings matter, that's the key difference between my investment approach and your's kasper.  SUM have a 10 year CAGR of 33%.  Just 3 years growth at 33% compounded means earnings grow 135% and support a share price more than doubling.

For the life of me I cannot see OCA's eps growth beating SUM's growth in the foreseeable future.  Its simply not a plausible expectation given the radical Government underfunding of care and OCA's huge exposure to care.

I sometimes wonder if SUM did a 10:1 split and their shares were $1.04 how much more attention they would get from retail investors ?  Certainly the institutions like them...interesting comments from Sam Dickie of Kingfish in their quarterly report yesterday.

Anyway, good luck to shareholders, its time I did something more productive.

If I had $10.40 to spend, would I be tempted by one SUM at $10.40. Or would I prefer 10 SUM's at $1.04. I don't think anyone pondering that question adds mush to the share registry.

I must do a closer inspection of OCA's Belview in christchurch. It is coming on at a rapid pace and by all accounts a very nice facility. Especially the Care Suites "Choose from either a studio Care Suite with an open-plan bedroom and lounge, or a one-bedroom Care Suite with a separate bedroom and living area. Some Care Suites are large enough to accommodate couples, so you can be together – even if one of you requires Hospital level care."  And "A DHB assessment is not required for care that is paid for privately." that should help sort the wheat from the chaff.

[winner (n)]

It will be interesting to see if the recent acquisitions start having some bearing on EPS, test out whether M&A crew at OCA really understand what the phrase EPS accretive means.

The promise is 'These acquisitions are expected to deliver strong accretion to underlying earnings per share in FY2023'

Did they ever say how much in the way of earnings the recent acquisitions would bring in .....or keeping that close to their chest so nobody can say 'what happened'

[winner (n)]

EPS accretion talk

Didn't OCA said their Hobsonville and Pukekohe acquisition done in early 2021 was going to be underlying eps accretive?

Result - F22 eps looks pretty similar to F21 (maybe marginally up)

If Hobsonville/Pukekohe were eps accretive the rest of the business must have gone backwards

Hope better this time around with the new invigorated team

[Basil]

I think Investment bankers know eps accretive talk is what really gets the punters excited...like baiting a hook with a huge bit of bait and reeling them in.  Very rare event you ever see a company back that "come on" talk up with genuine accountability with what really happened afterwards.

[winner (n)]

Arvida would be struggling to demonstrate that Arena acquisition was accretive as well.

They'd say too early to tell and just give us time

[Ferg]

Did they ever say how much in the way of earnings the recent acquisitions would bring in .....or keeping that close to their chest so nobody can say 'what happened'

From memory (and don't hold me to this) it was high single digit EPS accretive.  My interpretation of that is it will sit somewhere between 7 and 9 cents per share inclusive.  Others might have a different interpretation,  And "E" may refer to underlying earnings or EBITDA or plain old NPAT (which is actually the same as NPBT).

[winner (n)]

From memory (and don't hold me to this) it was high single digit EPS accretive.  My interpretation of that is it will sit somewhere between 7 and 9 cents per share inclusive.  Others might have a different interpretation,  And "E" may refer to underlying earnings or EBITDA or plain old NPAT (which is actually the same as NPBT).

Had a look and yes the promise is high single digit EPS and it's Underlying Earnings ...,and they mention the 'baseline' is consensus analyst earnings.

F22 Underlying earnings was 8.0 cents per share

So my expectations for is F23 is 8.0 plus minimum 10% for business as it was pre acquisition (remember they said 'positioned for growth') giving 8.8 cents PLUS say 7% (high single digit) accretion for acquisitions gives 9.4 cents EPS

Anything less they've failed in my eyes .......but on past performance (both yours at forecasting and Oceania on delivering growth)  you'll probably be right with your 7 to 9 cents

Just shows why companies love talking 'accretion' when they buy something ....sounds impressive up front but at the end of day never needs to be shown to be true, even if it could be measured