Oceania Healthcare Limited (OCA) Earnings Call Transcript & Summary

Welcome to the Oceania Healthcare Limited Half Year Results announcement. [Operator Instructions] I would now like to hand the conference over to Brent Pattison, Chief Executive Officer; and Kathryn Waugh, Chief Financial Officer. Please go ahead.

Good morning, everybody, and welcome to Oceania's interim result for the financial year 2023. It's been a busy and productive period for Oceania as we have made solid progress towards our 5-year strategic plan with further growth in our greenfield build capability, our care suite innovation, which offers current and future residents the very best of convenience and outstanding care and a premium residents. The introduction of ambitious targets to deliver the very best and sustainable practices and observed strong resales and attractive development margins on new product delivery over this interim period. The macroeconomic conditions here and globally have created much publicized near-term headwinds for the sector with a noticeable softening in the New Zealand residential housing market as interest rates climb. We continue to see complete competition for certain key roles like registered nurses with borders just starting to reopen and note the inflationary pressure on some of our key inputs. Despite this backdrop, the business is well underway in achieving its ambitions for full year 2023. It's being delivered by a dedicated and fantastic team of over 2,900 employees, and our 4,100 much-loved residents. Turning to the highlights. The interim results include a 6% increase in underlying EBITDA on a PCP basis. 226 total sales, significant growth in our premiumization strategy for care and a strong resale result, both revenue and margin as we successfully have sold down the larger levels of resale stock we had on hand from our 31 March 2022 year-end. There are certainly some areas of pressure. And while staff shortages are moderating, key nursing roles continue to be in high demand across the sector. These clinical shortages and DHB resident admission policy settings have reduced our near-term resident occupancy by 1.6% to 91% overall. We welcome the Bream Bay and Remuera Rise residents to the Oceania family and note that this increased our financing costs for the period as these acquisitions were debt funded. With the softer residential housing sentiment, we have seen an increase in days to sale and a slower-than-expected uptake of new apartment sales at Awatere in Hamilton. They came on stream around March, April of this financial year, and the later than planned new care building at Lady Allum Milford, which opened in September versus expected in July of 2022. On the positives, Oceania is a portfolio business. Most sites provide the full continuum of product to cater for the independent resident through to a high-level need of care and our care suite offering. Our sites have a smaller, more intimate resident population with an eye to key locations boutique and well-designed living spaces and a great community field. We have continued to grow our DMF revenue over the period. Oceania has a seasoned portfolio with strong embedded value capture and resales and increased sales prices achieved from first-time new sales as key developments come on stream. We have been able to maintain pricing across our portfolio. The care premiumization is well established, and we are delighted with the accelerated growth in our care suite product innovation. Care suites now make up 40% of our total offering, and we have seen a 211% increase in premium care revenue over the last 3 half year periods. Our care suite proposition has proved its value by accommodating resident need and a cooling housing market. This is the more traditional house sale decision of an independent living resident. This has been further enhanced as we are now observing presale activity for new care suite development. Turning to Slide 3. Oceania has a solid pipeline of 1,836 units in care suites and importantly, the strength of the consented pipeline is not just in its size, but also the optionality of our pipeline. In terms of the number of care locations available, a smaller resident size and decreased complexity and variability of product mix. In these more uncertain times, we can accelerate care developments with tailored product delivery. For example, villas which we traditionally presell. This assists cash recycling and capital efficiency as well as supporting our annual growth aspirations of circa 300 units in care suites per annum. Over the last calendar year, we've invested in our property team capability across the design, delivery and development functions. Additionally, we have largely seen no disruption to timetable delivery expectations of the 519 residences under construction nationwide. Our build program has benefited from fixed term contracts and this has presumed development margin in a market with increased input costs observed from inflation or supply chain disruption. In this interim period, our new product delivery of 127 residents has largely and exclusively been our care suite offering, and I'll touch on this in the coming slides. We've certainly made good progress on our greenfield integrated retirement and aged care village development at Franklin and Auckland. Resource consent is in place and earthworks are underway. We are also inundated with new greenfield land opportunities, some offering better locations and stabilized pricing as larger land bankers find the projects more challenging in the near-term property cycle. We expect to add additional greenfield to our pipeline in the coming period, including the exercise of an option to acquire 6.7 hectares at Bream Bay once the plan change is operative, likely early 2023. Our Remuera Rise acquisition rationale is showing the first fruits and providing a care feeder for those residents. We have had a Remuera Rise resident purchase and transfer to a lovely care suite at our Meadowbank village. The family have commented on the ease of this transition and the benefit of having this continuum to care by becoming part of the Oceania family of sites. We've continued our exec team capability build with Anita Hawthorne joining the team. Anita comes from a senior and accomplished career in operations, infrastructure, sales and marketing and delivery of exceptional customer experience. Anita is also a qualified accountant to boat. Turning to Oceania's strategic pillars. Oceania has 4 strategic pillars to support our ambitions of outstanding financial performance and sustainable growth over the next 5 years by way of a simple example of each pillar. If we think about our offer, it's a resident-focused and evidence-based approach to our properties, right product, right place. Two recent examples include Lady Allum Care in Milford in Auckland, which is adjacent to a major hospital and in high socioeconomic demographic with an older population, and The Helier in St. Heliers Bay, Auckland, which offers the highest quality apartments in amenity and an attractive residential [ living ]. If we think about resident experience in an example, we offer a continuum of living, independent living to care, a smaller resident population, greater connection and greater independents. People capability. We've certainly observed staff shortages, especially clinical and Oceania offers a career pathway for registered nurses to become clinical managers and ultimately nurse practitioners, the highest level of nursing leadership practice available. And if we think about growth, simply put, it's about adding value to everything we do. Our focus as a business has been to take a disciplined approach to capital allocation across our brownfield and greenfield development portfolio. And this started by building resilience in our balance sheet. We secured attractively priced 7-year corporate debt. We extended our banking facilities, both tenure and capacity and raised equity capital for M&A when trading at a premium to net tangible asset backing. This has provided a good platform to support our growth ambitions while maintaining lower levels of overall gearing in the business to support this growth. Our brownfield pipeline is well established and future capital allocation does not require the complexity and disruption to earnings of the past. With reduced buyback of units and decommissioning of rooms, which is the equivalent of foregoing earnings to make the site available for new development. In addition, the brownfield investment can be staged to meet market conditions and to meet resident requirements at these care sites. Greenfield ambitions and M&A. Let me firstly say on M&A, we don't see any attractive M&A in the near to medium term, and it has only ever been an accent to our overall strategy. The addition of Waterford, Bream Bay and Remuera Rise have added accretion and importantly, high-quality sites and care locations with future development potential and ILU residents that will benefit from our adjacent care offering. We are well underway on greenfield development and have 2 contrasting examples. One is a broad acre master plan site at Franklin and one a more boutique premium retirement living environment in St. Heliers Bay. As part of our capital allocation and return profile, we also look at those sites we own that may not offer us the same future development potential or maybe geographically remote from adjacent cluster sites or offer lease optimization for premiumization. Lastly, we continue our quest to innovate by delivering reemergent resident services. We are pleased with the adoption of the care suite offering. And in the higher socioeconomic catchments, we are pivoting towards full resident-funded care services. This allows us to tailor our care service moments around resident need through our highly professionalized model of care and staffing and to move away from dependency on government funding proportion of our care residents. If we think about our future development pipeline. As guided, we are well underway on the premiumization of the Oceania portfolio and future development pipeline. We do not intend to build standard care beds. In fact, with decommissions and conversions, the standard care bed proportion of our fully development portfolio will be 10% smaller than it is today. By contrast, our care suite portfolio will increase by more than 72% as we develop out the existing pipeline. The midterm new product delivery will be ILU focused at circa 1.5x ILU to care ratio across a mixture of brownfield and greenfield sites. This ILU development will also include a greater number of Villa product versus apartment. The pipeline does not include the Bream Bay land acquisition option with circa 113 villas contemplated for Stage 2 post a plan change. The future composition of the development pipeline when completed will continue to position Oceania as the premium provider of retirement and aged care living with circa 75% of all product attracting premium pricing and the commensurate growing deferred management fees. What have we completed in the period? An interim period first half '23, we have delivered 127 care suites across 2 sites. Lady Allum is 113 care suites split across 3 floors. It comprises 96 care suites and 17 dementia rooms. The Lady Allum care building is impressive at over 7,831 square meters. There has been well received by the Milford community and broader North Shore catchment areas and offers a quality product, lots of amenity, including cafe, hair salon opened both care and village. Since opening the doors in September, we have already secured 10 sales with several presales for a product that is not traditionally achieved presales, and these will fall in second half '23. The area highlighted in blue on the graphic is a large future development site, and it provides a compelling footprint to design and construct premium apartment and community amenity with little disruption to existing residents in occupation. Also, the aerial photo shows the proximity to Milford, the hospital and the lovely vistas of the lake in Rangitoto Island. Woodlands, which is located in the regional setting of Motueka as a further proof point of market adoption of the care suite product and demonstrates efficient site optimization. Originally, the site was standard care beds, which is the green roof and villa product, which looks like it's a combination of colors from blue to red and to gray. The site has undergone care room conversion to care suites in the additional 14 care suites that have been delivered, which is the gray roof, demonstrates a strong resident preference to premium with 4 presales already secured for the second half '23. We've got a lot of development under construction. We certainly have an active construction program underway with 519 units in care suites to support our targeted annual growth. The development and property team led by Andrew Buckingham, continue to demonstrate the capability in designing, developing and delivering premium living spaces for future residents across the product spectrum and multisite management across 10 sites nationwide. Scheduled completions for the second half of '23 provide over 130 units and 44 care suites. This includes the boutique premium village The Helier in Auckland, offering both apartment in private care, which will be delivered in -- the private care will be delivered in full year '24. Stage 2 apartments at our Bellevue Village and Christchurch, some villa product in Stoke in Nelson and the completion of some care suites. What's also important and not necessarily evident from the slide, is that the future construction includes both greenfield and brownfield. The brownfield sites like Elmwood, 106 care suites, Bayview Stage 3, 28 units, Waterford Stage 1, 50 units can all be constructed with minimal to no impact on existing residents and occupation nor they are a community amenity at those sites. In the past, our brownfield pipeline has had greater disruption and short-term impact on financial performance. On contracting and supply chain. Oceania has selected key construction partners, which have managed the supply chain disruptions incredibly well. Most project delays have been because of COVID absenteeism rather than the availability of materials. Chip remains the commonly discussed material shortage but this is much about the lack of competition as it is a supply chain issue. Shipping costs, we're pleased to see are coming down. However, inflation is driving up other building inputs. Competitive tendering by main contractors is largely did and 100% fixing of construction pricing is becoming challenging to achieve. Separate contingencies are being carried for escalation risk on the nonfixed price elements, and we engage early with our construction partners through an ECI process, which results in a negotiated contract and this will become the norm. Greenfield and M&A. Waterford has settled well into the Oceania portfolio following our acquisition in full year '22. It has a vibrant resident population, high-quality community and amenity for those people that have visited it, and we are underway on the next phase of growth for the site. Stage 1 in the foreground is the construction of an additional 50 apartments, which is up from the originally 24 consented. Aspec Construction has been selected as the main contractor for the works. The ECI methodology I touched on earlier, has been used with an initial contractor input into the design and construction methodologies. Aspec will be familiar to colors as they have previously constructed The Sands and Meadowbank Stage 1 to 5, delivering these projects on time into a high level of quality. Aspec have been working with preferred subcontractors to eliminate cost escalation exclusions, and we have been able to achieve a 73% fixed price contract. Bream Bay on the right-hand side of the graph, we discussed the acquisition at our full year 2022 results in the AGM. Since that time, we have acquired an additional half hectare of development land, and you can see that highlighted in pink. To complement the existing site and to protect the beautiful amenity, bowling green, swimming pool and spa complex, resident workshed in clubhouse. We will build villa product on this vacant land. In addition, we have an option to acquire a further 6.7 hectares of neighboring land. This is subject to a lodge plan change that has been approved by the Whangarei District Council subject to hearing in the settlement of appeals. The last of the appeals relevant to this land at Bream Bay Village is in the process of being settled, and we expect a result in Quarter 1, 2023. Once operative, Oceania will be able to lodge a resource consent application for Stage 2. Stage 2 is likely to comprise approximately 113 villas, new community facilities and potentially care. If Oceania exercises its option for this development land, then building would likely to begin in 2024. Final slide for me. Franklin in Auckland. We've made significant progress with our broad acre greenfield site at Franklin. We received consent for circa 246 villas, apartments, care suites and wonderful community living space. This site consent allows us to build across the broadest range of options, and it's likely we will start the community hub and villas, extending in stages to high-density apartment and care suites at the later stages of development. I've seen the early stage design imagery and renders and the built form will indicate a new style direction for Oceania with a focus on curating a wonderful living experience for future residents adding significant value to the local area, including a grand entrance through the heart of the site, leading to amenity and the care center in time. We are underway on the groundworks and expect to lodge building consents in full year 2023. Lastly, the Helier, which is in St. Heliers Bay in Auckland, we are well underway on the construction of the Helier, as you can see from the graphic. The crane in the photo is gone and the scaffolding is coming off. We are delighted with the impact of this highest-quality boutique apartment and private care residents. It offers unmatched 360-degree views in a bespoke resident experience. We have seen unprecedented demand for this unique offering, which is the first of its kind in New Zealand. The design approach was based on a 2-story scale of the existing houses along the residential street supported by a W-shaped building to remove the perception of scale and deliver an enduring and well-admired property. Our construction team at Argon, Argon and our architects Peddle Thorp have worked tirelessly alongside our expertise to deliver this vision. I'll now hand over to Kathryn Waugh, our CFO.

Thank you, Brent, and thank you again, everyone, for dialing in today. I have a handful of slides to run through before we will open for question time. Sustainability and ESG is an area that we have invested in significantly since the last reporting period, and which we will continue to do so. Sustainability is integral to everything that we do, integral to our future strategy and in every decision that we make. During the last 6 months, we have made a strategic investment in this area with the onboarding of our Head of Sustainability and Corporate Responsibility, the establishment of an executive Sustainability Committee and the establishment of a subcommittee of the Board, which is chaired by Rob Hamilton and will oversee our sustainability journey. You can expect to see rapid adoption and increased reporting from us moving forward as we push more and more into this area. In June 2022, we announced a sustainability-linked loan that links our $500 million 5-year banking facilities to achieve an ambitious environmental and social goals. Linking our borrowings to our sustainability vision was one of the first signals that we are committed to driving our performance even further and with great ambition. On the left-hand side of the slide, we provide the high-level details of the 3 KPIs to which we have linked our loan around greenhouse gas emissions, diversion of construction waste from landfill and improving the experience and well-being of residents through our excellent quality of care and resident well-being. We have also detailed our focuses for the next 6 to 12 months, a look to what you can expect from us as we move towards the full year results in March. There are 3 main priorities for us in this space. In the coming months, we will be finalizing our full value change emission inventory. For those familiar with this language, it's Scope 3, and draft in our emissions reduction plan as well as committing to the international science-based target initiative. This is something that not many NZ companies have completed to date but something that will really set us up in the best possible position for the future. Preparing for climate reporting requirements will be a huge learning curve for us all as we will be asked to look at climate risk and opportunities, how those will impact our strategy and what mitigants we have in place to manage risk. As part of this work, we will also be looking at how resilient our strategy is under different warming scenarios across different time horizons. The final, and extremely key piece of work is the refresh of our ESG framework. As a business, we are undertaking a review of our sustainability aspiration and framework. This exercise will provide us with a really clear steer on our priorities over the next few years, and will bring together all aspects across our business that deliver on ES&G, framing our integrated reports moving forward. Moving to trading highlights. We have seen continued increase in our total assets. The acquisition of Remuera Rise and Bream Bay added around 2% to our total asset position with a further 17% increase from positive fair value movements and additional development spend at sites like the Helier and our other recent developments, which are maturing. Our disciplined approach to capital allocation, more specifically, ensuring with each build we are focused on the right product in the right place, translates to an improved asset base. This considered approach to development has not only increased our total assets by almost 50% over the last 2 years, but also shows in our future earnings streams. Despite the tough market, we have achieved an underlying EBITDA increase of 6% to the prior comparative period. We will come on to the components of that in my next slides, but we are continuing to see further fruits of the premiumization of care and the embedding of recent developments and acquisitions. Sales volumes are in line with the prior year, but we have seen the emergence of strong resales, especially with the care suite model, which we are seeing being accepted by the market more and more as we move through reporting periods. This great uptake of care suites, more and more a choice-based product is being seen directly in the positive increase in premium revenue, which has almost doubled in 2 years. On my next slide, I focus on total sales across the portfolio. Total sales volumes have been consistent with the pcp, and we've experienced a significant increase in demand for our care suite model across the country. Prior periods saw a strong delivery of apartment and villa product with the last apartments coming on stream in March 2022 Awatere in Hamilton. And the last villa is coming on stream being those at Gracelands in September and October of 2021. Villa delivery has not been a feature of this interim result, a product that was previously presold noting that the 2 comparative results include the benefit of approximately 32 villas. Over the last 6 months, our delivery of product is focused on care suits. We largely sold through the resale stock, which we had on hand at 31 March and experienced strong resales in our first half. Assessing the applications that we have secured for new ILU and new care suites over the last 6 to 7 weeks, we have seen a pleasing uplift in volume while maintaining price despite the residential housing market sentiment. Even in a falling housing market, our disciplined approach to setting sales prices and rolling out developments of right product, right place and our disciplined approach to capital allocation has meant that we have been able to continue to dynamically price product with reference to housing pressures and affordability ratios, maintain and set price on a premium product across the portfolio and continue to observe strong resale and development margins. My next slide, premium care revenue. As signaled in March, we have come through peak to trough care margins, and we are now observing an uptake in the EBITDA per bed. Heading towards the full year results, we expect to see an average EBITDA per bed in excess of $10,000 achieved. It's worth noting that this EBITDA per bed rises to over $17,000 per bed when we include care suite resale gains and development margins. Funding increases received during the period help in driving those margins as we see increased contribution to our service costs. The uplift in bed day rate funding for July and September has helped support increases in care revenue and will be further recognized in the next 6 months with an expected $4 per bed per day positive impact. The sector still faces staffing challenges with nursing shortages still ongoing and with pay parity and pay equity for nurses still outstanding and the future upside. Another major contributor is the ongoing acceptance of the care suite model. Premium care revenue continues to offer an established earnings stream, which is recognized directly to the bottom line and provides a meaningful benefit to supporting our margins in care. PAC revenue and care site DMF have improved from a strong base in the first half to now more than triple the level at the time of the IPO in 2017 demonstrating the effectiveness of our disciplined approach to investment in the premiumization of care. Looking to our future pipeline, we will see less disruption to our earnings from major whole of site brownfield developments and continue to see the upward momentum of EBITDA per bed and margins with 16 of our sites currently achieving above $12,000 per bed. As I have just noted, we have our premium revenue growth, embedded value provides a sign of what is to come. With recent acquisitions coming online, the embedded value in our portfolio is also increasing and we are confident that a disciplined approach to capital continues to improve our portfolio. We have seen a total increase in embedded value of just under 14% since this time last year supportive of our overall premiumization of the portfolio through DMF growth and ongoing capture of embedded value. Our current embedded value includes $232 million of accrued DMF cash flows to be realized and $220 million of resale gains. I -- and today with a look at our balance sheet position with a comparison to the 31 March 2022 position and a net adjusted value view. At March, the acquisitions of Waterford and Franklin allowed us to break through the $2 billion mark, and this trend has increased further with the acquisitions of Bream Bay and Remuera Rise along with further fair value increases to our total assets, bringing total assets just shy of $2.5 billion. In the appendices, we include details of our cash flow movements in the period, and I note that operating cash flow is reduced by approximately 40% or $20 million when compared to the 6 months to 30 September 2021. There are 2 main components to this. We have used operating cash in the current interim period to buy back products to facilitate future brownfield development growth, and this in itself has been at approximately twice the level of prior periods. In addition, we saw lower-than-anticipated new sales capture, particularly at Awatere. This coupled with the $60 million drawn down to execute the acquisitions in the period has resulted in a $120 million increase to our drawn debt from March. This has increased our gearing to around 35%. It is important to note that on the opening of the Helier around March 2023, we expect to see significant cash recovery for the investment made. Our balance sheet is strong, and we have worked hard to ensure we are well positioned financially to enable growth. We are focused on securing tenure of funding, diversification of debt and securing a low blended fixed interest cost. The bonds we secured early at an attractive interest rate and these, along with the swaps on our extended banking facilities are enabling us to keep our interest costs low. This upfront effort has set us up to succeed and we have significant headroom to enable future growth through greenfield land acquisitions. Our net asset value per share, excluding the assets held for sale, has decreased slightly from $1.38 per share at March to $1.34 per share at September as a result of the increased borrowings, which enabled acquisitions in the period, including the assets held for sale in the current period, the net asset value per share as at 30 September is approximately $1.42, an increase on that from March. When considering the unsold stock on hand, this increases our net assets per share a further $0.11 to $1.53. Finally, dividends. We have always looked to reward our shareholders through our dividend program in accordance with our payout ratio, which is 50% to 60% of underlying impact and we have announced today an interim dividend of $0.019 per share, which is at a level of 50% of underlying NPAT. We have enjoyed strong reinvestment through our DRP program in the past. The DRP is in place for this interim dividend, offering a discount of 2%, and we again expect a good uptake, which in turn supports our future balance sheet growth. Thank you, everyone, for your time. We'll now return to the operator for questions.

[Operator Instructions] [Technical Difficulty]

So I think we dropped off the call. So we certainly apologize if that was the case. Hopefully, we got through all of Kathryn's presentation before we dropped off the call. But in any event, please feel free to ask us some questions, and let's use this next time to catch up on any of the matters that people didn't hear from Kathryn's presentation.

[Operator Instructions] Your first question comes from Andrew Steele from Jarden.

First one for me is just on sales. You announced 2 months in the second half. How many new units have you sold in the half to date and based on the sales how do you expect all that to progress through the remainder of the period?

Yes. That's a good question, Andrew, and I'm sure it's on people's minds if we think about first half delivery. So if I think about what we had available for sale from a new product delivery, our ILU products make up about 30% of our unsold stock. And our care product deliveries on a new sale basis make up a slightly smaller proportion, about 25% to 30% of unsold stock. What we have observed is from the first half results, we had 28 new ILU sales as recorded in our results. But we're up sort of 64% from an applications point of view on ILU. And we're up about 55% on an application basis with care suites. We made mention of the softer sales uptake within Awatere. That's starting to turn the corner, but it had quite a material bearing on the first half. We bought 63 apartments to the market, and it represented about 40% of the unsold stock available from a new ILU basis. We are seeing that days to sell is taking a bit longer, Andrew. And that's been observed across the market as people consider rising interest rates in housing -- residential housing sentiment generally. Care suites continue to sell through the cycle well as we know. They have more of a needs-based extent.

Great. Just the next one for me is on office costs, they increased during the half I know $2 million. What is this increase related to them, should we take as similar quantum of cost growth in the second half?

Yes. Thanks, Andrew. It's Kathryn here. And so it's a similar story to what we would have said at March with kind of inflationary increases that we're seeing coming through. So there are kind of usual suspects of increased IT and staffing costs and insurance. We have, of course, made some extra people investments in the 12 months to March that we're seeing coming through in the 6 months. Coupled with that as well and the acquisitions of Remuera Rise and Bream Bay because we didn't raise capital at that time, those costs are unfortunately straight to the expenses lines for us. So there are some kind of advisory consultants and due diligence costs that we've seen coming through that won't repeat. And so whereas you'll see an elevated cost and you won't see it to that level.

You called out the quantum of those transaction-related costs and what's your expectation for underlying inflation across the business as well for the full year?

Yes. So I didn't call out the quantum of the [indiscernible]. Unfortunately, that's something that we're not disclosing. And it was a one-off cost going forward, as we move into greenfield acquisitions. There'll be a certain level of kind of advisory costs that come through as well. Wage cost inflation, we had in the prior year. We've seen inflation around New Zealand, obviously, peaking in over 7%. We'll see that coming through in some of our main lines and the biggest cost for us at support office is obviously the wage costs. So what you've seen in the first half will be relatively consistent with what you'll see in the second with that regards.

Yes. And I guess, I would just add, Andrew, that from my perspective, Oceania has taken the approach of rewarding key roles, building a good value proposition for our staff. As a consequence of that, we had invested ahead of the curve as it related to retaining and rewarding key roles, particularly clinical staff. So we're not seeing the same wage pressure increase accruing in that part of the sector, where others may have some catch-up in the next half.

Great. And just one last one for me, you saw EBITDA a bit increase in the period. There's some moving part within this. Could you highlight on, I guess, a like-for-like basis, what happened to profitability per bed?

So that's quite granular. We might have to take some of that offline, Andrew. What I will say is we had a funding increase that came through partway through the second half. That increase only impacted us from kind of July, August onwards. So we are expecting more of an increase in the second half. In my notes, I think I kind of called it out as being what we're expecting going forward from that increases $4 per bed per day, but we can certainly go through a bit more of the granular items off the call.

Do you have a sense at the moment as to whether that would be on a like-for-like basis, care profitability would be up or down? And could you to how much that might be?

Yes. Well, I think what we did, Andrew, as we commented on EBITDA margin. So what are we seeing as the input cost? What are we seeing as our labor pool, how we're thinking about margin improvement. Kathryn has just referenced sort of the revenue line, if you like, so $4 per bed per day. We still have ahead of us pay parity and pay equity to solve nurses. Oceania has a disproportionate amount of nurses relative to others in the sector. There's about 4,500 nurses in New Zealand. We have about 460 of them. And that would make a material improvement to our business if we thought about getting anywhere near pay equity as it relates to nurses and DHB setting is about $20,000 a per employees. So you can do the maths on that. But additionally, we're just starting to see the model of care deliver us an improvement in operating leverage. So we've learned a lot through COVID about rostering, about workforce dynamics, but we've also learned a lot about just the optimization of that staffing. So it's not material improvements in margin, Andrew, but it is -- we feel like we are lifting off the trough as it relates to those kind of EBITDA care margins. Premiumization through care obviously add some additional fuel to our growth and profitability.

Your next question comes from Aaron Ibbotson from Forsyth Barr.

Yes. I've got a few one, but I'd like just to start with the sort of big picture one. And that is how have you changed your sort of priorities with regards to speed and type of investments in light of what one could argue it's a pretty substantial increase in cost of capital, both equity and debt for the market in general and HKRM Oceania in particular, over the last 6 to 12 months?

Yes. That's an excellent question, Aaron. I think what we have learned, and we observed this through COVID is that as it relates to growth, it's very hard to scale up quickly. It's very easy to scale down, but it's very, very hard to scale up. So as a consequence, what we started with was ensuring that we had the right balance sheet footing. At that time, we couldn't see what has emerged with a more global deterioration in market conditions. So I'm talking several years back, Aaron. But what that led us to do was to look for optionality in our portfolio. So part of our strategy is get the balance sheet on the right footing, first and foremost, have the capacity to scale up. But as we found through COVID, we can quickly scale down. We can move sites. We can have a more regional buyers. We can have a more urban buyers as the market shapes and changes. And also what we've learned is -- have plenty of optionality in the product mix. So we've had standard care beds. We're not doing that anymore. We've had care suites, and it's been well adopted across the market. But also apartments take a long time to build. They're very, very expensive. And you recover your cash over a longer period of time vis-a-vis villas. So having that optionality has been part of what our growth aspirations are. Our growth decisions that we see today, we're kind of grounded in some decisions that we took 18 months ago if we think about built form. So the consenting process, getting construction underway. And with the Helier in particular, in this period, we've obviously had a disproportionate amount of our balance sheet capacity used in the construction of what is going to be a unique offering, I think, in the retirement in aged care sector, but clearly in the Auckland market. So that's having a bit of a drag on our near-term strategy. We are not growing for growth's sake. We are very mindful of the market conditions that we are in. But we have tried to fix as many of the inputs to give confidence to our investors as we can. And Kathryn touched on some of those as it relates to our settings around interest, some of our disciplines about capital allocation and hurdle returns that would expect out of those products. So that is hopefully addressing some of that overarching sentiment, Aaron.

Okay. But if I'm slightly more specific, your market value of your equity is around 0.6x your book value. So in your view, are you getting a signal from the market that you're maximizing shareholder value by sort of accelerating investments or focusing on paying down debt? How do you -- or do you think it's just cyclical and not something you should or the Board should worry itself with?

Well, we're very mindful of market capitalization. And we look through those signals. We are here to implement a 5-year strategic plan. So we are obviously mindful of what's happening in markets. We don't govern our strategic planning on a point-in-time market condition. But the market is clearly saying, cash and recycling of cash is a very important aspect of the stability of this market going forward. Because we've got optionality in our pipeline, because most of our pipeline is consented, because it's across multiple sites with multiple product types, it does allow us to address that if we see further deterioration in the market. We've already pointed to the fact that we expect our new sales to be stronger than what they have been. And so that's clearly a key focus area for us as well as we work through cash recovery in this next period.

Fantastic. Could I just go just for, I think, the interest of the market and certainly for me personally, just to understand this cash recycling, if you could talk to Lady Allum. So you've had 113 care suites. If you could let us know, a, how long you expect it to take you to sell that down? B, what cash recovery you're expecting from that. And c, how much you've spent on it, so we get a sense of how this cash recycling functions in practice?

So I think I'll attempt to answer what I see from a resident experience point of view. Kathryn may answer some of your question or we may take some of the details of that off-line. But what I would say is that we delivered, obviously, 113 care suites there. We had hoped to have the building come out of the ground in February originally, and then it became July because of the genuine COVID disruptions. We're about 2,500 sheet short on [ chip ]. But in any event, Lady Allum opened its doors in September. We have already had 65 residents that have moved from the existing site into occupation. We have had 10 new sales since we opened the door, and we've been open just a couple of weeks now. And we are observing presales at that site. We think it's a fantastic product. We think it is located well adjacent to the hospital in a very, very high socioeconomic catchment. So our normal view on care suite cadence, a delivery of that size would take multiple years to sell down. We are finding that with Lady Allum because it's right product, right place, then the sell-down cadence of that, we are very, very impressed or happy with at this early stage. I'll hand over to Kathryn to maybe touch on some of the financial aspects of how much have we spent and what are we expecting. I would say on average, and we've provided it in the appendix, we do expect to recover far in excess of the cash deployed in the development of all of our properties from first-time sales.

Thanks, Brent. Aaron, so in the notes to the account and the easiest way for you to kind of look at what this has cost us with what's publicly available is looking at what we've transferred out of under development into kind of the freehold building. So Lady Allum and Woodlands came online. So we've around a balance of $40 million. So I think it's safe to take that around $35 million of that would be in relation to Lady Allum. And Brent has talked about the cadence of what we'd usually have. As we say, we've seen presales in this product. It's not something we've seen before. So we do expect it to sell down quicker than some of our care suite sites such as the BayView in Tauranga, Awatere in Hamilton have done in the past. It's hard to gauge how long this will take on a cash recovery basis because of the transferred resident. So as Brent said, 65 residents have been transferred over. But the benefit that does give us, and we demonstrated this in Tauranga and Hamilton is it provides an operational kick start for us while we sell the available rooms. And then as we've seen in Tauranga and Hamilton, you have a quite meaningful waitlist for those accommodations. And as residents depart, they pretty much fill straight away.

Okay. It's around $35 million, and you expect to get around $40 million back? Final question for me. Just on your care suite DMF. So your average ORA balance was up 22%, but your DMF was up 6%. And if look at the last period, period-on-period -- your half-on-half, your sort of average ORA was up 10%, 12% and then it was flat. I'm just trying to understand what's going on there as far as I can tell, you DMF is 9% of average occupational advances, which in my -- how you're charging for it should be impossible as far as my maths work, but if you could help us understand what's going on there, that would be great.

Yes, it is a little bit complicated as we all know. So just for the benefit of others on the call as well. So with our care suites, it's a 30% over a 3-year contract. And it is weighted front ORA 15, 10 5 for some of the contracts that we have. But for the results and what you see from an underlying earnings and IFRS perspective, it is a straight line, 10, 10, 10 over the 3 years. And one thing on the care suite DMF that may not be obviously apparent at the start is -- and because of the service level of the accommodation that the residents in, that care suite DMF does attract a GST charge of 9% on there as well. So it's one element that might be muddying the water a little bit. And the other element is around kind of tallying up the number of ORAs we've got versus the DMF that's come through during the period. I will note that this period, particularly a lot of the care suites that came in -- came online towards the end of the period, so in August, September. So those residents we're only seeing 1 or 2 months of their DMF as opposed to the whole 6 months.

Okay. My understanding is that [indiscernible] you have, the [ high rate ] would be, but because you charge upfront, but maybe that's not how it works. Okay. That's all for me.

Your next question comes from Bianca Fledderus from UBS.

Yes. So firstly, just following up on net debt and gearing. So yes, gearing obviously increased quite a bit to 35%. And you did mention that the Helier opening should see significant cash recovery. So I guess that's opening in March next year, so first half '24 impact. And so just for FY '23 for the full year, could you just give a bit of color around what we sort of can expect with regards to net debt increase for the second half? Yes, it's a full year, I guess?

Yes. Thanks, Bianca. And so if we look at where our debt was at March, we had drawn around $380 million. That has increased by $120 million to where we stood at 30 September. I guess there's 2 or 3 components to that, half of that, so $60 million was in relation to the funding of the acquisition of Bream Bay and Remuera Rise. And the other $60 million is kind of a mixture of where we're at in the development cycle of the Helier. So as Brent touched on earlier, it is a really premium product of a large size. We're kind of at the peak of where the costs are coming through at the moment in the first half and around the time where we stand today. And the other element of the $60 million increase is a mix of kind of the softer sales that we've seen in the first half. So I think looking towards March and then Brent will probably add things on this as well. Around that 35% is probably where we see our peak gearing. We're obviously not running out to do any more M&A as Brent mentioned, is not really any kind of business acquisitions that we would be wanting to debt fund in that second half. So really, what we're going to see is the usual increase in development as we come to the Helier and then offset by the sales that we see coming through in the second half.

Okay. And then just looking at your average sales prices on Slide 13. So it looks like you no longer split this between new sales and resales. Could you share what your weighted average resale price was for first half '23?

Yes, I don't have that to hand, sorry, Bianca, but we can take that one offline.

Yes. I think what I would say, Bianca, is that what we have observed is that resales have -- because of the embedded house price inflation that's existed in resales. Those resale prices have been significantly higher than what we expected. So maybe in the $600,000, $700,000 range. If we think about the product mix that we had, we had no kind of Villa products. So it's been at an apartment product on a new sales basis, and that's been around $1 million. And we've obviously seen good price escalation in terms of the care suite products. So as it develops and is adopted by the market, we're seeing that kind of lift well above $300,000 now in a lot of areas. So we can get the exact details for you off the call.

Okay. Great. And then just last question around care occupancy. So what are you sort of seeing there for the first weeks of trading in the second half of '23, like are you seeing any improvement there or...

I think we have dropped off the call. [Technical Difficulty] So Bianca, we apologize. It seems that a couple of times over this call, we've been cut off. So we apologize -- are you just able to repeat the last part of your question. I think it pertains to what's our observation on care profitability in the next half. If I maybe -- if that was the question in my response to that is we're expecting some progression on pay equity and pay parity for nurses. We think that it's a key issue that New Zealand is getting behind. So why would somebody in age residential care not be paid over a similar level to somebody in a district health board or as they were district health boards setting. But also, clearly, we're going to benefit from some $4 per day per bed rate in the next half. So we'll have 6 months of that revenue capture. And that revenue capture largely goes straight to our bottom line. I talked a little bit earlier when addressing Andrew's comments around just the operating leverage that we're starting to get out of our model of care as well.

Yes. And I was just wondering if you could please share what your current care occupancy ratings?

Care occupancy is sitting around 91%.

Okay. So no improvements there really in the second half yet?

Well, not -- it takes quite a lot of additional beds to move occupancy up. But yes, we're sitting about just between 91% and 92% of the occupied beds that we have.

Your next question comes from Stephen Ridgewell from Craigs Investment Partners.

Just first question on the results. Development margins were pretty strong in the first half and over 30%. Can you just talk to how sustainable that is? And I guess if I cast my 1 back to a couple of years ago, the indications have been that the margins wouldn't tail off, if you like, [indiscernible] and there's a few moving parts, obviously, with -- you've got some fixed price contracts and house price has gone up. Just talk to your expectations of the margins maybe on 2, 3 year view?

Yes. Thanks, Stephen. Yes, we were really pleased with where we saw the half year. As we mentioned on the call, even despite the kind of falling house market, we were still able to kind of maintain price. And as you say, the affordability ratios we've still got quite the buffer while that falls. And we have, as you pointed out, in the past, kind of moderated the market that we do expect to decrease down to around kind of the 25% moving forward in 2025. Cost pressures are coming through on construction, and we're definitely seeing that come through. as you mentioned, when you do have the fixed price contracts, even one that we've just started in the last couple of months has still got around the 70% mark fixed. And so we expect them to moderate off definitely, but not to a huge extent in the immediate future as we're tailing off on developments that have been underway for a couple of years. And what I would say as well is in that number, we see the benefit of the care suite sites or things such as in the Bayview and Awatere that I mentioned earlier, we moved residents into those sites. And so we are seeing first-time sales come through at those sites, a good 2, 3 years after opening.

That's helpful. And just maybe one for Brent. You've kind of noted early in the call that M&A is not on the agenda in the near to medium term in that you're considering divesting some assets. Can you just give an idea of the quantum of asset sales, you'd like to execute in the 6, 12 months? And how advanced are these discussions to at least divestment discussions?

Well, I think yes, as it relates to assets held for sale, we sort of had that in our accounts. So I think the quantum is around $60-odd million. So that probably answers that question. If I think about what sort of assets we might consider divesting, it's really those assets we are -- they're great sites for us, but they don't necessarily have any future premiumization or they don't have development optionality or they are geographically dislocated from other sites where we can get operating leverage from the existing resources in staffing that we actually have. So that's part of the divestments. As it relates to M&A, M&A for us was always an accent, and it is an opportunity to either diversify the portfolio, take us into a new built form or give us some optionality around almost a free carry on some of the development land that a private operator might have available for future development. We're not seeing attractive opportunities in the market over this near medium term. And additionally, Stephen, what we've done is pivoted towards greenfield. We want to cast our own sales, we want to get underway and be rewarded for good greenfield development, right product, right pricing, and fantastic cash recovery.

That's helpful. And then just following on from Aaron's line of questioning. I guess just given the market's increased focus on cash flow, could you just provide an indication of when Oceania of cash flow breakeven at a portfolio level. I mean, obviously, you're in an investment phase at the moment 500 suites under construction. So there's obviously a CapEx phase going on. But just at a kind of more consistent level, when would we -- should we be thinking about the business being on a steady keel in terms of those net cash flows?

Yes, I guess it's hard to have the crystal ball out on that one because there are quite a few levers that build it with the pipeline coming on most of the main ones. What I would say is, and I think we talked about this in the past, when we do our feasibilities for going into a new development and the cash recycling, both the amount and the tenure over which we can do that as one of the key criteria that we look at in making those decisions. So it is something that's kind of front of mind for appropriate use of our capital.

Yes, sorry, I was just going to add to that states, if I think about the sculpting of the portfolio, I think covering analysts, [indiscernible] own strategic plan suggested that FY '23 was a bit of a peak period for this investment cycle that you're talking about. And then what happens as a consequence of that, we've got the portfolio effect. The care premiumization, making a contribution well in excess of its operating costs. We are diminishing corporate overhead. And in addition to that, sort of a more time table delivery of products, almost within a gearing bending that we're comfortable with. So we are in that kind of a peak investment flow. And I think a couple of years ago, we saw that in the numbers, and we are now experiencing it real time. And then cash recovery returns to the business in time. So I mentioned earlier, as we develop out the pipeline, 72% of the pipeline will be accented towards premiumization. So that deferred management fee, that care annuity earnings, if you like, provides solid cash for the business as we think about the execution of our 5-year strategic plan.

I appreciate all that, Brent. I guess, if I sort of look at this pivot towards greenfield. It sort of feels like there's still quite a few years of accumulation, if you like to fund it working capital growth. Would that be a fair observation of [indiscernible] the actual investment cash flow come off a little bit from what we've seen in the last 6 months?

Yes, I think that's right. And it depends how aggressively we undertake that greenfield acquisition pathway. We know that we've got about 1,836 units in our development pipeline today. We've been quite tactical about greenfield. We know that because we haven't been set on greenfield in a prior period, then the land acquisition that we do going forward probably will be at either an advantaged rate, stabilized pricing rate or at the very least, it will allow us to get to better locations -- care locations that we might have accessed. And I think we're learning a lot more about our built form, what actually works for residents, how does Oceania differentiate itself. So that's strategically what we're trying to achieve. So greenfield is building out that pipeline, and we can scope to a degree, how aggressive or otherwise, we are around that kind of lean banking acquisition on that side and making those kind of capital commitments. So we've got to sell -- we've got a lot of brownfield development to do as well as greenfield.

That's helpful. Maybe just one last one for me. Guess we're running over time. Just in terms of the operating cash flow result in the first half, and you've called Awatere apartment sale has been a little bit softer and also buybacks being a bit elevated, can you actually just quantify that headwind, if you like, from both those drags that you've called out? I mean you sort of alluded to them, but I'm not sure what the numbers are that would to the extent explains the decrease in operating cash flow?

Yes, of course. So I think Appendix 11 in our pack probably gives you the detail that you'll need, but if we just run through it now. If we look at it in comparison to the September '21 comparative. We're seeing essentially $22 million less new sales. We've done a significant number of the brownfield development buybacks. So that's about a $4 million differential as well. That has been offset, though, by some really good retail gains coming through in the period. So those decreases are offset by a $6 million increase in the resale cash. But we're essentially talking about kind of a softening of around $20 million.

No, great. I mean -- so just on Awatere and to your point, about [ earning ]. I mean is there any particular -- I think you point to why sales have been a little bit slow at that site.

Yes. I mean it's a good point. And so it's certainly exercising our mind. I think what we have done is we've been quite adventurous. So we bought 2 markets, 63 apartments all in 1 lot. If we contrast that to the Bayview at Tauranga for argument sake that's been a more staged delivery of apartments in the community amenity. So when you're bringing that many apartments to market, Hamilton is a market that's reshaping to high-density apartment dwellings. So we're probably ahead of the curve in terms of that built form vis-a-vis competitive product in the market, which is more traditionally been villa product. Those sales exist for us. So we're confident we can make up the ground. But those are probably some of the key learnings from my perspective, Stephen.

Your next question comes from Nick Mar from Macquarie.

Just following on Awatere, how are you thinking about the other 70 odd departments coming online in the next stream, while they are underway?

Well, they don't come on stream until sort of FY '24, '25. It's a good point that you're raising that from our perspective, having a vibrant resident community goes a long way to demand. And I think as they come on stream, we're expecting to obviously be sold through what we have that creates resident scarcity for new product delivery. So it's a few years off in terms of solving that particular issue if it is an issue. But in any event, our immediate priority is to get a higher cadence of sales at Awatere in the short term.

And is that involved in any changes in pricing?

It hasn't needed to involve any changes in pricing. But we're mindful that the market is softening. We have been price setters in this market context. And you can see that in the resale margins achieved in the development margins achieved. We're conscious of the buffers that exists. So there's a traditional buffer as people are aware that sit between sort of CBRE affordability in the market. And so that might be something that we look at and at time, but we haven't been trying to sacrifice price for volume. We've just been confident that we've delivered the right product, and that's what our main focus is.

Great. And lastly, do you expect any [ way ] of settlement over the second half '23?

Well, we've certainly received unprecedented inquiry for it. So I can't foreshadow where we're going to land, but we are delighted with the inquiry that we're receiving for it.

But is there enough time post completion to actually settle some units?

I think in that socioeconomic environment, a number of our future residents will not be requiring on -- not be focus on market conditions for the acquisition of those apartments. So if there's an opportunity for them to not have a house settlement or days to sell, then that may be an opportunity in that. But at this stage, that's sort of more speculation than evidence that we can provide. What I would say, the Helier is a fantastic site. It's going to be very unique. It's going to be very unique in the services that it provides. It's going to attract a different resident and potentially people outside of the country or outside of the region may be attracted to some of the product.

We have a follow-up question from Aaron Ibbotson from Forsyth Barr.

Apologies. But just following up from Ricky's question, I don't think we or the market is really asking for a crystal ball, but just a business plan that doesn't just include units delivered, but also the cash cost of those units delivered. So I think it's reasonable to ask when you just added $120 million of debt in 6 months, where you expect that debt to end up in 6 months or 12 months' time. But is it fair to say that you expect it to be up, but that you don't know how much?

Yes. Well, I think of the $120 million, $60 million, we'll win into M&A. So I guess we're talking about the $60 million -- and I think from our perspective, that's certainly something that we can think about to add into future updates to the market. So there's actually a greater sense of that and a greater tracking of that. So we don't have it in this presentation, Aaron, as you know. We know that it's going to be a key feature as we go through this next period with the macroeconomic conditions. So yes. That would be probably the comment that I'd make at this stage.

There are no further questions on the teleconference at this time. I'll now hand back to Brent or Kathryn to answer any questions from the webcast.

There are some questions from the webcast, and I'm just looking at the questions now, and I'm conscious of time as well. I think, by and large, to be honest, we've answered them. So people wanted to understand sort of our view on sales, people wanted to understand about government funding and how this might impact our returns, people wanted to know about some of the inputs as it relates to our build program. So from my perspective, I would hope that the questions have been answered that we've received online. So thank you for those that have provided online questions.