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

Good morning and thank you for joining us at Cedar Woods' 2020 Annual General Meeting. My name is William Hames, and I am Chairman of Cedar Woods. As it is now after 10 a.m., and a quorum is present, I formally declare the meeting open. This is the first time that Cedar Woods has held a virtual AGM, and I welcome all of our shareholders who are joining us through this web platform. Turning to the agenda, I will provide a recap of our performance and highlight some of our other achievements in the 2020 financial year. We will then hear from our Managing Director, Nathan Blackburne, who will review our property portfolio, provide some insight into the first quarter of FY 2021 and also touch on our outlook. Finally, I will return to open the formal proceedings as set out in the Notice of Meeting. Shareholders using the Lumi platform will be able to vote at any time on today's shareholder resolutions. Until I close the voting at the end of the meeting, you can vote. If you have multiple holdings and wish to vote each one, then you will need to process each one separately. Voting is now available. Shareholders will also be able to submit their questions in writing on the Lumi platform at any time until the end of the meeting. If you have questions, I encourage you to submit them as early as possible because we have a moderator in place who will receive the questions and provide them to me. We have a very long agenda and limited time and may not be able to answer all questions. If you do have a question, it will help us if you can note a particular resolution to which it relates, unless it is a general question. This session is being recorded, and an audio webcast of today's presentation will be available via the ASX and our website after this meeting. The notice convening this meeting and related documents have been made available to shareholders on our website. I propose the notice be taken as read. The minutes of the previous general meeting of members have been signed by the Chair in accordance with the Corporations Act, and it has been placed on the Shareholders' Minute Book. I would like to now welcome my fellow Directors, Nathan Blackburne, our Managing Director; and members of our executive team who are with us today. These people are Jane Muirsmith, Director; Ron Packer, Director; Valerie Davies, Director; Nathan Blackburne, Managing Director; Rob Brown, Deputy Chairman; Paul Freedman, our Company Secretary; and Leon Hanrahan, our Company Accountants. Let's briefly review the financial highlights for 2020. As you're aware, the company's results were impacted by the global pandemic. We achieved a net profit after tax of $20.9 million, down 57% on last year's profit, with earnings per share of $0.26, a full year fully franked dividend of $0.19, a return on equity of 5.5%, and a total shareholder return of minus 2.4%. The major reason for the reduction in profit was that revenue was down 30%, reflecting the impact of COVID-19, in particular, the deferral of settlements into '21. These results were disappointing for us and our shareholders. But in circumstances of a global pandemic, we have fared a lot better than many others. Presales stood at $360 million, up $30 million on the prior year. I'm also delighted to report that we have begun the 2021 financial year strongly, increasing presales to $454 million at the end of the first quarter, inclusive of Q1 settlements. This compares to $401 million -- $409 million at the end of the first year of FY '20 and provides a strong platform for the financial years ahead. The company's balance sheet remained strong, with gearing at 38%, at the lower end of our target range 20% to 75% and has further reduced since the end of the financial year, putting us in an even stronger position. Let's look at the company's performance over the last year 1, 2, 3 and 5 years relative to our peer group and also the ASX 300 Index. In terms of share price performance, stock markets continue to be volatile and Cedar Woods was impacted by this in FY '20, with the share price dipping significantly in response to the pandemic. Since then we've seen improving sentiment on markets globally and locally towards property stocks as the markets anticipate a national recovery in housing, in part supported by government incentives. We are now trading at $5.59 when I wrote this. Today, it's $5.68, on a historical PE of 21.6, reflecting market expectations of improving property markets and a recovery in earnings. In terms of Total Shareholder Return, or TSR, our performance again was impacted by the pandemic, but it's interesting to see how we have performed relative to various benchmarks and our peer group. Across all time periods in our table, our TSR are outperformed the peer companies and the ASX. Our TSR for FY '20 was 16% higher than the average 6 peer companies and 5% higher than the ASX 300. This is something we are proud of and is explained by our strategy, the quality of our portfolio and the job that our management is performing. Accordingly, Cedar Woods has continued to enjoy strong interest from new and longstanding shareholders. Our strategy is to grow our national portfolio, diversified by geography, product type and price point so that it continues to hold broad customer appeal, and we can perform well in a range of market conditions. This strategy is a key differentiator for our business. We are not exposed to a single market or single product type. In line with our strategy, we have a presence in Western Australia, Queensland, Victoria and South Australia, with a growing number of well-located projects in each state, and in FY '20, we continued to produce revenues and profits in all 4 states in which we are operating. We have over 30 projects with over 8,600 lots, a substantial pipeline to support future earnings. During the recent lockdowns, our strategy was tested, and your Board believes our strategy is sound. However, we are always thinking about the long-term shifts in consumer preferences and how we might be able to take advantage of these. We are confident in our future. As you have seen recently, we continue to invest in strategic acquisitions, which our Managing Director will tell you more about. Last year, I talked about the active role Cedar Woods plays in the business community and the residential communities it creates. This year, we have gone a little further in explaining our activities, and for the first time, we produced (sic) [ provided ] an ESG, Environment, Society, Governance, report in our annual report. Environmental issues, including climate change, are a challenge affecting society globally, and we must address them collectively to preserve our planet for future generations. We have published a new Environmental and Climate Policy -- Change policy, and we are working further to adjust our strategy to the inevitability of climate change. We are creating communities that will continue to exist well into the second half of the century, and we are reviewing and refining our strategy in respect to the places and products we create, to make them fit to face the challenges of climate change, and indeed, the opportunities that may present. Independent Director, Ron Packer, is due to retire by rotation at today's Annual General Meeting and is not seeking reelection to the Board. He has been with the company for more than 14 years, during which time he has chaired all of our committees and has brought his independent judgment and wisdom to hundreds of meetings over that time. He will be missed by us all. Accordingly, today at least, the Board wishes to sincerely thank Mr. Packer for his long service to the company and wishes him well in his retirement. I am happy to report that the Board is well progressed with the recruitment of a new independent director, who might already have been on the Board, had it not been for the pandemic, which has prevented us from meeting these candidates in person, and we hope to make that announcement on that matter later in the financial year, if conditions allow. On behalf of the Board, I would like to congratulate Cedar Woods' management team and all the employees for their performance endeavors in what has been a very difficult 2020 and for placing us into a solid position going forward in 2021. The Board acknowledges their hard work and thanks them for their efforts. I would also personally like to thank my Board colleagues for their continued engagement and enthusiasm over the past year. Finally, I would like to thank our shareholders for your ongoing support. May I remind shareholders, in case any of you have joined us late, that you can vote on the shareholder resolutions at any time in the meeting, and please send your questions using the Lumi platform. I will now hand over to our Managing Director, Nathan Blackburne.

Thanks, William, and good morning, everyone. I'm going to provide an overview of the year's activities, challenges and achievements and then provide some commentary on the outlook. What an extraordinary year we have all had. It was one which bred plenty of challenges for our sector, but also some incredible opportunities. Throughout this more recent difficult period, we have been disciplined in maintaining a longer-term outlook by continuing to invest in our business and in making acquisitions. We know that this is a time where strong companies can come out even stronger, and over the medium term, this is certainly our aim. I'm very happy with how we came together as a Board and an executive team in dealing with COVID-19. It may sound strange, but rallying together as a team to fight our way through this, and accelerate our way out of it, has brought us all together even more and emphasize what a great company we have. We've got a robust strategy that COVID-19 has confirmed again is the right one for us. It's our diversification that sets us apart from the peer group and helps explain our superior performance. We've got quality projects that are winning awards and plenty of customers moving into new homes that they are very proud of and, indeed, that we are very proud of. We are leaving a legacy and innovating with our projects. Our townhouse development strategy is a great example where we have innovated and created a niche for our business, which is paying dividends. We are playing an active role in the communities that we operate within and are regarded for what we give back in those communities and the environmental credentials of our developments. And finally, our people, which are doing a great job in creating value from the assets that we've got and in acquiring new ones for the future. We value an enjoyable workplace and one which is very spirited and driven. Update on progress with regards to our strategic priorities. On financial strength, the FY '20 result was impacted quite heavily as you have seen, but the settlements that were delayed have now taken place, and we have crafted a position for ourselves with a strong balance sheet and healthy presales. We have had strong performance relative to peers and indices over the short, medium and long-term time frames, and I too am proud of this. We have continued to receive strong bank support, our gearing is at the low end of the target range, and we have the capacity to fund growth. On earnings growth, we maintained a growth mindset over this recent period to capitalize on what we see as favorable buying conditions. And in fact, we've acquired 5 sites over the last 2-year time frame. This won't be a snap back in profit, though, for our business. It will take a little time for us to recover, but we are doing all we can to accelerate this. In terms of operational excellence, which is being operationally strong and safe with quality projects, we have had some meaningful outcomes. In FY '20, we completed the implementation of new financial systems, and we now have a strong platform from which to scale up the business. We've got stronger controls, real time data, better integration and a system that allows us to automate previously manual tasks. We have had a greater focus on sustainability in FY '20, the outcomes of which are set out in our enhanced ESG report. And customer surveys during FY '20 have shown the high levels of satisfaction across the projects surveyed. And finally, on high-performance culture, I'm very happy with the workplace outcomes we've achieved over the period and the plans that we have in place particularly around things like training and career developments for the period ahead of us. Thoughtful and well-designed projects are key to our approach and, to give you some insight into this, I wanted to show you 2 projects that we are working on. In South Australia, where we have 2 projects, Glenside, which is one of them, is only 3 kilometers from the city, and will deliver 1,000 townhouses and apartments over its 17-hectare extent. This is a really substantial development and that's proving successful, and it fits really neatly with our business model. In FY '20, we completed the Botanica apartments project within Glenside and started construction on the Grace apartments project, for which sales have been good, even in recent months during the pandemic. A few weeks ago, we launched a new stage of townhouses at Glenside, for which these are the designs, and the sales have been excellent. The average price of these was around $1 million, which is more than double the Adelaide median home price. Following are some images of our Subiaco development. This project will deliver a mix of townhouses and apartments on a former TAFE site, and it's really smartly designed. We are bringing to Perth the model that we have developed up and delivered on so successfully on the East Coast. Demolition of the old TAFE buildings will start in a few weeks and construction will start on the housing itself in early 2021 calendar year. The architecture and landscaping is thoughtfully integrated and positions this multiyear project really well. Here are some of the -- here are some more images of the townhouses we have at the project, which we're in the process of launching. And these are appealing to 2 main buyer profiles: downsizers and young professionals. Inquiry on the project has been really strong, and it's being launched this Saturday. Now on to market conditions for the property sector. Demand has been impacted by several factors arising from the pandemic, including social restrictions, low buyer confidence, weak economic conditions and suspension of immigration. But impact on housing has not been as much as expected, with median house price drops being modest thus far, and this has really been a prevailing theme of economic impacts to date, with it being not as drastic as expected. The drop in supply of new housing around the country from around 2019 and pent-up demand in some states is cushioning the blow somewhat from COVID-19. Federal and State Government stimulus too has significantly supported the housing sector and, in turn, the broader economy. WA stimulus dramatically turned around the soft conditions we had and has resulted in a period of very strong sales from June through to August this year. This has supported our recovery as a business and, ultimately, accelerates it. We await the announcement of housing stimulus in Victoria as restrictions progressively ease. We expect that further stimulus there will generate good sales for our business. Longer term, we expect conditions to progressively improve as unemployment drops, national borders are reopened and state economies get back on their feet. Of course, there will remain uncertainties, particularly to the point where a vaccine becomes widely available. Conditions, of course, vary from state to state with the common themes being those that I've talked through on the previous slide and were listed on the previous slide. The housing industry in Melbourne, first up, as you would expect, has experienced difficult conditions. As a general theme, the restrictions impacted demand and delivery time frames at some projects for an extended period. Remarkably though, some of our projects there have still been generating good sales even during the lockdown. We experienced delays at the apartment projects, but for the land estates and townhouse developments, we didn't experience significant delays with those. Brisbane is arguably the best placed East Coast city to recover quickly and for the housing sector to perform. This will be driven by a few factors, but mainly the relative affordability of housing there and the performance of the Queensland economy more broadly. Our Ellendale land estate in Brisbane has been performing well with sales and pricing being steady. Perth has seen extraordinary sales, which has enabled us to sell lots of residual stock and bring forward future stages. And this is mainly due to the generous stimulus that is on offer, but also due to the relative affordability of housing in Perth. It has been pleasing to be able to wind back some of the incentives that have been in place for years and to start to improve margins across the projects. We think it is fair to assume that sales will slow for a period once the incentives end. And finally, Adelaide, which is a mature and much more stable market with its history of much less volatility than the other capitals. Sales have been performing steady there in recent months, with sales coming mainly from non-first home buyer [ profiles ] at our projects. It was certainly slow for us in Adelaide at both of our projects for a few months, particularly March to June, though. Acquisitions. A key element of our strategy is to acquire sites in order to support our future earnings. And we've made 5 acquisitions in the past 2 years, refocused internal resources towards growth activities and are intending to make the most of what we see as favorable buying conditions nationally. The number of opportunities are certainly elevated noting that particularly development finance is really hard to come by for lots of developers out there. So we will continue to target well-located infill and urban fringe sites. And the final slide for me before I hand back to William is on our outlook. So uncertainty remains over the depth and duration of the economic downturn due to COVID-19, and the outlook for property markets is dependent upon the level of ongoing support and the timing of the reopening of state and national borders. Cedar Woods remains in a strong position with $454 million in presales expected to settle over the FY '21 to FY '23 period. Subject to the continued availability of federal and state governments to effective -- ability, I should say -- the continued ability of federal and state governments to effectively manage COVID-19 as well as overall market conditions prevailing at the time, the company is targeting strong growth on FY '20 earnings for FY '21. Cedar Woods remains well placed for the medium term with more than 8,600 undeveloped lots or units in its development pipeline across the 4 states, maintaining the ability to respond quickly to improved market conditions. The company considers that current conditions represent a strong countercyclical buying opportunity and we continue to assess the potential acquisitions to supplement future earnings. So I'll now hand back to our Chairman.

Thank you, Nathan. I will now move on to the formal business for today's meeting as contained in the Notice of Meeting. And afterwards, I will take general questions regarding the company. Proxies. I've made rulings on appointment of proxies as follows: a record 212 valid proxy instructions were received by the company by 10:00 a.m. on the November 2, 2020. The minutes of this meeting will record in respect to each resolution voted upon the total number of proxy votes exercisable by all valid proxy appointments, the directions of those proxy forms and the total votes for, against and abstaining. The proxy votes received will be shown as we address each ordinary resolution. I'll move each of the resolutions and then take questions afterwards. If you have a question that is not submitted -- you've not submitted it already, please submit it now. The first item of notified business is to receive and consider the financial report for the year ended June 30, 2020, and the accompanying Director's report, Director's declaration and auditor's report. I now table these documents, and we'll consider questions we have received from shareholders that relate to the financial report. Questions on the conduct of the audit and the auditor's report may be directed to Helen Bathurst, a partner from our auditors, PricewaterhouseCoopers, who is in attendance today. I'll now proceed to the next item of business. We now turn to the resolutions to be put to the meeting. We will move directly to a poll for all of the remaining items of business. Shareholders who have not already done so may vote at any time on the resolutions. We refer to the virtual meeting guide of how to vote. This is on Cedar Woods' website on the AGM page. Special Resolution 1 relates to our constitution. We are proposing to adopt a new constitution. The current -- the company's current constitution was adopted by the company following receipt of shareholders' approval at the company's 2,000 AGM. So we've had good value out of that one. It is proposed to adopt the new constitution as there has been a number of developments in law, corporate governance principles and general corporate and commercial practice for ASX-listed companies since 2000. The Explanatory Memorandum contains a summary of the material changes for your information. The Notice of Meeting states that the other directors unanimously support the resolution. A special resolution requires voting, majority of 75%. The proxy votes for this resolution are as shown on the slide. I now move the motion. Thank you. Please enter your vote on the Lumi platform. [Voting]

Ordinary Resolution 1 relates to the reelection of a Director. Mrs. Jane Muirsmith, FCA, GAICD, having retired in accordance with the company's constitution and being eligible, offers herself for reelection -- be reelected as a Director of the company. The Explanatory Memorandum sets out Mrs. Muirsmith's credentials. The proxy votes for this resolution are shown on the slide. I now move the motion. Thank you. Please enter your vote. [Voting]

I now move to Ordinary Resolution 2, which relates to the remuneration report. The report is set out in the directors' report on Pages 39 to 60 of the 2020 Annual Report. Further information on the remuneration report is contained in the Explanatory Memorandum attached to the Notice of Meeting. Following ongoing improvements made to the remuneration framework, we have generally received positive feedback from investors and the proxy advisers. And hence, at last year's AGM, less than 8% of the shareholders voted against our remuneration report. The Explanatory Memorandum advises that numbers is less than 25% for no for first strike was recorded in last year's AGM. A summary of the major changes to the remuneration framework during the year are set out on Page 39. Proxy votes received for the resolution are shown on the slide. Please note Directors, key management personnel and persons associated with them are not eligible to vote in favor of this resolution and is reflected in the proxy votes as shown. Shareholders are advised that the vote on this resolution is advisory only and does not bind the Directors of the company. I now move the motion. Thank you. Please enter your vote. [Voting]

Ordinary Resolution 3 requests shareholders' approval for the issue of 16,232 Zero-Price Options to the Managing Director or his nominee under the Deferred STI Plan for 2020 financial year. As noted in the company's notice convening the 2019 AGM and consistent with what is becoming common market practice, the Board resolved from the 2020 financial year that the Managing Director's short-term incentive, STI, component of his remuneration, will be structured as part cash and part deferred into an equity-based plan rather than the STI being paid wholly in cash. Accordingly, the Board determined to split the Managing Director's STI for the 2020 financial year so that 45% of the approved STI would be paid in cash and 55% would be deferred by way of issue of Zero-Price Options, ZEPOs. The ZEPOs are proposed to be issued under the company's deferred short-term incentive plan for year '20, which requires shareholder approval. The objective of FY '20 DSTI Plan is to assist with attracting, motivating and retaining executives, in this particular case, the M.D., delivering rewards for individual and company performance, allowing executives the opportunity to become shareholders, enabling short-term incentives to be settled by way of shares in the company and aligning the interest of executives with those of the shareholders. For FY '20, the DSTI plan operates by way of a 1-year performance period and a 2-year service period, both of which commenced on the July 1, 2019. At the completion of 2020 financial year, the Board assessed the performance of the company for the year and awarded the Managing Director an STI, of which 45% or $75,834, is awarded in cash and 55%, or $92,686, is deferred and awarded by way of a proposed grant of 16,232 ZEPOs, which will vest at the end of a 2-year period of service on June 30, 2021. The Directors, other than Mr. Blackburne, recommend that shareholders vote in favor of Resolution 4. They consider that the terms and conditions of the ZEPOs that are proposed to be issued to Mr. Blackburne reflect the objective of the deferred STI Plan and that the STI and the number of ZEPOs proposed are commensurate to the role and responsibilities of the Managing Director of the company, his potential impact on the company's performance and having regard to the relevant market remuneration data. Mr. Blackburne makes no recommendation in respect to Resolution 3 due to his personal interest in the outcome. Proxy votes received for this resolution are shown on the slide. I now move the motion. Thank you. Please enter your vote. [Voting]

Ordinary Resolution 4 requests shareholders' approval for the issue of 127,666 Performance Rights to the Managing Director or his nominee under the LTI Plan for the 2021 financial year. The LTI Plan provides an annual issue of performance rights to the Managing Director and other executives, with the Managing Directors requiring shareholder approval. The objective of the LTI Plan is to allow the Board to grant Performance Rights to executives of the company to assist with attracting, motivating and retaining our executives, delivering benefits that reward individual and company performance aligning the interest -- executives' interest with those of the shareholders. The Board is responsible for administering the LTI Plan in accordance with the plan rules and the terms and conditions of the specific grants to participants under the LTI plan. The Board is cognizant of general shareholder concern that long-term equity-based rewards for staff should be linked with the performance of the company. The Performance Rights the Board has offered to Mr. Blackburne under the LTI Plan for the 2021 financial year are subject to 2 performance conditions as outlined in the Explanatory Memorandum attached to the Notice of Meeting. The Directors, other than Mr. Blackburne, recommend that shareholders vote in favor of resolution for. They consider the terms and conditions of the Performance Rights that are proposed to be issued to Mr. Blackburne reflect the objective of the LTI Plan and that the number of Performance Rights proposed are commensurate with the role and responsibility of the Managing Director of the company, his potential impact on the company's performance and having had regard to relevant market remuneration data, which has been thoroughly benchmarked this year. Mr. Blackburne makes no recommendation in respect to the Resolution 4 due to his personal interest in the outcome. Proxy votes received for this resolution are shown on the slide. I now move the motion. Thank you. Please enter your vote. [Voting]

Questions. I will now consider questions from the shareholders regarding the performance and management of the company that may like to ask the Board and the management. Some of these questions have come in before the meeting and others, hopefully, have arrived during the meeting. I will have the Company Secretary to ask the first question.