Ingenia Communities Group (INA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ingenia Communities Group 1H '21 Results Presentation. [Operator Instructions] I would now like to hand the conference over to Mr. Simon Owen, CEO and Managing Director. Please go ahead.

Good morning, everyone, and thanks for your attendance today. I'm really excited to be presenting another strong result underpinned by doing the basics well: focusing on our residents and guests, recruiting and developing the best industry talent, growing our rents, increasing occupancy, selling homes and being vigilant on our costs. COVID has required us as a business to rethink our priorities and our operating model. The overwhelming focus has been on prioritizing the safety and wellbeing of our residents, our guests and our employees. We have deployed new ways, primarily utilizing digital channels of engaging with our customers and seeking to build market share. And through COVID, we have continued to develop, acquire and grow. And on occasion, this seemed counterintuitive to the status quo. As recently as last Friday, continual border closures and state lockdowns impede consumer confidence in booking into stay holidays. However, we have clearly fared better than most businesses. Our holidays communities have boomed since the September school holidays, and our rental communities are operating at record levels of occupancy. It is also evident that most capital city and key regional residential property markets are experiencing strong demand and price growth, of which we are a beneficiary. Consequentially, the group has decided to voluntarily hand back 1/3 of the JobKeeper supplement we have received in the current financial year, representing approximately $1.7 million. I would also note that we have not received JobKeeper since the end of September, and any JobKeeper receipts will be excluded from the calculation of any executive bonuses payable this year. There are some great highlights which we announced today: record revenue of $122 million for the first half, our earnings before interest and tax was up 25% to $40.3 million and our operating cash flow was up 110% to $59.7 million. We have started the year with a flurry on the acquisitions front. To date, we have settled $105 million in stabilized communities and land and have a further $40 million of acquisitions under contract which are yet to settle. In addition, we have a significant pipeline of acquisition opportunities under due diligence or advanced negotiation and expect to be announcing several more acquisitions in the coming weeks, including one of the largest and most premium lifestyle communities on the East Coast. On the basis of the deal flow that I presently see in front of the business, and I was personally out doing due diligence inspections last week, I'm confident that the proceeds from the May 2020 capital raising will be fully invested in the coming months, and our LVR will be within our target range of 30% to 40% by the middle of the year. Before we go into the details, I'm just going to make a couple of opening comments on what we are currently seeing in the sectors and markets within which we operate as well as our strategy moving forward. The housing market is, by and large, booming in Australia and at the end of January, reached a new record high fueled by low interest rates, limited supply, pent-up demand and rising consumer confidence. In the first 2 weeks of February, Ingenia experienced our strongest ever demand where we achieved 36 net sales at a rate of nearly 3 new sales per day. As of Friday, the 12th of February, we have recorded 162 new home settlements and have a further 296 contracts and deposits on hand. However, it is not a uniform surge. It's an owner-occupier upswing with growth led by first time and changeover buyers, encouraged by a heavy mix of federal and state-based stimulus. Detached housing in lifestyle locations seems increasingly preferable, and regional markets are seeing price growth of at least double that of capital city stock. And demand for units has diminished through COVID amidst low levels of investor participation, changing living preferences and an absence of offshore buyers. A surge in residential housing prices is a double-edged sword for Ingenia. On the positive, there is clear confidence, strong liquidity and a sense of urgency to transact. Balanced against that, however, is the possibility that some homeowners will inevitably wait out in the current market and seek to maximize any possible price gains before transacting, particularly if they are seeking to downsize or cash out some equity in the family home. Our holiday business is also strongly benefiting from border closures. And holiday parks, which are located within a 2- to 3-hour drive of key population centers, are seeing the biggest upswing in demand as many guests are planning shorter, more regular trips. Our Ingenia Gardens seniors rental business is also trading very strongly with residents placing additional value on safety and security. And occupancy in that business closed at the end of January at 96%, which is up around 400 basis points on pre-COVID levels. Our strategy as we emerge from COVID remains unchanged. Our business is underpinned by owning land and collecting rent. We presently have 9,277 income-yielding homes, cabins and sites, which is up 26% on the prior year. And that number continues to grow every week as we settle new homes, integrate acquisitions and add new rental and tourism cabins across the portfolio. Every week, we collect more than $2.1 million in rent with a significant component underwritten by the government. Rent collections were completely unchanged through COVID. Our strategy is based around growing an increasingly deep pool of rental income that gives our business fantastically predictable weekly cash flow. Today, our core bottleneck remains finding the land and accessing the necessary approvals. Our sector is supply constrained, and the demand is escalating. Every day, some 700 Australians turn 65, and that will continue for the next 30 years. Furthermore, approximately 70% of Australians aged over 65 own their home outright with no mortgage, but many have limited or no savings beyond the equity in the family home. Ingenia is in a great position today with strong tailwinds supporting our key lifestyle, rental and holidays platforms. We are well capitalized, have great capital optionality with our funds management platform and our development joint venture with Sun Communities and deep industry knowledge residing within the Board and management team. Joining me on the call today are a number of the Ingenia executive team, including Scott Noble, our CFO; Natalie Kwok, who heads up our Acquisitions team; Nicole Jentz, who is our Interim General Manager of Residential Communities; and Donna Byrne, who heads up Investor Relations. This is Nicole's first results call today, so please feel free to direct any tough questions to her. And with that, I'll now hand over to Scott, who is going to talk through the financials and capital management.

Thanks very much, Simon. Good morning, everyone. I'm pleased to present Ingenia's 2021 interim results. The group delivered 136 turnkey settlements in the half, 4 down on the prior period, with 128 settlements recorded within Ingenia and 8 recorded within the joint venture with Sun Communities. The highlight of the interim result was the operating cash flow, up 110% on the prior period to $59.7 million. This growth was driven by the group's growing rental base, strong second quarter tourism result and positive working capital movements from reduced inventory and increased tourism deposits held. Revenue increased 4% to $122 million, and EBIT increased 25% to $40.3 million. These improvements were driven by growth in our lifestyle rental income and strong second quarter from our holidays business, which were partly offset by a decline in our development earnings from lower settlements. Pleasingly, stabilized EBIT margin grew 320 basis points. Underlying profit increased 24% to $32.8 million with underlying EPS declining 6% to $0.101 per security as a result of the increased securities on issue from the May equity raising where the funds raised were not fully deployed during the period. Statutory profit increased 38% to $32.5 million, and statutory EPS grew 5% to $0.10 per security. An interim distribution of $0.05 per security has been declared. While this is an increase in the final FY '20 distribution, it's a decline on the same period last year as the group focuses on preserving capital to internally fund growth. Turning to Slide 7. While the result was impacted by COVID, Ingenia delivered a 25% growth in EBIT from the prior year and continue to grow stabilized margins across the group's core Lifestyle and Holidays and Ingenia Gardens businesses, delivering continued scale improvements, which offset the decline from the development result. Please note, the EBIT result includes $5.1 million of JobKeeper that partially offset the impact of COVID on the business from lost revenue and additional costs. As mentioned by Simon, $1.7 million of JobKeeper will be returned to the government due to the recovery of our holidays business and improved outlook. At the segment level, Lifestyle and Holidays EBIT increased 39% to $22.5 million, with the Lifestyle and Holidays stabilized margin improving to 42.1%. Lifestyle Development EBIT declined $1.7 million on the prior year due to lower settlements. This decline was offset by the growth in fee income from the development joint venture with Sun Communities as the joint venture's first development at Freshwater progress and asset acquisitions completed. Pleasingly, at 31 December, sales, deposits and contracts on hand grew 29% from what we were holding at 30 June, providing good visibility on the group's second half earnings. Ingenia Gardens continues to deliver strong cash flow and improved margins, ending the half with record high occupancy of 96.4%. Turning to Slide 8 on capital management. Ingenia continues to have a strong capital management position from which we will be able to grow the business. At 31 December, the group's LVR was 14.7% compared to our covenant of 55%. Weighted average debt maturity was 2.8 years, and the average cost of drawn debt was 1.9%. Last week, we announced the group had entered into a new 7-year, $75 million debt facility with the Clean Energy Finance Corporation. This facility increases the group's debt maturity profile and diversifies the group's debt sources, taking our total available facilities to $525 million. As part of the CEFC facility, the group has formalized our energy and carbon reduction commitment, delivering on our sustainability objectives. The group's February '22 debt maturity refinance is also well progressed. Slide 9 provides an overview of the group's asset valuations of its investment properties. At 31 December, we had 20 assets independently valued. The average capitalization rates of our Lifestyle and Holidays portfolio fell by 19 basis points over the half to 7.13%, with pure lifestyle communities dropping 24 basis points to an average of 6.29%. Transactions of high-quality lifestyle assets continue to transact at levels well below what our assets are recorded at. The improvement in the group's lifestyle asset cap rates has offset fair value declines from writing off of transaction costs on new acquisitions and the reduction in development value from the realization of development profits on discounted cash flows. While holiday parks are performing well and the outlook for them remains extremely positive, we are not seeing any material reduction in holiday park cap rates. Our Ingenia Gardens portfolio valuations were positively impacted by higher average occupancy. However, the average capitalization rate for this strong cash flow portfolio still remains an outlier in the property sector at 9.65%. Thank you very much. Simon?

Thanks, Scott. We might now move into operations. So moving on to Page 11. Ingenia today owns outright 40 Lifestyle and Holiday communities, including 4,327 occupied permanent sites, which is up over 17% on 12 months ago. This has been achieved through a combination of acquisitions, development and community expansions. Moving on to Page 12. Total income from our Lifestyle and Holidays business was $48.3 million for the half, up 18% on the prior year, and our earnings before interest and tax for the first half grew by 39% to $22.4 million. And we've been able to further improve the operating margin by another 170 basis points up to 42.1% with further growth to come. The margin expansion is really being driven by a combination of rent growth and scale leverage as our revenues grow at a faster rate than our costs. We're also able to grow our rents on a same-store basis by around 2%, up to $187 per week. That was through a combination of contractual rent increases, rolling market reviews and rent resets when homes turnover. Rent growth has been impacted by state government-imposed rental pauses in Victoria and Queensland as well as lower CPI and general COVID sensitivity. Just touching on to Ingenia Holidays, which is on the next page, Page 13. The first few months of the financial year remains sluggish, particularly as many interstate borders remain closed. But then the market bounced sharply leading into the September school holidays and has remained incredibly strong since then. Current year receipts to date plus forward bookings through to 30 June 2021 are up over 13% on last year's full year result, and we still have a further 4.5 months left to capture additional bookings. I'll now move forward to our funds management business, which is covered on Page 15. Funds management will be a key growth driver moving forward as we look to launch a new $100 million fund later this year. Funds management provides Ingenia with additional capital flexibility in terms of how we fund our growth. It's highly accretive to earnings, and we also retain a last right of refusal over the communities within each of the existing funds should the funds ever be wound up. Moving through to development on Page 17. Home settlements were slightly down on the prior year due to delays associated with COVID. As of the 12th of February, we currently have 162 new home settlements, plus a further 194 deposits and contracts on hand for this current financial year and a further 102 deposits for next financial year. And the reduction in reported earnings and margin are primarily related to home settlement volumes, which are expected to recover into the second half. I'll now close on Page 22. Given the steadily improving trading conditions we are experiencing, the group is pleased to reinstate guidance with earnings before interest and tax growth forecast at 15% to 20% and a $0.01 to $0.02 decline in underlying earnings per share. The reduction in underlying earnings per share is a result of the timing difference between issuing additional securities in May 2020 and deploying that capital into the acquisition of new communities and development land which will be complete by June this year. That's all Scott and I were going to present today, so we're now delighted to hand over to Q&A.

[Operator Instructions] Your first question comes from Michael Peet from Goldman Sachs.

Simon, Scott, congrats on the result in difficult times. Just on the guidance, can I just clarify? Does that -- the minus $0.01 to $0.02, does that include JobKeeper?

Yes, it does, Michael.

Okay. And then the hand back of $1.7 million of JobKeeper, has that already occurred? Or is that going to impact in the second half?

No. That's going to occur in the second half, Michael. It's not in our results for the first half, but it's in our guidance for the full year.

All right. Great. And just the margin uplift, that is exclude -- that's a stabilized -- excluding any JobKeeper, was -- is that margin increase there 320 basis points?

Yes. That's correct.

Yes. Okay. Great. What sort of settlements are you expecting to come? Are you expecting a sort of ramp-up in the joint venture in the second half? Or how is that looking?

Yes. Michael, we are expecting a bigger uptick in the second half from the joint venture and likewise from Ingenia, heavily weighted to the second half.

Yes. Okay. You called out -- I mean, obviously, in a rising price environment, maybe some people might hold on, on things. I'm just trying to get a sense of what you think is coming through or the demand that's out there versus how you're going to convert that from inquiry, sales, settlement in the current environment. It just sounds like it's a little bit harder than maybe you thought to sort of ramp those settlements up.

Michael, I think, as I noted, we -- as of last Friday, we recorded 162 settlements -- new home settlements, and we have a further 194 deposits and contracts on hand relating to this financial year. We still would have at least 2 months to convert additional customers who are capable of settling prior to 30 June. So I think we have great visibility in front of us at the moment on what settlements for the current financial year are going to look like.

And could you give us a sense of the stock homes that you have maybe for walk-ins or anything like that? Or are you still building really to order?

No, no, we've -- apart from Victoria, where we've paused construction just due to the basic shutdown of the industry down there, we've continued to build homes in some communities as quickly as we can, like up at Hervey Bay, Latitude and Plantations. So the inventory numbers at...

Yes. Michael, look, I just may point you to the property book. We actually did call out at 31 December per project what were available and unsold at each project.

Okay. Just looking at the margin increase again, just on the Lifestyle and Holidays business, 170 basis points you've called out there from the EBIT margin expansion. Could you give us a sense of what -- how to split that between, say, permanent and the short stay side of the business?

Yes. Look, I have to get back to you on that one, Michael. We obviously had a, certainly, a big uptick in that second quarter from holidays. But we also had improved scale coming through from the, yes, additional acquisitions and then from the development sites that settled. So I don't have the exact details to split that out, that margin, but happy to work on that offline.

But it would be -- I would imagine that margin should continue to head up. I mean [ it will be at ] holidays. It will remain tight for the short term, absolutely. But obviously, on the operating side, that -- you're going to be banking those sort of permanently -- [ home for the permanent home ], I guess. But that's the way to think about that margin increase, it should keep going up?

Yes. That's the way we look at it.

[Operator Instructions] Your next question comes from James Druce from CLSA.

Just to follow up on the settlement story. Just wondering if there's any skew in terms of price as well coming into the second half. And can you just remind me of the sales rate you were doing at? You mentioned something in the prepared remarks.

James, so can you just repeat the question again?

So just wondering if there's a skew in terms of the average price at all you're looking for in the second half, just following on from the earlier question. And also, just on the sales rates that you're achieving, I think you mentioned something in the prepared remarks. Can you just repeat that, please?

Yes. So in terms of the sales prices that we're achieving, I would expect there'll be some modest growth in that in the sort of low- to mid-single-digit figures as we increase our home prices in line with what's going on in the broader residential market. We will sell out of our Latitude One community this financial year, and we're probably another 12 to 18 months away from starting the 170-home expansion of that next door. So there will be a mix change as there'll be no Latitude One homes to sell into the next financial year. In terms of the sales velocity, if you look back over the last 3 or 4 years, we typically, in terms of new home settlements, have a 1/3-2/3 split between the first half and the second half. And we have great visibility, probably the best visibility we've had, on settlements for 30 June for some years. I think the numbers you're referring to is that we have 162 new homes sold -- or sorry, new homes settled as at 12th of February, and we have another 194 deposits and contracts on hand for residents who intend to settle this current financial year. And I do think that -- we're basically in the middle of February. So there's plenty of time for prospective residents, particularly given the days on market we're seeing at the moment where it's not uncommon for residents to be able to list their homes in key coastal markets like Port Stephens or up at Coffs Harbour or up in Hervey Bay and the time on market is less than 30 days. So there's still, effectively, the best part of another 2 months for us to convert prospective residents and have them settled before 30 June. So I think we're in a pretty good position at the moment.