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

Ladies and gentlemen, thank you for standing by, and welcome to the Cedar Woods FY '20 Full Year Results Presentation. [Operator Instructions] With us today, we have Cedar Woods' Managing Director, Nathan Blackburne, and Chief Financial Officer, Leon Hanrahan. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your first speaker, Nathan Blackburne. Thank you. Please go ahead.

Good morning, and welcome to the presentation of Cedar Woods Properties result for the 2020 financial year. 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 company, including our strategy and objectives. I'll then hand over to Leon to take us through the financial results for the year. Then I'll provide an overview of our portfolio and market conditions, and 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 approximately $420 million. Our products include land estates, townhouses, apartments and commercial. We have over 9,000 lots in our pipeline, and there are 30 projects across Victoria, South Australia, Western Australia and Queensland. And our projects are in high amenity locations and with many of them next to train stations. We have a very stable Board and management with excellent governance structures in place and a strong corporate reputation. Our outlook is supported by good presales levels and a high-quality portfolio. 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 this strategy is proving successful with the strong relative financial results that our company has been able to deliver. We have multiple product types in 4 states and different price points that are appealing to a variety of buyer profiles. And it's fair to say that our strategy of diversification has helped us through COVID-19, and our business is performing much better than many peer companies in the development sector. We continue to work on 4 strategic priority areas to aid the company in achieving its objectives. Good progress has been achieved on each of these, which I'm going to briefly run you through. On financial strength, we have continued support from our 3 banks with facilities having been recently extended. Gearing is at the low end of our target range, and there is significant facility headroom to fund our growth. On earnings growth, we've maintained a growth mindset, acquiring 4 sites across the nation in FY '20. In terms of operational excellence, we have been developing leading, integrated systems to create efficiencies, to get superior controls, have real-time data and workforce mobility. Our business has an excellent safety record, and our projects have excellent sustainability credentials as well. Our purpose and vision have interconnected objectives. They are reliable and growing income streams for our investors, quality housing or offices for customers, vibrant communities for our customers to be part of, a high spirited and safe workplace for staff and a loyal business partner to our suppliers. There is great clarity within our business of these objectives as is necessary for an aligned and ambitious business that we are. Our most recent staff survey confirmed all of this with 93% of staff having demonstrated clarity on our vision, purpose and values; 84% being satisfied or very satisfied with their role; and 88% of staff willing to recommend Cedar Woods as a great place to work. So these outcomes essentially mean that we have happy staff who understand their role and how their role fits into the broader purpose of the organization. There are 3 key areas in which we create value and which describe the key functions of our business: we acquire property for development; we then research, design, achieve planning approvals and deliver the project; and then we market and sell the products within each development. In each of these areas, we have a distinct approach and one that is characterized by discipline, focus, and trying to do things differently from our competitors. So now I'm going to hand over to Leon, who will present the FY '20 financials.

Thanks, Nathan. A hallmark of our business has been our track record of profitability and dividends. In this chart, the blue bars show dividends over the last 10 years, with the interim dividends in dark blue and the final dividends in lighter blue. The black line shows our profit performance over the same period. Since listing, Cedar Woods has always made a profit and always paid a dividend. This is a testament to our staff and the quality of our portfolio that we have achieved this in what can be a cyclical industry. COVID-19 gave rise to soft sales conditions nationally in the final quarter of 2020 and social distancing requirements at construction sites, which caused the delay of a significant number of our settlements. This largely explains the fall in earnings in financial year '20 with many businesses globally experiencing similar and even worse outcomes. I'll now take you through some of the key financial metrics for financial year '20. As mentioned earlier, like many businesses, ours was impacted by COVID-19 in the final quarter when we were previously expecting the completion of a significant number of housing lots, homes and offices and completion of settlements with our customers. As a result of soft sales conditions for part of the year and the delayed completions, revenue ended the year down 30% from the prior year at $260.7 million. Net profit after tax was also down from its financial year 2019 high of $48.6 million to finish financial year '20 at $20.9 million, generating earnings per share of $0.26 and return on equity of 5.5%. Gross margin, however, remained solid at 27%, mildly moderated on the 29% delivered in the prior year due to both changes in product mix and some discounting. With consideration given to the company's strong balance sheet, comfortable gearing at 38% and improving liquidity position, the Board elected to continue with the final dividend for financial year '20, albeit at a lower level in recent years, declaring a $0.065 final dividend, taking dividends for financial year '20 in total to $0.19 per share, reflecting a payout ratio of 73%. This is a departure from the long-standing dividend policy of distributing approximately half of full year net profit in dividends, acknowledging the lower earnings result in 2020 and the outlook for strong growth in '21. The dividend reinvestment plan and bonus share plan will be in operation for the final dividend. And while the outlook for the economy remains uncertain, we start financial year '21 in a fortunate position with more than $360 million in presale contracts on hand at June 30. This is up from $330 million reported at the same time last year. Approximately 2/3 of these presales are expected to settle in financial year '21 and have got us to target strong earnings growth to '21 over the result achieved in 2020, subject to government's managing of the COVID-19 pandemic. We continue to operate a strong modestly geared balance sheet in accordance with our financial strength, strategic priorities. Total assets at June 30 of $646.7 million grew 13% in the year as we secured 4 new projects at Wollert in Victoria, Burpengary in Queensland and Subiaco and Hamersley in Western Australia. Wollert and Subiaco are reflected in the balance sheet inventory at year-end. And the conditional acquisitions at Burpengary and Hamersley will be reflected once they've been derisked by planning environmental approvals, at which point the contracts will go unconditional. Net assets and equity are up only modestly in the period, with the majority of the softer financial year '20 earnings being distributed to shareholders via the FY '19 final and FY '20 interim dividends that were paid during the period. The delay to expected quarter 4 settlements in financial year '20 meant year-end net bank debt of $142.7 million was higher than the prior year, although gearing measured by net bank debt-to-equity and net bank debt to total tangible assets less cash both remained at the lower end of the company's target range. Cedar Woods continues to maintain a strong liquidity position with the tenures of both its $30 million 3-year project facility and $205 million 3- and 5-year corporate finance facilities both extended during the year. Interest cover finished the year at 6.1x, and the company continues to maintain compliance with all of its facility covenants, ensuring continued secure long-term funding availability. Sizable facility headroom of $68.7 million was available at year-end and significant settlements early in financial year '21 has further reduced gearing and increased facility headroom to more than $85 million by the end of July 2020. This capacity puts the company in a strong liquidity position to navigate the current environment and continue to roll out its development program and, where prudent, take advantage of compelling acquisition opportunities as well. While the result in financial year '20 didn't meet the high expectation the company sets for itself, Cedar Woods continues to outperform both its peers and relevant market indices in terms of 1-year, 3-year and 5-year total shareholder returns. Table in this slide shows Cedar Woods' 3-year total shareholder return of 6.2% is well ahead of an average of its listed residential property developer peers that recorded an average of negative 2.3% over the 3 years and also ahead of all the relevant indices. This is particularly impressive result considering the cyclical nature of the property industry in which the company operates and the impact of COVID-19 on the whole sector, and it reaffirms Cedar Woods' compelling investment opportunity. I'll now hand back to Nathan to provide you an overview of our portfolio.

Thanks, Leon. Cedar Woods has 30 projects across 4 states, and our products are really diverse and include the large-scale land estates, large-scale townhouse developments, apartment projects and commercial projects where they're associated with master plan communities. Our projects are characterized by their high amenity locations and are often located adjacent to train stations. Many of our projects are distinctly different from the competition and are in markets where there is limited supply. And this is a deliberate part of our strategy. Our projects are positioned as quality developments within their respective markets, and we are very proud of the innovation within our designs, their sustainability and the great thought that is put into ensuring that our products meet with good demand. These charts further demonstrate how our diversification strategy has played out. The chart on the left shows the proportion of our portfolio in each state, with WA followed by Victoria playing the dominant roles. The chart on the right shows the mix of product in the portfolio with residential land still being dominant, but apartments, townhouses and commercial starting to play an increasing role. COVID-19 threw up many challenges for our sector but also some important opportunities. Demand has been impacted by social distancing, low buyer confidence and economic conditions more broadly. But impact on housing has not been as much as everyone has expected, with medium price drops so far being modest. Detached housing is expected to perform better than apartments over the near term with the impacts to immigration hitting the CBD apartment sector hardest. Federal and state government stimulus has significantly supported the housing sector and, in turn, the broader economy. Population growth, economic conditions and unemployment levels will continue to dampen demand in the medium term. But as we have seen more recently with WA, stimulus can dramatically turn this around. Sales fall-overs across the business are slightly elevated but remain at reasonable levels. And finally, low interest rates will continue to support demand for housing. Conditions do vary from state to state, with the common themes being those I talked about on the previous slide. The housing industry in Melbourne is experiencing subdued conditions. The restrictions are impacting demand and delivery time frames. Remarkably, some of our projects are still generating good sales, even in August during lockdown. We expect delays at the apartment projects, but land estates and townhouse developments we have shouldn't experience significant delays. Brisbane is arguably the best placed East Coast city to recover quickly and for the housing sector to perform. This is likely to be driven by a few factors but mainly by the resources sector, which is doing well, housing stimulus and the relative affordability of housing in Brisbane compared to Sydney and Melbourne. Perth has seen extraordinary sales, which has enabled us to sell residual stock and bring forward future stages, and this is mainly due to the generous stimulus that is on offer, but also the relative affordability of housing and decently performing mining sector. It has been pleasing to be able to wind back some of the incentives that have been in place for years here and start to improve our margins. We think it is fair to assume that sales will slow a bit once the incentives have ended. And finally, Adelaide, this is a mature and much more stable market with a history of much less volatility than the other capitals. Sales have been steady there in recent months, with sales coming mainly from the non first home buyer cohort. So it's worth talking a little more about the housing stimulus. As whilst some of the sector drivers are weak, stimulus can have the effect of turning this around overnight. And that's exactly what's happened in Perth and exactly what happened with housing stimulus that was enacted during the GFC in 2008 as well. This graph shows the housing stimulus in place at each state, comprising the federal stimulus in light blue and state-based stimulus on top of that. Total grant on offer in Queensland are $40,000 but are a staggering $55,000 in WA. This represents around 10% of the median house price, so it's no wonder buyers are coming out of the wood work. Effective stimulus always prompts buyers to act within specified time frames. So for the Federal home buyer -- homebuilder stimulus, for example, contracts need to be signed by 31st of December with construction needing to start within 3 months of that. Here are some statistics from the Housing Industry Association, the HIA, which were recently published. It shows the trend and outlook for new dwelling starts in the 4 states that we operate in. The darker bars in each graph are for houses and the lighter bars are for apartments. The black line is the total of the 2. And you can see that the outlook according to HIA varies from state to state with where that black line is heading, either stable, down or trending up. Over FY '21, most states are expecting declines. For FY '22, some states will start to recover, whilst it is expected that other states will take more time. It is fair to assume that the actual outcomes will depart from these projections, particularly if state government stimulus is offered in the Eastern states, which for example in Melbourne, we fully expect. I'll now take you through highlights in each of our states, starting with WA, where we have 14 residential projects and more than 5,000 lots or dwellings. We have projects catering for a range of buyer types and a mix of product types. We are keen to build a greater townhouse and apartment portfolio in Perth and are actively trying to do that at the moment. There are 2 new developments delivering first contributions in FY '21 called Solaris and Ariella. The most recent Perth acquisition is a good infill project in Hamersley, which has been secured subject to planning approvals and which we expect will be met with good demand when it is released. This slide shows 2 WA projects, Bushmead and Subiaco. Bushmead is an award-winning and premium land estate that has been very popular with buyers and has a strong reputation within the industry for the quality of the design and the sustainability outcomes that have been achieved at the estate. Subiaco is a townhouse and apartment project in a sought after inner area and one which we will release to the market in coming months. The design we have worked out for this state -- for this estate echoes the model we are regarded for in the East Coast, and we'll bring a new style of development to Perth. In Victoria, we currently have 10 projects, which offer a wide range of products, including land lots, townhouses, apartments and strata offices. One important factor that underpins our Victorian projects is that they are in high-performing locations, often with little competition, and they do tend to have strong appeal from the owner/occupier/buyer group. This enables our projects to be more resilient in tougher market conditions and the sales we are achieving now a testament to this. Williams Landing, a major new town development in Melbourne's West is really taking shape now with several buildings completed in FY '20. Over the next few years, we will continue to deliver a mix of commercial and residential projects and continue to progressively lift the height of buildings, given the favorable planning controls we have over this site. The team has done an excellent job in delivering the projects to date, and we're very proud with the developments that we have on the ground in this new town. At Jackson Green in Clayton South, 20 kilometers from the CBD, we have a mixed density project which is performing well. We have completed all the townhouses now and have 2 large apartment developments to go called Huntington and Aster. Sales slowed in the last quarter of FY '20, but have picked up again in August, and the project will be a decent contributor for the business in coming years. Moving to Queensland. We have 3 projects, 2 of which are located relatively close to the Brisbane CBD. Ellendale, just 12 kilometers from the city, continues to progress with several stages completed in the year. Sales are doing quite well due in part to the federal stimulus but also because of the quality of the estate. Ellendale has higher-priced lots which target higher income budgets than traditional land estates. And this, at the moment, is serving the project well. Wooloowin is a site that is just 6 kilometers North of the CBD that will deliver a mix of townhouses and apartments. We are expecting to launch the first stage of this project in coming months with the revised planning approvals now in place. We recently announced the conditional acquisition of a site 35 kilometers North of Brisbane in a strong growth area. Burpengary will be a 300-plus lot development for which a planning application has been lodged and which will deliver a wide range of residential lot product to first and second homebuyers. In Adelaide, we have 2 projects. Glenside, which is a really stunning project and one of scale that is in a sought-after suburb of Adelaide. It's 17 hectares and only 3 kilometers from the CBD and will deliver over 1,000 dwellings when complete. We have been delivering the estate for 3 years now and have approximately 7 years to go. The design we have in place has resulted in several awards having been awarded to the project. Fletcher's Slip is a townhouse and apartment development in the regenerating suburb of Port Adelaide. Our several works at the project are well underway, and we have strong presales. This project, too, will be a good contributor over approximately a 5- to 6-year period. So now I wanted to comment on the outlook. The sector drivers of population growth, economic growth and unemployment are currently weak. But as we have seen, stimulus has dramatically turned that around in some states. The leverage we have to WA provides our company with a distinct advantage. The stimulus on offer in Perth has catapulted demand, and sales remained strong. Strong earnings growth is targeted for FY '21 off the back of the result that we had in FY '20. Our outlook is underpinned by presales of $360 million with 2/3 of these presales to settle in FY '21. Our forecast FY '21 settlements are also largely presold, positioning our business well. We have a long pipeline of quality projects with many of our projects in high demand locations. And finally, we are currently assessing a number of acquisitions in what we consider favorable buying conditions, and this will serve to support earnings growth in future years. 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 with a strong fully franked dividend yield. We are well positioned to benefit from the WA housing conditions that we are currently witnessing. Our diversification strategy is a key point of difference and has proved successful over many years. And finally, Cedar Woods' record of total shareholder return has seen the company outperform on both short and long-term time frames. Thank you very much.

[Operator Instructions] Your first question comes from the line of Scott Murdoch from Morgans.

Just interested in the composition of the presales, if you can sort of give us an idea of the sort of the state composition and the product side composition of the presales and how that sort of compares to PCP, if that's okay.

Sure. Scott, thanks for that. Just let me get to the relevant information. As you would expect, with the strong conditions that we have in WA, we've got a significant amount of the presales in WA and then the second state is Victoria, where we've got significant apartment and townhouse presales with minimal presales in the other 2 states. There are presales there, but the proportions are much lower. And we can't give you specific numbers.

Yes. So in our smaller states, they make up about 10% of the presales each via dollars. Half of the presales are still in Victoria because on a revenue basis, the built-form products there are higher revenue and WA making up the balance there. And as Nathan mentioned, WA was towards 30% of the presales. This is up a much higher portion than we normally have this time of year presold in WA with typically presales not occurring as far ahead as settlement in WA where we have predominantly land business. And that's the breakdown.

Okay. And can you just sort of give us some indication of what you've seen recently on any fall-over rates COVID related or otherwise across the main states?

Yes. So we've commented that fall-over rates are slightly elevated. They're up about 2% on a national basis, and it does vary state to state. Fall-over rates actually moderating in WA where we've had such a big boost in sales. But those other states, they are up slightly, as we've commented, and then it's about up 2% on a national basis. But that's 2% as a portion of sales, just to confirm.

[Operator Instructions] We have no further questions from the telephone lines. I would now like to hand the conference back to your presenters. Thank you, and please continue.

So that ends the presentation and the Q&A session. Thank you very much for listening in everyone.

Ladies and gentlemen, that does conclude our conference for today. Thank you for your attendance. You may now disconnect.