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

Thank you for standing by, and welcome to the Cedar Woods FY '21 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 first half results for FY '21 for Cedar Woods Properties Limited. I am Nathan Blackburne, and with me is our CFO, Leon Hanrahan. Together, we are going to give you a summary of our first half financial results, comment on market conditions, provide a portfolio overview and finish with our outlook. Cedar Woods is an ASX 300 property company with a market capitalization of around $550 million. We develop a diverse range of products with residential land estates, townhouses, apartments as well as commercial projects. We've got over 8,400 lots in our project pipeline, and this is across 4 states. We have quality projects with many in areas of high amenity, close to transport and commercial hubs. We have a stable Board and management with strong governance structures and corporate reputation. Our outlook is supported by a good bank of presales, which substantially derisks our earnings outlook, and we have an improving property sector. And as many of you know, we have demonstrated our ability to outperform our peers. 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 perform well in a range of market conditions. The strategy is proving successful with the strong relative financial results that we've been able to deliver. We have multiple product types in 4 states and different price points appealing to varying buyer profiles. And it's fair to say that this strategy of diversification has helped us through COVID-19 and positions us well for recovery. I'm now going to hand over to Leon to take you through the financial highlights.

Thanks, Nathan. In the first half of financial year 2021, we delivered a net profit after tax of $22.4 million and revenue of $169.2 million from 582 settlements. Revenue and profit were up substantially on the first half of financial year '20. Earnings in financial year '21 will be weighted to the first half, and we are guiding to achieve a full year net profit after tax of approximately $29 million, providing strong growth in earnings for the full year. We are pleased to have contracted $380 million in presales by 31 December, up some 12% on the same time last year, with second half earnings now substantially derisked and a great platform to enter financial year '22. We expected about 1/3 of these presales will deliver revenue in the second half of '21 with the balance falling into financial years '22 and '23. The Board has declared an interim dividend of $0.13, fully franked, providing 4% growth on last year's interim dividend. For full year, dividends are expected to be between 60% and 75% of full year net profit after tax with the Board to review and consider the final dividend after the full year profit result. Our share price, like many of our peers in the wider market, has benefited from stimulus and improved sentiment since 30 June '20, experienced a lift of 19% in the first half. We continue to operate a strong, modestly geared balance sheet. Total assets at 31 December of $631 million fell slightly in the first half as we realized inventory in response to the government stimulus. Net assets and equity are up on the basis of the strong result in the first half, reflected in the stronger NTA. Net bank debt of $142.6 million is almost unchanged from the full year. And gearing, measured by bank debt -- net bank debt to equity and net bank debt to total tangible assets less cash, remained at the lower end of the company's target ranges. 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 facility recently extended. Interest cover finished the year at a very strong 10x, and the company continues to maintain compliance with all its facility covenants, ensuring continued, secure, long-term funding availability. Sizable facility headroom of $62 million was available at the end of the half and further increased to more than $79 million by the end of January 2021. This capacity puts the company in a strong liquidity position to navigate the current environment and to continue to roll out its development program, and we're prudent to take advantage of compelling acquisition opportunities. I'll now hand back to Nathan.

Thanks, Leon. I'll now provide some commentary on market conditions for the property sector. So market conditions were buoyant in the first half of FY '21 due to a range of factors, including government stimulus for the housing sector, record low interest rates, and an economy that is recovering more quickly than originally anticipated. While the stimulus has been wound back at 31st of December, inquiry and sales levels remain quite strong. Dropping vacancy rates and strong demand is increasing rents and pushing up prices. Detached housing is expected to perform better than apartments over the near term, with the impact to migration hitting CBD apartments hardest. The reopening of the national border to new migrants will be needed to sustain demand, with population growth expected to return to normal levels after the vaccine rollout. Low interest rates, pent-up demand, a shortage in supply and ongoing stimulus will continue to support demand for housing. Conditions do vary from state to state, with the common themes being those that I talked through on a previous slide. Melbourne was subject to restrictions for a large part of the first half but started to recover well when restrictions eased. Our projects are generating moderate levels of new inquiries and sales. There are some delays to apartment projects due mainly to lower inquiry, but land estates and townhouse developments are going well and shouldn't experience significant delays. Brisbane's recovery is being driven by the resources sector, which is doing well. Housing stimulus and the relative affordability of housing in Brisbane compared to Sydney and Melbourne is also supporting that market. We saw good inquiry and sales levels in the first half, and this has continued in the second half albeit at lower levels given the winding back of some of the stimulus. Perth saw extraordinary sales in the first half, which has enabled us to sell residual stock and bring forward future stages, and this is mainly due to the general stimulus on offer but also the relative affordability of housing and decently performing resources sector. It has been pleasing to be able to wind back some of the incentives that have been in place for many years and improved margins. Sales are slower so far in the second half but remain, again, at decent levels. There are constraints as the homebuilding industry is currently working to capacity following the activity that the stimulus has created. Adelaide is a mature and much more stable market with a history of much less volatility than the other capital cities. Sales were at moderate levels in the first half but have improved for our business in the second half as new stages were released to the market and we have been able to increase prices in recent weeks. I am confident that Adelaide will be a strongly contributing state in coming years. On sales fall-over levels around the country, these are not at elevated levels overall for our business. WA fall-overs, in particular, have dropped significantly, with fall-overs for the other states being only slightly elevated. Now for an overview of our portfolio. We have 30 projects across 4 states. Our products are very diverse, and this has helped us deliver a smoothing earnings profile. We produce residential lots, townhouses, apartments and commercial projects. Our projects are well known for being in higher-performing locations often near shops, employment and train stations. Many of our projects are distinctly different from the competition and are in markets where there is limited supply. And finally, our projects are positioned as quality developments within the respective markets that they operate in. These 2 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 then 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 townhouses, apartments and commercial playing an increasing role. We continue to build upon this diversification with the planned expansion of, in particular, our medium-density residential portfolio. I'll now take you through highlights in each of our states, starting with WA, where we have 14 residential projects and more than 4,700 lots and dwellings. We have projects catering for a range of buyer types and a mix of different products. We are building a greater townhouse and apartment portfolio and project, starting with our Incontro at Subiaco development. There are 2 new developments delivering first contributions in FY '21, being Solaris and Ariella North, and both of these have benefited from stimulus as have all of our land estates. This slide shows 2 WA projects, Byford and Subiaco. Byford on the Scarp is a premium estate in that district and appeals primarily to first-home buyers. It has benefited strongly from stimulus and, accordingly, has been performing really well. Subiaco is a more recent acquisition for our business and is a townhouse and apartment project in a sought-after suburb and a project that has been really successful in terms of the sales launch, which occurred in November of last year. We have the first 2 stages of that project almost sold out. Demolition of existing buildings is underway, with construction of the civil works and the housing to commence shortly thereafter. We will progressively sell and deliver townhouse stages at that project and finish with the apartment development, which forms part of that master plan. In Victoria, we currently have 10 projects, which offer a wide range of products, including land lots, townhouses, apartments and offices. One important factor that underpins our Victorian projects is that they are in high-performing locations with little competition and have a really strong appeal to owner-occupiers. Townhouse sales have been strong, while apartment and commercial projects have been a little slower due to COVID-19, but these are starting to pick up and we have a couple of projects that are due to commence shortly. So this is an overview of 2 Melbourne projects. Williams Landing, firstly, which is a major new town development in Melbourne's west, which continues to perform well with good sales of housing product in the first half. Over the next few years, we will continue to deliver a mix of commercial and residential projects as the town center at this project matures. The second development, Jackson Green, is in the suburb of Clayton South and is 20 kilometers from the CBD of Melbourne. And it's a mixed-density project, accommodating townhouses and apartments. We have completed all the townhouses now at this project and have 2 large apartment developments yet to settle. Sales have slowly picked up at this project, which will continue to be a strong contributor for 2 to 3 more years. Our company recently announced the acquisition of a strategic 21.7-hectare site in Melbourne's north, immediately adjacent to the company's existing Mason Quarter project in the suburb of Wollert. The combined project will accommodate a master plan community of around 800 lots plus 2 school sites. Mason Quarter was launched in November with the first release of 23 lots now fully sold. At this scale, the project will be a long-term contributor to the company's earnings, and first settlements are expected in FY '23. Moving to Queensland. We have 3 projects, 2 of which are located relatively close to the Brisbane CBD. Ellendale, just 12 kilometers away, continues to progress with several stages completed in the last year. Sales are doing quite well, in part due to the federal stimulus but also because of the quality of that estate. Ellendale has higher-priced lots which target higher-income buyers than traditional land estates. The second project I'll talk about here is Wooloowin that is on a site just 6 kilometers north of Brisbane CBD and that will deliver a mix of townhouses and apartments. The first stage of this project was recently released with good sales levels, and the presales achieved to allow construction to commence, which is occurring now. 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 our planning application has been launched and -- which will deliver a wide range of residential lot products to first- and second-home buyers. In Adelaide, we have 2 projects. Glenside is a stunning project and one of scale in a sought-after suburb. It is 17 hectares, 3 kilometers from the CBD and will deliver around 1,000 dwellings. Two stages of townhouses and 1 stage of apartments have been completed with a second stage of apartments now under construction. Sales are going really well at this estate, and prices are being progressively increased. Fletcher's Slip, our second project in Adelaide, is a townhouse and apartment project in the regenerating suburb of Port Adelaide. Our several works at this estate are well underway, and we have strong presales. And the project will be a really good contributor over approximately a 5- to 6-year period. On our aim of growing earnings, one of the important KPIs for our business is forward presales. As noted, we have $380 million in presales as at the end of the half, which is up from $340 million at the same time last year. In the context of our annual revenues, you can see that presales for both FY '21 and FY '22 already exceed total revenue for FY '20, and we are some way towards returning to revenue levels pre-COVID. During the second half, we will continue to add presales for FY '21 and indeed future years. New project launches and acquisitions will help underpin the growth in our earnings. In the first half of FY '21, we successfully launched 4 new projects, 2 of which were in Victoria, 1 in Western Australia and 1 in Queensland. And in the past year, we have continued to make acquisitions with 2 new sites contracted, 1 of them in Victoria and 1 of them in Queensland. We continue to assess acquisition opportunities in all states in which we operate and consider current conditions to be favorable for doing so. So now I wanted to comment on the outlook. Along with the broader economy that continues to improve, conditions for the new housing sector are expected to remain positive overall but with state-by-state variations. Most economists are forecasting increased building activity and house prices nationally growing in 2021, despite the housing stimulus easing from the 1st of January. Backed by presales of $380 million and a strong first half result, the company is forecasting full year FY '21 earnings of approximately $29 million, subject to market conditions. And we are well placed to grow earnings strongly over the medium term from there. We've got a long pipeline of quality projects with many in high-demand, low-supply locations. And finally, we are currently assessing a number of acquisition opportunities in favorable buying conditions which 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 benefiting from government stimulus and strength in property markets more generally. Our diversification strategy is a key point of difference, and it's proving successful for our business. And finally, CWP's record on total shareholder return has seen the company outperform on both short- and long-term time frames. Thank you for listening to the financial results presentation for Cedar Woods.

[Operator Instructions] Your first question comes from Joshua Hain from Rest Investments.

Good result. I just sort of had a broader question, stepping back a bit, just trying to think about the sort of medium-term earnings potential of the business. Obviously, in FY '19, pre-COVID, the business is doing sort of in the high 300s revenue and almost sort of $50 million of NPAT. Is the delta -- is sort of the key to getting at those levels the return of offshore migration? Or can the business, just from a domestic sort of demand point of view, sort of get back to those levels? Just trying to work out sort of structurally what the market looks like now versus sort of pre-COVID.

Sure. Thanks for that, Joshua. It's Nathan here. So we're targeting strong growth on FY '20 earnings for FY '21. So that approximate number of $29 million will -- means 39% up on the low result of last year. And we'll continue to target strong growth in FY '22. And it's important to note that we're already starting to derisk the earnings for FY '22 and FY '23 with significant presales. And the presales number that we've quoted, 2/3 of that will support those future years. So we're already in a good position to do that. We're using strong language in relation to the growth in our earnings in future years. And yes, migration is an important part of the puzzle for new housing in this country. But there's a couple of factors at play here. Firstly, we expect migration to return to usual levels once national borders open up. Secondly, there is so much positivity in the market and in several markets that we're in, such as Queensland and Western Australia. There's significant pent-up demand. In WA, we've had subdued conditions for around 6 years now, buyers just sitting on the fence, waiting for the confidence to buy. And that confidence has come back in a very big way. So we think that even just with the domestic demand, if I can call it that, that it will -- it bodes well for our industry and it bodes well for our business in the short and medium term. And then the last point I'd make is that there are buyer groups that aren't significantly represented at the moment that we expect to come back and support demand. And that's the investor cohort. So with dropping vacancies, increasing rents and the publication thereof of those things, we expect investors to come back around the country in a big way. And there was even some press on this in today's AFR.

That's more so in the 3 of the 4 states we operate in, in Queensland, WA and South Australia, and less so in VIC in relation to those investor demand that we're not experiencing yet but we anticipate over the next 6 months or so.

Yes. Okay. So yes -- so I guess assumed within your comments around strong growth over '22 and '23, a part of that is the migration piece coming back. And would it be fair to say that's probably more in FY '23 contributions in your current...

Yes. I think the domestic demand now has given us strong growth from all these -- weak base from '20 to '21. The domestic demand give us an opportunity to have strong growth from '21 to '22 and even into '23 to some extent. And noting it takes sort of 6 months to be able to land stage; 9 to 12 to build a townhouse stage; 18 month plus, an apartment, that -- at times, quite well, if you think of the vaccine rollout and the likely timing of opening up of national borders, that when that will kick in, it should play in well to our continued growth story over that medium term.

Yes. Understood. And just a clarification, I might have misheard, Nathan, when you were talking about Victoria, did you make the comment that Williams Landing sort of residential is expected to continue to contribute for the next 2 or 3 years? Was that the comment?