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

Thank you for standing by, and welcome to the Cedar Woods Properties Limited 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 '26 half year financial results for Cedar Woods. My name is Nathan Blackburne, and with me is our CFO, Leon Hanrahan. In this presentation, we will provide an overview of the company and its activities, our financial results, the current market conditions, our portfolio, and then we will finish with the outlook for the business. Cedar Woods is the long-established property company with a track record of acquiring and delivering projects and growing earnings for shareholders. In our portfolio, we have over 9,000 lots or dwellings in the pipeline, which is made up by 36 projects across Victoria, South Australia, Western Australia and Queensland. We are developing approximately 1,100 dwellings and residential lots per year and have a good pipeline of projects to support future earnings. Our strategy is well proven, and we have a long track record in the disciplined execution of it. Diversification is key to our strategy and our products include a mix of apartments, townhouses, master planned communities and commercial. Conditions are very favorable for our business at the present, and this is expected to be the case for some time yet. Noting the shortfall of housing and the strong policy support our sector is getting. And finally, our balance sheet is strong, and we have some strategic partnerships in place, helping us to scale up our business. Now for a summary of our financial results. We're really pleased with the outcomes at the half year point, and we are on track for a record results for the full year. In the first half, we delivered a record net profit after tax of $39.6 million. This is 164% higher than H1 FY '25. This profit was generated from revenue of $275 million, which is up 40% on last year and came from 642 property settlements. This results in earnings per share of $0.474 up 160% on last year. The Board has declared an interim dividend of $0.14, fully franked, which is up 40% on the prior year. The dividend reinvestment plan and bonus share plans will remain in operation for the interim dividend. Over the first half, we contracted sales of 756 lots. And at 31 December, we held presale contracts with a value of over $748 million. This is up 16% on the $642 million in presales for this time last year. The majority of these presales will deliver revenue over the second half of FY '26 but also into FY '27 and beyond. More detail on the financial position of the company will be covered shortly. The strategy for Cedar Woods is a key differentiator for our business. Our strategy is to grow and develop our national project portfolio diversified by geography, product type and price points. So that it continues to hold broad customer appeal and performs well in a range of market conditions. And this broad customer base is a real point of difference for us and effectively translates to a smoother earnings profile for the company. The strategy is proving successful with a strong relative financial returns that we've been able to deliver over the years. We have 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 and have a long track record of identifying and converting high-quality sites. The quality of our portfolio is testament to this component of value creation, and I think it's unparalleled in the 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 the construction process. And the third value-add area is marketing and sales, where we create quality brands and presell projects before starting construction. As part of our strategy, we are supplementing our portfolio with projects that are undertaken in partnership. Our partnering strategy is a strategic pivot that will see an increasing proportion of future earnings coming from these partnering arrangements. Partnering allows us to further leverage our existing development skills, access larger scale and a greater number of development sites, which in turn supports that diversification strategy I just talked to. It generates regular fee income and thereby smoothing out our earnings profile. And it helps us to grow our earnings, but in a less capital-intensive way. Further diversification and greater scale essentially allow the company to perform more consistently through the cycles. We are now working in partnership with QIC and Tokyo Gas Real Estate, which provide exciting opportunities for Cedar Woods to participate in projects of scale without committing to the entire capital requirements. 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 at a time when those housing forms are in very short supply. We have had 4 projects with Tokyo Gas, 2 of which are now complete. And the intention with both partnerships is to expand them with more projects, and we continue to evaluate opportunities. We continue delivering the ESG strategy. with further investment in our policies, practices and in climate responsive developments. Both in design and material selection, we are ensuring the sustainability of our core development activities. And there's many great examples across our portfolio where we are leading the way in sustainable development, including the award winning energy-efficient apartments that we're doing at Glenside in South Australia. And the electricity microgrid that we put in place at Eglinton Village in the northern suburbs of Perth. We continue to refine and develop our carbon footprint mapping activities in readiness for mandatory reporting. Cedar Woods continues its national partnership with the Smith Family, Australia's leading children's education charity. Our flagship community grants program is another initiative we're really proud of and which the a portion of profits from projects given back to small community groups in the various regions that we operate. I will now hand over to Leon.

Thanks, Nathan. Taking a look at the financial results in the half in a bit more detail. Higher revenue and growing margins resulted in a much improved profit result for the first half compared to the first half of the prior year. Revenue was 40% higher in the half due to 34% more settlements and at a slightly higher values on average than last year. Gross margin increased to 31%, up from 26%. Project operating costs are lower due to savings on marketing spend, which was -- which generated strong inquiries with a lower level of spend. Higher administration costs in H1 FY '26 were associated with the increased head count and incentives as we continue to invest in new projects, reflecting our accelerated acquisition strategy. Finance cost expense were lower than the prior period as a result of the lower average debt in the half and a higher portion capitalized reflective of the stage in development. Now taking a look at the balance sheet. Total assets at 31 December of $854 million were broadly in line with the June 30 balance with the release of inventory related to the significant number of first half settlements, broadly offsetting the significant investment in development spend in the period. Net assets and equity were up 8% from 30 June, reflecting the strong first half earnings less the significant cash dividend paid in the period. Net bank debt of $85 million was paid down 40% from 30 June, and gearing, measured by net back debt to total tangible assets less cash was at a low 10% and net back debt to equity, another measure at 16%, reflecting the strong results in the period. Gearing currently sits below our target range but will increase over the second half with slightly fewer settlements and approximately $80 million in land acquisition payments to fund. Gearing is, however, expected to finish the year still at the lower end of our target brand in the high teens. The company extended the tenure of its 3- and 5-year corporate finance facilities shortly after the end of the half, ensuring continued secure our long-term funding availability with average debt maturity exceeding 3 years. We maintain a strong liquidity position with sufficient facility headroom available at the end of the half, interest cover of 8.9x, 40% above the prior year, and importantly, comfortably well above facility covenants of 2x. Now taking a look at the cash flow. As you mentioned, the company continues to operate a strong liquidity position, boosted by the first half operating cash flows. During the half, the company generated strong operating cash flow of $44 million after funding $5 million in new land acquisitions. With the strong operating cash flow generated from the business and undrawn facility headroom of approximately $170 million, the company expects to continue to maintain strong liquidity even after funding committed acquisition. While we only invested $5 million in the first half on new land acquisitions in the period, approximately $80 million has already been spent growing the project pipeline early in the second half to date, funded by a combination of operating cash flow and the company's corporate finance facility. These are the previously announced Corio and Mount Barker land acquisitions, and we're excited about these projects. I'll now hand back to Nathan to talk to market conditions.

Thanks, Leon. I now wanted to touch on the market conditions that the company is experiencing around the country. There are considerable tailwinds for our business and which we expect to persist for some time. The chronic shortfall of housing remains a pressing issue with significant supply gaps projected. The supply of new housing is nearing the lowest level we've seen in a decade. Housing completions are expected to fall short of the government's target by around 400,000 for the combined capitals by 2029. Our view is that it will take at least 5 years for meaningful levels of supply to be provided and for some balance to come back into the market. This fact will further support sales volumes and pricing going forward and Cedar Woods has 36 projects and 9,000-plus dwellings to supply into this market. There is unprecedented policy support for the new housing sector. Approvals are faster. Some state governments are providing infrastructure support and there's a national effort to get more supply completed. There is also support on the demand side with the various grants in play for particularly first home buyers, which are an important buyer cohort for our business. Economic conditions are generally very favorable for our sector. Homebuyers are securing their jobs and the employment outlook remains strong. The considerable shortage in skilled workers has been the skilled migration program continued to support our sector. Net overseas migration numbers may moderate over time, but government has a number of factors to weigh up in deciding migration levels. On house prices, the undersupply is expected to keep prices high. Forecasters are expecting further price growth across our capital cities, and Melbourne is expected to lead the market in this respect as it recovers. I now wanted to provide some insights into our portfolio. Inquiry level and sales have been very strong for our business, as evident in these 2 charts. This first chart shows our quarterly inquiries levels from Q1 FY '25 through to the most recent quarter, and you can see the gradual increase. We had strong first half inquiry with Q2 being 14% up on Q1 and 56% up on the prior corresponding period. The demand is broad-based across states and products, but first homebuyers are the most active buyer profile, supported by attractive government incentives. This bodes well for continued strong sales into H2 FY '26. On sales, we had record quarterly sales in Q2 FY '26, which were up 20% on Q1 and 17% on the prior corresponding period. WA and Queensland sales were particularly strong with steady sales in South Australia and improving sales in Victoria. Strong price growth was achieved in H1 in WA and Queensland and modest price growth achieved in SA and Victoria. We have a portfolio of 36 quality projects and a total pipeline of 9,000-plus lots, townhouses and apartments that will support future earnings. There's a good mix of products, price points and locations, giving us a diverse customer base. These charts demonstrate the diversification in our portfolio. And in the first chart, you can see the breakdown of our portfolio by state and that there is a good spread of locations. The second chart is an analysis of our presales which shows that owner occupiers are 2/3 of our buyers. The third chart shows the varying buyer profiles across our portfolio with a mix of downsizes, upgraders, investors and firsthome buyers and with first-home buyers being the biggest buyer category for us. And the fourth chart breaks down our portfolio to product type. And you can see that land lots in the dark blue are our dominant product type. In WA, we have 11 residential projects and over 3,300 dwellings in the pipeline. Our WA portfolio is comprised of residential lots, townhouses and apartments, and we are in a good spread of locations north and south of the CBD. Sales prices continued to grow in the half, further strengthening our margins across WA projects. Sales volumes remained high and we have strong presales to support H2 and financial year '27. State delivery is tracking well. We have good, reliable builder partners who are delivering to program and budget. In Victoria, we have 12 projects, which offer a wide range of products, including land lots, townhouses, apartments as well as offices. We have over 13 hectares of high-value mixed-use land at Williams Landing that remains undeveloped and is expected to accommodate a further 1,000-plus dwellings or strata offices. Improving inquiry and sales have allowed modest price improvement at summer states and further market recovery is expected over the second half. We have 6 projects in Queensland and a total of 1,540 lots and dwelling to deliver. There's a mix of land estates, townhouses and apartments in this portfolio. And our projects in Queensland are performing well, and we continue to regularly increase prices, further improving our margins there. The demand and price growth for affordable land product has been very strong. And the construction sector, though, continues to experience capacity constraints, especially with apartment builders down on the Gold Coast. In Adelaide, we have 7 projects, including 4 within the Glenside state. In total, we've got over 1,700 townhouses, apartments and residential lots yet to deliver, a pipeline which will keep us busy for at least a further 7 years. Our South Australian projects are well established with strong reputations for quality and sustainability and will continue to make meaningful contributions in the coming years. And we recently added to this portfolio with an acquisition in, Mount Barker. Our projects are seeing good sales volumes and prices continue to grow. We think the outlook for the performance of these projects will continue to be positive for at least the medium term. On acquisitions, we've got more resources allocated to locking in acquisitions to support and grow future earnings. And we're currently assessing opportunities across Victoria, Queensland and WA, which is in line with our strategy. We have ample capacity to fund new acquisitions with over $189 million of liquidity as at 31 December and as well the partnerships that talked about previously, which are in place to co-fund opportunities as they arise. Several sites were secured over FY '25 and FY '26 to date. And additional sites have been contracted and are under due diligence. During the half, we contracted a site in Aveley in the northwestern suburbs of Perth. We expect product development at that estate to meet with high demand as there's a shortage of supply in the immediate area. And now to the outlook for our business. Cedar Woods is well placed for further growth in earnings. Conditions for the housing sector are favorable, and our portfolio across the country is performing well. The housing shortage, low unemployment and attractive buyer incentives are all coming together to create this favorable set of conditions. Our balance sheet is strong with liquidity of over $189 million as at 31st of December '25. Acquisition efforts are proving successful with several sites recently secured, others under due diligence and partnerships in place with QIC and Tokyo Gas Real Estate. We've got presale contracts of $748 million, which are in place and these significantly support our earnings outlook for FY '26 and FY '27 in particular. We are guiding full year NPAT growth of approximately 30% to 35% for FY '26. This is up from the minimum 20% earnings growth we had guided for previously. Over the medium term, the company is well placed with a pipeline of more than 9,000 undeveloped lots, dwellings, offices across our 4 states. Thank you for listening to our presentation. And as we go to questions, I will leave you with a slide being an investment summary of our business. Thank you.

[Operator Instructions] Your first question comes from Connor Eldridge with Bell Potter Securities.

Nathan, Leon. Thanks for your time this morning. My first question today is just can you maybe walk us through, I guess, the key moving parts in the recent guidance upgrade? It seems like most of the upgrade was driven by, I guess, stronger margin rather than volume per se. But yes, if you could just comment on, I guess, what's changed since the first quarter update.

Thanks, Connor. Yes, the guidance upgrade was the result of a number of factors. There was more price growth than expected achieved in the half across a number of projects, more settlements than expected have come into the half and will come into the year, and lower marketing costs. And the lower marketing costs are because of the incredibly strong inquiry that we're getting across the country. And that effectively means we can turn down that marketing spend.

Yes, that's clear. And just when you say more settlements have come into the year, is that a reflection of just stronger land projects performing? Or is there some pull forward in timing projects coming in from FY '27?

It's a little bit of both, Connor, but really just the stronger sales generating more settlements for the year, particularly in WA.

Yes. That's clear. My second question is just on the presales pipeline, those $748 million on hand. Could you just give us some color on how much of that is expected to settle in FY '26 and maybe how much in FY '27?

Connor, the majority of it is falling into FY '27. There is still a good portion coming into and supporting FY '26. And pleasingly, we've already made good headway in terms of FY '28 with the presales already building for that year. But approximately half of it will go into FY '27.

Okay. That's clear. And maybe just one more from me, if that's okay. Just around the interest rate environment. Obviously, the commentary around the robustness of your demand for Cedar Woods product was very clear, but I'm just wondering, the market is pricing in at least one more interest rate hike this year. I guess, wondering what your thoughts are internally about rates? And maybe if you thought about the impact that further hikes might have on demand for your product?

Connor, I suppose it comes back to the extent of the hikes and the number of them. But you just really have to go back to the chronic shortfall of housing across the country. And the significant task that the industry has ahead of it in addressing that shortfall. And so in our view, even if there were to be a couple of rises, we would expect continued widespread demand across our product types.

Great. That's very clear. Sorry to ask one more question, Leon, if I may. Just around the payout ratio. It looks like it came down in the first half, but can we just assume that, that normalizes back at 50% for the full year?

Yes. So the payout ratio is -- we view it on a full year basis. The interim dividend is not necessarily tied to the half year profit at all. It's more -- we always weight our dividend -- total dividends to the final dividend, and there's no change to our 50% payout ratio policy.

[Operator Instructions] Your next question comes from Larry Gandler with Shaw and Partners.

Fantastic results. A few questions from me. Just with regards to the new projects that appear in your project pipeline Aveley. And I think there's one, Soko here. With Aveley, I think you're indicating sales conditional or purchases conditional. Do you think that would settle in FY '26? Or is that something for maybe FY '27?

No. There's a planning hurdle to achieve. And that's why it's conditional. We're very confident on our assumptions around that. So we would expect this to go unconditional and settle. However, the timing of that will be, yes, not in FY '26, it will be likely '27.

Great. And Nathan, I'm not sure if I am seeing something new here in terms of Soko, the townhouses there. Is that a new project? And maybe you can just describe it?

It's a smaller project in the northern suburbs of Perth. It's an infill site. It's very much in Cedar Woods' sweet spot in terms of product type. It is townhouses that we will -- that we've just gone out to the market for expressions of interest on. The builders are locked in. We expect strong demand for that product. And that will contribute Leon to predominantly -- I think it will be FY '27 and FY '28.

Fantastic. And have you -- is the land for that project settling in FY '26?

We've settled on that.

Great. In the first half, 1H '26?

Yes, or earlier even. So it's a smaller acquisition. It was previously described as Madeley, in the pipeline chart. It's not new to the pipeline chart. It's projects advanced, now at a project name, be in market selling it very soon..

Fantastic. Okay. Great. In terms of second half settlements, you're talking about $80 million for Corio and Mount Barker and Fairfield. When does that settle?

So not in FY '26. So there's 2 installments remaining, one in '27 and the other one likely in '28. We don't have much more committed acquisition expenditure at this point in time with those payments fairly spread out and not large in nature.

Okay. I was going to sort of ask Nathan similar question about committed. So Nathan, what does the acquisition pipeline look like to you? Does it feel -- in each half, you described it as robust and exciting. Do you feel perhaps you've got more opportunity, less? Is it more expensive to buy land? What's your perspective today on the acquisition pipeline?

We're seeing the buying conditions as quite good, and the number of opportunities is quite high. And that, in part, is because we've got more people on board looking for them. We've got numerous sites that we're doing assessment work on at the moment and a couple of which are contracted, subject to due diligence. We are -- because the shortfall in housing is quite widespread in terms of locations and product types that opens up the acquisition mandate. So we're focused on 3 of our 4 locations, having recently purchased something in South Australia, we are focused on the other 3 locations. We have a slight bias towards medium-density projects and land subdivisions, but are also assessing some opportunity, some apartment projects where we see a significant shortfall of supply in that immediate area. But yes, seeing plenty of opportunities. And I would hope that we would convert some more over the half and into FY '27.

Right. And none of those projects are indeed diligence, you have not specified them by name yet other than Aveley. Yes.

No.

[Operator Instructions] Your next question comes from Murray Connellan with Moelis Australia.

Nathan, Leon. Congrats on the upgrade. Just taking a look what your guidance now implies half-on-half in terms of what second half earnings are going to look like. It looks like there's a drop off there sort of 30% to 40%, depending on where we sit in the range. I assume that the majority of that has to do with just a first half skew this year around settlement numbers, but I was wondering whether there's just anything else that we should be aware of in terms of seasonality or spend that may occur in the second half?

No, that's pretty much spot on Murray. It's just timing of stages completing. This year it was weighted to the first half. So we just -- we'll have slightly less settlements in the second half. And then we're expecting a very big Q1 in FY '27 and likely weighted to the first half again in FY '27.

Got it. And then obviously, the lion's share of settlements still coming from WA. It does look like you've -- with the service overlay acquisition, you've sort of backfilled the pipeline in Perth. But I was just wondering, I guess, first off, how easy or difficult is it now to make new acquisitions and new projects stack in WA, given the cost of land relative to the cost of -- or the pricing of housing. And then secondly, how would you expect that sort of project -- or that settlement mix state-by-state to evolve over, let's say, a 3- to 5-year period?

So in terms of making projects stack, we're readily finding opportunities that when assessed meet our minimum benchmarks. And we've got a lot of opportunities that we're working on that have been sourced off market. There's a few of those that have been sourced on market that we're assessing, but where we've got a greater number of them that have been secured off market where we've approached the vendor directly. And yes, we're not finding vendor expectations too unrealistic at this point in time. And I'm confident that we can continue to make acquisitions on reasonable return metrics as we have done for the past 30-odd years. In terms of the settlement mix, we do have that strategy that we've worked very hard on executing and that's a strategy of diversification, giving us a broad customer base. So we like at any one point in time to have a mix of master plan communities delivering land lots, medium density apartment projects and townhouse projects and of course, the commercial offerings that come out of our Victorian portfolio. So I would like to think that, that continues. We, at any one point in time like to have a mix of product settling, which means we need to have a mix of product that we're acquiring. We can pivot with that strategy towards particular product types and towards particular locations where we see a particular shortfall in that product type. What's outperforming at the moment is more affordable products, be that lands, townhouses or apartments. And so we have had a bit of a bias towards product that can -- or projects that can deliver more affordable land supply over the medium term.

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