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

Thank you for standing by, and welcome to the Cedar Woods Properties Limited Half Year 2024 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 FY '24 half year financial results presentation for Cedar Woods. I would like to make an acknowledgment of the traditional custodians of the land we present from today. We pay our respect to elders past, present and emerging. For they hold the memories, the traditions and the culture of Aboriginal and Torres Strait Islander people across the nation. Cedar Woods is a property development company that was established in 1987 and has been ASX listed for 30 years now. Our products include land estates, townhouses, apartments and commercial developments. And in our portfolio, we have now 9,700 lots or dwellings in the pipeline, which is made up of about 35 projects across Victoria, South Australia, WA and Queensland. We have an excellent long-term track record in growing earnings, and we have always made a profit and always paid a dividend. Our focus on shareholder returns is instilled through disciplined capital management, and the company has demonstrated superior return to peers over the longer term. We have a stable and experienced Board and executive team that is very focused and consistent in its approach. The housing market, broadly speaking, looks to be entering a favorable phase and one we expect to last for several years. The nationwide housing shortage will take years to fix and those with multiyear projects that are ready to go can take advantage of this. It is predicted that the economic climate continues to be very supportive of the new housing sector that we are in. We see this as the right time to stick to our strategy as our core business is likely entering these more favorable operating conditions. Our strategy is to grow and develop our national project portfolio diversified by geography, product type and price point, so that continues to hold broad customer appeal and performs well in a range of market conditions. The strategy is proving successful with the strong relative returns that we've been able to deliver over the longer term. Cedar Woods has multiple product types in 4 states and different price points that appeal to a variety of buyer profiles. As part of our strategy, we are supplementing our portfolio with projects that are undertaken in partnership. Our capital partnering strategy is a strategic pivot that we'll see a greater portion of future earnings coming from partnering arrangements. Partnering allows us to do a number of things; further leverage our existing development skills, generate regular fee income and thereby smoothing our earnings profile, accessing larger scale and a greater number of development sites, which in turn supports our diversification strategy. And finally, grow our earnings, but in a less capital intensive way. Further diversification and greater scale allows the company to perform more consistently through the cycles. So far, we have established partnerships with QIC and Tokyo Gas, presenting exciting opportunities for Cedar Woods to participate in projects of scale without committing to the entire capital requirements of those projects. QIC and Tokyo Gas are both substantial and experienced partners. The QIC partnership offers us access to well-located sites in major town centers for developing apartments and townhouses when those housing forms are in very short supply around the country. QIC is the owner of a substantial portfolio by major shopping centers, and our first joint venture project with them will be at one of their major town centers being Robina in Queensland. Tokyo Gas has selected Cedar Woods as a national development partner. We announced a second project with Tokyo Gas being our Bloom retirement concept, which is now underway in Adelaide. The intention with both partnerships is to expand them with more projects, and there are discussions underway with both parties in this regard. These charts demonstrate the geographic and product diversification in our portfolio. The first chart on the left shows the proportion of our portfolio in each state and a reflection of our geographic diversification. The middle chart shows our presales 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 particular 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 the future charts. The chart on the right shows the mix of product in the presales with residential land still being the largest sector for townhouses and apartments together accounting for 30% of our presales and offices accounting for 9% of presales. We continue to boost this diversification with a joint venture at Robina in Queensland, which will add a large number of townhouses and apartments to the portfolio. As announced separately, we have signed an unconditional contract of sale to sell the Williams Landing Shopping Center in Victoria. The sale comprise the shopping center and 1 hectare of adjacent development land with settlement during March for the shopping center component and the surplus land component due to settle in the first half of FY '25. Cedar Woods will realize a net profit after tax of AUD 16.8 million directly from the sale, most of which will be realized in the second half of FY '24. The purchaser was selected to purchase the shopping center, given its extensive experience in owning and managing shopping centers, which Cedar Woods considered would benefit the Williams Landing community. We'll be retiring the existing shopping center funding facility as part of the sale and apply the balance of process to debt. The transaction will significantly improve our hearing and corporate facility headroom. Cedar Woods still retains a significant pipeline of Williams Landing of more than 15 development-ready sites with the capacity to do commercial, residential and mixed-use style developments that will be progressively tackled over the coming years. I will now hand over to Leon for an overview of the financial results.

Thanks, Nathan. As we advised in the previous ASX announcements, full year financial year '24 earnings was substantially skewed to the second half. We are forecasting full year net profit after tax in the range of AUD 36 million to AUD 39 million. In the first half of financial year '24, we delivered net profit after tax of AUD 2.6 million and revenue of AUD 123.2 million from 417 settlements. Reflecting on the interim results and the expectations of the full year, the Board has declared an interim dividend of AUD 0.08 fully franked and the Board will consider the final dividend in the context of the full year results. With sales improving in the first half compared to the prior corresponding period, we hold presales contracts with a value of AUD 525 million at 31 December. About half of these we expect to settle in the second half of financial year '24 and the balance contributing to earnings in financial year '25 and financial year '26. In setting up the business for continued earnings growth into the future, during the period we paid AUD 28 million for previously contracted land acquisitions, continuing to build-out our project pipeline. Looking at the half year results in a bit more detail. Lower revenue and higher finance costs in the period has resulted in a lower profit result for H1 financial year '24, notwithstanding improvement in gross margin and stable administration overhead. Revenue was 19% lower in the first half due to a higher portion of lower value land settlements. Gross margin improved from 25% to 26%, although gross profit overall was lower with the lower total revenue. Higher land holding costs in the first half contributed to an increase in project operating costs. Finance costs were higher as a result of the combination of higher average debt balance, higher base interest rates, wind-out of the interest rate hedges and accrued interest on other financial liabilities and the lower tax expense in H1 financial year '24 resulted from the lower profit and the establishment of an employee share trust that will provide future tax deductions for existing employee share plans. Now taking a look at the balance sheet. Total assets at 31 December of AUD 838 million was up 7% on 30 June's balance of AUD 783 million as we progressed development at our projects in the first half. Net assets and equity was slightly down on the June balance, reflecting the half year earnings less cash dividends paid during the period. Net bank debt of AUD 274 million was up from 30 June and gearing measured by net back debt to equity at 63.9% and net back debt to total tangible assets less cash at 33% reflected our investment in inventory in the first half and this will contribute to the stronger profit result in the second half. The company increased the limit and extended tenure of its 3 and 5 year corporate finance facilities in the second half, with the increased limit giving the company AUD 390 million in combined finance facilities and ensured continued secure long-term funding availability with an average debt maturity of approximately 3.2 years. We maintain a solid liquidity position with sufficient facility headroom available at the end of the half. And while interest cover at 2.3 times is lower than the prior year, it remains comfortably above facility covenants. Gearing and interest cover are expected to improve as we retire debt in the second half quite materially. Taking a deeper look at our cash flow and capital management objectives. We continued to benefit from the long-term support of our finances. As I just noted, we increased our funding limits by AUD 30 million during the period. And at 31 December, we had AUD 50.2 million in undrawn facility capacity. This was at on the investment in new land of AUD 28.7 million, which was included in operating cash flow, and we expect much stronger operating cash flows in the second half as we release capital from inventory, particularly significant settlements in March and April will boost facility capacity given undrawn facility headroom of over AUD 100 million around that time. These will come from a few East Coast projects, including Glenside, Fraser Rise, Sage and Mason Quarter. [ Receipt to recycle capital weren't ] appropriate, and this includes the Williams Landing Shopping Center sale Nathan just talked to. And as mentioned, this settlement in the second half will retire the AUD 30 million project facility we have with that asset and further pay down the corporate debt facility. With the strong operating cash flow expected in the second half and significant undrawn facility headroom, the company projects to continue to maintain strong liquidity in the upcoming year. And I'll now hand back to Nathan to talk to market conditions.

So now touching on market conditions. I will also talk about our recent sales experience. So this graph we have here shows our gross sales by quarter going back to FY '20. The first 2 quarters of FY '24 on the right-hand side show that the first half sales results were strong and generally in line with the last quarter of FY '23. The second quarter of FY '24 showed the strongest quarterly sales results for the last 2 years, importantly. Sales growth is a positive forward indicator as these sales translate to settlements in future periods. Sales are being driven by investors, downsizers and upgraders with first homebuyers sales improving progressively. Sales are most buoyant in WA, where the economy is strong and property is more affordable. Sales prices have been increased across many projects in the company's portfolio in the first half, but especially in WA. The construction sector continues to experience challenges with high work volumes and labor shortage, though improvement in these conditions is progressively occurring and cost growth has slowed considerably. There are significant shortfalls in new dwelling supply across jurisdictions and dwelling starts. These charts demonstrate that we have hit a low point on dwelling starts nationally and that the dwelling shortfall is forecast to intensify over the next 3 years as the number of completions dwindle amidst strong population growth. Due to the construction sector headwinds, many approved projects are not being delivered across the industry and government is seeking to expedite planning approvals. This shortfall in supply has started to create upward pressure on prices and enabled increases across much of our portfolio. Those with the supply pipeline are set to benefit. Cedar Woods has a broad portfolio of shovel-ready projects, and I will soon outline some of those that are coming on-stream. Demand for new housing is significantly influenced by population growth. The current migration surge is providing a tailwind for new housing, and it has been occurring at record levels. Net overseas migration was at around 240,000 persons per annum pre-COVID but well over 500,000 last financial year, and we expect migration levels to continue to be robust through to FY '25 and beyond. In the year to June 2023, WA grew by 3.1% due to interstate population movements in part, and we expect this trend to continue due to stronger wages and cheaper housing. On buyer profiles, new home loan commitments are starting to rise with similar increases being experienced across both investors and first home buyers. We expect demand to lift as confidence increases around interest rates stabilizing, especially with those first home buyers. This year, we continued to deliver the ESG strategy with significant investments in climate change initiatives and environmental enhancement across the communities. And an example of this is the micro grid we put in place at Eglinton Village in WA. Approximately 50% to 65% of total energy demand at that project is expected to be supplied by renewables through rooftop solar and community battery storage. And this is just one example of the types of initiatives that we are developing and putting in place across the portfolio. Over the last 2 years, we've mapped our corporate carbon footprint and put in place targets and measures across our offices, such as committing to green energy and minimizing paper waste, and we are now exploring ways of the business to reduce the emissions associated with some of our development activities. Cedar Woods continues its national partnership with the Smith Family, which is Australia's leading children's education charity. Our flagship community grant program is another initiative we are very proud of and one which sees a portion of the profits from our projects given back to small community groups in the various regions that we operate. It was also pleasing to see that our latest staff survey recorded strong staff satisfaction scores. Now to look at some highlights from each state. In WA, we have 13 residential projects and more than 5,000 lots or dwellings. Our WA portfolio is primarily comprised of residential lots in the good spread of locations, north, south and east. The first stages of new projects were successfully launched, including Atwater in Rockingham and Eglinton up in Perth North. The Ariella project has been extended by the acquisition of adjacent land, and this extends the life of this highly successful project. Sales have been strong in the first half of FY '24 across the portfolio, and we have achieved strong price growth across most of our WA estates. Price increases are now nearing 15% across many projects in the WA portfolio, and this is just over the past 3 to 4 months. In Victoria, we 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 high demand for stronger offices in Melbourne's West. Our Victorian residential projects experienced a softer market during the first half than other states, mainly as a result of the increases in interest rates and property being less affordable in Victoria. We have 6 projects in Queensland and over 1,400 lots and dwellings to deliver there. There's a mix of land estates, townhouses and apartments in this portfolio. The construction sector has seen significant cost increases, which has impacted the timing of some stages, but which we expect to restart once more capacity comes back into the sector, and we are starting to see that now. Given Southeast 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 with the joint venture with QIC at Robina. The newest of our states in Queensland is Flourish at South Maclean, which was recently launched and has experienced strong sales results. In Adelaide, we have 7 projects, including 4 within the Glenside estate and 3 at Fletcher's Slip. In total, we have around 1,100 townhouses and apartment yet to deliver, a pipeline which will keep us busy for a further 6 years. Our South Australian projects are well established with strong reputations for quality and sustainability, and they will continue to make meaningful contributions in coming years. Sales conditions have been moderate to strong in recent months, depending upon the project or stage that we're delivering. In our portfolio, we have a number of new projects that will start to deliver first earnings over the short and medium term with 6 new projects in FY '24. 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 across the states that we are in. In the medium term, there is a raft of apartment projects that will be ready to go in any apartment market recovery. These new projects, along with the existing ones already contributing in the portfolio to support our growth outlook. Enquiry and sales are currently the strongest in 2 years with WA especially experiencing a significant uptick in demand. Sales to first home buyers are picking up, and sales to this cohort are supporting already strong sales to investors, downsizers and upgraders in most states. There are sound underlying fundamentals of low unemployment, record immigration and a significant undersupply of dwellings as well as strong government support to get new supply online. We think the housing shortage will last several years and further price growth is anticipated in the markets in which we operate, which are largely the more affordable states. Cedar Woods is well placed to roll-out shovel-ready projects and stages as conditions allow to capitalize on the expected demand. We ended the first half with over AUD 525 million of pre-sales, partially derisking future earnings. We expect a significantly stronger second half underpinned by planned residential settlements and the sale of the Williams Landing shopping center and the full year net profit in the range of AUD 36 million to AUD 39 million is expected. This result is dependent upon settlement scheduled close to the end of the financial year. The catalysts for a more sustained improvement in sales volumes is expected to be a combination of the peaking of interest rates and an improvement in building capacity, both of which will help to restore buyer confidence. And finally, our portfolio of approximately 9,700 lots in dwellings in quality location supports our medium-term earnings outlook. Thank you for listening to the results presentation for Cedar Woods. I'll now hand over to our operator.

Thank you. [Operator Instructions] Your first question comes from Edward Day with MA Financial.

Just wondering if you can talk about the sales mix in a bit more detail. And I guess, the composition of settlements are in the first half and what that looks like in the second half?

Yes, sure. So in the first half, our biggest contributor to our settlements was from Mason Quarter, it's a land project in Victoria. We had about 120, 130 settlements there. We still anticipate making another 60-odd from there in the second half, but it is a much more mixed settlement profile where we will have an office building in Victoria. We have about AUD 36 million of revenue from there. And then the other big one is Glenside townhouses. We had none in the first half. We could have 60 to 70 million in the second half, quite a strong revenue contribution from those, whereas in the first half, it was more lower-value land lot settling largely from Mason Quarter and projects in WA.

A couple more, sorry. Just on your -- so your acquisition in WA, can you just talk about what you're seeing in terms of movement in land prices?

Really, there's been so few transactions. It's difficult to point to a trend. But it is fair to assume that the numbers that we are offering are at lower rates per square meter or whatever other measure than we might have been a year or 2 ago, primarily to reflect the increase in construction costs over that period. So that is flowing through to cheaper land or flowing through to our ability to pay for land. And I would say that, that is consistent with what is happening nationally. There are quite a number of opportunities out there that we're running the ruler over both built form and land, but also noting that we've acquired quite a few projects over the past few years and have a healthy pipeline from which to deliver on and capitalize on current market conditions.

And then just one last one. Just wondering what the average time from sale to settlement is and whether you're seeing any movement there?

So it is improving for both built form and for land. We aren't yet back to the delivery time frames for a typical stage or apartment project that we were doing pre-COVID. But the tenders we're getting in, now, for example, for a civil stage in WA are a couple of months shorter than they were 12 months ago. So let's say, a 10% to 20% improvement in delivery time frames in WA for land stages over the last 12 months. And then with apartment projects, we're seeing delivery time frames come down from 2 years to somewhere between 18 months and 2 years.

Your next question comes from Shane Bannan with PAC Partners.

Just a couple of quick questions. I know in the past you've basically articulated [ natural gross ] margin gravitate to about 30%. We've been sitting below that over the last couple of years. I'm assuming with these price pressures that you're articulating on the call that you'll see that sort of margin start to improve a little bit from here. Would you like to put that in a broader context saying that you're obviously going to be buying much of some sort of mark of how that's going to evolve over-time.

Yes, that's true, Shane. So if I look at the sales prices we have in market over the last, say, 6 months, we have improved prices at a faster rate than cost and improve margin on most of our projects in saying that the overall group margin is highly dependent also on the mix of product that we're settling, so different projects and different types of products have quite different margins and also the cycling out of older projects and bringing in newer projects because margins also typically improve over the life of the projects. So the newer projects typically have lower margins initially and then the older projects typically have improved those margins and have higher margins. So for our existing projects, our margins are generally improving. In saying that, it will still be very dependent on what mix of product we have, say, settling next financial year.

And just to supplement that, Shane, we are nearly at 15% in terms of the amount of price increase that has been passed through on your average WA project since October, including a meaningful increase each week over the last 2 weeks. So we'll be very quickly getting above 15% average price increases in just those few months.

That mix, again can drag the whole overall group if we have 2 apartment buildings that are giving us quite a high dollar profit but might have a lower margin. And then so that the overall group margin is quite impacted by that.

Right. [indiscernible] balance, the outlook here is the operational leverage in these partnerships you're entering into where other parties are contributing the land from the sound of things in large part anyway. Could you just give us a sense as to what the revenue model looks like there in terms of the go forward? And how big you'd like to see this partnership aspect evolve?

So on the last part of your question first, we'd like to think that around 1/4 of our earnings is in a few years' time, is coming from these types of arrangements. And particularly with the QIC arrangement, there's quite a lot of potential there with the projects already identified, but only a formal agreement with QIC on one of them, which is quite substantial in itself. So that's the end aim showing that the core business of Cedar Woods only on balance sheet developments remaining the focus, but a meaningful part of our earnings coming from these partnering arrangements and hence the use of the term strategic shift. And then the way the revenue model works, it varies between Tokyo Gas and QIC. Yes, QIC are initially sort of -- they're putting in the land. And then once all the pre-conditions have been met, we've tendered the project, we've got the pre-sales, we've got the approvals, then the land is valued. And Cedar Woods contributes 50% of that land value to QIC. And then the project costs are co-funded all the way through and profit is shared at the end. That's that model.

And Cedar Woods having management fees, selling fees and throughout.

So that is the management fee plus the 50% share in the profitability of the underlying project.

Yes. And so that does supercharge the returns for Cedar Woods. Yes, we're giving away some of the profit, but we've got less capital out and we're taking the development management fees and sales and marketing fees along the way.

Ideally, these arrangements for new projects are a similar arrangement where we are 50-50 partners on the land and sharing projects in -- sharing profits in the end, 50-50, but we'll be undertaking the project management. So there'll be management fees, also the selling fees and we'll be potentially finding the projects acquisition fees also. The current Tokyo Gas projects are a bit different because they came into a couple of our existing buildings. So they've just done that via participation fee, and they get paid a kind of percentage return, if you like, based on that, it's actually shown as a financial instrument in the new accounts.

Lastly, obviously, construction companies going to the war over the course of the last sort of 12 months or so. Can I just understand how you now manage that exposure? I'm assuming you're probably more sensitive given the pressure of the sector has been under over the course of the last sort of 12 to 18 months.

So we have 35 projects across the company. We do have builders working across a few projects each, some having just a single project. We've had 1 builder in South Australia fail on us. And that primarily impacted our purchases because we had already settled on the land on most of the products. But nonetheless, it's an issue for our customers, and we've had to manage that for them. We think that we're through the worst of that. We certainly look very closely at the financials of any new builder that we're intending to appoint and look closely at the financials on a regular basis of builders that we have across the portfolio. And we do have some deep partnerships with builders that we're very comfortable with the financials on. And so there's that. The other protection mechanism we've got is, yes, we've got a gross maximum price structure across our projects as required in order to secure finance. So we have confidence around the [indiscernible] number and as much confidence as we can reasonably get in terms of the builder getting through to the end of the project.

And that financial check is quite a deep look. We'll get their order book, see what other projects they have, will look at the who else they're working for form a view of those counterparties, whether we think they'll pay their bills. We will reference check. We will also look at their payment times reporting numbers to see if they're paying their subcontractors on time. And as Nathan said, after their appointment, we will continue to check-in on those financials. That one in Adelaide that [ Williams Landing ] we were kind of aware of their position for a while. Obviously, they had a good position when we appointed them, and we were trying to help them through that by sort of paying invoices immediately to help them manage that cash flow, but it didn't get there in the end.

In the meantime, from the stand what you're saying on the -- the risk is largely shared by the end customer. And I guess you've got a portfolio of projects anyway. So the risk is actually quite modest in so far as said it was as concerned?

Yes. It's definitely a risk we focus on, but it's in the scheme of all our projects, the different types of products, the shared risk with customers. The fallout of it is financially not that significant, but Adelaide example. There was minimal financial impact of it.

And we have no information across the portfolio now that would suggest any of our builders are in trouble.

Thank you. There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.