Ann: AOG Buy Back and cancellation of AOG securities, page-25

Delphi, I can agree with you on a number of fronts, viz:

I cannot explain the share price movement other than the normal jousting that might take place by a company or companies wishing to buy some AOG assets or partner with AOG on various projects. It has been publicly announced (30/11/18) that AOG are “encouraged by inquiries from a significant number of parties.” According to the timetable, they are in the data room right now with indicative bids submitted later this month.

Is it not in their interests to have the AOG share price reeling? Would this not strengthen their hand/s in placing lower bids? Make no mistake, they are attracted by the thought of a lower price than what has been paid for similar assets in recent times…LLC and INA to name but two.

I can tell you this, there has been no significant increase in short selling for the past month or so. I watch it every day. At short selling of around 3.6%, AOG isn’t ‘smelling’ like a Myer or an AMP…far from it.

Check the announcements…since the announcement of the strategic review in August, no substantial holders have sold down. Mulpha have snapped up around 2% approx. and PPT have snapped up 6.2%. Could PPT be lending out their holding to other short selling parties? Could be, they are in the business of finance. Then have a drive past the top 20 shareholder in the AR…they control 80.01%...but Citicorp and UBS could also be renting out their holdings to short sellers. Never stand between these companies and a dollar coin…you will get steamrollered!

Secondly, I agree with you that debt is perhaps higher than it should be, but your figures are not accurate.

The most accurate way of assessing debt with retirement companies is to look at the Group Gearing Ratio, which is ‘total assets less cash and resident loans as a percentage of net debt’. Page A51 of the appendix for FY18 shows this to be 16.8%, way less than their covenant of 30% or less.

Interest Coverage Rate (ICR) is another good one to assess the debt situation. This is EBITDA/Interest Expense. Again, page A51 shows this to be 5.8x…significantly higher than the required 1.5x or greater.

Then you talk about the bankers ‘pushing for a strategic review’. Are these the same bankers who increased the limit by $77.5m in July (before the announcement of the strategic review), and extended the debt facilities to March 2020 and July 2021?

I make it that AOG has borrowing capacity and cash of some $165.7m in FY19…and they will need a chunk of this to finance the FY19 development program and the stock overhang.

Naturally, the bankers would be encouraged by some cornerstone investors and development partners.

I still hold to the view that existing AOG retirement assets under the DMF model will be segmented and hived off as annuity style assets whilst the company begins to follow the Ryman model of ‘aging in place’ by building residential towers which house both ILU’s and care beds. Plus, they might well enter the lifestyle marketplace so successfully developed by INA and LIC in appealing to the pre-retirees who are downsizing.

As to your comment: ‘Forget the discount to NTA, its only book value underpinned by dubious optimistic future scenarios.’ This would be true IF the underlying analytics used by AOG are out of line for the industry, which they aren’t. Right now AOG is 39% of NTA whereas NZ companies Ryman and Summerset, both using the DMF model, are trading at 265% and 173% of NTA respectively! Even Aussie based lifestyle company (LIC) is trading at 270% of NTA.