Oceania Healthcare Limited (OCA) Earnings Call Transcript & Summary

Good day, and welcome to the Oceania Healthcare 1H '20 Results Announcement Conference Call. At this time, I would like to turn the conference over to Earl Gasparich. Please go ahead, sir.

Well, good morning, everyone, and thanks for coming onto the call. For those of you that don't know me, my name is Earl Gasparich, and with me today is Matt Ward, our CFO. Also on the call is Brent Pattison, who's been with us for a sum total of about 4 days now. And Brent will replace Matt as CFO, when he leaves us in late March this year. So we're pleased to bring in this presentation of our interim results for the 6 months ended 30 November, 2019, that we announced this morning. There are a number of highlights within the first half results, which I'll cover quickly before presenting an update on our strategy then an overview of our developments before handing over to Matt to present the detailed financial results. So firstly, the financial highlights of the period, we increased our underlying net profit after tax from continuing operations by 17.6% to $24 million during the 6-month period compared to the prior corresponding period, and we also increased our underlying EBITDA by 27.6%. These increases predominantly reflect strong sales momentum at our 2 new Auckland villages at The Sands on the beach front at Browns Bay and Meadowbank Stage 4, both of which were completed in May 2019. Our operating cash flow of $57 million was almost $10 million or 21% higher than the pcp. And our total assets are now $1.5 billion, and that's a $288 million or 24% increase compared to November 2018, and that was due to a significant amount of CapEx that we invested in the portfolio over the year. Our strong sales volumes were a key feature of this interim result with 186 sales achieved in the 6-month period, 29.2% higher than the pcp and more than double the sales achieved in the first half of the 2018 financial year. As well as delivering the highest volume of new sales since our IPO, we also achieved 102 resales, which is 29% higher than the same period last year. We're well on track for the delivery of 265 units and care suites over the full year to 31 May, which is in line with our build rate guidance previously given, and we've already completed our new 90 bed care suite center at Awatere in Hamilton, that was in July 2019 as well as 10 new villas in the beach front of Whitianga, which were completed in November. We currently have 557 villas, apartments and care suites under construction, and that's across 10 sites. There are 3 projects ongoing in Auckland at Meadowbank Stage 5, Lady Allum and Eden as well as the second stages of the BayView in Tauranga and Awatere in Hamilton. On top of that, we're building at Gracelands in Hastings in the Upper Hutt, Green Gables in Nelson, Windermere in Christchurch and Woodlands in Motueka at the top of the South Island. It's a substantial build program and each site is progressing well in terms of timing and budget. Our total development pipeline of 1,958 units and care suites is now 86.6% consented, and that's a 19.3% increase and consents compared to just 6 months ago. And that demonstrates the great capability of our in-house team and the design and planning for new projects. As I mentioned on the previous slide, we achieved very strong sales volumes over the 6 months to 30 November, 29% up on the pcp. During that time, we sold 55 new care suites, which is almost as many as the entire 2019 financial year and more than double the volume achieved in any previous reporting period. We also reported 63 care suite resales, which again is almost double they'd achieved over the pcp just 2 years ago. These sales volumes of care suites demonstrate both the proven success of the care suite model, as we bring new product to the market, and also the maturity of those locations where we are now seeing regular resales activity in the care suite product. In terms of new retirement villas sales, The Sands and Meadowbank Stage 4, obviously, 2 of our luxury Auckland locations that were completed in May 2019, are selling down very well. In just 6 months, we've sold 48% of apartments at The Sands and 49% at Meadowbank. And as I said, these sales rates are in line with our expectations for these prime locations. Our development margin of the period of just over 36% is consistent with last year, and it was driven equally between margin achieved on care suites and on retirement village units. We also maintained a resale margin very consistent with the prior periods at 30.3%, and Matt will give more detail on this in his section shortly. Our resale stock levels remain low, which is consistent with the last 2 reporting periods, and we currently only have 31 resale units that are not under contract or application by an incoming resident. We continue to make excellent progress in the execution of our aged care strategy with occupancy at sites not affected by developments, increasing from 92% to 94% over the year. And as you've just seen, very strong sales volumes in new and resale care suites that have either developed -- that we've either developed in our new care centers or converted in existing centers around the country. As most of you on the call will already know well, we are transforming our portfolio sites around New Zealand as we redevelop older standard room facilities into premium care centers. And during the 6 months ended 30 November 2019, as already mentioned, a good example of this was the completion and commissioning of 19 new care suites at Awatere in Hamilton as well as the conversion of 23 care suites at other sites. We currently have 245 care suites under construction, meaning that Oceania represents a very large proportion of all aged care being built around New Zealand at present. Just under half of our aged care portfolio is now premium beds or care suites, and as we complete our brownfield development pipeline, this will land at a 70-30 mix of premium to standard rooms, as we have previously reported. Obviously, the reason why we're redeveloping the portfolio is to drive greater returns from our care beds, and the significant increase in premium revenue from care in the form of deferred management fees on care suites or premium accommodation chargers is further evidence of the progress that we're making in our aged care strategy. Premium care revenue increased by 33% compared to the pcp and is almost 76% higher than at the time of our IPO in May 2017. Another highlight of the last 6 months has been the appointment of Dr. Frances Hughes, as General Manager, Nursing and Clinical strategy at Oceania. Dr. Hughes is a registered nurse, and she's held senior management and nursing positions throughout the world. She was recently made a companion of the New Zealand Order of Merit as well. We're obviously delighted to have Frances join the team. Her skills and experience will enhance our service offering and the quality of care that we're able to provide to our residents. And finally, in terms of care, we continue to roll out our new clinical information system, e-Case with 27 sites now fully operational, and the rest of the group will follow over the course of this year. The directors have declared an interim dividend of $0.023 per share, which is not imputed, and that represents a 9.5% increase compared to the pcp. Just in the detail, the record date is 10 February and payment 24 February, and the dividend reinvestment plan will apply. So now I'm going to update you all on some detail on how we've advanced our strategy over the interim period, and this slide represents our strategy on a page in a very simple way, demonstrates how we're growing our asset base by investing in the redevelopment of the portfolio and recycling our capital as we sell the units and care beds from that development program. As we continue that cycle, we realized development margins from the first time sale of the new product as well as create longer-term growth and recurring income streams through both the deferred management fees generated and also the aged care earnings from the new aged care beds. Our growth this year will, therefore, be delivered through the redevelopment of 265 units and beds in the portfolio. And as already mentioned, we're well on track to deliver that. We now have 41% of our total portfolio of combined aged care and retirement village that is of a premium standard compared to 29% at the time of our IPO in May 2017. This growth in our asset base in turn enables us to generate higher yield for investors with an improved quality of earnings going forward from the premium units and beds built. So while our existing mature aged care and retirement village business is effectively already delivering strong cash [ for our ] returns, this will be enhanced as we redevelop our sites and deliver more premium care suites and village units. And that's both through the full redevelopment of key strategic sites and also the upgrade of a large proportion of our existing aged care [ staff ] Around the country. As already noted, the objective of this strategy is to significantly increase the premium of -- the proportion of premium aged care and retirement village units in the portfolio. In 2017, 29% of the portfolio was in the premium category, and this has increased to 41%, as I've just said today. By the end of this financial year, that will increase further to 44%. And as we completely build out the pipeline, our max will move to a 2/3, 1/3 premium to standard in terms of both retirement village units and care beds combined. So we're effectively repositioning the portfolio around the country such that we have the right mix of product in the right locations in order to meet the demands of the local residents in those areas. And in doing so, we're constructing a market-leading product in those localities in which we operate. Executing our strategy and building out our existing brownfields development pipeline will more than double our net asset base from the time of our IPO to the completion of this current build program as well as provide dividends to investors over this time. As a brownfields developer, it's important to note that our growth will not be linear over that time frame because to achieve it, we're decommissioning existing assets for redevelopment, which has been a feature of the business over the past 3 years. We are well on track to deliver this doubling of NTA with net assets increasing by 35.5% in less than 3 years since our IPO. If you then add the $57 million in dividends paid to shareholders over this time, we have effectively delivered a total of 48% growth since our listing. Again, this slide illustrates a significant investment in both the redevelopment of the portfolio since the IPO, on the left-hand side, and how that translates into both upfront development margins, which are the orange boxes in the chart on the right-hand side. And then in the longer term, higher deferred management fees in aged care earnings, which are the green boxes. As we invest the cash and the capital, we translate that into earnings growth, both upfront and in the longer-term time frame. In terms of where we are in the execution of our strategy. As mentioned previously, our total pipeline is now 1,958 beds and units and 86.6% of this is currently consented or under construction at present. We're in the sell-down phase of beds and units delivered during 2019, as you well know, at The Sands and Meadowbank 4 and the BayView care center as well as our recently completed care center at Awatere in Hamilton. Sales of new products at these sites is driving growth in near-term earnings through higher development margins, as we achieved in the 6 months to 30 November 2019 at The Sands and Meadowbank, in particular. Once these sites are in the maturity phase, they generate recurring income through the DMS accrued on both retirement village units and care suites and aged care earnings. So as we transform the portfolio through the redevelopment program, we are changing the mix of earnings from our aged care business. While we incurred $1.9 million of upfront commissioning and establishment costs during the past 6 months as we open new aged care centers. We also generated $5.9 million of development margin from the sale of those care suites. Such that our aged care related earnings were actually slightly ahead of the prior corresponding period. Once we sell the care suites and realize that development margin from them, we [ send ] the platform for increased recurring earnings going forward through the accrual of the DMF from the occupation right agreement on the care bed and the new aged care earning. The chart on the right-hand side of this slide illustrates the typical EBITDA per bed that will be in the $8,000 to $10,000 range before development, will reduce as we redevelop and commission the older care center, then we'll incur upfront establishment costs through the commissioning phase. But will ramp up towards maturity, by which time earnings per bed will be $20,000 and beyond, depending on the sale or resale value of each room. This is effectively the reason why we're investing in our aged care portfolio and the value opportunity inherent within its redevelopment. Aside from the cost of establishing sites and the development margin achieved through the sale of new and resale care suites, aged care earnings from our core sites, which are those that are already mature, decreased by around $0.5 million over the 6 months to 30 November '19, and that was due predominantly to unfunded wage costs. We are currently planning new workforce initiatives around recruitment and immigration, and that will reduce wage pressure caused by the well-publicized staff shortages in the aged care sector going forward. In the longer term, increased premium revenue will reduce our reliance on government funding alone and offset any further wage pressure. In order to give a more visual description of a brownfields development. The photos on this slide show how we took the old operational care facility at the BayView in Tauranga and constructed a new aged care center on surplus land towards the front of the site in 2018, while the older facility continued to operate. Then once the new care center was complete, we transferred existing residents and staff from the old facility into the new care center and that freed up the land on which the old facility was built. This was the premium area of the site on which future stages will be developed, including the new community center, which is currently under construction as Stage 2 at the BayView. Similarly, as previously mentioned, we completed the conversion of older standard rooms to 23 new care suites over the 6 months to 30 November, 2019. This conversion process involves decommissioning the standard rooms, relocating residents to other rooms in the care center, then refurbishing the rooms and fitting on suites and small kitchenettes. Once construction is complete, the rooms are commissioned and progressively sold under ORAs. The new rooms are in greater demand because they're fit for purpose for today's market. We recycle our capital and achieve upfront development margins from the sale of the ORAs and longer term, we generate higher income through the DMF accrued on the ORA. Now I'll run through an update on our development program. First of all, a summary of what we've achieved and what we have going forward. As I've already mentioned, we're delivering new developments and according with our target build rate and over the past 3 years, have established a genuine track record in doing so. During the 6 months to 30 November, we delivered 100 beds and units through the Awatere care center and 10 villas at Whitianga, that compared to 81 units in the pcp -- sorry, 81 care suites in the pcp that we delivered in the BayView, so an increase in build rate over the half year periods. We also commenced the new development on land adjacent to Eden and Auckland. And at 30 November, we had 444 units and beds under construction that's since increased to 557 as we commence Stage 1 of Lady Allum redevelopment this month. We've also obtained some significant resource consents during the interim period, as already announced, with Waimarie Street in St. Heliers now consented and the redevelopment of Elmwood in the gardens in the Manurewa. In total, as I've mentioned before, our resource consents are now up to 86.6% of the total pipeline, and that further enhances confidence in the degree of the pipeline over the next 5 years. We -- as already mentioned as well, we're well on track to deliver 265 beds and units. In the second half of the year, we'll complete Stage 5 of Meadowbank, we'll complete Green Gables in Nelson, new village surrounding the existing Gracelands village in Hastings, village in the Upper Hutt as well as in Motueka at the top of the South Island, that's all to be delivered in the second half of the year, and we're well on track to do so. And finally, just recently, we've commenced the second stages of the retirement village developments at Awatere in Hamilton on the former land owned by the -- occupied by the old care facility. And as I just mentioned as well as Lady Allum. Now some more pretty pictures in terms of the sites that we've got underway or recently completed. Firstly, just quickly, Awatere in Hamilton. This is a photo of the lounge and the new care center is now fully operational with the residents transferred from the old village -- from the old care facility. And Stage 2, as I just mentioned, has commenced with 63 apartments and a new community center to be delivered. At Green Gables in Nelson, as you can see, the site is nearing completion now. It comprises 28 apartments and 61 care suites. That's due to complete around May 2020. It's a very good site close to the city center in Nelson, high-value area of the region, which has got good demand for aged care and very little competition. We've just commenced presales marketing activity with some good interest generated to date. At Meadowbank, one of our premium sites in Auckland, Stage 5 is in the foreground of this slide. And again, as you can see, it's substantially complete already. Comprises the final 26 apartments in the originally consented scheme at. And once we complete this, we'll only leave Stage 6 to come, which is our 35 domestic care suite center, for which we already have resource consent in place. Gracelands in Hamilton, as I mentioned before, we've got 32 villas being built around the edge of the existing village, an aged care center. And again, that will be complete within the next few months. In the BayView in Tauranga you can see a fantastic location of the site with views over the Mount Maunganui and the Tauranga region. Now we completed Stage 1, freeing up the land for Stage 2 of 74 apartments and the community center. Again, that will be completed in the 2021 financial year. Windermere in Christchurch comprises 22 apartments and 71 care suite along with a new community center. Again, this is a key strategic site and is progressing well according to time and budget. We are due to complete this in late 2020 calendar year. And finally, we are well underway with the construction of 49 luxury apartments and a new community center on the land that we bought adjacent to our Eden Village in Auckland. As you can see from the photo, we're now out of the ground and on track to complete this development in the 2021 financial year. Again, a site, as you can see, in close proximity to the city center in Auckland. So that's a quick overview of our key development projects, each of which, as I mentioned, is progressing well and being closely managed by our in-house development team. We clearly have got a high level of activity ongoing, but we're well on track with the redevelopment of our pipeline. So now I'd like to hand over to Matt Ward, our CFO, who will cover our financial results in more detail.

Thanks, Earl. Good morning, everyone, and welcome to our interim results presentation. I trust you all survived the school holidays and the cricket fans, you've overcome pain from the recent [ test ] cricket. Before I crack on, I'd just like to say thanks to the analysts and investors who I've worked with us over the last few years since our listing. It's been a real pleasure. Earl with his very pretty pictures has touched on the key operational and financial highlights, where we are at with the execution of our care and development strategies. And how the strategy will continue to deliver returns to shareholders and wider stakeholders in the future. I think a key point to note that Earl touched on is the 50% growth achieved to date since our IPO in our tangible asset base along with the dividends paid to shareholders. It's also important to note that due to the nature of our brownfields development strategy, our future growth won't be linear. [ Keep ] the detail provided in this pack on the brownfield redevelopment cycle and our earnings profile. As is customary, I'll be covering off an overview of the key financial statements, performance by segment and some of the trends and drivers behind the results. There's also further detail in the appendices, and we will shortly upload a case study on a brownfields redevelopment for the eager beavers on our Investor Relations web page, including the impact on earnings and balance sheet. As a number of you are now well aware, we operate 2 distinct segments that are represented differently in our statutory accounts. Our asset base for our Village segment, being villas and traditional apartments, is treated as investment property. Fair value movements, both up and down, go through the P&L and are reflected in statutory impact. This period, this equated to $11.4 million, excluding the [ overall ] right-of-use asset, and I'll touch on that [ overly ]. Our asset base for our care segment, on the other hand, is treated as PP&E. This means fair value decreases from decommissioning or derecognition of old care buildings flow through net profit after tax. For this half, this was $1 million relating to our Lady Allum site in preparation for the development, which as Earl said, is now underway. Our care suites, like our apartments, are sold under ORA and the value it determines our operators' interest in the future DMF and resale gains using materially the same approach. However, because care suites are in fact operational assets, they're treated as PP&E. The fair value increases flow through other comprehensive income and reserves not stat profit. For the period, this was $11 million net of tax. Accordingly, it is therefore our total comprehensive income of $24 million as opposed to simply NPAT that reflects the total performance of the Oceania group. Moving to Slide 26, and a review of the income statement. We had reported total comprehensive income of $24 million, comprising net profit of 14.9% and other comprehensive income of $9.1 million. This total comprehensive income was up 23% on the corresponding period last year. Operating revenue of $97.9 million was driven by the continued increase in both care suite and Village deferred management fees, which increased 20% and 50%, respectively. It is the derivation of these annuity-like DMFs that we are ultimately seeking to develop through our brownfields redevelopment strategy. As always, the fair value movements are the key determinants of our stat profit, and I'll run through those now. The fair value movement of IP was $11.4 million, and that was driven by $7.8 million from our developments. And as expected, the valuation of our existing villages increased modestly to reflect the increased pricing achieved in our regional villages. Much of the $7.8 million from new developments was in relation to the sell-down of developments completed at our May year-end, being The Sands and Meadowbank. And the fair value movement reflects the capture of the discount CBRE applied to unsold stock. While aggregated in the table on the left, you'll observe in our accounts that we had a fair value movement of $10.2 million in relation to the right-of-use asset for the Everil Orr village. As outlined in the footnote, there is a corresponding expense, which essentially results in an in and an out and a neutral impact on profit. The second area of fair value movement is from the decommissioning of older care sites for redevelopment. During the period, there was just one such impairment relating to the Lady Allum facility of $1 million. As I said before, this care facility is now valued as development land with development recently underway. In terms of PP&E, we had a fair value increase of $11 million, net of tax at The Sands, Meadowbank, BayView and Awatere centers. These increases reflect the sell-down of care suites on these sites at prices ahead of the prior assumptions by CBRE. It's important to note that our 3 phase cycle of decommissioning assets, which is recognized in profit, building and then selling, which is recognized in other comprehensive income as part and parcel of our business model. If you look at our current developments that Earl's outlined, at Green Gables, Windermere and more recently Lady Allum, we don't have any further or imminent decommissioning of buildings in a valuation sense as we already hold these as land. In terms of expenses, operating expenses reflect the ramp-up of costs at our new sites. And it's also worthwhile to note that our depreciation expense increased as a result of the new PP&E developed during FY '19. I note for good measure, we adopt a weighted average rate of 3% on our freehold buildings, including set outs. If we were to adopt a 2% rate, this would reduce depreciation expense by $1.5 million. Finally, the taxation benefit of $8.2 million relates to reduction in our deferred tax liability. Slide 27 provides a reconciliation of reported impact to the underlying impact in EBITDA measures. As noted previously, we assess our performance using underlying profit and use this metric in setting the dividend. Our underlying impact was $24.1 million, is consistent with our total comprehensive income of $24 million, and up 18% from the pcp. Stepping back, the reason for the consistency is because underlying impact only captures realized development and resale gains. And as explained just before, the bulk of our fair value movements related to the sell-down of our new care sites as opposed to unrealized fair value movements at existing sites. Adjusting for the 5 sites sold during FY '19, our underlying EBITDA from continuing operations was 28% above the pcp, with NPAT 18% above due to the higher development margins. As explained by Earl, the care segment, when we include the care suite resale and development margin was in line with the pcp. We have traditionally placed the resale and development margins for care suites in the Village segment as our village company is the legal issuer of the ORA. That said, we consider that to get a fuller picture, these margins can be aggregated with the operating care segment figures, given the margins are essentially the quid pro quo from the decommissioning of our sites. While we haven't formally changed the presentation of our segments for this reporting period, it is under consideration as we consider this aggregation provides a more holistic view of the care related performance of the group. Our village segment was well ahead of the pcp. Our DMF continues to climb as we sell down our new developments. And the other notable feature was our development margin of $19 million, which was almost double the prior period. The other segment includes support office. There were several one-off expenses relating to the implementation of our employee share scheme, dividend -- our DRP program and expenses relating to the migration of our IT platform to the cloud. We consider that the current run rate is sufficient to deliver the numerous developments and IT projects we have underway to further optimize performance. I'll now provide an overview of each of our segments. Total care related underlying EBITDA was consistent period-on-period at $18.4 million. Group occupancy increased over the pcp with occupancy at our core sites, those unaffected by development and refurbishment, increasing to an average of 94.2%. Revenue was also driven by further increases in our premium charging from the DMFs on care suites and daily pack charges on other premium beds. Combined, these were $5.3 million as outlined in the chart on the bottom right, with DMF 50% higher than the pcp. Our transformation strategy for the care portfolio is about increasing the mix of our premium beds to 70% and growing our recurring deferred management fee annuity stream on care suite. On IPO, around 34% of our beds were premium, and we expect these to be almost 50% by the end of this financial year. And as Earl said, close to 70% once we complete the pipeline. Our operating costs increased with higher staff costs, part of this is due to the general HCA and RN wage inflation that is consistent with the rest of the sector. We also had the ramp-up costs at Awatere, The Sands and Meadowbank 4, which all opened at the start of the period. As we illustrated earlier, the operating care earnings from these ramp-up sites were $1.9 million lower. However, they also contributed $5.9 million in development margin. And in future periods, the care earnings profile will reflect further material increases in recurring care suite DMF. Accordingly, in aggregate, the total care related underlying EBITDA was consistent period-on-period at $18.4 million. Obviously, we note that the composition of the earnings is different. But it's important to note that we carefully manage the timing of the decommissioning of our development sites to ensure there is offsetting margin from new developments in the near term. And ultimately, in the future, a far higher quality of recurring earnings in the care business. It's also worthwhile to note, as Earl said, strategically, we've been taking beds that were no longer fit-for-purpose and generating care earnings of $7,000 to $8,000 a bed that were almost wholly reliant on government funding. And a, deliberately ramping down and decommissioning these key centers to develop a premium product that generates development margins and recurring DMF of $20,000 a year plus. And finally, freeing up the site for further independent living development. As Earl has outlined, it is this further development that is now underway at sites like the BayView and Awatere on the premium parts of those sites. I'll now move to the Village segment. Operating revenue of $15.1 million was 16% up due to an increase in deferred management fees from the contribution of new units sold. You can see this depicted on the chart on the bottom right-hand side. Resale gains in dollar terms were above the pcp due to significantly higher volumes at care suites and a continuation of our strong resale margins for ILUs at 30.3%. We are starting to see a material step-up in care suite resale volumes as this portfolio matures, and they're now double the volumes that they were when we IPO-ed. New sales volumes were up 30% as the sales in The Sands and Meadowbank apartments continue and sales of care suites almost doubled compared to the pcp. As the care suite product continues to gain traction with the discerning residents. We provide further detail on our resale and development gains over [ lease ]. On the expenses side, these mostly reflect the new villages opened at the back end of 2019 and some rather minor increases in advertising and insurance costs. Some of the key village indicators for our villages are highlighted on Slide 30. As depicted in the top chart, our care suite resale volumes, in the orange were materially up on the pcp. Our ILU volumes were fairly steady and with increased apartment sales from the developments at Eden and Meadowbank that were completed prior to the IPO with [indiscernible] villages mature. The resale margins for these ILUs remain an impressive 30.3%. Development volumes, as depicted on the bottom left, was 30% above the pcp with healthy margins of 36%. This is illustrative of the premium pricing achieved at The Sands and Meadowbank 4. More importantly, these sales will deliver recurring deferred management fees in future and enable the capital to be recycled to future developments and distributions to shareholders. Moving to prices on Slide 31. As highlighted in the chart on the top left, resale prices were also above those in the pcp. The average apartment resale price was $657,000 compared to $503,000 in the pcp. This increase in resale price is consistent with our portfolio maturing and developments that we undertook at our prime sites at Eden and Meadowbank now having resales. As depicted in the bottom left, our prices for existing ILUs were in line with the last CBRE evaluation, which is why the fair value of the existing portfolio was steady over the period, and practically all of the $11.4 million increase in fair value in the [ set ] P&L was from our developments. Our care suite resale price stayed consistent around $240,000. As depicted on the bottom right-hand side, our low levels of ILU stock have continued and driven our ILU resale volumes. Pleasingly, our rolling 12-month days to sell, which we measure from the point of prior reason exit to a next occupation actually reduced in the half by 10 days compared to the position as at 31 May, 2019. Moving to Slide 32 and embedded value. Embedded value captures a value that will be realized if all units and care suites had to be realized at a single point in time at the price used by CBRE in the evaluation. Practically, it is a useful leading indicator of future realizable cash DMF and resale gains over the medium term. The embedded resale gains per unit of $112 million -- sorry, the embedded resale gains in aggregate of $112 million is $10 million under the pcp as we have realized $17 million of gains during the last 12 months, and CBRE have more or less kept their prices steady, which explains the modest $7 million offsetting increase. Moving now to our key development metrics on Slide 33. We delivered 100 care suites and units during the period with a further 165 to be completed in the second half. In total, as Earl said, we have 557 units in care suites under construction. We sold 84 new units in care suites at a development margin of 36%. This volume was up on the 65 sold in the pcp and includes the sell-down at Meadowbank Stage 4, The Sands and our 2 care suite developments at Awatere and BayView which are Stage 1 of large redevelopments at both sites. Looking at prices in the bottom left, you can see our average prices for new apartments and care suites reflect the premium nature of the stock sold. One thing we are finding is a particular attraction for the larger care suite, which is clearly a differentiated product in the market. I'll now cover off some of the highlights in relation to the balance sheet on Slide 34. Total assets increased to $1.5 billion, more than 50% higher than when we listed in 2017. The $288 million increase over November 18 was due to capital expenditure of $150 million plus revals of just over $100 million and the inclusion of right-of-use assets under IFRS 16. Of note, for our development, there was a 25% discount on brand-new unsold stock. This equates to around $55 million or $0.08 a share. As we sell down, we expect to realize the fair value gain. A net adjusted value per share, a non-GAAP measure, which is essentially the CBRE valuation, plus what's [indiscernible] at debt as at 31 May was $1.14 and as $1.15 as at November, similar to NTA. This is fairly consistent with May. The figure on the left-hand side of Slide 35 provides a bridge of the $36 million uplift in IP. In sum, our valuation assumptions were similar year-on-year with no material changes by CBRE in the evaluation and the same essentially applies to the care portfolio where we revalue our freehold land and buildings on a fixed monthly basis. Moving to cash flow on Slide 36. Operating cash flows of $57 million were materially up on the corresponding period and included first time sales receipts of $65 million. A reconciliation of ORA receipts and payments, including buybacks or development, et cetera, is provided in the appendices as per usual. The rental expense and the cash flow statement relates to when sales are made at Everil Orr village. This is a neutral item from a cash flow perspective and will remain a recurring item for the foreseeable future as we redevelop that site. The final slide for me is an update on our capital structure. Our net debt as at 30 November was $288 million, with gearing of 31.8%. We had facility limits of $350 million and the maturity date for our senior debt of 2023, provides certainty of funding for our medium-term development. We have also been preparing for a retail bond issuance and provide -- which will provide diversity of funding and tenor. That's it for me. I'll now hand back to Earl.

There was a question on the web, what was the key driver of sales improvement? And obviously, we had a significant increase in new stock to sell at the very close of the last financial year being Meadowbank Stage 4 and The Sands. So we had significant volume of stock to sell. And certainly, when the sun came out in Auckland, we saw a very big increase in that. And secondly, as we've alluded to, the maturity of the care suite product is really showing now with resales, in particular, of product that we've delivered over the last 3 years coming through on a frequent basis. So that's why you could see the doubling of retail volumes year-on-year in that category.

[Operator Instructions] And we do have a couple questions in the queue. We'll hear from Stephen Ridgewell.

Just for the new sales momentum. Are you able to give us a little bit of color as to the level of pre-sales that you're seeing at the moment for the 165? Your total units and suites that you [ don't think delivered ] in the second half?

Look, I mean, I can't give you details of how many applications we've got, Stephen. But suffice to say that we've got it spread geographically across a number of sites. So for example, Gracelands we have 32 villas coming there. And there's been strong interest. So we're fairly confident in the sell-down of those. Green Gables, as I said, we've just recently commenced, no point marketing too much prior to Christmas. So -- and we've had high levels of activity there. So I can't give you any, sort of, guidance on that. But yes, they're good sites. We're confident in the completion. In terms of timing, I mean, we've given you detail on the month that they're going to be completed. So Green Gables, we'll be right in May, so it'll be similar to last year at The Sands and Meadowbank in terms of wouldn't expect too many units to be included in our full year results from that site, but others that are completed in March, February, those that have already completed or about to complete now, in Upper Hutt, for example, we'd expect some sales to come through from them over the next 6 months.

If you put that together for the -- as you say, plus the kind of the sales, you are seeing at Brownsville, Meadowbank. I mean, should we be expecting that second half, new sales volume will be the same or better than the first half? Or how should we be thinking about that?

Yes. Right. It's a difficult one to answer, Stephen. We said that the same for Meadowbank, we're progressing according to expectation. As I say, we came through a wet winter. We had a good spring. We've got summer. And hopefully, for the next few months. So we're confident in terms of those sites. And the rest of them, as I said, we've spread geographically around the country. So depending on timing of completion, which will be before the end of the financial year, you'd factor in a few at each of those sites being sold before May, with the exception of Green Gables, as I said, which will be probably right at the end of May.

That's helpful. And just in terms of the care segment, not the commentary that there's obviously a few factors impacting that segment. But just trying to get a sense of when -- you'd be expecting kind of care EBITDA as reported currently, notwithstanding any potential change to that segment reporting, but when you expect care EBITDA as reported currently to stabilize. I mean, when do we start getting -- and can you just remind us when we're getting back into [indiscernible] [ decommissioning order ] impact phase as we're going through this redevelopment program and when they will start to kick in [indiscernible].

Yes. I mean, it's -- as we've talked about over many years, it's a feature of brownfields redevelopment. So we're decommissioning Lady Allum this year, for example, and that's going to impact the 2020 key earnings. As Matt said, going forward, the only other site that will have a material, sort of, interruption of aged care will be Elmwood when we redevelop that. So it's really a factor of looking at the care suites that have been sold, and as I say, the strong sales volumes in care suites, and as the DMF comes through on those, and those sites that have reached maturity, then you'd expect to see a flattening. So look, I can't -- again, I can't give the detailed guidance, but you really need to unpick what's going on in the key business and look at this overall strategic direction of the business in terms of creating a premium portfolio, creating a platform for longer-term recurring trail earnings through DMF on the care suites and premium revenue. So it's -- we're expecting it to flatten out moving into the back end of '21, '22. But again, if there's opportunities to redevelop existing stock, we may be decommissioning other sites. And the cost of commissioning, for example, Waimarie Street will come into play in that period. So I think the better way to look at it is to in terms of what's going on in the aged care business is to unpack those variables, and then look at the reference to the core sites, which is over half of the portfolio is what we'll call core, we're not -- it's not affected by development. And there was about $0.5 million drop there. So that's sort of demonstrating the fact that actually the core business was performing relatively well, and those unfunded wage costs are the major impact on that business. And as I say, we've got a clear sort of strategy to respond to that in terms of workforce planning as well as, obviously, increased premium revenue.

Steve, it's Matt. On Slide 12, we note the transformation of Meadowbank, sort of halfway down that slide. So actually that site in the last 12 months, there's actually 160 grands, sort of pcp. And if you cast your mind back, that sort of, have been open for, sort of, 12 to 15 months now. So that kind of gives you an indication of the length of time that, that ramp up takes. And as I said earlier, we've opened Awatere, Meadowbank Stage 4 and BayView, all within a relatively short period of time. So if Meadowbank is a sort of leading indicator of what happens at other sites, we'd expect over the 12 to 18 months, for those definitely to flip the switch from that perspective, and as Earl said before, at Windermere, we don't actually have any existing earnings to lose at that site nor at Green Gables. But obviously, we have to ramp up that site from a relatively cold start. So I think it's about sort of understanding what's coming on stream at what point in time and [ making ] your models sort of allowing the 12 to 18 months sort of ramp up of those new sites.

Okay. And just at a high level for this year. Historically, you've had a seasonal split, first half weighting for key earnings, sometime of the first half has been a bit behind in the second half for various timing reasons. Would it be reasonable to expect kind of a similar seasonal split as we see in the past, this year?

In the core business, that tends to be the case, Stephen, because the bulk of the state holidays fall into the second half of the financial year. But as you'll see in terms of the care business, we've just, in the first half of the year, commissioned a whole bunch of sites and opened new refurbish sites. So those sites will have a strong increase in the second half of the year. So again, it's sort of about balancing both aspects of that.

Okay, and maybe just one last one for me. Just going back to the comment, the -- all expectations, if you like, which has been talked about in previous sticks that they will double or better even after paying dividends. So as the Brownfield portfolio has developed, can you just remind us of the time frame for that? And also, as the reference point for that statement, that at the time of IPO is [ the -- is it today or maybe ] if you like?

Well, if you look at Slide 9, Stephen, we've gone from 450 to 609 in under 3 years. And that statement with reference to the entire pipeline. So we sort of feel like we're about 45% of the [ wavy ] now.

We'll take our next question from Nick Mar.

Just one on the remaining stock at The Sands and Meadowbank Stage 4. Could you just talk through how those kind of look versus the first half that you've sold? Obviously, there were some of the kind of more premium ones that might have been sold earlier on it. And how that kind of might affect, I guess, the margin and also the average selling price in the remainder?

Yes, that's fair enough observation Nick. I'll -- we've -- the -- I think Meadowbank 4, there's a few of the high-value stock items remain -- high-value stock remaining at Sands. I'm thinking top floor, that's pretty well gone. So it'd be fair enough to factor in a lower average price if you're doing it in your model for the remainder of the stock. Meadowbank [indiscernible] stock is -- we're selling through that now. Of course you get a bit of a scarcity [indiscernible] going on in terms of sales strategy once there's lower levels of stock available. So that sort of offsets to some extent the tendency to [ slow ] discount to remove it all. We're tracking well ahead of our original business case that's for sure.

And Nick, I think we guided to around about a 30% development margin at those sort of premium sites. So we've sort of been up around 36 for the stock we sold in the first half so there will be a little bit of normalization to occur as we sell down the remainder of the sites.

No, that's clear. And then just kind of [ clear sweet ] stock that's still sitting at those sites as well?

So at The Sands we're about 50% occupied. At the moment, the first stage of Meadowbank is almost fully occupied. And then in terms of Stage 4, we still have about 20 odd to go to complete the sale down there.

Next question from Andrew Steele.

Just a couple for me. The first one is on market momentum. I think it's the ability you're seeing to push through pricing increases. Could you just comment on how you're able to achieve much in terms of resell price gains and has it been any, sort of, broader pickup in sales inquiries, both on resale and new sale over recent months? Or is it reasonably consistent the first -- last time you reported it?

Pricing is pretty flat, Andrew, in Auckland, in particular. Out of Auckland, where there's still growth. But in terms of activity, yes, definitely. As I said before, coming out of winter in Auckland in September, not a significant increase in activity through that final quarter of the year. So I think the sentiments around town in terms of the housing market, we tend to agree with, we're seeing that as well.

Okay. Excellent. And then just one more on CapEx and net debt. Could you give us some, sort of, steer as to where you expect full year CapEx to be and year-end net debt?

Yes, Andrew. In the appendices, we provided a bit of an overview of CapEx. So I think it's fair to say that we're at the run rate now from a growth CapEx perspective. So that's around $70 million to every 6 months. We are coming towards the end of our, sort of, upgrade and conversion projects. Sorry this is on Slide 32, if you really want to factor the end of it. So we incurred around $5 million of CapEx in the 6 months on those refurbishment projects. And those are the ones that you can picture in Earl's slides that we literally go in and sort of gut a full wing and then reestablish it. So we've probably completed sort of 80% to 90% of that work now. So that number will come off going forward. And the IT and other, there was $2 million in relation to that in the last 6 months, obviously, the bulk of that related to the E-Case, Clinical Information System, that number will probably be fairly similar in the next 6 months as we complete our D365 implementation for our ERP system. But would expect that to taper off a little bit after that. And maintenance CapEx from an aged care and RV perspective will be sort of fairly consistent. And obviously, just reflect the number of beds we have in the portfolio at a certain period of time.

And we'll take our next question from Jeremy Simpson.

Just in terms of the new delivery of stock at villas at Whitianga and care suites at Hamilton. Were any of those sold in the period, or is that sort of sitting under new unsold stock at balance date?

No. There were sales in Hamilton. I think we got 8 underway at Awatere. That site had a large proportion of residents pulled over from the old center. So something about 15 to 20 beds available. So we sold about 8 of them. And we had a good Christmas, January period actually down there as well. For Whitianga, yes, post into November. So -- haven't got an update on that yet.

And just after your sort of thoughts on margins, resale and development margins over the next, sort of, couple of years? Is that sort of 30% level, that you're getting, is that a realistic number we should be thinking about? Or you expect that some downside risk to that?

I think in every previous presentation, we've done, we've said, once we get out of Auckland, that margin will be in the 10% to 15% range. So I expect it to sort of tailor off at about 20-on average. And we'll -- Waimarie Street will be a couple of years away. Lady Allum is [ geared ] at the first stage. So yes, I'd expect it to be averaging down in the next sort of -- once we get through 2020, we expect it to be coming off with what we're selling, we'll be selling Green Gables and Hastings and the like in the remainder of the -- and through '21.

And Jeremy, on the resale front, from an ILU perspective, I mean, obviously, a lot of the stock that we're selling now, with our average length of stay is 7 years in a villa and 5 years in an apartment reflects people that need to bear units and apartments in 2012 through '14, and obviously, benefited from the HPI over that time. So we have -- as we've sort of guided in previous presentations, if HPI normalizes at around sort of 3.5%, and our average length of stay, stay where they are, then those should, in theory, come back to around 20% as well. So we'll just -- well, we're obviously very happy with the 30%, but we've guided to sort of 20% with all things ceteris paribus.

Yes. Okay. And I guess -- we're over halfway through the year, you haven't commented on guidance. Pretty strong first half. I'm just wondering, I mean, what should -- should we be thinking double digit growth for the full year?

We haven't -- while we haven't provided any guidance, Jeremy. I mean, we've got -- I think you can work that out through the -- what we've got left to sell at The Sands and Meadowbank, the comments we've made on that. The -- and the timing of the new stock to be delivered. So yes, we haven't provided any earnings guidance at this stage.

And we'll take our final question from Carolyn Holmes.

I'm new to covering the stock, so I apologize in advance. A couple of quick questions from share clarity. In terms of the pressures on operating costs, employee costs and also just government subsidies coming through. What's the outlook there? And also, any pressures on construction costs, building material costs coming through? And how is the underlying contracts actually based if there is pressure on building material costs.

Yes, thanks, Carolyn for the question. So in terms of wage and operating costs, there has been increases over the most recent years in the HQ sector in New Zealand. That's being driven by a combination of an equal pay regime, which applies to our health care systems, which are the largest portion of staff at each center. And the funding, the government funding to sort of contribute to both of those costs is somewhat short of what's required to pay the rates that we're mandated to pay. On top of that there is a steady increase in the minimum wage for our housekeeping staff which is, sort of, funded almost in arrears in the sense that the fee increase from the government on our bed rates come sort of after the minimum wage increases. And thirdly, significant shortage of registered nurses in the sector in New Zealand, which will be alleviated through a relaxation of immigration restrictions that was recently announced by the government that is causing, obviously, short-term pressure on wage rates. So to date, the government funding is -- we receive increases every year, generally peaked to inflation. It's been that way for a long period of time over 10 years. So the government is funding the sector and is increasing the daily bed rates to address some of these things. There's just leakages generally sort of [ enter here ] and through some of those other factors that that are driving sort of staff shortages, et cetera. In terms of construction costs, I think, we've reported before that we're starting to see a leveling off generally in terms of cost pressure in that -- in that part of the business. Certainly, post-IPO, there was an increase in our cost of our contracts that wasn't -- that we didn't foresee at the time that was offset by increased pricing that we achieved on the stock that we built. So it was somewhat neutral from a margin perspective. But our contracts -- it was a good question about our contracts. Our contracts. When we start a project, we lock in the pricing at the time of commencement. So that -- we pass the risk of future construction costs escalation through to the contractor during the period of construction. So the risk lies in the time frame between, I guess, scoping a project, doing feasibility and actually getting to site and signing the construction contract. As I say there, once we get there, we lock in that cost, and that's a feature of how we deliver developments at Oceania.

Okay, that's great. And my last question is, again, I think Jeremy asked a little bit about the development margins. Given that, and Australia is no different. Given that there's been a significant increase in underlying land values in the last few years, both New Zealand and over here. How would you actually think about it in terms of -- just how much of the development margin is because the change in the portfolio is moving more towards the premiumization of your property portfolio. And also the benefit of the growth in the underlying land values. If we don't see that growth and a bit overall tapers off a little bit for the next couple of years, which, presumably, everybody would probably like to see except for you guys. How would you still see? So you've talked a little bit about the property margin will be lower in areas outside of Auckland, which is granted. But how would you then also just look at, okay, so how much in the past has been reflected of the change in your business model towards this premiumization of your property portfolio.

Hi, it's Matt. I think important to note that when we calculate our development margin, we go and get an independent valuation of our sites because noting that, of course, our brownfield development sites. That valuation has undertaken at the time of our change of use from an existing operating site to a development site. So obviously, we've owned a site like The Sands and Meadowbank for best part of 15 years. We don't take in the value of land from 15 years ago. Obviously, that's why our cash-on-cash margins are actually superior to our reported development margins. So hopefully, that gives you some sort of comfort around the way we calculate those margins. And in terms of margins in the future, we adopt a similar approach. I think the fact is that the cost of construction are fairly similar in Auckland as they are outside of Auckland, which is why, as Earl sort of guided to, we expect our development margins to, sort of, come back from [ 30-odd percent ] in Auckland to your 13% to 15% originally and with a weighted average of around 20% over the lifetime of the pipeline.

I think the key point of distinction that Matt raised here is the difference between brownfield's and greenfield's development. And most of our listed peers are Greenfield's developers so they acquire land and hold it and build the villages on it. The brownfield's developer we, as Matt said at the start, he -- we're operating an asset on that land when we get to the point of -- that we intend to redevelop it with the value -- we strike the value of land at that time through evaluation. So there's far less development margin reflected an increase in net value than there is for the other [indiscernible].

And it appears we have no further questions over the phone at this time.

All right. Thanks for coming on the call everyone. We'll speak to you in 6 months.

Once again, that concludes today's conference. Thank you for your participation. You may now disconnect your phone lines.