Oceania Healthcare’s first-half net profit plummeted 97 percent, mainly reflecting the demolition of a care facility in Tauranga, other property related costs and higher care wages.

Net profit for the six months ended Nov. 30 fell to $1.3 million from $44.5 million in the same period a year earlier.

The year-earlier result included a $34.1 million gain in the value of its investment properties compared with a gain of just $1.6 million in the latest six months.

Employee benefits rose 8.9 percent to $59.3 million in the latest period.

Nevertheless, the retirement village and aged care company is highlighting that its underlying operating earnings were up 7.5 percent in the six months, underlying net profit from continuing operations was up 8.7 percent and operating cash flow rose almost threefold to $47.1 million.

And the statutory result doesn’t include the rising value of Oceania’s care suites. Increasing those suites through development and converting its existing standard care beds to care suites are a key part of the company’s strategy.

The value of those care suites, which earn a premium over government funding, rose $18.2 million but that increase cannot be included in net profit as the high level of care provided means they’re required to be treated as operating assets, not investment assets.

Chief executive Earl Gasparich says the company has delivered and that the underlying result reflects increases in deferred management fees from the village operations and realised development gains from sites completed earlier in the year.

“We have focused heavily on generating higher revenues in our care business through occupancy and premium room charges, given the increase in operating costs, particularly staff costs associated with the equal pay settlement and registered nurse pay rates,” Gasparich says in a statement.

“Occupancy across our non-development sites has increased materially over the six-month period and across all sites is now 92 percent. That’s up from 89.9 percent in the previous first half.

“This has been driven by site refurbishments including conversion of standard beds to care suites and our new operational structure put in place earlier this year,” he says.

Sales from developments completed earlier in 2018 contributed $43.5 million to cash flow.

“While our developments are funded from our bank facilities that we increased and extended earlier in the year to July 2023, our net debt of $197.3 million as at Nov. 30 represents a prudent gearing level of 26.7 percent,” Gasparich says.

He expects gearing will rise to about 30 percent by the end of the financial year, but says the company aims to keep it from rising too much further than that.

The company will continue to complete developments in the second half and to convert standard rooms to care suites as it drives higher occupancy levels across the care portfolio, he says.

It has already received pre-sale applications for 13 apartments at The Sands property it is developing at Browns Bay on Auckland’s North Shore. Pricing reflects the high quality of the product, he said.

Oceania has a five-year development pipeline that will see village independent living units rise from 29.6 percent of the portfolio to 44.2 percent. Care suites will rise from 12.3 percent to 26.5 percent, while standard care beds will fall from 58.1 percent to 29.3 percent.

Oceania has a much greater emphasis on care than the other retirement village operators, even Ryman Healthcare. More than 34 percent of Ryman’s units and beds were in care facilities at Sept. 30, not counting serviced apartments which would take that percentage to 53.

Summerset Group, by comparison, can accommodate a little more than 17 percent of its residents in care beds.

But while companies such as Ryman and Summerset are building new villages, Oceania is redeveloping its existing facilities.

Oceania’s care suites are closer to apartments than rooms but with greater care through the continuum to hospital-level care.

While pricing of its village units is more tied to how the neighbouring residential property markets are performing, its care suites, priced well below independent living units, are much less linked to the surrounding market.

The average price of Oceania’s village apartments rose from $435,000 in November 2017 to $503,000 last November. But the value of its care suites eased a little from $250,000 to $248,000 over the same period, with the price more affected by location than the housing market generally.

In the latest six months, aged care operating earnings fell 14 percent to $14.1 million, reflecting the rising wages of nurses and other care workers, while village earnings rose 33 percent to $21.7 million.

Gasparich says he expects the aged care operating earnings will stabilise in the 2020 financial year – government funding had been inadequate until May 2018 when “I think the government got it right”. He’s not expecting the same wage inflation pressures from now on that Oceania experienced initially following the equal pay settlement.

The increase in Oceania’s care suites will also mean the earnings over and above government funding will increase, he says.

Oceania Health shares are 3 cents weaker at $1.06, about where they were 12 months ago but comfortably above the May 2017 float price of 79 cents.

Forsyth Barr analyst Jeremy Simpson says some investors may have been surprised by the weakness in the aged care earnings, but the results were mostly in line with his expectations.

Oceania Healthcare will pay a first-half dividend, which isn’t tax paid, of 2.1 cents per share, unchanged from last year.

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