Cedar Woods Properties Limited (CWP) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Cedar Woods Properties Limited FY '20 Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Nathan Blackburne, Managing Director. Please go ahead.

Good morning and welcome to the presentation of Cedar Woods Properties FY '20 First Half Results. I'm Nathan Blackburne, Cedar Woods' Managing Director; and with me is Leon Hanrahan, our CFO. In terms of today's agenda, I'll firstly provide an overview of our business and an update on progress with our strategic priorities. I'll then hand over to Leon to take us through the financial highlights for the year, then I'll provide our presentation on market conditions in the residential property sector before taking you through some of our projects across the country. We'll then wrap up with our expectations for the business going forward. Cedar Woods is an ASX 300 property company with a market capitalization of around $640 million. We develop a diverse range of products with residential land estates, townhouses, apartments and commercial projects. We have over 9,400 lots in our project pipeline, and this is across 4 states. Cedar Woods has a track record of financial strength and performance with strong return metrics delivered for our shareholders over the years. We have a stable Board and management team with strong governance structures and corporate reputation, and we have demonstrated ability to outperform our peers. And our business outlook is supported by a good bank of presales and improving property markets around the country. Our purpose of creating long-term value for our shareholders through the development of vibrant communities informs everything that we do. We understand how long-term financial performance is not achieved through the singular focus on profits but rather a wider purpose of reliable income streams for our investors, a high-spirited workplace and career opportunities for staff, quality homes or investments for our customers, vibrant communities for people to live in and embedding a loyal business partner. Our vision of being the best Australian property company known for performance and quality is a really good descriptor of our business but with an aspirational component to it. We are very much a values-based organization and there is company-wide alignment on our values, and that feeds directs – feeds directly into financial performance. Staff surveys undertaken in the first half indicate a high degree of engagement and satisfaction. And again, these things have a strong correlation with high performance. Now a look at our business model and how we as a company create value. We perform 3 key functions in the property development process: acquiring sites, developing them and marketing and selling the product. Cedar Woods has established a long track record of consistent earnings, which underscores our disciplined approach to acquisitions. We have an appetite for growth, but all acquisitions are done in a research-based and very technical manner and follow a rigorous assessment process. We've consistently shown our ability to uncover and acquire sites that have high potential. In the development stage, we have a proven approach to getting designs right to optimize quality and returns and then achieving planning approvals in a collaborative and timely manner. Our approach to managing construction is also part of our value add as we structure contracts and select builders to mitigate the risks. And sales is the third key function. We position our projects to maximize demand and to presell our products to help underwrite our projects, and we nurture our customer relationships to the point that we have good repeat customer numbers and high levels of referrals. Our strategy is to grow and develop our national project portfolio diversified by geography, product type and price point so that it continues to hold broad customer appeal and performs well in a range of market conditions. And the strategy is proving successful with the strong and consistent financial results that we as a company have been able to deliver. When I started in the role over 2 years ago, we identified 4 strategic priority areas to aid the company in achieving its objectives. Good progress has been achieved on these, which I'll briefly run through now. On financial strength, we have improved our capacity for growth with the recent extension of our corporate finance facility, which has seen the introduction of National Bank and with portion of the debt having a maturity date of 5 years. So this facility has been extended to 2023 with a portion of it to 2025. To provide for future earnings growth, we've acquired 5 sites at a favorable time in the cycle. And we continue to try to uncover and create opportunities across the states. In terms of operational excellence, we've worked diligently to make the business the best it can be operationally. Our digital transformation efforts have made material gains with a more mobile workforce, a new risk management framework, simplified systems and a new integrated financial systems implementation, which is now complete. And we also have a strong safety record. The strength of our culture and the caliber of our talent is an area we've made great progress on. We have a really high-spirited workplace and our strong culture generally is serving as a form of advantage. We have been active with acquisitions of recent. Five sites have been acquired in the past 18 months, with 3 of them occurring in the first half: Wollert in Victoria, which has around 500 lots; Hamersley in WA, which is a conditional contract and has around 200 lots; and Subiaco in WA, which will be a mixture of apartments and townhouses. This has been disciplined, countercyclical buying and the pricing terms we've acquired on are favorable. The sites are in locations with strong relative demand for new housing that we expect to perform well. A factor here is that there have been fewer business in the market due to finance constraints for some developers, making it easier for us to acquire projects. And importantly, we still have significant capacity to acquire more projects with several under review in Queensland, VIC and Western Australia. This slide shows our strategy and business model playing out. The blue bars are our dividends from 2011 and the green line is our net profit. We have a good track record of delivering consistent and growing earnings and dividends whilst navigating different phases of the economic and property cycles in each state. This come back --comes back to the diversification strategy, the ways we create value and the quality of assets that we've got in the portfolio. We have guided to a moderately lower profit than the record result in FY '19 but are optimistic about the medium-term outlook. I'll now hand over to Leon to take us through the financial highlights for the first half.

In the first half of financial year '20, we delivered a net profit after tax of $10.2 million and revenue of $128.8 million from 330 settlements. As guided at the end of last financial year and again at the first quarter up, earnings in FY '20 will be weighted to the second half, and we maintain our full year guidance of achieving a full year net profit after tax of moderately lower than the record profit of $48.6 million achieved in 2019. We do have a history of uneven halfs but also a history of delivering consistent and often improving full year earnings and dividends. Significant construction program in the first half and continuing into the second will see us complete 2 office buildings and 2 apartment buildings in the second half as well as multiple townhouse and land stages. We are pleased to have contracted $340 million in presales by 31 December 2019, which helps to de-risk second half earnings and provides a great platform for financial year 2021. We expect just over half of those presales will deliver revenue in the second half of FY '20 with the balance falling into FY '21. The Board has declared an interim dividend of $0.125 fully franked. And like earnings, which is skewed to the second half, total financial year dividends will also be weighted to the final dividend, maintaining our disciplined capital management. Our share price, like many of our peers, has benefited from the improving sentiment in the property sector since 30 June, experiencing a lift of 38% in the first half. Turning over the page to Slide 10. We continue to operate a strong, modestly geared balance sheet in accordance with our financial strength and strategic priority. Total assets at 31 December of $644.7 million were up strongly since 30 June 2019, reflecting the investment we have made in our portfolio, including those new acquisitions at Subiaco in WA and Wollert in Victoria that Nathan talked to earlier. Net assets and equity of $377.8 million are up only modestly, reflecting the lower first half and the final 2019 dividend paid in October. Net bank debt of $143.3 million is up $38 million as a result of lower revenues and the spend of our significant development program currently underway. This resulted in net bank debt-to-equity or gearing at 37.9%, and we continue to operate comfortably within our target range of 20% to 75%. We maintain finance facilities of $205 million with undrawn capacity of near $73 million at the end of the calendar year. This capacity will help us support funding our business as well as making future acquisitions. And as Nathan mentioned earlier, we are now supported by 3 major banks offering access to additional finance as the business requires it. Interest cover at 6.9x remains well in excess of our client's facility covenant of only 2x. I'll now hand back to Nathan to provide an overview of our portfolio.

So now for an overview of our portfolio followed by some comments on our key projects. We have 9,400 lots/dwellings/units across 34 projects and are in 4 states. FY '19 was the first time Cedar Woods generated revenue from each state, which was an important milestone for us given the geographic diversification strategy that we embarked upon several years back and which we will continue to deliver this year. We are somewhat unique in the diversity of our products with our offering, including land estates, townhouses, apartments and commercial projects. And what -- one other differentiator is the location of our projects, which are commonly in areas of high amenity, low supply, with several of them next to train stations. Our projects are positioned as quality developments within their respective markets. And this approach has served our business well with well-designed projects generally performing better when tough conditions prevail. These charts further demonstrate how our diversification strategy has played out. The chart on the left shows the location of our product, with WA and VIC having the largest land bank by number of lots or dwellings. Queensland and SA contributions will increase as new acquisitions are made there. The chart on the right shows the mix of products with residential land still being dominant, but townhouses, apartments and commercial playing an increasing role. It is important to note that this excludes 17 hectares at Williams Landing from which there will be many commercial and apartment projects to supplement this, both the number of projects in VIC and the proportion of commercial projects. I'll now discuss market conditions, starting with the key drivers for the housing sector. Australia's housing market is driven by several factors with population growth, economic conditions and unemployment being 3 of the key important drivers. In each of the states we operate in, the population is growing with SA though being the weakest and Queensland and VIC being the strongest. The outlook for economic growth is robust with WA to stand out but VIC and Queensland slightly moderated from prior forecasts. Unemployment is fairly stable in a range of 4.9% to 6.2%. So the fundamental sector drivers are supportive, but the new housing market is still experiencing challenging market conditions. I'll now talk about the market outlook and what we're experiencing across our own portfolio. As is usually the case, conditions vary from city to city, but there's a general theme of recovery and positivity. And I will talk to the national data, firstly. Most of the key indicators for the housing sector are going in the right direction. Option clearance rates are high in Sydney and Melbourne, up around 80%, which are really boon time clearance rates. Correspondingly, there is strong price growth being experienced in those markets, but the pace of that growth is expected to slow, though remaining at healthy levels. Sales volumes remain well below peak levels, but excess stock is starting to be absorbed. Planning approvals and new dwelling construction remain down, but there are signs of improvement in these indicators recently. The fall in rental vacancy rates and slight increases in rents that are now evident will also support new dwelling construction numbers going forward. The number of applications for home loans is another great indicator, and these have increased markedly over the first half when compared to the first half of FY '19. First-time buyers and owner-occupiers generally are the strongest segments with investors still relatively inactive but likely to rebound as vacancies drop and rents increase. I'll now comment more specifically on the capital cities that we're in. In Melbourne, strong population growth is driving demand with clearance rates that have been high and price growth correspondingly good. Excess stock is being absorbed, but sales volumes remain well below peak. It's the established housing market in Melbourne that is performing well with the median prices close to peak levels, but new housing in Melbourne is still recovering. Relatively strong price growth is forecast in the short and medium terms. We are seeing some price growth at our projects in Melbourne, but moreover, pricing and sales do remain subdued. Interstate migration is helping the Brisbane market where employment conditions are improving and there is a good affordability edge. Strong price growth is forecast for this market and our experience is that there has been a moderate uplift in inquiry and sales in the first half at our projects. We think we are at the bottom in Perth, which has vacancies tightening in the rental market and stabilized home prices. Mining employment is approaching previous peak levels, and this is rubbing off onto the housing market. It remains competitive in most areas, but we should see a recovery of the established sector, followed by a lift for new housing. Sales are going well at some of our projects, but the Southern Corridor remains slow. December and January were reasonable months when compared to last year, but it's too early to call a trend on that. In Adelaide, the market is expected to improve as a result of government initiatives such as major infrastructure projects and the submarine building program. We are seeing slow but improving sales and hope to see an increase in sales on the launch of new products over the coming months. I'll now take you through highlights of each of our states, starting with WA. In WA, we have 15 projects and more than 5,200 lots or dwellings. We have projects catering for a range of buyer types, and our offering is increasingly diverse with residential lots, townhouses and apartments. Cedar Woods has strong leverage to WA and the portfolio was recently supplemented with some acquisitions. This slide shows some detail on 2 of our WA projects. Ariella, 20 kilometers from Perth, has been our best-selling project and will make strong contributions to the current year. It's a land estate with lots ranging in price from $168,000 to $373,000 and is appealing to a mixture of first-time buyers and upgraders. And in FY '19, we increased the project life of this development out to FY '25 with the acquisition of the adjacent farm. At Subiaco, we acquired a 1.44-hectare site in the first half. Subiaco is a sought-after suburb 4.5 kilometers west of the Perth CBD. We're seeking planning approval at this project for a mixture of townhouses and apartments. And the sales launch is planned for FY '21. In Victoria, we currently have 13 projects, 6 of which are in Williams Landing. The projects are diverse in nature and includes land estates, townhouses, apartments and commercial projects. One important factor that underpins our Victorian projects is that they are in high-performing locations with little competition. We recently supplemented the portfolio with the acquisition of a 43-hectare site in Wollert, on which we will deliver around 500 lots. We have a long pipeline of developments to come at Williams Landing, with the town center incorporating a mixture of lands, townhouses, apartments and commercial projects. There are many sites undeveloped at Williams Landing, which we will progressively work through over the next 10 years. Numerous stages, including residential lands, apartments and commercial are under construction. These include 2 office developments, both of which are largely presold and substantially complete. We are also seeking precommitments from tenants for the next major office deal like Target. Jackson Green is a major infill development located next to a new rail infrastructure. It is made up of 570 townhouses and apartments. And again, it's several projects within the one development site. Huntington Apartments is one of these projects, and it has 165 apartments. Construction commenced on this during the half and there are good presales in that project in place. Apartments at the development range in price from $380,000 right up to $700,000. Moving to Queensland. We have 2 projects located relatively close to the city. Ellendale, just 12 kilometers from the city, continues to progress with several stages underway or recently completed. Sales did slow considerably in 2019, but in 2020 so far, sales have been good. Wooloowin is an infill project, and that's 6 kilometers north of the Brisbane CBD. It will deliver a mixture of townhouses and apartments. And we have recently refined the design and are amending the planning approval and have a sales launch planned for mid-2020. In South Australia, we have 2 projects which are underway. Glenside is 17 hectares and only 3 kilometers from the Adelaide CBD in a sought-after suburb. It's a large-scale project that will deliver around 1,000 dwellings and is being set up as a high-end housing development. We completed a few townhouse stages and have the first apartment building underway, for which we have 80% presold and the construction has been progressing well for this first apartment development. Our project in Port Adelaide, Fletcher's Slip, is located just 14 kilometers from the CBD and benefits from an adjacent train station and being close to the beach. It's also close to where the federal government's new submarine fleet will be built. The project has good presales and site works are underway. And when complete, Fletcher's Slip is a development that will produce a total of around 500 dwellings, most of which are townhouses. Now I wanted to comment on the outlook. There are favorable sector drivers with strong population growth, low unemployment and low interest rates. Established housing is improving and this is expected to flow through to new housing during 2020. We have a portfolio of high-performing projects, many in high-demand locations with low competition. We have a long pipeline of quality projects, and the development settlements program is currently on track for the second half. But we continue to monitor potential impacts the coronavirus may have on our sector for matters such as building materials availability. Subject to this, moderately lower earnings are expected in FY '20. Our outlook is underpinned by presales of $340 million with approximately half of this to settle in FY '20 with the other half positioning the company well for FY '21. Growth in earnings is expected over the medium term, and our WA leverage provides a distinct advantage for our business. We have a favorable acquisitions environment currently with numerous projects being assessed by the business and capital availability there to undertake them. Our presentation concludes with a summary of the investment proposition that Cedar Woods offers. We have a stable and experienced Board and management that has proven its ability to differentiate and deliver. We have a track record of consistent profits and dividends. And Cedar Woods is well positioned to benefit from a WA turnaround, and we do expect this to occur. And finally, our diversification strategy is a key point of difference that is consistently delivering results for us. That concludes our presentation. Thank you.

[Operator Instructions] The first question comes from Scott Murdoch with Morgans. Please go ahead.

Just you've been through a fair bit there on the project pipeline, but just wondering if you could help us understand just, I guess, a bit more on the timing of a couple of the bigger projects. What's expected to launch sort of FY -- second half '20, FY '21 in terms of settlement contribution? For example, I think you mentioned Subiaco and Wooloowin, but they may or may not land in FY '21 or '22.

Yes. Thanks, Scott. So FY '21, with a few new projects contributing there for the first time, our Huntington Apartments in Victoria, Jackson Green. It's a building of 165 apartments. It's significantly presold and currently under construction. We've got the Grace apartments in South Australia, which will be a borderline FY '21, FY '22 delivery. Solaris in Western Australia, a new project in Piara Waters that we've recently launched and under construction, and that will see first settlement early in FY '21. The second site at Ariella in Brabham that we bought in the last 12 months, that will see first settlements -- continuing the life of the Ariella project, that will see first settlements early FY '21 then into FY '22 and beyond. So Fletcher's Slip, we're currently selling in Port Adelaide at the moment. So we're not into building construction yet there. We're doing site work. So that will more likely be FY '22, FY '23 settlements. Wooloowin will relaunch sales mid this calendar year, and that will see settlements likely FY '22. Our new acquisition in Wollert in Victoria, that would likely see settlements as well FY '22, I think, from a number of years beyond.

Okay. Thanks, Leon. That's helpful. Just also want to understand your guidance a bit better, also the gross margin within the presales. Obviously, you've called out presales half roughly for next year. Just wondering if the composition of those presales in terms of the gross margin are similar to what we've seen over the recent periods such as -- of around that 30% gross margin level?

Yes. Thanks, Scott. So I think this time last year, we had a gross margin around 31% and fairly consistent in the first half of this year, around 30%. That's also fairly reflective of full year last year, and we would expect full year FY '20 to see a similar gross margin around that 30% as well. So a number of projects, you might say the majority, more than half of them would have margins around that point, but then there are a combination of other projects, which have both lower and higher margins. But if you think on balance, we, on a full year basis, I guess, we'd expect to continue to see margins around that 30% or just shy of it.

Okay. That's helpful. And just the presettlement, obviously, you've said that roughly 50% is for the second half. Can we assume that the vast majority of the remaining sales are for FY '21?

Yes. Near all of that number that won't fall in FY '20 will fall in FY '21.