Oceania Healthcare Limited (OCA) Earnings Call Transcript & Summary

Good day, everyone, and welcome to the Oceania Healthcare 1H '21 Results Announcement Conference. At this time, I'd like to turn the conference over to Earl Gasparich, CEO. Please go ahead, sir.

Hello, everyone, and thanks for coming on the call this morning. My name is Earl Gasparich as you just heard for those that don't know me. I think I know just about everyone on the call. And with me today is Brent Pattison, our CFO. And we are pleased as usual to bring you this presentation of our interim results for the 6 months ended 30 November 2020, which we have announced this morning. There are a number of key highlights of the first half results that I'll quickly cover, before presenting a brief update on our strategy and then an overview on our development. And then I'll hand the presentation over to Brent to present the detailed financial results for the period. Sorry, we're just waiting on the next slide coming up. So for those of you that have the slides in front of you, I'm on Slide 3 now, and we'll catch up with you with the visual when we can. So firstly, the financial highlights of the period. And we improved underlying EBITDA compared to a heavily COVID-impacted -- COVID-19 result in the previous 6 months. And earnings were back in line with the prior corresponding period at $35 million. And this is a pleasing result for the business, given that in the 6 months to 30 November, we also had a government lockdown in Auckland and obviously ongoing costs of managing the risk of COVID-19 across our sites. The key highlights of that financial result was undoubtedly the strong sales volume across both our retirement village units and our care suite product, with sales increasing by 44% on the prior corresponding period. And secondly, the 15% lift in our underlying earnings from our aged care business. And we noted in our last annual results for the year ended 31 May 2020, that our aged care earnings are at a point of inflection following 3 years of redevelopment and increasing the proportion of premium rooms in that portfolio. So it's particularly pleasing to record that strong increase in earnings from our care segment. Operating cash flow was also strong over the period, increasing from $57 million to $75 million, which is 31% growth. And that's as a result of those high sales volumes achieved. Our total assets are now $1.7 billion, which is 12% growth year-on-year, reflecting the ongoing development capital expenditure invested in the portfolio. And also, there was a $27 million increase in the valuation of our investment property. And that was predominantly driven by changes to the CBRE assumptions that CBRE had made in response to COVID-19 back in May 2020. And in particular, they adjusted their year 1 growth rate back to 0 as opposed to negative 2% that the 31 May 2020 valuation included. And this reflected the sentiment that the property market has emerged better than expected since the government restrictions were largely lifted in June last year. As I just mentioned, on the bottom right of Slide 3, our sales volumes were a key feature of the interim result. We achieved 268 total sales in the 6-month period. And many new residents enjoy the benefit of our retirement villages and care suites in what's been an uncertain year for them. As I mentioned, we're 44% higher than the prior corresponding period and 86% up on the sales achieved in the period before that in 2019. And just highlighting the resale volumes as well, the 21% increase in resale volumes compared to the prior period was particularly pleasing and -- because that's a key indicator of the quality of our annuity earnings now coming from the business. Now on Slide 4. And as I mentioned, our aged care business is certainly demonstrating that it's past the point of inflection, with improved occupancy and premium revenue streams delivering a 15% increase in underlying EBITDA from this segment of the business. As those of you that have been with us for a few years will know we embarked upon the redevelopment of our sites following the IPO in 2017. And we've undertaken substantial redevelopment projects at a number of sites around the country. And we have 340 care suites that we've delivered in that 3.5-year period. When we undertook those redevelopments, we always expected to incur a short-term reduction in earnings from the sites as the old facility was decommissioned and beds were closed. And that did cause some volatility in our aged care earnings over that 3-year period to May. But what this interim period certainly demonstrates is that we're now past that point of inflection. And we're now generating higher occupancy levels as we sell down our care suites and we're generating that premium resident-funded revenue through the deferred management fees on the care suites. So combining those care suites that we've developed over the past 3.5 years and the standard rooms that we've converted to care suites, we now have 772 care suites in our portfolio. And that's more than tripled since the time of our IPO as we progress towards our target mix of 70 to 30 premium to standard rooms. So that's aged care. In terms of the other key highlight, I mentioned sales growth. And again despite losing another month of sales in Auckland during the government lockdown of August-September 2020, we did record 268 total sales, and that's 83 sales higher than the prior corresponding period. There's no doubt that growth was fueled by the excellent job that the aged care and retirement village sector did generally by keeping our residents and staff safe during those government lockdowns and the heightened risk of COVID-19. Coming out of that uncertain period, many residents that have joined us in the last 6 months have given us feedback that they did reflect on their well-being during the lockdown, and they couldn't more greatly appreciate the benefits of living in our retirement village with a community of like-minded neighbors in an environment that provides security and peace of mind. So of the total sales growth, our sales of care suites increased by 36% and sales of underpinning living units by 60% year-on-year, with care suite resale stock brought down to what we call normal levels compared to what we were holding at the end of the government lockdown. And furthermore, despite the high resale volumes, we have good resale stock levels on hand at the moment in independent living units, which will underpin sales for the 6 months period to 31 March 2021. Other highlights, we're bringing our development team back on board in the 6-month period following the lockdowns and ramping up our development activity again. And we remain on track to deliver 217 units in care suites in only the 10-month period to 31 March 2021, which is in line with our previous guidance. So we've already completed the 28 apartments and 61 care suites at Green Gables in Nelson. We've got another 35 first stage retirement village apartments at The BayView in Tauranga as well as 22 apartments and 71 care suites to come at Bellevue in Christchurch before the end of March. And that brings us to a total of the 217 units and care suites build rate that we are confident of delivering in just a few months. Right now, we have 520 villas, apartments and care suites under construction across 7 projects and 5 geographical locations in New Zealand. And a number of exciting projects have recommenced and new projects commenced during the 6-month period. Our remaining development pipeline of 780 units and care suites is 84.2% consented. And that demonstrates, again great capability of our in-house team in getting the design and plan for new projects done, getting consents in place. And it provides us with a very clear growth pathway over the coming years. The Directors have declared an interim dividend of $0.013 per share, which is not imputed. The record date for that dividend is 10 February, and payment 24 February. And the dividend reinvestment plan will be operating. We are very pleased with our inaugural domestic retail bond issue on October 2020, where we raised $125 million. This has provided us with diversity of funding and tenor, which will help facilitate our future growth plans. And finally, as we've previously advised, we will be changing our balance date to 31 March from 2021. And that aligns our financial year with some of our industry peers. So just a brief update on strategy, and this is a slide that we've presented before. Again, the objective of our brownfield redevelopment strategy is twofold: first, to optimize returns per bed from our aged care business; and second, to achieve site optimization and the best yield of retirement village units at those sites, effectively offering product to our residents that is appropriate for the local markets in which the sites are located. So in terms of aged care, the brownfields redevelopment cycle involves taking a site that may, for example, be returning $8,000 to $10,000 per bed at a standard in the facility and interrupting those earnings as we move through the consenting, constructing and commissioning phase of the new aged care center. And the cases where we put to close the old facility entirely, which was the case at Green Gables in Nelson, this would mean that we are generating no earnings from the site at all during the construction phase. Whereas for other sites like The BayView in Tauranga, the new aged care center has been constructed on previously vacant land without the need to physically reduce the capacity of the existing facility. So while we incur a short-term reduction in earnings in the near term, once we've completed and commissioned the new aged care center and sell the new beds as care suites, we're recycling our capital through the ORA model, achieving upfront development margins, and establishing long-term trail earnings from the deferred management fee generated on the ORA. And that enables us to significantly generate higher earnings per bed from the site than were achievable before it was redeveloped. And we know from our experience with our aged care center at Eden in Auckland that annual earnings per bed in excess of $20,000 are achievable, which is significantly ahead of average earnings in the aged care sector generally. And again as we increase our earnings per bed in our aged care segment, our brownfields development strategy also unlocks the prime land on the site to optimize yield through the construction of independent living units and new community facilities for residents. In total over the past decade, we've completed 582 new independent living units. We have 305 under construction right now and have consents in place for a further 635 on our existing sites. So now just a brief update on developments. And as I've already mentioned, we're well on track with our target build rate. And we've certainly proven a genuine track record in doing so and meeting those build rates over the past 3.5 years. As I already mentioned, we completed Green Gables during the period and that's selling well, with 18 apartments and 9 care suites already sold or under application. We're well on track to complete stage 2 of The BayView. The first phase of that comprising 35 apartments in The Bellevue in Christchurch. And that brings our build rate to 217 units and care suites. During the interim period, we also commenced the development of our greenfield site at Waimarie Street comprising 79 apartments and 31 care suites. And also the final stage of villas at Gracelands in Hastings, which comprises 18 units. As well as those 2 projects, we expect to complete the extension to our Eden site in Auckland early next year, next financial year, which is another 49 apartments. We're continuing with the construction of Lady Allum in Auckland; the next phase of Stage 2 at The BayView in Tauranga. And then finally Hamilton, another 63 apartments there. So there are 520 units and care suites under construction, as I mentioned. And that represents a substantial development program, all managed by our in-house team. We're also continuing to prepare for new projects as we roll through the pipeline with new resource consents obtained in Rangiora. And as I mentioned, 84% of the pipeline now under construction -- sorry, under consent. Just going through some nice photos. Green Gables is now complete as you can see in the photo here. The top floor does have a view out to the sea. And we completed that around end of September and recorded some good sales data across apartments. And the care center is filling well. Waimarie Street in Auckland is our greenfield development site we acquired in 2018 at 13,500 square meters in a prime area of Saint Heliers with wide sweeping views over the harbor and back towards the city. Construction has commenced. As I mentioned, we're over halfway through our earthworks in this project, and we expect to complete this development in one stage by the end of the 2023 financial year. And this will be one of the highest-quality retirement villages in New Zealand offering a full continuum of care to a very high specification. And as we've reemphasized on other presentation, Saint Heliers is an area of Auckland with a high median house price, high demand for aged care and retirement village living and limited competition, so we are pretty excited to commence that project. The BayView in Tauranga, you can see from the photo here, the first phase of the first retirement village stage comprising 35 apartments is well on track to complete before the end of March. And it's a good example of site optimization that I was talking about before, where you can see in the background to the photo, the new aged care center, which is now completely full, the new apartments to the foreground and the more prime area of the site with the greater views. And then if you look at the top right of that photo, you can see other land with some older units on it that will be demolished and rebuilt for the remaining stages of our retirement village build out on that site. The Bellevue in Christchurch, again, you can see from the photo is substantially complete. And certainly, we'll have residents moving in by the end of March. Again, it's in a high-value area of Christchurch with good demand for aged care. And up into Eden in Auckland, extension to our existing site, you can see again, it's progressing very well with the roof going on. We've got a new community center and 49 apartments to add to our existing village there. And again, we expect to complete that pretty early on in the 2022 financial year. So finally just to reiterate, as we progress through the execution of our strategy and redevelop our sites, we are substantially increasing the proportion of premium retirement village units and care suites across the portfolio. At the time of the IPO, as you can see on the left-hand side, 29% of our units and premium were classified as premium, which would include care suites and rooms to which we attributed daily premium accommodation charge to. Over the past 3 years, we've increased that proportion to 46%, which is your middle stack. And as we build out the remainder of our pipeline, that proportion will increase to 69%, which is our 70-30 mix I mentioned before. So in summary, our long-term strategy is to reposition our portfolio, ensure we have the right mix of product in the right locations in order to meet the demands of the local market. This will deliver the highest earnings per bed in the sector as well as substantial growth in our annuity earnings and underlying asset value. So that's all for me. I'm now going to hand over the presentation to Brent, our CFO, who will cover the financial results in more detail.

Thanks, Earl. Good morning, everyone. Welcome back from holidays. Great to be presenting our half year results for FY '21. This will be our last time -- this will be the last time our interims are presented so early in the reporting calendar. We'll now move to a full 31 March -- full year March 31 reporting date. A lot has have occurred domestically and globally over the last 12 months, with COVID-19 largely dominating press headlines. It's certainly been a rewarding time to be on deck. And as Earl has discussed, our aged care business has turned the corner. We have delivered substantial growth in sales volume, with the housing market continuing to defy market commentators. We have some exciting new and new stages of development scheduled for completion in the next 6 months and delighted with the market support from new and existing investors and now an overall $125 million retail bond. Over the next 9 slides, I'll be covering off an overview of the key financial statements, CBRE valuation, insights and performance of our care and village segment, sales data and key indicators, our cash performance, growth in total assets and capital structure. There is also further detail in the appendices of our presentation. Turning to the income statement. Total comprehensive income of $57 million was up significantly 137% on prior corresponding period. The material contributors to this positive result were largely reflecting the reversal of COVID-19 valuation assumptions contained within 30 November CBRE valuation. This has resulted in favorable fair value movements in both our investment property, IP; and property, plant and equipment, PP&E. There has been a positive change in the fair value of IP, $26.7 million favorable movement driven by an improvement in CBRE's operator's interest valuation, which reflects the value of future DMF in retail gain cash flows from the village portfolio. At the time of our full year '20 results, CBRE's valuation of IP reflected adverse changes to key assumptions, resulting from a point-in-time valuation being undertaken with the COVID-19 [ room ]. As at September 1, 2020, CBRE had reversed either in part or in whole some of these key assumption changes. We've highlighted that for readers on the right-hand side of the table. Firstly, property price growth, PPGR, in year 1 has returned to pre-COVID levels of 0%, back up from negative 2%. Year 2 remains at 0%, and it's historically been 1%. And discount rates have reduced by 12.5 basis points across the portfolio, having previously been increased by between 12.5 to 25 basis points across the portfolio in FY 2020. Further supported at the total comprehensive income level by a change in fair value of property, plant and equipment, $31.3 million favorable movement in fair value of PP&E. Valuation improvements across many of our key care sites, reflecting the reduced discount rates and lift and EBITDA per bed. Turning to the operating revenue of $103.9 million, up 7.6% on first half '20, driven by continued growth in our care business as we progress through the premiumization of our care strategy. Further, we observed a healthy 26% increase in recurring revenue of $18.3 million for care suite and village deferred management fees. Operating expenses, up 7.4% on first half '20, reflecting the continued investment in staffing, patient welfare and COVID response across our facilities. Depreciation expense on buildings, up $0.4 million pcp. Our care suite assets treated as property, plant and equipment and are therefore depreciated. We will continue to see growing depreciation expenses as we build out our pipeline of premium high-value care suites. By comparison of our depreciation rate when it comes to our peers, building depreciation expense would have been circa $1.3 million lower. Taxation benefit of $4.4 million. We hold $72.1 million of tax losses off balance sheet. Each year, we recognize a portion of these losses as a deferred tax benefit to offset any tax expense, mainly relating to fair value movements of our property activity. Moving to underlying earnings. This slide provides a reconciliation of reported net profit after-tax, underlying NPAT and underlying EBITDA, both of which are non-GAAP measures. These measures are important to us as they remove the fair value movement and capture the actual realized gains achieved on resales and realized development margin on new sales at our sites. Underlying EBITDA was slightly up on first half '20 at $35.4 million. These results saw good levels of new sales and resales despite operating in a COVID-19 environment, particularly at the start of the period when Auckland experienced a further alert level 3 lockdown for 2 to 3 weeks. Underlying NPAT of $23.3 million was down 5.8% on pcp. I previously discussed the higher depreciation charge, and note the higher interest costs in the first half '21 from completed developments that we are in the process of selling down. If we turn to resale gains and development margins, resale gains, up $2.1 million pcp on strong resale volumes across both village and care suite. Development margin, down $1.7 million. New sales volumes increased significantly. However, the first half '20 benefited from higher-margin sales at Auckland premium sites such as The Sands. I'm pleased with the strong levels of sales we are now experiencing and reiterate that the increased regional mix in resales and new sales will be a theme that continues in the second half of this year. Turning to a segmental view on the right-hand side. The aged care segment underlying EBITDA of $11 million, up 15.7%, reflects the ongoing transformation of our care portfolio toward a greater proportion of premium care beds and a strong performance for the half. We have traditionally reported the resale and development margin for care suites and the village segment as the village company is legally the issuer of the ORA contract. We make an adjustment to underlying care EBITDA on the next slide to illustrate the level of these 2 gains. Our village segment has continued to see strong growth in DMF, up 21% compounded annual growth rate since the first half '19 as development sell-down and resales occur at a higher price point. Overall first half '21 has underlying EBITDA of $34.7 million was largely flat pcp. And I'll address this in more detail under the village segment Slide 18. The other segment includes support office and increased $1 million on first half '20. This includes investment in IT; increased insurance costs; clinical as well as expenses relating to the new long-term incentive plan, which was put in place for senior management in first half '21, noting that the previous held up [ in advance ]. The care segment, we have observed strong performance in our care segment. At the full year '20 results in July, we referenced reaching a point of inflection in the progress of our care strategy, whereby the earnings drag from the ramp-up of new facilities have peaked. And we expected care operating earnings per bed to continue an upward trajectory from that point on, driven by these premium recurring revenue stream. We continue to see strong evidence of this, with care underlying EBITDA increasing 15% in first half '21 to $11 million. EBITDA per bed was up 14%, nearly a $1,200 increase per bed to $9,549 per bed annualized. This was largely driven by growth in our care ramp-up sites, being Meadowbank 3 and 4, BayView, Sands and Awatere, which generated a large positive operating EBITDA swing, $2.4 million, relative to pcp, more than offsetting the ramp-down costs at future development sites. In addition to the turnaround in operating earnings at these care sites, they also delivered $4.8 million of development margin in the first half '21 from strong care suite sales. We've not formally changed the presentation of our care and village segments in our financial statements. That said, we consider that to get a fuller picture of care, these margins can be aggregated with the operating care segment figures, given the margins are essentially the quid pro quo from earnings foregone to the decommissioning of the site. Total aged care underlying EBITDA was up 21.6 -- was $21.6 million, up 16% on pcp and delivered $18,779 underlying EBITDA per bed. Total care underlying EBITDA includes care suite development margin and resale gains of $10.6 million in first half '21. These are primarily related to The Sands, Meadowbank 4, Awatere and The BayView. Premium revenue. We are continuing to see good growth in recurring premium revenues from PAC and DMF and observed a 30% -- 37% compounded annual growth rate since first half of '19. We expect to see continued strong growth in this area, while we continue to build and [ re-empower ] our premium care development. Total aged care revenue of $87.3 million, up 7.1%, an increase largely driven by premium revenue capture. Operating costs. Staff costs were the greatest contributors of first half '21 total expenses of $76.3 million. This included pay increases to registered nurses as part of our ongoing efforts to retain key professional staff. The ramp-up of Green Gables, which opened in September, also drove an increase in care operating costs. In summary, the care portfolio has performed well pcp with higher occupancy. We continue to replace the short-term earnings impact with longer-term quality and quantity of premium earnings being DMF, PAC and resales. And importantly, we are past the inflection point of the brownfield development of our portfolio. And we will likely see less volatility in our annual care earnings as the maturing and ramp-up prior period investment takes hold. Village segment has rebounded strongly since COVID-19, underpinned by a 44% growth in total sales. Underlying EBITDA of $34.7 million was flat on first half '20. As with the care segment, we continue to see strong growth in DMF revenue for the Village segment, delivering a 21% CAGR over the last 2 years, resulting in $12.9 million of DMF revenues in first half '21. Minor costs increases across occupancy and staffing, including costs relating to Green Gables which as I mentioned, opened in September. We have managed to maintain underlying EBITDA in the Village business despite the first half of '20 being heavily reliant on the super premium sales in our flagship sites, The Sands and Meadowbank. And we have pivoted to higher-quality earnings underpinned by recurring DMF. Total sales were a key feature in the first half '21. We delivered strong growth in sales volume on first half '20, up 83, total sales to 268. This was underpinned by new sales and resales of care suites, which grew 36% to 159. Total new sales and resales of apartments and villas also experienced strong growth, increasing 60% to 109. We provide further detail on resale and development gains on a few slides. So looking at the resale volumes. Total resales of 123 for the half year was up 22% on pcp, a significant portion of the increase driven by care suite resales as our care portfolio grows and matures. We've seen a solid sales recovery from COVID-19 as depicted in the second half of '20 graphic. Importantly, we have also recorded increased resale across all product types, villa, apartment and care suite, compared to first half '20 We are pleased with the resales selling volumes, which we have achieved across the country, not just in Auckland. On a prices basis, resale prices continue to grow across villas and care suites in first half '21. Apartment resale prices as an average decreased slightly pcp due to the regional mix of apartment resales versus the pcp in the second half '20, heavily weighting towards Auckland-based resales. Resale on margins of both ILUs and care suites improved on second half '20, which was heavily impacted by COVID. As was previously foreshadowed, ILU resale margins have and will continue to moderate down from earlier levels of around 30% as more of the portfolio moves from key new and urban locations to core urban regional locations. From a closing stock perspective, at full year '20 full year results, we -- in July, we noted the high levels of resale stock that was sitting on at that time, resulting from COVID-19, hindering sales at the end of that financial year. As emphasized at the time, this was a good signal for resale momentum in FY '21, and our strong resale volumes and gains in first half '21 proved it. Despite strong growth in resale volumes in first half of '21, we still have good levels of resale stock on hand presently, with a higher mix of ILUs is in care suites relative to full year '20. This is a positive indicator for resales both volumes and margins over the next reporting period. If we turn to developments, new sales volumes. As covered earlier, Oceania recorded 145 new sales in the first half '21, a 73% increase or 61 sales on first half '20. Within the development sales volume, care suite volumes increased to 85 new sales, further illustrating this model is well-established and accepted by residents wanting the convenience of a larger, well-equipped room, the additional services in confidence of care in a single move to meet their future need. ILU and villa development sales volumes doubled on pcp, reflecting the sell-down of Green Gables as well as sales of new villas at Whitianga and Woodlands completed in late full year '20. Development margin. There was a softening of development margin percentage in the first half '21 relative to first half '20. As we indicated previously, we expect the development margin to moderate in the near term as we move our mix away from recent premium Auckland development to those in more regional locations. Continued strong apartment sales achieved at Meadowbank and The Sands offset by lower price point offering at [ Gable apartment ] at the moment. From a cash flow perspective, strong operating cash flows of $74.6 million, including first time sale receipts at development sites of $65.1 million. Payments to employees and suppliers, down $5.4 million. Receipts from new ORA contracts, up $11.4 million from first half '20 to $113.4 million. Total CapEx of $60.1 million. Development capital expenditure is about $10 million lower on a pcp as a result of re-ramping up on development sites post-COVID-19. Development activity has since returned to pre-COVID levels with a number of quality sites, as was presented earlier, coming on stream by full year March '21. Also, CapEx includes a small acquisition of an adjacent site in Christchurch. Pleasingly, during the period we generated circa $15 million of excess cash sale proceeds relative to development CapEx incurred. A reconciliation of ORA receipts and payments, including buybacks and the developments, is provided in the appendices. The balance sheet. Total assets increased by $177 million to $1.7 billion. The circa $120 million increase since full year '20 was driven largely by capital expenditure, which is around $60 million and CBRE valuation -- revaluation movements of $57.9 million across both IP and PP&E. Our net adjusted value, NAV, per share, which is a non-GAAP measure at 30 November '20, was $1.24 per share. This is a strong increase from the $1.10 per share at full year '20, again driven largely by the revaluation uplift in IP and PP&E coming from the aforementioned changes to CBRE's assumptions. As this is an equity valuation, it strips out the value of refund or ORA payments being $97 million for care suite and $470 million for ILU. It's important to note that our IP and PP&E balance sheet values already include a CBRE valuation discount on the unsold stock. For first half '21, this was a blended discount of 25%, down from 27.3% at full year '20 and equates to around $35 million of additional value or $0.055 per share. As we continue to sell this down, we expect to realize this fair value accounting gain. NAV is a proxy for valuation of the status quo [ that is existing ] and excludes the $0.055 per share referred to, and importantly the incremental development cash flow in earnings including resale gains and DMF from the 520 units and suites under construction as at 30 November '20. Capital structure. Our net debt at 30 November '20, was $311.4 million with gearing at 32.3%, down from 35.1% at full year '20 as we have reduced unsold stock value and experienced fair value gains in our property portfolio. That includes $125 million from our inaugural 7-year retail bond issue, which was successfully completed in October '20, achieving the full [ oversubscriptions ] of $50 million. This issuance extends our tenor and provides diversity of funding sources. Facility C, which was secured from Oceania's banking syndicate in April 20 to provide $70 million of additional liquidity amidst the uncertainty of COVID-19, was undrawn and canceled in full upon the issue of the retail bond. The net impact of the bond issued on total facility limits would be for a $55 million increase to $475 million. We have $299.7 million net bank debt drawn as at 30 November '20, providing $175.3 million of headroom in our banking facility. We have sufficient bank facilities in place to execute our development pipeline with the ability to switch funds between the facilities. We also note the addition of a debt tenor profile graphic in the slide. So that's it from me. Thank you, everyone. That concludes the financial update. We are now open for questions.

[Operator Instructions] We'll take our first question in the queue at this time.

It's Bianca from UBS. So my first question is around -- so my first question is around care. So obviously, great to see the growth in care EBITDA after a few periods of negative growth. So do you expect it to really be in an inflection point here? And can we sort of expect it to increase further going forward? Or can we expect some more periods with some more pressure on care EBITDA?

I think as Brent said in his part that we've certainly passed that point, and we expect more linear growth profile going forward. So as we continue to sell down our development that we've completed over the last few years, there are some that would support the market in the last few months. We'll continue to build that premium revenue stream. So we would expect to see care earnings continue on the upward trajectory from here on.

Okay. And then also on the care suite new sales, what percentage there was ORA sales? And what percentage that you would have to sell as a premium accommodation charge there?

So all of the sales are actually new ORAs. We don't recognize our premium accommodation revenue as sale per se. So the unit sales volumes that you're referring to are all care suites under ORA.

Right, but like -- so from the new developed care suites in the last half, did you have to sell any as a PAC there? Or did do you manage to sell them out all as an ORA?

So the 9 sales, I'll refer to Green Gables, for example, as sales of ORAs.

Yes, okay, all right. And then just a bit on unit price inflation, so obviously you've seen very strong HPI around the country recently. Have you started pushing some of this through in unit prices? Or have you kept unit prices reasonably flat?

We're pretty dynamic in our pricing strategy, Bianca. So we don't necessarily go across the country and say there's been an expected increase in house prices in this part of the country, so we push the unit prices. But we're pretty dynamic in terms of when the unit comes up for resale in particular to look at what the local median house price is and benchmark our sale prices against that. So prices have increased as you've seen from Brent's presentation. But it is heavily -- the averages we've given in the presentation are heavily influenced by mix. So the pricing outside of Auckland, obviously, within Auckland is totally dependent on where the -- sorry, the averages that we give you is totally dependent on which [ stockage ] it at the time.

Okay. Okay, and then last question from me. Could you give an indication on some of the demand in more recent months?

Demand in more recent months. So everyone, certainly it sounds like, had a good holiday. So I think everybody closed for Christmas pretty early. But I will say that we've had a significant increase in inquiry levels over the last week. So volumes leading into sort of November, December were very high. And it obviously came off. We had a good break and a well-deserved one. And we've seen a ramp-up again in the last week, so back to those sort of levels that we were experiencing pre-Christmas.

And I think in addition to that, Bianca, obviously there is -- there are new products that are coming on stream in this forward period and -- which we touched on earlier, particularly as it relates to The Bellevue in Christchurch and BayView apartments in Tauranga. And in addition to that, we obviously sold well through our unsold stock, but we're sitting on some quite attractive closing stock that we intend to make profits.

We'll move and take the next question in the queue.

This is Aaron from Forsyth Barr. I have a couple of questions, maybe slightly off what you're focused on. But my first question is just in relation to construction activity and access to finishing products and to some degree also to skilled labor. We've heard about sort of pockets of shortages here and there. I just wanted to know if you could comment around that, and see if you had any concerns with your ability to complete developments over the next 6 to 9 months or so.

It's a good question, Aaron. I mean, particularly, we contract -- as you know, we outsource our actual construction activity. And -- but we deliberately sort of choose our construction partners in that sort of mid-level, mid-tier range of construction operators. So Watts & Hughes, for example, are gone at building Waimarie, just have built other -- Meadowbank, et cetera. So we're dealing with long-term established construction partners and haven't experienced any labor issues to date with that. In terms of materials, similarly, haven't experienced anything to date. I would say that of the projects we've got underway right now, we are nearing completion of The BayView and The Bellevue and Eden. So -- and Waimarie is in earthworks, so we're not necessarily sourcing a lot of steel or something for example, at the moment. So that may be ahead. It's certainly something we'll keep a watch on. But short answer is we're not experiencing any of those impacts today.

Okay. And secondly, just on operating expenses and more specifically on staff costs, I guess, so we've had sort of excess costs reported by a couple of operators in relation to COVID sort of ongoing through some of these restrictions even after the worst couple of months in March, April. And then we also have this sort of, as you mentioned, repricing, or reset as you called it, of nurse salaries in particular. So looking ahead, how should we think about costs going forward? Is -- do you feel that what we've seen in the numbers is a sort of fair base level? Or is there any excess costs in there? And when it comes to sort of staff costs generally, have you reset it now, so we should expect traditional inflation going forward?

Yes. I was just going to say, I would certainly expect sort of inflationary levels of cost pressures to continue. In terms of nurses' wages in particular, we've reset ours at pretty much the highest in the sector. Retaining staff is not just about wages. Career pathways and professional development opportunities are important. So we're focusing on those initiatives as well. I would steer you towards further cost increases being offset by funding increases, particularly in aged care. So there is, as you may have seen, a significant lobbying effort for pay parity of aged care nurses. And the [ Head Assumption ] Report did refer to that and support it. So we would expect that to be resolved in the government budget for this year, this calendar year, so an increase specifically for nurses. And the final round of pay equity adjustments for health care assistants is due this year. And again, that will provide a sort of one-off boost that would be matched by funding. So again short answer, yes, I would expect it to revert to inflationary levels and further cost pressures, particularly from nurse wage rate adjustments; and health care assistant pay equity to be offset by funding, which has been well-managed by the -- by treasury and the sector negotiators.

In addition to that, Aaron, I'd just make the comment that all operators, probably including ourselves, continue to invest in patient welfare, and particularly in COVID. It's not a material part, which is why we've not pulled it out separately in our results, but it is just the extra diligence that we and other operators are taking in the sector. So clearly, there is some ongoing pressure around some of the suppliers of those patient [ welfare ] materials, and we're just continuing to manage that.

Okay. One question on the results, just on -- you obviously had a very strong result. And if I look at new sales, they were strong, and margins were certainly slightly higher than guided for. But if I look at the actual price achieved on the care suites, I think you put in 227 or something in the report for the first half '21. I was just wondering the sort of absolute number here. Is -- should we expect that to hover around this level in the low 200s? Or do you expect that to change up or down going forward just as a forward indicator of DMF, I'm thinking here, rather than your margins per se.

So the new prices -- in terms of prices on the new suite itself...

Yes, new price for care suite, yes, yes.

The higher prices are undoubtedly being generated out of The Sands and Meadowbank. We still have stock at Meadowbank. We have no stock at the BayView in Tauranga, and we are well through our sell-down of Hamilton. So I would expect to see on an average level that to sort of moderate down, but that will then turn into resales. And as you know, the average tenure in care suite is relatively short, so your resale margins and resale volumes will continue to rise, and care suites because it got a lot much higher total volume of them in the portfolio.

Okay. Final question for me. Have you heard anything about this white paper? Or is it sort of dead on arrival?

Dead on arrival.

Yes. Look, it's out for consultation now, Aaron. That's due by the end of the month will be in active submission. And certainly, the retirement villages association will -- it's been put out by Jane Wrightson as the new retirement commissioner, heavily influenced by feedback from resident lobby groups. But I mean in short, there are certainly adjustments that can be made to the framework, which would enhance the resident voice, so to speak. And that's in relation to the organization of recent committees and the interaction with operators generally, and secondly through the complaints process. It's obviously -- the larger operators are not really prone to that because it's obviously in our interest and to keep residents' satisfaction levels high as they are and to deal with issues quickly as they arise. The noise really comes from smaller operators in some of these issues. The more fundamental sort of questions around the business model in terms of sharing of capital gains and compulsory buybacks I don't think will progress simply because it's obviously fundamental to the New Zealand retirement village sector. And sharing of capital gains would take us back 12 years to when there were issues at every resale around who pays for the refurbishment and what level of refurbishment there is. I mean that's what the adjustments of the code back then resolved, and they were well accepted. And I think the thing I'd leave you with, Aaron, is that the retirement village sector generally has the highest customer satisfaction rating of just about any industry in New Zealand.

Next, we'll take the next question in the queue.

I hope you can hear me. Stephen Ridgewell from Craigs here. First question on kind of thinking around development margin long run. There's been a bit of discussion about it earlier on the call. But I guess the previous kind of guide was to kind of circa 20% development margins long run once we got through The Sands and Meadowbank and obviously, you're progressing very well there and the mix change to more regional sites. Is that still how we should think about development margins medium term? Or given the recent step-up in New Zealand house prices and actually the untapped pricing upside in your own developments, should we be pitch reincurring to maybe something like the mid-20s? Just interested in your thoughts about what you can see on dev margins going forward.

Yes, I think that's a good question, Stephen. It's Brent here. I think what we've guided the market to in the long term is correct. So we see things as we move, I guess Auckland South sort of moderating over time and into those kind of 20. I do think that we've all been caught somewhat surprised by just the buoyancy of the housing market. So that probably allows for some of that dynamic pricing to come through, which won't be reflected in the comment that I just made. We don't know the duration of that, and we don't know the strength of that, but that obviously provides a bit of a shield for potentially higher development margins. But I think what we have guided to is correct. As the mix change, as the product mix changes and as we move regionally, then we end up with kind of a leaner development margin, as we've guided, with some upside as pricing metrics and the housing market continues to be as buoyant as it's been in this last period.

Yes, that's helpful. And then just on the balance sheet, I mean there's strong cash flow result, and gearing well under control. Can you talk a little bit to the dollar value of the company's capacity to make acquisitions? And potentially the gearing ratio you might be happy to kind of go to at least in the short term, if the company was to make an acquisition?

Yes. Well, I think we've -- we always have an inquisitive eye. We think that the sector naturally will consolidate in time. It has been very important for us to demonstrate to the market that we can present prudent gearing, particularly with the uncertainty of what's existed on the global stage around COVID. So we're pleased to have taken a couple of basis points off our gearing from the full year. But yes, there's certainly capacity there. Acquisition for us has to be well accepted by the market. And as such, we're not looking to do anything heroic. We are looking for things that are on strategy. We're looking for opportunities that are going to add value to our shareholders in this next phase. But inevitably, there will be some sector consolidation opportunities. As we know, the segment is very hard. It's very complex. It's got operational challenges and regulatory challenges. And that naturally gravitates towards some genuine acquisition opportunities for us.

Okay. That makes sense. And then just in terms of site acquisitions or organic growth, to what extent is the company going to be looking at other sites like Waimarie Street? Are those sorts of acquisitions under active consideration? Or is the focus still on building out the brownfields portfolio?

I think it's twofold, Stephen. We've mentioned before, the -- we've got enough land to keep us busy. But we all know there's a runway that has an ending and the time from sort to [ site ] acquisition, consenting, building consent and construction can be 3 to 4 years. So we are certainly looking at sites now actively. We have our eye on a few regions of the country, and I would fully expect to be making an acquisition of some sort over the next few months.

That's helpful. And last one for me, just with the move to the March balance date. I was wondering if you can give us any sense of the kind of the seasonality. I mean I think, Earl, in response to an earlier question, obviously there's a quieter period over December, January. But I guess we haven't got historics on -- historical trading for the kind of 4-month period. So just wondering if there's anything you can indicate however -- what the comparable might look like for the 4 months to March, to either in terms of earnings or sales volumes, or any kind of metrics you could give us just ahead of the actual result, which we'll be looking forward to in May.

Yes, I think that's a pertinent point that you're raising, Stephen. I think from our perspective, we appreciate that moving to a March period means that we probably end up with traditionally a stronger first half against that lens from the second half because of the December-January impact with [ expected wave ] kind of 6 weeks, 8 weeks, et cetera. Having said that, the property market is defying logic. And as a consequence of that, we've seen tremendous velocity in sales and obviously some improvement in pricing. But I think your point is right. Moving forward from here, we're putting ourselves on a similar timetable to our peers. And if they think about their seasonality and our seasonality, it's pretty similar. So we are going to have that kind of softer window through December, January. It just is the nature of our calendar year and the summer season.

So I think Stephen, if you -- certainly, it's not just a matter of cutting out 2/12 of the year. I think that's the shorter.

[Operator Instructions] We'll take our next question.

It's Nick from Macquarie here. Most of the questions have been asked. Just on the dividends, can you just talk through the thinking of the kind of payout ratio for the first half? And just confirm the kind of full year intention in terms of the traditional payout ratio?

I mean obviously dividend is a benefit of the Board, but there's no intention to change the payout ratio. And really, I think the dividend that was declared this year at these interim periods is a reflection of ongoing caution, the growth of the business, the opportunity to reinvest the capital, but obviously rewarding shareholders for staying with us through the period. But yes as I said, I think the key takeaway is that there's no intention to change the payout ratio. And the full year result is just a few months away.

That's great. And then just kind of formally kind of commenting on your thoughts around Ryman's kind of care payment model they've proposed and trialing. Any observations you've made around that?

Yes. Well, I mean I think as we've said before, Nick, that's a matter for Ryman. We have our care suite model generating the deferred management fee, which obviously provides greater economic returns. I think there are some challenges to the RAD model in the fact that it gives residents the opportunity to switch out of -- from capital deposits to the premium combination charges, which can cause a drain on cash flow. I think one thing I'd really emphasize is that our care suites, particularly our larger care suites, do not compete with the Ryman aged care room or any other operators' aged care rooms. The larger care suites are 36 square meters. They're more akin to a serviced apartment. So even our smaller care suites, our 22 square meter care suites, have kitchenettes. They may be more the size of a standard care room but even those rooms are more highly spec-ed than most of the competition. So certainly from a competitive perspective, it does not concern us one bit. But -- and rolling back the clock, if the regulatory model in New Zealand was RAD and DAP, I've certainly welcomed it 6 years ago when I joined Oceania. So it's a far better funding model than what we had. The fact that we're doing care suite to the fact that all operators building new beds are premium beds is a reflection of the chronic problems with the government funding model, the fact that operators have taken economics into their own hands. And residents out there are wanting premium rooms. We wouldn't be building them if there was no demand for them. So yes, I look at -- as I said, that's somewhat of a reflection of Ryman's own position in the growth cycle. And from a competitive cycle perspective, they haven't actually rolled it out. We don't know what the pricing looks like or anything like that of the RADs, but not -- we're certainly not concerned. Aged care doesn't only compete when you're in the same geographical location. And we've got pockets in New Zealand where a Ryman facility is close enough to be competitive. But to a large extent, we're not -- we're offering quite a different product in terms of the size of the rooms and the specification of the care suite.

I think in addition to that, Nick, I'd just comment that the RAD model in particular created some significant challenges in the Australian market. So it's going to be carefully thought against that backdrop. And clearly as Earl said, it creates a current liability. So if you're a model which you're highly leveraged to development and highly leveraged as it relates to capital structure, you're potentially crystalizing a very real current liability. And so that needs to be carefully managed. And the other observation I'd make is that generally, the implementation of a RAD model is to push price up. So people have thought about the economics of using that resident payment. And that's often had a direct correlation to sort of movement in price up as it relates to that particular product.

We have no further questions in our queue at this time. [Operator Instructions] It appears we have no further questions in our queue at this time.

Okay. Thanks, everyone. We'll be speaking to you again at the end of May. Look forward to catch up with some of you over the next week.

Thanks, everyone.

Everyone, that does conclude our conference call for today. We do thank everyone for your participation. You may now disconnect.