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

Thank you for standing by, and welcome to the Cedar Woods Fiscal Year 2022 Full Year Results Presentation [Operator Instructions] I would now like to hand the conference over to Mr. Nathan Blackburne, Managing Director. Please go ahead, sir.

Good morning, and welcome to the presentation of the full year financial results for Cedar Woods. In terms of today's agenda, firstly, I will give an overview of the business, including our strategy and progress with ESG. Then I'll hand over to Leon to give you a snapshot of the financial results. I'll then talk through the market conditions, portfolio highlights and the outlook. Here are a few slides about our company. Cedar Woods is a property development company that was established in 1987 and listed on the ASX in 1994. Our products include land estates, townhouses, apartments and commercial developments. In our portfolio, we have 10,300 lots of dwellings in the pipeline, which is made up by 34 projects across VIC, SA, WA and Queensland. Cedar Woods is known for the quality and sustainability of its developments with many awards for design and sustainability excellence. We have an excellent long-term track record in growing earnings and outperforming our peers. And in fact, over our 30-odd years, we have always made a profit and always paid a dividend. We're a purpose-driven, values-based organization that is very focused on creating long-term value for our investors through the creation of vibrant new communities. Our focus is on delivering attractive returns for our shareholders, which is achieved through exceptional management and the disciplined execution of our strategy. 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. The strategy is proving successful with the strong relative financial returns that we've been able to deliver. Cedar Woods has multiple product types in 4 states and different price points that appeal to varying buyer profiles. In terms of our business model, we create value in 3 key ways. Firstly, in acquisitions, we are tactical and research based in our approach to identifying sites for acquisition. And once identified, we have a rigorous assessment process. The quality of our portfolio is testament to this component of value creation that, I think, is unparalleled in our sector. In the development phase, we engage designers and create products that we think will meet a demand sweet spot. We then engage builders and oversee construction. And the third value-add area is marketing and sales, where we create quality brands and presell projects before starting construction. We have 4 strategic priorities listed here and good progress has been made with each of them. We've maintained a strong balance sheet and [ financing ] relationships whilst being disciplined in pursuing earnings growth. We acquired a number of new projects in FY '22, which help underwrite future earnings. And in fact, we don't need to acquire any new projects to support earnings growth in FY '23 and FY '24. Our third priority, operational excellence, is quite a broad priority area. We have pursued leading and integrated systems that helps serve as a form of advantage for the business. We pursue excellence in our projects with innovative and award-winning designs. We value a strong safety record with diligence in our work health safety practices. And finally, there is high-performance culture, which is viewing our culture as another source of advantage, especially in the attraction and retention of talent. Staff surveys demonstrate this advantage in the strong satisfaction scores and feedback that we get. ESG ties in with one of our key values, which is when we think about tomorrow. This year, we achieved good progress in delivering on the refreshed strategy, calling out some new initiatives and the continuation of long-standing loans. We have been working to further reduce the impact of our projects through development of minimum sustainability standards as well as knowledge sharing of initiatives across our business. And Cedar Woods continues its national partnership with The Smith Family, which is Australia's leading children's education charity. I'm now going to hand over to Leon, who will take you through the financial highlights.

Thanks, Nathan. I'll first provide a summary of our results, then make some comments on the balance sheet and the cash flow. In financial year '22, we delivered a net profit after tax of $37.4 million and revenue of $330 million from 955 settlements, both revenue and profit being up strongly on the prior year. This results in return on equity of around 9% and earnings per share of $0.457, which was up 12% on financial year '21. Gross margin remains solid at 29%, although down on 31% achieved in the prior year as a result of changes in product mix and higher costs at some projects. Reflecting on the full year result and the company's sound capital position, the Board has declared a final dividend of $0.145 fully franked, bringing full year dividends to $0.275. This reflects a payout ratio of approximately 60% of net profit after tax and a favorable fully franked yield currently approximately 6%. Dividend reinvestment plan and bonus share plan will remain suspended for the upcoming dividend. Over the year, we were pleased to have contracted sales of more than 1,100 lots, homes or offices well ahead of the 955 settlements. At 30 June, we held presale contracts with a value of $500 million. This is up $22 million on the same time last year, which helps to derisk earnings for financial year '23. We expect about 70% of these presales will deliver revenue in '23, guiding us to target earnings growth for the year ahead, with the balance of presales to deliver revenue in future years. We continue to operate with a solid moderately geared balance sheet. Total assets at 30 June of $779.8 million was up strongly on the prior year as we invested in new projects that have grown our project pipeline by more than 1,450 lots and will deliver earnings in future years. Net assets and equity are up reflecting the strong '22 result, less the cash dividends paid during the period. Net bank debt of $198.7 million was up from the prior year and corresponding with gearing measured by net bank debt to total tangible assets, less cash or net bank debt to equity, were also up but remain comfortable sitting around the middle of the company's target range. The company increased the limit and extended the tenure of its 3- and 5-year corporate finance facility during the year. The $95 million increased limit giving the company $330 million in combined finance facilities and ensuring continued secure long-term funding availability. At year-end, we maintained sizable facility headroom of $87.8 million and interest cover of 9.1x. Taking a look at the financial year '22 operating cash flow, the company continued to maintain a strong mobility position. During the year, the company generated strong operating cash flow of $87.7 million before funding investments in new land acquisitions. Investment in new land acquisitions to grow the project pipeline totaled $153 million and were funded by a combination of operating cash flow and the company's corporate finance facility. With the strong operating cash flow generated from the business and the undrawn facility headroom of approximately $87.8 million, the company projects to continue to maintain strong liquidity after funding committed acquisition payments in the upcoming year. I'll now hand back to Nathan to talk to market conditions.

Thanks, Leon. The key factors that determine property market conditions include broader economic conditions, employment levels, population growth, interest rates, sentiment and supply. Noting that the decision to buy a property is commonly the biggest financial decision people make in their lives. Rising interest rates, inflationary pressures and the resultant drop in sentiment have created some headwinds for the sector and this was evident with our Q4 FY '22 sales, which were lower. But at the same time, we have many positive fundamentals, that there is record low unemployment, the population is growing, vacancy rates are very low, and supply is constrained. Overall, we expect sales to continue to be lower over FY '23 with recovery expected in FY '24. In fact, there's a good case to say that the downturn will be pretty short, and there are a few reasons for that. The more affordable markets of WA, SA and Queensland are still relatively cheap and are, therefore, likely to outperform. We expect investor demand to remain strong, driven by attractive yields with the low supply of rental stock and rapidly rising rent. There is limited supply of new housing across most product types and jurisdictions, and this is likely to put a floor on values and volumes. New dwelling commencements are already dropping and for apartments, have been particularly low. FY '22 saw the construction sector deliver much of the sales generated from the stimulus, paving the way for improved conditions for the construction sector in 2023. Strong population growth is expected as the government responds to nationwide skill shortages. Immigration numbers are expected to be increased and brought forward in response. Demand for new housing is, of course, significantly influenced by population growth. 50% of Australia's population growth comes from net overseas migration, providing a tailwind for new housing as it returns. Net overseas migration pre-COVID was around 240,000, and we expect migration settings to be significantly improved in response to the labor shortages. There are significant shortfalls in new dwelling supply across most jurisdictions and dwelling types. This chart shows the number of dwellings that commenced construction on 2017 until now with houses in the blue line and units in the orange line. Dwelling commencements in the first quarter of 2022 reflected an 11% drop in stand-alone detached houses. Many approved projects aren't being delivered due to the construction sector capacity limitations, and cost increases have been experienced. Development finance availability is also restricting supply with the major banks restricting lending over the past 2 years. As population growth returns and investor demand remains high, supply shortfalls across most product types and geographies are considered likely. Those with supply that are ready in 2023 and 2024 are expected to benefit the apartments and townhouses especially expected to perform as commencements for these product types are well down on requirements. I now want to provide some insight into our portfolio and in particular, the presales composition. These 3 charts demonstrate the geographic and product diversification in our portfolio. The first chart shows the proportion of our portfolio in each state with WA and Victoria playing the dominant roles, but with an increasing representation from Queensland and South Australia, consistent with our geographic diversification strategy. The chart in the middle shows our presales or contracts on hand by location. And as you can see, there is a greater proportion from the East Coast markets, and we expect good contributions from all states in FY '23. The chart on the right shows the mix of product in the presales, with residential land still being the largest sector for us, but townhouses and apartments together accounting for 40% of our presales. We continue to maintain this diversification with the ongoing acquisition of both medium-density sites in infill locations and master planned communities. I'll now provide an overview of our state portfolios as well as some selected projects. Starting with WA, we have 13 residential projects and more than 5,500 lots or dwellings. Our WA portfolio is primarily residential lots and we are in a good spread of locations, both north and south of the CBD. Three new projects were acquired over the year in Rockingham, Eglinton and Henley Brook. Ariella is an 1,150-lot estate in Perth's North East growth corridor. The estate was expanded in 2019 and again in 2022 with the purchase of neighboring properties. It's trading at about 100 settlements per annum. It achieved 15% price growth in the last 12 months and is predominantly a first home buyer estate. Eglinton is an 86-hectare site in Perth's North West growth corridor that we acquired in FY '22. This new community will be conveniently located 500 meters from the new Eglinton train station, which is due to open in 2023. The estate will have around 1,200 lots over several neighborhoods and is expected to contribute to earnings over an 11-year period from FY '24. The first stage of approvals have already been secured, and we are gearing up at the moment for launch of the project. Now turning to our Victorian portfolio. In Victoria, we have 11 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 strong appeal to owner occupiers. Our land, townhouse and commercial projects have been selling strongly with excellent price growth, while the partner projects have been slower. We recently added to our Victorian portfolio with new projects at Southbank close to the city and Fraser Rise in the northwestern corridor of Melbourne, with these adding 470 dwellings to our project pipeline. Williams Landing is a major master planned community with a mixed-use town center and around 3,000 homes across several neighborhoods. Year to date, it has a 8- to 9-year project life remaining, mainly in the town center, where we have over 15 sites with planning approval ready to be developed for apartments, townhouses, offices, education or retail. Cedar Woods is currently actively bidding for single-tenant office opportunities. And when these are secured, they can significantly boost earnings. We successfully pioneered strata office development in Melbourne's West at the project. Our third strata office building, Boston Commons, is almost 70% presold. And the fourth strata office building is currently in the design phase. The shopping center at the project is performing well. It is 98% leased, and the market value shows significant premium over book value of about $45 million. There are considerable residential presales at the project, which are settling in FY '23, and we also have strata [indiscernible] project presales that will settle in FY '24. Also in Victoria, we have Mason Quarter, which is an 800-lot estate in the high-performing suburbs of Wollert. It's 26 kilometers north of the Melbourne CBD, and there are 200-plus presales, which we have achieved since launch in 2021. Significant price growth has been achieved since launch, though we expect this price growth to moderate now. Construction is underway for the first 3 stages, and the first settlements for Mason Quarter are expected in H2 FY '23. Now let's turn to Queensland. We have 5 projects in Queensland and a total of 1,500 lots and dwellings to deliver. There's a mix of land estates, apartments and townhouses in this portfolio. This market has seen significant cost increases, which is impacting the timing of some stages but which we expect to restart once more capacity comes back into the construction sector. Given Southeast Queensland's relative affordability and the population growth expected, we anticipate this market to perform well over the medium term and will be a strong contributor for Cedar Woods in FY '23. Ellendale is a masterplanned community with 900 residential lots. It's located 12 kilometers northwest of the Brisbane CBD and is adjacent to a national park. The estate is around 50% complete, had significant presales and had strong profit margins due to the extraordinary price growth that we've experienced in Queensland. Sage is a new masterplanned community with over 300 residential lots, which is located 40 kilometers north of the Brisbane CBD. Planning approval is in place for the project, and we are gearing up for the launch of sales in coming months. Through the significant database of inquiries, and we note that Southeast Queensland is currently undersupplied with new land projects. Buyers at this estate are expected to be a mix of first and second home buyers with lot prices pitched at around the $350,000 mark. And lastly, the South Australian portfolio. In Adelaide, we have 5 projects, including 3 within the Glenside estate. In total, we have around 1,200 townhouses and apartments yet to deliver, a pipeline which will keep us busy for a further 8 or so years. Our South Australian projects are set to make meaningful contributions in coming years, which is testament to the company's strategy and execution of it. Glenside is a major multiyear infill project for the company, and that is contributing strongly to earnings. It has 1,000 townhouses and apartments planned on a 17-hectare site, just 3 kilometers from the Adelaide CBD. Several apartment projects and townhouse stages are in train at the moment with new releases of both these product types planned in coming months. And FY '22 recorded significant settlements from Glenside. Fletcher's Slip is in Port Adelaide and is 14 kilometers northwest of the CBD. There are 500-odd townhouses and apartments at the project and the first stage of townhouses recently settled. The inquiries and sales at the estate have been strong, and we expect that to continue, though moderated somewhat in FY '23. And now for our outlook. In our portfolio, we have a growing number of new projects that will start to deliver first earnings over the short and medium terms. This is as a result of the successful acquisitions activity over the last few years, which has significantly added to our portfolio. There is a mix of apartments, townhouses and land estates, and the new projects are spread geographically. These new projects, along with the existing ones already contributing in the portfolio, support our growth outlook. Factors supporting the new housing sector are low employment, job security, rising wages and supply limitations. Low but rising interest rates are impacting sentiment, a short and sharp interest rate cycle is expected with peak rates around the end of 2022 widely expected. Our presence is mainly in relatively affordable markets, which are expected to perform well. Supply constraints at the same time that migration is returning and investor demand is strong will put a floor on pricing and sales volumes. Our outlook is underpinned by record presales of $500 million, partially derisking future earnings and growth in earnings is expected in FY '23, subject, of course, to market and construction sector conditions. The company has a portfolio of 10,300 lots or dwellings in quality locations to support future earnings. So this brings us to the end of our presentation. Thank you for your interest in Cedar Woods.

[Operator Instructions] Your first question will come from Sky Walker with Alder & Partners.

Just got a few questions, if I may. Just firstly, if we can go to Slide 37, and you've laid out the projects that are contributing to growth in coming years. I just look at that, I just don't have a sense of what the value is in potential sales growth that could come through. And just whilst it looks exciting, I just need an anchor so that I can feel -- so that we can get some sense of where we're actually going. So I just wondered if you could just unpack that for us a bit.

Yes. Thanks for the question, Sky. Firstly, to look at 23 there. We've got [indiscernible] part townhouses, Lincoln master apartments in VIC. First land settlements Mason Quarter as well as Monarch Apartments in South Australia and some Burpengary land in Queensland. So this year, we did $330 million -- $333 million in total revenue. We've got presales of $500 million in total, and which we've guided about 70% of that land in financial year '23. So already $350 million plus already exceeding prior year revenues in contracted presales. As in any normal year, we'll have a few projects cycling out that we had in the prior year, and we'll have a few cycling in. But as this slide is indicating, we're starting to have more projects cycling in than we have cycling out. And as a result, we're -- we'll have a step-up in revenue. I won't put dollars on that at this point in time. But you can see from what we'd indicated as far as the portion of presales settling in '23, we'll have a step-up in revenue. And if things go to plan, that will continue into '24. We do note that this is our sort of current look at when we think these things will settle. Some might be earlier, some might be later.

Okay. And what's the potential for further presales that you do in FY '23 to settle in FY '23?

So as Leon said, we have 70% of the presales for FY '23 secured already. particularly the land projects where the delivery time frame is shorter. Therefore, our WA portfolio is where we'll be generating the majority of that 30% extra presales required. So at the moment, the sales rates that are ticking over, we're confident that we can get there to deliver an outcome that sees earnings growing.

Okay. All right. And just the slowing inquiry that you've seen in the recent weeks and months, what's your assessment of what's supplier-side driven versus demand-side driven as in building constraints versus sentiment changes on the demand side?

There's a couple of things there, Sky. So our sales results were down in July and August to date and June to a lesser degree, and that was as a result of 2 things. One, over that period, we had less new stages being released around the country. That's probably the smaller portion. The larger explanation is really the current sentiment. So buyers are increasingly cautious. And so that's held back sales really across jurisdictions and projects. Construction constraints, if you look at the WA market, the demand is certainly down, but we would be generating significantly more sales if the builders had more capacity to deliver homes for our customers. So we are talking to our -- or our customers put a block of land on hold. I then talk to the builder, and the builder advises them that the lead times to start construction on a home might be 6 or 9 months' time. And the purchasers are often coming back to us and saying, "I might as well wait for that time frame to bridge somewhat, and I'll come back and contract with you on a block of land in 6 months' time."

And it sounds like you're increasingly confident that, that constraint will start to subside from next year -- as we move into next year.

Yes, that's right. I mean, this is a global situation, not just a domestic one. And globally, nationally, as well, there has been really good progress in working through the stimulus-generated construction activity. And the builders that we talk to are telling us that they're making good progress with that, and that over the next 6 months, in particular, they'll see a lot of that done. But it's going to take that 6 to 12 months really to get through that stimulus activity. And then after that is when we expect there to be much more capacity as well as a moderation in costs. The builders are also starting to call us asking about what projects we've got coming up in first, second quarters of 2023 calendar year. So they're obviously a bit anxious about those 2023 work volumes, and that is echoed in the subcontractor market, with the key subcontractors of our major builders starting to contact them and looking at their forward orders. So all of that would indicate more capacity and moderation of costs.

Okay. Great. Great. Just one last question for me, just the shopping center. You've stated again that you think the market value is well above book that you've got in your accounts. I'm just wondering if you can provide us some clarity there on what is the book cap rate you're carrying and what is the market cap rate you think it is because it's a substantial part of your market cap, that asset, as your share price trades today.

Yes. So the book value is not based on a cap rate being carried at depreciated cost. So it's basically the cost of building it with a very low land value, and we've held it for a number of years now. So that sort of depreciation sort of brought that cost down, and it's on the book now for below $40 million. We've had -- and just to sort of break it up, there's the center itself, which is worth about $63 million. And then there's surrounding development land worth about $20 million. And so that development land is based on sort of land cost basis again, not cap rates. And it's just sort of the $63 million in the shopping center, which is sort of it's being calculated value based on those cap rates. I don't have the number in front of me to quote, be able to work that backwards of its income in the accounts.

Okay. And your assessment of market value, can you give us more color around that part?

Yes. So the shopping centers, I think, about 99% leased, and we're routinely sort of having assets valued. So our sort of internal guys who look at the valuations have a good handle on what those cap rates are relative to the income and fairly confident on that valuation.