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

Thank you for standing by, and welcome to the Cedar Woods Properties Limited FY '23 Full Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Nathan Blackburne, Managing Director. Please go ahead.

Good morning, and welcome to the presentation of the FY '23 financial results for Cedar Woods. My name is Nathan Blackburne, Managing Director; and with me is our CFO, Leon Hanrahan. In this presentation, we will provide an overview of Cedar Woods, the FY '23 financial results, market conditions, our portfolio, and then comment on the outlook for our business and sector. So firstly, a bit about the company. Cedar Woods is an experienced property development company with a strategy-driven team that has proved its success in acquiring and delivering projects over the past 30 years. Our products include land estates, townhouses, apartments and commercial developments. In our portfolio, we have 10,000 lots of dwellings in the pipeline, which is made up by 35 projects across Victoria, South Australia, Western Australia and Queensland. This positions Cedar Woods well for an upswing in demand from increased migration and housing under supply. We are known for the quality and sustainability of our developments with many awards for design and sustainability excellence. And we have an excellent track record for delivering and growing earnings for the benefits of our shareholders. We are a purpose-driven, values-based organization that is very focused on creating long-term value for our investors through the creation of new communities. Our focus on delivering attractive returns for our shareholders is achieved through the disciplined execution of our strategy. Our vision is to be the best Australian property company renowned for performance and quality. And to support that aim, we have a number of core values, as shown on the slide. Our strategy is to grow and develop our national project portfolio that's diversified by geography, product type and price point. So that it continues to hold broad customer appeal and performance 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 appealing to varying buyer profiles. In terms of our business model, Cedar Woods creates value in 3 key ways: Firstly, in acquisitions, we are tactical and research based in our approach to identifying sites that we want to acquire. Once identified, we have a rigorous assessment process, and at the moment, we are doing capital partnering on some new acquisitions, which enables us to improve project return metrics and access unique opportunities on land held by others. The quality of our portfolio is testament to this component of value creation, and I think it 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 the construction of them. We have 4 strategic priorities and good progress has been made with each of them. Our financial strength is underpinned by a solid balance sheet and strong financial relationships whilst being disciplined in pursuing earnings growth. To provide future earnings growth, we've acquired a number of new projects in the last 2 to 3 years, which help underwrite future earnings. And in fact, we don't need to acquire any new projects to support earnings growth over the medium term. Our third priority, operational excellence, is quite a broad priority area. We have pursued leading an integrated system and have a strong cybersecurity posture. We pursue excellence in our projects with innovative and award-winning designs, and we recently won the best medium density project award in Adelaide. We value a strong safety record with diligence in our work-health safety practices, and we have further enhanced our ESG and sustainability-related practices across the business. Finally, there is high performance culture, which we work hard to maintain and we are pleased with our retention rates, the quality of our staff and staff survey results. ESG ties in with a number of our key values, 1 of which is we create community connection. This year we achieved good progress in delivering on the strategy, rolling out some new initiatives and the continuation of long-standing ones. And it was pleasing to see we maintained our A rating with MSCI. We have been working to further reduce the impact of our projects through development of minimum sustainability standards and knowledge sharing on these initiatives across our business. A major initiative was the launch of the Community Energy Sharing Network, or microgrid, at the Eglinton state in WA, which is expected to result in a 50% to 65% of total energy demand being supplied by renewables through rooftop solar and community battery storage. Our flagship community grants program is something we are really proud of, and which sees a portion of the profits from each project given back to small community groups in the various regions that we operate. So I'm now going to hand over to Leon, who's going to take you through the financial highlights.

Thanks, Nathan. In financial year '23, we delivered a net profit after tax of $31.6 million and revenue of $391 million from 919 settlements. Revenue was up 78% from the prior year with profit lower as a result of softening in margin from the prior year. This resulted in return on equity of around 7.3% and earnings per share of $0.385. Gross margin, about 25% was softer, primarily due to higher construction costs. We expect this to rectify over time by both the moderation in cost growth and improvement in revenues, although in the short term, we expect a similar margin in financial year '24. The Board has declared a final dividend of $0.07 fully franked, taking full year dividends to $0.20. This reflects a payout ratio of approximately 53% of net profit after tax and a favorable fully franked yield. The dividend reinvestment plan and bonus share plan will remain suspended for the upcoming dividend. During financial year '23, we contracted sales of 694 lots/home/offices, and at 30 June, we held presales contracts on hand with a value of $448 million. This is somewhat down on the $500 million in presales for the same time last year, but still represents a strong outcome, especially when considered in the context of total revenue for the year. We expect the majority of these presales will deliver revenue in financial year '24 with the balance flowing into '25. On the balance sheet, we continue to operate with a solid moderately geared balance sheet. Total assets at 30 June of $783 million, down slightly on the prior year as we completed a significant number of settlements in the second half. Net assets and equity were up on the prior period, reflecting the full year earnings less cash dividends paid during the period. Net bank debt of $195.8 million was down on the prior year and gearing measured by net bank debt to equity of 45% and net bank debt to total tangible assets less cash at 25%, remain comfortable around the midpoint of our target ranges. The company increased the limit and extended the tenure of its 3- and 5-year corporate finance facilities in the second half, with the increased limit giving the company $360 million in combined financed facilities and ensuring continued secure long-term funding availability with the average debt maturity of approximately 3 years. We've maintained a solid liquidity position with sufficient facility headroom available at the end of the year. And while interest cover at 3.7x is lower than the prior year, it remains comfortable and is well above facility covenants of 2x. Taking a deeper look at our cash flow and capital management objectives. We continue to benefit from the long-term support of our financiers. And as I've just noted, we increased our funding limits by $30 million during the year. And at year-end we had more than $106 million in undrawn facility capacity. The business generated strong operating cash flow of $23.7 million in financial year '23 and this was after the investment in new land, which is included in operating cash flow. We seek to recycle capital where appropriate. And over the next 12 months, we expect to realize the $113 million excess of current assets over current liabilities on our balance sheet at 30 June. This includes the previously announced Victorian shopping center sale and were completed will add substantially to company cash flow. Our acquisition strategy is measured, taking a long-term view of market cycles and positioning the company to grow earnings into the future. To this effect, $81.9 million was invested in land acquisitions during the year, and we expect to invest approximately $68 million in previously announced acquisitions in the following year financial year '24, which will be funded by a combination of operating cash flow and the company's corporate finance facilities. With the strong operating cash flow generated from the business and significant undrawn facility headroom, the company projects to continue to maintain strong liquidity in the upcoming year. I will now hand to Nathan to talk to market conditions.

Thanks, Leon. There are, of course, a range of factors that influence conditions for the new housing sector. Rising interest rates, inflationary pressures and the resultant drop in sentiment did create some headwinds for the sector, and this was evident in sales results for most of FY '23. This graph shows quarterly gross sales in FY '19. You can see the sharp rise in sales that we experienced in the final quarter of FY '23, where sales jumped 57% on the Q3 sales. Since then, over July and August, sales have moderated, and we continue to monitor conditions and employ tactics to optimize sales across projects, across jurisdictions. The construction sector continues to experience challenges with labor shortages, cost pressures, builder availability and builder stability. We expect these challenges to moderate over FY '24. There are many positive fundamentals in that there is very low unemployment, the population is growing, vacancy rates are low, supply is constrained and governments are pivoting policy towards construction of even more homes. Overall, we expect sales to continue to be impacted over FY '24, and I will talk later on what the catalyst will be for a sustained rebound. Demand for new housing is significantly influenced by population growth. The current migration surge will provide a tailwind to new housing, and that has been occurring at record levels in Australia. Net overseas migration was at around 240,000 persons per annum pre-COVID and we expect migration levels to continue to be elevated in response to Australia-wide labor shortages. There are significant shortfalls in new dwelling supply across jurisdictions and dwelling types in Australia. These charts show the number of dwellings that were launched each year since 2010. You can see across the 4 locations the historically low levels of new supply that is currently coming online. Investor demand has been strong, and we expect that to continue, and this is driven by very low vacancy rates and rapidly rising rents. Many approved projects aren't being delivered due to construction sector capacity limitations and costs that I referred to briefly before. But Cedar Woods is ready with many approved projects and stages for when conditions improve. I now wanted to provide some insight into our portfolio and in particular, the presales competition. These charts demonstrate the geographic and product diversification in our portfolio. The first chart shows the proportion of our portfolio in each state and a reflection of our geographic diversification. The middle chart shows our presales or contracts on hand by location. And as you can see, we have good presales in 3 of our states. Queensland is running a little behind because of the timing of various stage releases. We have acquired a number of new projects in Queensland in recent times. And as these come to market, that will be reflected in future charts. The chart on the right shows the mix of product in the presales with residential land still being the largest sector but townhouses and apartments together accounting for 30% of our presales, and offices being 9% of our presales. We continue to boost this diversification with joint venture at Robina in Queensland, which will add a large number of townhouses and apartments to the portfolio. Now let's take a look at a summary of each state portfolio, starting with WA. We have 13 residential projects and more than 5,000 lots or dwellings in WA. The portfolio here is primarily comprised of residential lots and we are in a good spread of locations, north and south of the city. The first stages of a couple of new projects were successfully launched through the year, including Atwater in Rockingham, and Eglinton, up in Perth North. The Ariella project in Perth has been extended with the acquisition of nearby sites, and the launch of the next stage will occur later in the first half of this financial year. Sales really rebounded in the final quarter of FY '23 in WA, but have come back somewhat in FY '24 so far. The Eglinton project will be a major master plan community with over 1,200 residential lots, a school and the shopping center. It will contribute to earnings for over a decade and has gotten off to a good start with sales that will contribute to profits this year. The estate is located 500 meters from the proposed Eglinton trade station, which is currently under construction. The estate also includes the aforementioned community energy sharing network or microgrid. The future neighborhood center provides the focal point for the project, and we have received strong inquiries from anchor tenants and specialty tenants for leases at the project. Now turning to our Victorian portfolio. In Victoria, we currently have 9 projects, which offer a wide range of products, including land lots, townhouses, apartments and offices. Our office projects continue to do well, with Boston Commons experiencing continued high demand for strata offices in Melbourne's West, a product type that our company pioneered in Melbourne's West. Our residential projects experienced a softer market during the year, mainly as a result of the increase in interest rates. Second quarter is a good example of 1 of the company's residential projects. It comprises 800 dwellings, 2 schools, community facilities and open space. The estate is located close to the future Robina town center and train stations. It has been positioned as a premium estate in Melbourne's North, attracting mainly first home buyers and second home buyers. A number of stages are currently under construction with some settlements having already occurred in FY '23 and further stages due for completion in FY '24. And now let's turn to Queensland. We have 6 projects in Queensland and a total of 1,400 lots and dwellings to deliver there. There's a mixture of land estates, townhouses, and departments in this portfolio. The construction sector has seen significant cost increases in Queensland, which has impacted the timing of some stages, but which we expect to restart once more capacity comes back into the construction sector. Given South-East Queensland's relative affordability and strong inbound migration, we expect this market to perform well over the medium term. We've also added to our portfolio there with the joint venture with the Queensland Investment Corporation at Robina on the Gold Coast. The newest of our states in Queensland is flourished at South MacLean and I have a slide on that to follow. Flourish is the master plan community located 35 kilometers south of Brisbane in the suburb of South MacLean. This area is a major growth corridor of Brisbane, and the estate is close to existing housing and amenity and offers affordable price points. The project has just received planning approval for the first 500 lots, and the first sales release will occur in coming months. And lastly, the South Australian portfolio. In Adelaide, we have 7 projects, including 4 within the Glenside estate. In total, we have around 1,100 townhouses and apartments yet to deliver, a pipeline which will keep us busy for a further 7 years approximately. Our South Australia projects are well established with strong reputations for quality and sustainability and will continue to make meaningful contributions in coming years. Glenside is a major multiyear infill project for the company in South Australia that is contributing strongly to earnings. It has 1,000 townhouses and apartments planned on a 17-hectare site, which is just 3 kilometers from the Adelaide CBD. Several apartments and townhouse stages are [ entrain ] with new releases of both planned in coming months. The Bloom apartments project is a new concept developed by Cedar Woods, and is focused on delivering over 55 apartments with traditional strata title ownership model. We intend to roll this Bloom concept out at other locations around the country. And pleasingly, Glenside recently took out the 2023 UDIA Awards for Excellence for a medium density project in South Australia. And now to the outlook for our business. In our portfolio, we have a number of new projects that will start to deliver first earnings over the short and medium term with 7 in FY '24. This is as a result of successful acquisition 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 well geographically. These new projects, along with the existing ones already contributing in the portfolio supports the company's growth outlook. The rising interest rates and broad-based inflation are currently impacting buyer sentiment and demand. However, there are sound underlying fundamentals of low unemployment, record immigration and a significant undersupply of all types of dwellings. Cedar Woods is well placed to roll out new projects in stages as conditions allow us to capitalize on the demand that is expected. We have a significant presence in the more affordable markets, which means the impact of interest rates on buyer demand is less pronounced. We start the new financial year with a good level of presales at $448 million, partially derisking future earnings. Due to the current uncertainties, earnings guidance will be provided when there is greater clarity on sales volumes, the delivery program and the sale of the Victorian shopping center. The catalyst for sustained improvement in sales volumes is expected to be a combination of the peaking of interest rates and improvement in builder capacity, both of which will help to restore by our [ confidence ]. And finally, our portfolio of over 10,000 lots and dwellings in quality locations supports the company's medium-term outlook. So this brings us to the end of our presentation. Thank you for your interest in Cedar Woods.

[Operator Instructions] Your first question today comes from Liam Schofield from Morgans Financial.

Just 2 quick questions, Williams Landing. How is that sort of progressing and how are the asset cap rate expectations changed through time? And just also, can you just comment sort of on the average selling price and where that sort of, I suppose, mix shift has occurred in the past year and what that might look like going forward?

Thanks, Liam. So regarding the Williams Landing Shopping Center, so that sale process remains underway. We've got agents working with a number of buyers and working to get the best possible price and the cleanest possible offers. I can't comment on sort of likely cap rate, that's sensitive, obviously because we've got a process underway that we're negotiating with various people. So that's really all I can say on that particular point, Liam.

Just on average same price there.

Yes, I could actually talk to that. So around the 350 mark in financial year '22 and around in the life low 400s for financial year '23, it reflects a little bit of growth, but largely change in mix, built form as far as apartments, townhouses, offices around 45% of settlements in both years, albeit a little less in '22, a little more in '23. But the change in mix is more expensive land projects. So a bit of a shift away from lower value WA land projects to higher value or Victorian and Queensland land projects is explaining that average price movement across the group.

And Liam, that particular metric for our business is not as informative as it is for some others in the peer group given the diversity of our portfolio. We've got townhouses, apartments, blocks of land and variations within land from high-priced land estates to lower-priced land estates and so on for the other product types.

Your next question comes from Edward Day from Moelis Australia.

Firstly, just sort of came to understand the balance between demand and supply here. And perhaps you can sort of pick out one of the key projects. But if you were able to bring more product to market, is there demand sitting there behind it, ready to go.

So that -- Ed, that does vary from state to state and project to project. As a general rule, if you were to strike one, demand is subdued now. Buyer confidence has been hit by the rising interest rate environment and the broader inflation rate pressures. We did see a jump -- quite a significant jump in that demand in the last quarter. That has come back a bit in the first quarter to date. Time will tell as to where that will trend and we'll talk more about that in the first quarter result. So we have lots of stages across built form, across land, across the country that are ready to go, but the demand right now is still quite subdued. So we're not fast-tracking releases. We are fast tracking approvals in anticipation of that demand jumping in quite a broad-based way. So being ready with all of our approvals to capitalize on that.

And is your anticipation in the demand jump, does that sort of come back to your point on population? Or is that a shift in sentiment?

It's all of the above and other factors. It's really that peaking of interest rates. The moderation of inflation, it's really the availability capacity of the construction sector freeing up a bit, reducing lead times to start the construction of a home on a lot and the improvement of builder availability for medium density and high-density product as well as they work through the peak workloads that they've got on at the moment, which should relate to moderated prices or costs and certainly greater dealer appetite and availability.

And then just finally on your ICR, sort of keen to understand how that plays out in the context of your -- I think it's 68 million commitments, and I guess, the risk that Williams Landing continues to take a bit longer than expected. How do you see your ICR playing out through the next 6 months?

We're expecting improvement in the ICR over the next 6 to 12 months. So we ran the facilities fairly hard in financial year '23, but we'll paid down debt a bit in the final quarter. And as you can sort of see at year-end in a reasonable position. So the acquisitions we need to make, we can comfortably absorb those in the facilities. And even without transacting on the shopping center, we would still expect to be in the midpoint of our gearing range and still see interest cover come down. Sorry interest cover go up rather.

[Operator Instructions] Your next question comes from Sky Walker from Alder & Partners PWM.

Nathan and Leon, I hope you're well. Just a couple of macro questions from me. Just -- on Slide 16, your charts of apartment supply other than what you've mentioned or mentioned around building availability. What do you see is the catalyst for a new wave of apartments more broadly, which we need to support population growth? And obviously, there's an interplay with your product which is more land and townhouses.

So Sky, just firstly there. We've got hundreds of apartments across the portfolio. Let's say, at Glenside in South Australia, flagship slip, South Australia, Williams Landing, [indiscernible] up in Queensland, in Kedron, in Perth -- and Subiaco in Perth, and significantly Southbank in Melbourne. So we've got lots of those projects that can -- that will feed earnings for the next few years if we can get those projects going with builder appetite improving. So it is quite meaningful for us. This is probably -- to the earlier question that was asked about demand and supply. This demand and supply shortfall is most exacerbated or pronounced for apartments around the country, and hence the inclusion of those graphs in the presentation. Compared to long-term averages, there are just not enough apartment projects getting off the ground. In fact, it's well off where they need to be, well off the peaks and well off average volumes of new releases. Migrants and students in particular, what are coming into the country, and inevitably, they tend to go into apartment type product. So we do expect, particularly in the more affordable states for there to be a structural shift in the pricing achievable for apartments. And if you look at Sydney and Melbourne prices for apartments, it would suggest that there's quite a bit of room to move.

Medium price of units over the last 3 years just hasn't made the gains that house and land has post-COVID, there was a bit of a pivot -- and there were incentives towards house and land product. And so that gap between medium unit prices versus medium house and land prices widen and it's about as wide at the moment as it's ever been. So that will naturally shrink over time, and there will be gains in unit prices as affordability becomes more important.

I suppose that the last cycle was characterized by a big wave of large high-rise product, and that's probably what we don't have now. So I just -- maybe that's what I'm asking is -- what's the catalyst do you see -- catalyst do you see for that part to come back?

So just to be clear, the catalyst for high-rise construction nationally and for the industry? Is that the question?

Yes.

So look, the challenges are there for low, medium and high density part of delivery. The demand is there for low, medium and high-density product. Yes, it's the high density that really kicks goals in terms of meeting -- providing supply. And I think they will generally move in sync because they're all experiencing similar issues.

Makes sense. And just 1 more for me. Just in terms of the builders and the offerings that they're providing to the market, has there been any sort of change you would call out over recent months?

Yes. And just to clarify again, Sky, when you say builders of traditional houses on detached lots on the urban quench.

Yes, yes.

Okay. So the big shift that we've seen, for example, in Perth, is builders offering a completion date of the home within 12 months of signing the contract. We haven't seen that for approximately 3 years. So the lead times not long ago, we're 12 months to start the construction of a home. But now the builders are guaranteeing that if you sign up today, you will have your house complete in 12 months. That means a lot. Because their need is short term, not long term, and it just provides a lot more confidence. So this is not all builders offering this, but a couple of the major builders in Perth. It's not quite that way in, say, Queensland. But in Victoria, there's quite a big pool of builders there. And we didn't have the lead times and availability issues that there are in WA.

There are no further questions at this time. I'll now hand back to Mr. Blackburne for any closing remarks.

So thank you for listening into Cedar Woods' FY '23 financial results. We look forward to delivering on the undertakings that we've set out there. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now disconnect.