Ingenia Communities Group (INA) Earnings Call Transcript & Summary

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

Good afternoon, everyone, and thanks for your attendance today. I'm excited to be presenting another really strong result for Ingenia. The past 12 months has been an incredibly challenging period for Ingenia as it has for all businesses across Australia. Hence, it is pleasing to be reporting the group's best result ever since Ingenia was created in 2012. Putting aside the challenges of COVID restrictions, domestic and international border lockdowns and supply chain challenges, the resilience and quality of our portfolio construct has continued to shine through. Even more pleasing is that the outlook for Ingenia, once we work through the current restrictions in New South Wales and Melbourne, has never been stronger. Through COVID, the overwhelming focus has been on prioritizing the safety and well-being of our residents, our guests and our employees. At its essence, Ingenia's business is underpinned by cash rents, much of which are supported by commonwealth pensions and rent assistance. This is supplemented by the low-risk, high-velocity and profitable development of [indiscernible] and outer-ring metro lifestyle communities geared towards the rapidly growing number of downsizes and young retirees across the East Coast of Australia. COVID has certainly impacted and disrupted elements of our business model. But it has also accelerated macro trends and consumer behaviors, which are hugely positive for both Ingenia's immediate and longer-term growth aspirations. Pre-COVID, our business model was already uniquely leveraged to the intersection of 3 key thematics: an aging population, a continuing housing affordability crisis and several generations of Australians downsizing or retiring with limited savings beyond the family home. But through COVID, we can see a few more longer-term thematics emerge. A flood of people, both downsizes and families, flocking to the regions and especially the coast, seeking space and quality of life. And secondly, several generations of Australians holidaying at home, many for the first time ever and appreciating the amazing experiences that our country has to offer. And Ingenia is highly leveraged to these thematics and uniquely poised to become a key beneficiary. I look forward to exploring these concepts a little further with you over the next 10 minutes as well as talking through some of the key highlights from today's announcement. Joining me on the call today are a number of the Ingenia executive team, including Scott Noble, our CFO; and Natalie Kwok, our Chief Investment Officer; Justin Blumfield, who heads up our Lifestyle and Rental Communities business; Matt Young, who leads our Holiday Park business; and Donna Byrne, who heads up Investor Relations and Sustainability. Today, Ingenia announces an incredibly strong result, which demonstrates the incredible momentum in our operations. Our earnings before interest and tax are up 31% to $94.4 million. Our earnings per security are up 7% to $0.238 per share. Our operating cash flow is up over 100% to $137.6 million. And over the course of the year, we settled an industry-leading 390 homes. We've also closed on over $200 million of acquisitions in the past 12 months. But even more exciting are some of the lead indicators, which clearly point to continuing growth in the current year ahead for Ingenia. We presently have over 317 new homes, contractors or depositors, which underpins a significant component of this year's development earnings. At the same point last year, we had 205 contracts and deposits on hand. Hence, we are really well positioned for the current year. We presently have over $200 million of acquisitions contracted or deposited, pending completion of due diligence and final board approval. We also have a further $250 million of acquisitions under assessment or consideration. So our deal flow remains really strong. And our development pipeline stands at over 4,220 home sites, which even allowing for the record number of settlements just recorded, this is up over 40% on the pipeline in place last year. Before we go into the details, I'm just going to make a couple of comments on what we are currently seeing in the sectors and markets within which we operate as well as our strategy moving forward. I'll start with a couple of the challenges we are experiencing at the moment and namely the impact of COVID on our holiday communities, the impact of COVID on our lifestyle and development business and what we're seeing with supply chains. COVID has currently caused the closure of all of our holiday parks in New South Wales and impacted travel plans in other states. We continue to receive rental income for annuals and permanent residents who reside in many of our holiday communities in New South Wales, which typically covers the fixed costs of running the park. Lockdowns are presently costing the group approximately $400,000 in lost revenue per week. However, typically, at least 50% of these council bookings are rolled forward to future dates, thereby preserving the cash flow. School holidays are scheduled for the second half of September, and this is a key period for our holiday business. Assuming that in Sydney, we remain in lockdown, then the cost of this would be an additional $1 million to $1.5 million in lost revenues. At this stage, Ingenia is working towards in November reopening of our holiday parks in New South Wales in time for the peak summer markets. Today, COVID lockdowns have had minimal impact on sales or development activities in our lifestyle communities business. There has been some minor disruption on the New South Wales Central Coast, However, we only have 2 relatively small expansion projects in market, which are scheduled in total to deliver approximately 40 settlements over the balance of the year. There has been no discernible impact to date in our key development markets of Victoria and Queensland, which will collectively account for the bulk of new home settlements in the current financial year. Without exception, the biggest challenge currently being experienced by Ingenia is on global supply chains and the rising costs and lack of availability of key building materials and labor. Home framing materials being particularly timber and steel are really tight in availability, and prices are pushing upwards sometimes by as much as 50%. The availability of building crews in regional markets like Hervey Bay is also very challenging. However, notwithstanding these challenges, Ingenia does have long-standing relationships with our core builders. And to date, we have committed or contracted over 75% of our total new planned home starts for the current financial year and are seeking to close out the balance in the coming months. Development margins to date have remained broadly intact as cost increases have been offset by the rising residential property market. Certainly, we have had to pay away some margin expansion, however, our new home rents are also making up for this. On a positive side, I thought it might be good to start with Slide 5. Lifestyle communities remains our highest priority and absolute core focus. Ingenia is supremely positioned to be a key beneficiary of the continued aging of the population, which every day see some 700 Australians turn 65, and that will continue for at least the next 30 years. Our opportunity is not only about being a beneficiary of the increasing number of active retirees and downsizes, but also increasing market penetration. Today, less than 1.5% of Australians over the age of 65 living a lifestyle community. Ingenia also see significant opportunity to grow our market share as well. We are a key beneficiary of a buoyant residential property market. However, as I've spoken previously, it is not a unique -- sorry, it's not a uniform surge. There's a strong preference for detached housing over apartments. It's an owner-occupier upswing with growth really being led by first home and changeover buyers, encouraged by low interest rates, steady employment and government stimulus packages. Detached housing in lifestyle locations seems increasingly preferable. And as you can see in the chart on the bottom right-hand corner of Page 5, the price growth being achieved in the regional markets of New South Wales, Victoria and Queensland has materially outstripped their respective capital cities. On Page 6, we have mapped out the median house price and price growth achieved over the past 12 months in our core development projects as well as a few new planned communities. Seven of our existing 10 projects in market have experienced price growth over the past 12 months of at least 20% with several materially above that level. Today, our core bottleneck remains finding the land and accessing the necessary approvals. Our sector remains supply constrained and the demand continues to escalate. On Page 7, we briefly discuss the strategic opportunity of our holidays business, which will be a key beneficiary of increasing levels of domestic travel and closed international borders. Our expectation is that demand for domestic travel will remain very strong for at least the next 3 to 4 years. And then our network of holiday parks typically offering beachside low-density open air accommodation will be a key beneficiary. There are now over 741,000 caravans and campervans registered in Australia, which is an all-time high, and wait list for new caravans typically extend beyond 12 months. Across Ingenia's entire holiday portfolio, which is one of the largest in Australia, we only have a total of 2,213 caravan and camping sites. Hence, as Sun is now experiencing in the U.S., the demand for quality caravan sites will greatly exceed available supply moving forward. On Page 8, we have updated the industry landscape, which has obviously undergone some significant change in the past 6 months with the acquisition by Stockland of the Queensland-based boutique lifestyle built developer Halcyon. On Page 9, you can see there's been a very acquisitive year for Ingenia with 12 acquisitions, predominantly being existing communities that we closed in FY '21 and a further 6 settlements in the past 6 weeks. We also have a seniors rental community in Victoria scheduled to close in the coming weeks. As I noted previously, Ingenia presently has a further $200 million of acquisitions under conditional contract or offer subject to confirmatory due diligence and another $250 million of sites and communities under preliminary assessment. It is anticipated that these acquisitions will be funded through existing committed debt and cash on hand, our funds management business and via our development partnership with own communities. And on that note, I'm now going to hand across to Scott to talk through the financials and capital management.

Thanks very much, Simon. Good afternoon, everyone. Look, I'm really pleased to present this really strong set of numbers today in light of the difficult start to the financial year. Just talk to Slide 11. We've grown -- we have a growing rent roll that underpinned our strong cash flow. A balance sheet that positions us well to maximize opportunities, and we have excellent visibility on FY '22 sales revenue, with record levels of deposits on hand. The growth in our rental sites and a strong second half performance for both our holidays and development business were the key drivers of strong revenue and EBIT growth. The 105% increase in operating cash flow to $137.6 million also benefited from positive working capital movements as we reduced our inventory and increase tourism deposits. Underlying profit increased 31% with underlying EPS growing 7% to $0.236 per security. The result includes $3.4 million of job keeper and it also includes $3.3 million of unusual costs. These items have been removed from the stabilized margins of each segment. A final distribution of $0.055 per security has been declared, bringing the full year distribution to $0.105 per security, an increase of 5% on last year. Turning to Slide 12. FY '21 EBIT grew 31%, and we delivered improved margins across the business as further scale improvements were obtained. This year, we have split our lifestyle and holidays business into 2 separate segments to reflect the growing contribution from each business and our new management reporting structure. At our lifestyle rental business, which comprises our land lease communities and Ingenia-owned permanent rental communities, EBIT increased 43% to $16.5 million, with stabilized margin growing 170 basis points to 48%. Lifestyle development EBIT increased $6.2 million in the prior year with 32 additional settlements within Ingenia, with a strong contribution from the group's successful Latitude One, Plantation and Hervey Bay projects. Pleasingly, at June 30, sales deposits and contracts on hand grew 32% from 31 December, providing good visibility of the group's FY '22 sales revenue and earnings. Ingenia Gardens continued to deliver strong cash flow and improved margins, ending the year with high occupancy of 96%. At our Ingenia Holidays business, which includes tourism and mixed-use communities, EBIT increased 57% due to strong domestic travel demand and from our new assets acquired during the year. The stabilized margin for this business grew 650 basis points on prior year. Corporate costs include $1.1 million of nonrecurring business development costs. Excluding these costs, normalized corporate costs grew 22% on prior year, driven by growth in insurance premiums and additional costs to support the growth of our asset base. Underlying cost growth remained below the growth in EBIT. Turning to Slide 13 on capital management. The group's balance sheet is in a strong position to maximize opportunities to grow the business and fund our development pipeline. While we started the year with an historically low level of gearing, we move toward our target gearing range through identifying, completing and integrating over $215 million in acquisitions in the financial year, with a further $48 million in acquisitions completed since June 30. We successfully refinanced $350 million of debt facilities at reduced margins and used 7-year debt facility with the Clean Energy Finance Corporation, committing Ingenia to meaningful energy and carbon reduction targets. At June 30, the group's LVR was 22.2% compared to our covenant of 55%, growing from 8% at the start of the financial year. The weighted average debt maturity was 5.3 years. The average cost of drawn debt was 2.1% and 50% of our debt was hedged. Turning to Slide 14. This provides an overview of the valuations of our investment properties. Capitalization rates of our lifestyle rental and holidays portfolios continue to sharpen on the back of increased corporate activity in the sectors. Lifestyle rental cap rates reduced 74 basis points to an average of 5.91% over the year, driven by the increased recognition of the quality of the cash flows this business enjoys. Transactions of high-quality lifestyle assets continue to be strongly contested. In particular, Stockland's recently announced acquisition of Halcyon at sub-5% yield portfolio for further valuation upside. Quality holiday parks are performing extremely well and have also started to experience cap rate compression with key operators focused on expanding their footprint. The average capitalization rate for our holidays portfolio sharpened by 28 basis points over the year to 7.79%. Our Ingenia Gardens portfolio valuations were positively impacted by higher average occupancy and portfolio cap rate sharpening to 9.25%. The high capitalization rates on our Ingenia Gardens and holidays portfolios still remain an outlier in the property sector. Thank you. I'll just now pass back to Simon.

Thanks, Scott. I'll now move to Page 17 and just touch briefly on development. Home settlements finished the year with 350 settlements in the head stock, along with another 30 inside our Sun/Junior partnership and 10 within our funds management business. We've also experienced another really strong start to the year with 34 new homes settled and a further 330 homes contracted or deposited. Our margins slightly expanded over the course of the year, driven by both scale efficiencies and a resident preference for generally larger homes. I'll now touch briefly on lifestyle operations, which is on Page 19. Across our lifestyle business, Ingenia has 3,681 permanent rental homes and villas which is up over 24% on 12 months ago as a result of acquisitions, development and community expansions. Total earnings from our lifestyle rental business were $16.5 million, up 43% on the prior year, and we've been able to further improve the operating margin by another 170 basis points up to 48% with further growth expected in future periods. The margin expansion has really been 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 3.2% up to $189 per week. That was through a combination of contractual rent increases, rolling market reviews and rent resets when homes turn over. Rent growth for the period was impacted by state government imposed rental pauses in Victoria and Queensland as well as lower CPI and general COVID sensitivity. On Page 20, we speak to our Ingenia Gardens seniors rental business. Earnings in that portfolio grew by 6.9% to $10.9 million, principally driven by occupancy being maintained at near all-time high levels of 95.8%. As I noted previously, Ingenia has contracted to acquire another garden style rental community in Victoria, and we expect to close on that in the coming weeks. I'll now move on to Ingenia Holidays, which is on Pages 22 and 23. Ingenia now owns and manages one of the leading portfolios of holiday parks in Australia. And on the East Coast, we have a network which extends from Torquay on the Victorian Surf Coast, right up to Cairns in Tropical North Queensland. Earnings for our holidays business was $28.7 million for the year, up 57% through rate increases of 36%, occupancy increases of 14% and multiple acquisitions. I'll now touch briefly on our funds management business which is on Page 26. 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 with highly accretive to earnings, and we also retained the last right of refusal over the communities within each of the existing funds should the funds then be wound up. And finally, I'll now close on Page 31 with outlook for the group. The group is really well positioned for another strong year of growth. We have a record number of 330 deposits and contracts on hand on top of the 34 settlements already recorded this year to date. We have over $200 million of acquisitions under conditional contract and a further $250 million being assessed. We have a very strong balance sheet, offering significant undrawn committed capacity, and we have a development pipeline of over 4,220 home sites, of which more than 3,000 are already fully approved. And we have a significant rent roll largely supported by government pensions and support payments, which underpins the group's cash flows. However, due considerable uncertainty with COVID-related lockdowns and restrictions, particularly in New South Wales, which is adversely impacting our ability to forecast near-term holiday bookings, we believe that it's prudent to withdraw guidance until there is greater clarity, and hopefully, that will happen in the coming months. That's all Scott and I were going to present today. So now we'd be delighted to hand over for Q&A.

[Operator Instructions] Your first question comes from Sophie Carran from Goldman Sachs.

Just a couple for me. Maybe first on the holidays' margin. So there was quite a step-up on the PCP at 39%. And I mean, there's a few things that were impacting the PCP. But how do you think about the sustainable margin for this business going forward?

Thanks for that. Sophie, that's a great question. Look, from our point of view, Sophie, we're expecting that margin -- in a normal year, if it wasn't impacted by COVID, we will be expecting it to grow margin. Certainly, as we bring on new parks, we've settled another 6, I suppose, holidays and mixed-use parks that will go into that segment since June 30. So from our point of view, it's -- that's just going to improve our scale. And so we should see margin improvement in a normal year. Obviously, COVID is impacting us. So subject to -- if you remove that COVID component.

Yes, makes sense. And then just on the lifestyle rental at sort of 48% margins, I mean what's your goal in terms of where this margin can get to? And then also just thinking about the lifestyle development, how should we think about the short-term impact on the development margin with a bit of mix shift in the settlement and then also some of those supply chain pressures you mentioned?

Yes. Good question again. Thank you. Look, in terms of the lifestyle rental, we'll continue to see growth there. We get to increase rents above CPI. They're contracted rents that grow above CPI. It's about managing costs. Again, it should improve with sale as we bring on new sites that we develop. We'll start -- we'll be able to collect rent. So this year, in the Ingenia headstock, we delivered 350 new homes that basically came where the rent drops straight through to the bottom line. We'll continue to see that next year as we settle new homes. In terms of the second question around development, look, we ask that we will see a mix. This year, we had -- our successful project at Latitude One has sold out. So we'll have a couple of small settlements that will come through this financial year, but that had a big contribution to last year. So I will be expecting to see, I suppose, from an average sales price, we'll be selling more homes at a lower average sale price because we will have a bigger contribution from Ballarat, Lara and Hervey Bay. But we would expect to see, I suppose, growth in settlements from where we landed this year.

Excellent. And then just on the acquisition pipeline. I mean, there's still a bit of headroom to get to that 30% to 40% LVR target, and you've mentioned you've got quite a lot in the pipeline. But could you just talk about how between the mix of holidays versus lifestyle and then also what you're seeing in terms of competition?

Yes, I'll take that question, Sophie. So in terms of -- we have available debt capacity of around $170 million. So that's committed but undrawn, so that gives us substantial capacity. We also are planning to launch a new $100 million fund. And the assets going into that fund would be a combination of probably 3 mixed-use communities that are currently on our balance sheet and 4, 5 other communities that we presently have under contract or where we're finalizing our due diligence inquiries. So broadly, the pure lifestyle communities would go into the head stock, mixed-use communities would more than likely go into the fund and any greenfield development sites that we acquire or option up, then Sun has the first right to participate at a 50-50 level on those projects with us. So we do believe that based on everything we see in front of us, we're very well capitalized to be able to internally fund or use third-party capital to fund those acquisitions.

Great. And then just one more from me, please. Just on the holiday business that sort of mid-November reopening that you were talking to for the New South Wales park. I mean how much of that recovery is dependent on interstate travel that is people traveling for the out of Sydney to the course.

So broadly speaking, we have about 20 holiday parks in New South Wales, and our furthest most North Holiday Park in New South Wales being up at Kingscliff is largely dependent on people from Brisbane and the Gulf Coast. We do have a holiday park in Bayern but that's flight from Sydney to Bayern, and I think is the most popular -- or one of the most popular flights internally. So I'm sure we'd be able to -- if the New South Wales borders were fully shut to Victoria and Queensland, that Bayern would be operating very well. And then we do have one holiday park that we recently buy down in the South Coast at Eden, Eden Beachfront. But the balance of our holiday parks in New South Wales, Sophie, would be largely driven from people coming out of Wollongong, Newcastle or Sydney or towns such as Canberra. So in the worst case, that New South Wales was shut to the rest of Australia. I'd be very confident that all of our New South Wales holiday parks would be very busy over the Christmas, Easter, summer school holiday period and -- but I would be expecting that there'll be a demand -- sorry, an explosion of demand today that people in Sydney are allowed to book holidays and travel up and down the coast. So it's really just a waiting game at the moment. It may be that November is a little bit conservative, but I do think it's probably fair to say that we will miss out on the September school holidays. But when we can open, whether that's in October or November is really beyond Ingenia's control at this point in time.

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

First question is just on the development business, sounds like it's going reasonably well. And I appreciate there's a change of mix come into FY '22. But can you provide a better sense of the volume growth that you're looking at for FY '22? Is it going to be significant or about normal? How are you thinking about that?

Yes. So we would expect that the volume growth in settlements for FY '22 would be somewhere potentially 50 to 70 homes over and above what we delivered in the current financial year.