Ingenia Communities Group (INA) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Ingenia Communities Group 1H results teleconference and webcast. [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 thank you for joining us today. Apologies for the delays at 11:30. The presentation was held up with the ASX. I'm pleased to be presenting what I believe is a solid result in an incredibly challenging market. I thought I would make a few opening comments before jumping into the presentation. So let's address the challenges and the bad news upfront. This morning, unfortunately, we are about to reduce our settlements target for this current financial year and downgrade our earnings. This is incredibly disappointing and not a reflection of the energy, passion and commitment of the entire Ingenia team to deliver for our residents, our guests, our colleagues, our investors and other key stakeholders. We continue to experience chronic labor shortages across many of our 16 development projects. And whilst we will commence construction on over 500 new hires this year, it has become evident that too many of these homes will now not likely complete until late June or early July and August, and therefore, will be not available for settlement in this current financial year. Production times have also been impacted by wet weather, particularly with civil works in our 3 Victorian projects in late 2022. Secondly, in recent times, our sales team has also begun to report incoming residents, becoming more hesitant to commit to purchase due to recent rate increases, softening house prices and fairly rapid and recent increase in time on market. Delays in completion times for our new homes is also causing some purchases to sit on their hands until they can inspect their completed home. Consequently, with the convergence of these 2 factors, we have made a difficult decision to adopt both longer construction times across a number of our key projects as well as longer lead times for settlements across all of our projects, and we have dropped our settlements guidance for this financial year from 460 to 485 settlements, down to 370 to 420 settlements. Reflecting the heightened uncertainty, we have adopted a wider range for settlements at this given point given the recent and emerging changes in our production and sales cycles. It is worth pointing out that these settlements are not disappearing. They are just drifting into the first half of the next financial year. Nevertheless, it does have a material impact on this year's earnings and cash flows. I'd like to make a few other comments on development and new home settlements. As at 31 December, we only had 3 completed and unsold new homes. Inventory remains at record lows. We are also holding over 350 deposits and contracts for new homes. Interest remains very high in moving into our communities. However, the purchase journey has slowed. This year, we have launched more new communities than ever before, including Bobs Farm and Fullerton Cove on the New South Wales Mid-North Coast, our Victoria Point community in Brisbane's Eastern Suburbs; Miles Glen on the Queensland [indiscernible] and Bargara on the Queensland Capricorn Coast. This will be followed by further scheduled launches over the coming months, including Australia's largest DA-approved MHE community, 1 hour north of Sydney at Maurice. These projects are forecast to materially drive settlements and earnings growth over the next 3 years and will underpin our revised 3-year settlements target of 1,750 to 2,000 new homes. There are also many positives to report for the first half. Our rental communities are reporting both record high levels of occupancy and strong rental growth. For many capital cities and regional towns, it is often new item possible to secure rental accommodation, and it's quite likely that this will only get worse over the coming years. Our tourism business continues to boom as many families grappled with rising living costs, affordable domestic travel will likely be a key beneficiary. The key demographic drivers that underpin Ingenia's business model remain firmly in place, an aging population, a housing affordability crisis, especially with rental accommodation, the population drift to the regions and strong domestic travel. We are enjoying strong pricing power, and we have in-built inflation protection. We are enjoying increasing demand from changing work habits and Ingenia is a sector leader with sustainability and carbon reduction. As Essence Ingenious Business is underpinned by owning land and collecting cash rent. A significant component of this rent is supported by Commonwealth pension and rental assistance payments. This is supplemented by low-risk, high-velocity and profitable development of regional and out-of-metro lifestyle communities geared towards the rapidly growing number of downsizes and young retirees across the East Coast. Ingenia has been one of the fastest-growing REITs in Australia over the past 5 years, and I firmly believe that we are moving into a prolonged period of demand driven by the aging of the population and the desire for high-quality community living. Joining me on the call today are a number of Ingenia's executive team, including Karen Landy, our acting CFO; our General Manager of Investor Relations and Sustainability, Donna Byrne; Natalie Kwok, our Chief Investment Officer; and Von Slater, who heads up our Development Business. Over the past 6 months, we have really focused on improving our operational yields and looking at expansion of opportunities within existing communities. I should say, I've now moved on to Page 2. This has seen us add 76 cabins and villas across our holiday parks and our rental communities. We continue to focus on divestment of noncore assets to recycle capital and in addition to previously announced divestments. We have a further 4 communities under offer and with due diligence well underway with further assets likely to follow. Lifestyle communities now represent over 57% of our business, and our development pipeline comprises some 6,450 future development sites, which will underpin many years of future profitable growth. The domestic holiday thematic will be with Australians far longer than many of us are thinking, and Ingenia is strongly leveraged to this story. Revenue in this business is up 65% -- sorry, 55% and forward bookings are up 20% on the same period last year. Ingenia is now the largest owner of holiday parks on the East Coast. The 2 most popular regions in Australia for Caravan and Camping both heading north and heading south out of Sydney. These are 2 markets where Ingenia is the clear unassailable market leader. Our group continues to prioritize our ESG program, which remains core to our strategy in line with our vision, purpose and values. We remain a leader in diversity and inclusion, and we are well advanced with our green star strategy for pending new lifestyle community developments. I'll now just touch on Slide 3, which is our results summary. As previously noted, today, Ingenia announced a solid result but not without its challenges. Our revenue was up 32% to $173.6 million. Our underlying earnings per security were up 57% to $0.085 per security. Our lifestyle rental EBIT was up 65% to $16.7 million, and we have commenced 4 new lifestyle projects, as I've previously outlined. I'm now going to hand over to Karen to discuss in more detail, the group's financial performance and capital management.

Thank you, Simon. Now turning to Slide 6. The December 22 half year results represents a positive operational performance across our tourism and lifestyle rental portfolios. This has been tempered by the challenges faced by our development business, which has impacted the first half results and will continue into June. Nondevelopment revenue grew 44% through our rental and tourism portfolios, and this underpins the EBIT growth and our underlying profit performance. Statutory profit and EPS declined as a relative impact to revaluations in the current period decreased. This was due to stabilizing cap rates and revaluation uplift and stronger net operating income being offset by the realization of development profits. The distribution of $0.02 per security has been declared, which is consistent with the distribution of the prior corresponding period. This is in recognition of our moderate growth in underlying EPS and our guidance update. Moving to Slide 7. Our Lifestyle rental business has achieved its strong performance through growth in sites and CPI-linked rental contracts. Increases of circa 5% have been applied to rent reviews across the period with higher rates applied to those reviews in more recent months. Headwinds of longer construction times impacted home settlements growth in the period. However, increased home sale prices have seen gross development profits rise. Higher portfolio costs associated with future settlements has resulted in lower current period development EBIT. Ingenia Gardens continues to see high occupancy and positive rent increases. However, it's not immune to inflationary influences, which have impacted wages and utility costs. Combined with the sale of 2 assets in Horsham and Tamworth during the period, the portfolio's EBIT has remained flat. Tourism has performed well with domestic holiday demand enabling strong rate growth. This delivered a significant increase in the portfolio's EBIT. Capital partnership income for the period reflects the group's ability to derive increasing income from the rollout of the joint venture's existing development with the commencement of construction at Fullerton Cove and Bobs Farm. Bobs Farm will commence to delivering home settlements for the joint venture in the second half of FY '23. As a further 2 projects commence construction later this calendar year, additional development fees will begin to be generated. With the group's asset base increasing by more than 1/3 in the past 12 months, corporate costs have increased significantly. While there is some one-off costs, this rise also reflects higher insurance, compliance and governance costs and increased investment in ESG and technology resources. Turning to Slide 8. The group's balance sheet is well positioned with an LVR of 30.9%. We are well within our covenants and have debt headroom with undrawn debt capacity of $200 million, combined with strong cash flow through our lifestyle rental and holidays business and asset recycling, we can actively manage the capital requirements of our development pipeline and the group's 3-year growth settlements target of 1,750 to 2,000 homes. Our cost of debt is being actively managed with approximately 50% hedging in place. Our hedging profile is well matched with a weighted average hedging maturity of 3.2 years against a weighted average debt maturity profile of 3.9 years. Slide 9. Following a prolonged period of cap rate compression in our lifestyle rental portfolio, the cap rates across our portfolios have stabilized between June 2022 to December 22 to 5.86%. The valuations reflect high occupancy, CPI rental growth and continued NOI growth. We are cognizant of the anticipated market pressure on cap rates and view the quality of our assets and income, particularly in the inherent -- particularly with the inherent long tenure in our lifestyle rental portfolio will position the assets well in response to the change in market conditions. Further, the price achieved for the small number of assets divested during the period supported our December 22 value. Thanks, Simon.

Thanks, Karen. I'll now move on to Page 12 and discuss our Lifestyle rental business, where we grew the number of income-producing sites by some 21% compared to the prior comparative period. We're also to hold our operating margin in a high inflation market, which demonstrates the quality and resilience of this business. We have high-quality CPI-linked rents supported by government pensions and transfer payments and Commonwealth rental assistance. Same-store rent growth was 3.6% and average rent increases across the portfolio for the first half were 5%. Contractually, we could have pushed some of these increases higher. However, we balance this against residents' needs, particularly those dependent on government pensions. For the first half, we achieved 128 resales and were able to achieve an additional 5% to 7% rent increase, representing a market catch-up. On Slide 15, we discussed in Ingenia Gardens, which is Australia's original build-to-rent business established over 20 years ago. During the year, we were able to hold record levels of occupancy. However, our operating margin fell by approximately 340 basis points, reflecting the sale of 2 communities as well as the impact of higher costs, particularly wages, utilities and food. Our unique Ingenia Connect program delivers care, support and well-being advice to over 1,500 residents and delivers significantly higher occupancy and resident tenure. Let's move to Slide 14, which is our lifestyle development. For the first half, we settled 125 homes, including 10 in our joint venture in Sun. Average new home price grew by 18% to $480,000 and I would anticipate further growth in the second half, reflecting portfolio mix. Margins contracted materially to 13.8% due to lower-than-expected settlement volumes, launch costs of new communities yet to contribute settlements, and weather-related claims from several of our builders. I would expect both margin and earnings to recover and improve in the second half, reflecting the higher priced projects. We now bringing to market as well as a significant increase in settlement volumes. Aboveground margins remain consistent with prior periods, typically tracking between 40% and 44%. As I noted previously, at 31%, but we only had 3 built and unsold homes and inventory levels today remain the same. Everything we can build at the moment is selling. Our development business has absolutely been impacted by chronic continuing labor shortages over the course of the first half. Our 3 Victorian communities have also been significantly delayed by wet weather. We are presently sitting on over 350 deposits and contracts. However, due to construction delays and softening consumer sentiment, some of these will drift into the first half of FY '24. I'll now touch on Slide 18. More specifically, we've experienced some delays at several of our new premium projects, particularly Nature's Edge on the Queensland Sunshine Coast as well as Victoria Point, which is on the Eastern Suburbs of Brisbane. Over the last 3 months, the time on market for a person to sell our home has materially started to increase. Typically, 3 months ago, it was approximately 20 to 22 days, and now it is between 40 and 44 days, and that is slowing down settlement times. We do offer homes at a wide range of price points, typically now from $295,000, which is out in Logan, or at Beaudesert, through to in an excess of $1 million on Queensland Sunshine Coast, and the New South Wales Mid North Coast. The spend ratio of our incoming residents has increased by -- has increased to 73%, which means that they're selling more -- or investing more of the proceeds from the sale of our family home into our communities, which supports our pricing power. And downside increasingly motivated to free up equity as the cost of living and borrowing capacity tightens. The Bank of Mum and Dad, which is the fifth largest residential lender in Australia, is emerging as a very strong driver of the downsize of decision. Moving on to Page 19. We are seeing across a number of our development projects, some early signs of easing and greater access to trades. So in particular, at our Bobs Farm community on the New South Wales Mid North Coast near Port Stephens, our home build times have normalized to where they were pre-COVID, which is typically in that 16 to 18 weeks. At the moment, we have 500 new homes under construction in this financial year. And we have construction underway at 16 communities, including 4 new communities being Fullerton Cove, Bobs farm, Victoria Point and Bargara. We are well progressed with the introduction of new construction partners to further diversify our supply chain. And at several projects, we have also started utilizing off-site or facts we built homes to further develop our building capacity. And today, I noted that our single largest builder, which is the McDonald Jones Group, has announced their expansion into Victoria through the acquisition of an existing builder down there, which further bolsters our development capabilities in that state. Touching now on Page 20. In terms of building diversity and scale in our journey to achieving 1,750 to 2,000 settlements over the next 3 years. You can see here that we have 9 new communities coming to market that will be contributing homes for the first time from FY '24 and that includes Victoria Point, which is presently under construction with first settlements expected in August of this year. Bobs Farm on the New South Wales Mid-North Coast, where we expect settlements from May or June this year. Fullerton Cove, which is again on the New South Wales Mid-North Coast, just north of Newcastle, where settlements will start to commence from mid-2024. Bargara which is currently underway on the coast near Bundaberg. Our beverage project in Melbourne's Northern growth corridor, which again is presently under construction. Our Beaudesert community where first settlements will be happening in May of this year. Over the last few months, we approved a final approval for our Sunbury project in Melbourne's Northwestern growth corridor. We will be commencing construction at our Morisset project in April of this year. And finally, on our Nambour project on Queensland Sunshine Coast, where we have an existing DA, but our amended DA we expect to come out from council very shortly, so you can see an incredibly strong and diverse runway of high-quality projects, which will really underpin the growth in group settlements over the medium to longer term. Now touching on Slide 24. I'll just talk briefly about our holidays business. This business is delivering extremely strongly at the moment. Earnings before interest and tax from our holidays business is up 64%. Our margin is up 190 basis points. Across our portfolio of holiday parks from the Great Ocean Road right up to the Great Barrier Reef, we are seeing forward bookings up around 20% on the prior comparative period, and we're also seeing a change in Australian habits where there's a lot more bookings of shoulder and off-peak which is really driving performance through that business. Now touching briefly on our development partnership with Sun Communities on Page 26. In recent weeks, several senior executives from Sun have been in Australia, visiting the 5 projects and development sites that we have with some of which 3 are presently under construction being Freshwater, just North of Brisbane and Bobs Farm an Fullerton Cove, which I've spoken about previously, and then they will be followed up later this year with Morisset just north of Sydney and Nambour on the Queensland Sunshine Coast. Our partnership with Sun does expire or comes up for review at the end of this calendar year, and we fully expect that Sun will remain committed to the existing projects that they have in Australia with us at the moment. Under the terms of that agreement, once a development project is sold down to 95%. Ingenia has a 12-month option to acquire Sun's interest which gives us the great opportunity to continue to feed our origination machine. I'll now close on group outlook, which is on Page 32. As noted previously, we are now targeting 370 to 420 settlements for this financial year. We've had to lower our financial guidance. So EBIT now we're looking at 0% to 10% growth in EBIT and underlying EPS of between $19.1 and $0.215. The business conditions remain incredibly challenging, not only are we being buffeted by delays in the time to build a home, but also, we're definitely seeing a demonstrate increase in consumers' weariness to commit to a sales journey until their home is completed. We see the opportunity to develop and sell between 1,750 and 2,000 settlements over the FY '23 to '25 year. And over the course of this -- the balance of this financial year, we have a significant number of high-margin, high-quality projects coming to market, which will drive the business forward. With that in mind, I'll now hand over for question time.

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

First one, Simon, just on the build times. Can you give us a bit more color into what's happening there? Is it still sort of trades and labor that's the main problem? Maybe if you can quantify? I think you mentioned maybe it was Bobs Farm 16 to 18 weeks, but maybe just across the group, on average, what the build time is at and where you think you can get it to in the next sort of 6 to 12 months? And just another part to the question is just with that consumer change, possibly whether one the completed home, what's the strategy there? Will you be building more sort of inventory homes to sort of have them ready? Or just wondering where you're going to manage that shares.

Thanks, Michael. So pre-COVID, back in 2019, it would typically take us approximately 16 weeks to build a home. At the moment, across the portfolio, that is typically between 32 and 36 weeks. 12 months ago, we were significantly impacted by delays in being able to access materials such as steel, timber, [indiscernible] tiles. We now have great visibility on the material side, and we are seeing a significant moderation in the inflation that we've otherwise experienced with building materially, not seeing a lot of retracement, but not seeing the sort of gapping upwards in -- particularly in the cost of price of steel and timber that we witnessed about a year ago. What we are experiencing at the moment is just a really -- a real challenging environment for consistent access to trades. The 2 worst markets that we're in at the moment is on the Queensland Sunshine Coast. So particularly at our Nature's Edge community where homes are taking in excess of 32 weeks at the moment. A lot of construction activity on the Sunshine Coast and sometimes trades if the surfs up, just go missing or don't turn up on site. And then secondly, down in Victoria, where we have 3 projects under construction. So we've got the expansion of our Lara community. We've got our Parkside community in Ballarat, and we also have our Beverage Community in the Northern Growth Corridor of Melbourne. And again, the build time across each of those communities would be in excess of 30 weeks. On the flip side, probably our 2 best-performing communities at the moment in terms of build times would be up in Harvey Bay, where we -- that's our largest development project at the moment and build times there would be sort of in that 16 to 18 weeks. Our Bobs Farm community, which is on the New South Wales Mid-North Coast, again, that would be similar 16 to 18 weeks. It's not a consistent theme across all projects, Michael. So certainly, in Queensland and New South Wales with the exception of the Sunshine Coast, in the conversations I'm having with the owners and CEOs of our building partners, they're talking about more trades becoming available, people looking for work. If you look at the number of new home approvals and the number of -- from the housing Institute, the number of new home commencements, -- there's definitely a tapering off in new home starts, and we do expect that, that's going to free up trades at some point in time later in this calendar year, but that could be potentially offset by the significant government infrastructure works in place at the moment. We're not seeing a lot of catalyst for change down in Victoria at the moment. So seeing our largest homebuilder, McDonald Jones Homes who our largest homebuilders seeing them move into Victoria, I think is a really positive step. We have started to introduce new builders into the mix. And as I mentioned, at our Lara expansion project out [indiscernible] and at our Beaudesert community in Queensland, [indiscernible], we have commenced introducing 2 bedroom modular homes, manufactured offsite to supplement the on-site construction that is presently underway. In terms of your second question there about consumer confidence, we are remaining committed to continuing to build these homes. We know from experience over the last 8 or 9 years that we've been doing this building that the more homes that we have on site the more homes we can sell. There's a lot of -- the decision to move into a lifestyle community to sell out of the family home where you've raised your kids for 25 years. It's a very challenging and stressful decision and sometimes prospective residents are looking for reasons to delay the decision or to slow it down. So we do think that having more stock available, enabling our residents to touch and feel the homes is an absolute positive development. There are a number of communities where Bobs Farm, for instance and also at Beaudesert where we don't presently have a display home, we're frantically trying to build that the same at Victoria point. So there is a little bit of a catch-up to occur, but we are going to watch our inventory levels very closely. This financial year, we're building 506 homes, and we're forecasting to settle between 370 and 420 homes, so we'll be watching our inventory levels very closely. But at the end of the first half, we had 3 built but unsold homes, of which 2 have subsequently settled. And at the end of January, the inventory levels were again extremely low. So at this present point in time, every home that we've built has solved and settled. But in talking to the 30-plus sales people that we have across the 16 communities we have in market, they're definitely feeding through stories of delays in residents making the purchasing decisions wanting to see their completed home. And we're also conscious that core logic put out some data yesterday which showed that the average time on market across the majority of the regional locations where Ingenious building the time on markets and the time from a resident listing their primary place of residents to that home, having a contract on it has extended from previously, it was 20 to 22 days now to somewhere between typically 40 and 44 days. And that's just slowing down the purchasing decision.

Just a couple of follow-ups, if I may. Just on the first sort of 6 weeks of the half. What are you seeing since January in terms of customer activity in terms of inquiry rates? And just how are you managing the 350 sort of deposits? Is there any sort of change in the dropout on deposits given the delays in building?

Yes. Look, that's a great question. I'll make a couple of higher-level comments. And then I joined here by Kate Melrose, who's our General Manager of Sales, and I'll get her to capes in that business a lot more day to day than I am, so I can get her to add some granularity to the question. But yes, I think what profoundly changed, Michael, is that with the last rate increase at the beginning of this month and then the commentary from the Reserve Bank governor during those Senate inquiries, I think that frightened a lot of people who previously been thinking that we were approaching the end of the rate increase cycle. But now people are clearly aware that there's a minimum of 2 and possibly another 3 or 4 rate increases to come. And I think that has spooked the market. The fact that people are -- or some incoming residents are reluctant to put their home on the market until they know definitively when their new home that they are buying from us is going to be ready because there's no rental accommodation available in basically in any capital city or any regional location. So that makes people extra cautious. So that's really a couple of observations from the top, and I'll hand over to Kate now.

Thanks, Simon. I think to that question, with regard to lead generation, we're seeing leads holding strong. There's certainly no slowing of the overarching demand for this sector. We're coming off the back of a period of pent-up demand from consumers who have stayed in place to ride the property wave and the property price growth. They then faced 3 years of COVID. So we've got sort of 5 to 8 years of pent-up demand for this sector. So globally and holistically, I don't see a slowing in the appetite for the product. What we are seeing though is, to Simon's point, lack of rental, fear of being homeless, if I sell too early, they're quite aware of the very real and broad impact on construction delays. So they're hesitant to go to market too early, but then they're also conscious that they need to get to market because data market is blowing out. So that's causing some uncertainty. To the point Simon made earlier, equaling interest rate rises are 2-edged toward for our market and the Bank of Mum and Dad to both support kids through this period. And also, they're seeing a once-in-a-generation opportunity may be reemerging for their family or children to get on to the property market or trade up. So that is in effect, driving into our buyers' desire to downsize, and that's a positive impact. The major challenge we've got here is just timing. You all know that people are sitting on the siren and auction clearance rates are bouncing all over the place. They were down last week, they're back up this week. So that's our only challenge. It's a timing issue, no lack of demand.

Your next question comes from Solomon Zhang with JPMorgan.

Two questions from me. Just firstly, just on your degree of confidence in your revised settlement target for FY '23 as well as your 3-year target. I guess what are your base case assumptions around the normalization of construction conditions and residential sales lost? Do you sort of assume current conditions don't improve into the midyear or there's some more improvement there?

Yes, for sure. So I guess in terms of this year's settlement range of 370 to 420 new home settlements. Our latest internal forecast is certainly well above the 370. So that -- the market would need to deteriorate further for that to become a reality. But there is significant uncertainty out there, and it really is in the last very short period of time that we had to change our guidance. Just I think we see the commentary around the last RBA rate increase, I think, has changed the absolute near-term view from prospective residents. And then we have had a couple of builders case in point would be our Victoria point project where up until very recently, we were firmly on track for new homes to be available for settlement in late May or early June. And each of those homes will be selling for in excess of $800,000 at a very attractive margin. And losing 11 settlements out of that project has quite a significant impact on group earnings as the margins on those homes alone are typically around double what we have across the weighted average of the portfolio. In terms of the confidence around the 3-year target, we absolutely have the pipeline of projects to deliver that volume that volume of supply. In the presentation there, I stepped through the 9 new projects that currently haven't contributed one settlement to the business, that are either coming out of the ground right now or about to commence. And so we have absolute confidence that we're going to be able to build those homes. We have the biggest bottleneck in the business, and it's been the same for at least 5 years as we start finding the land, it's taking it through the approval process. And all 9 of those projects have DAs in place now or we're amending the DA. So that takes out a lot of the risk there. Look, in terms of your question around the builders, we are expanding the panel of builders that we use. Our 2 main builders who we've been using for in excess of 5 years, continuing to work with us. And then we're supplementing them with new builders, and we're also introducing prefab homes at 2 of our communities being Beaudesert and Lara. But I've got Von slated here who's our Head of Development, and Mike to add a few comments to that, Solomon.

Thanks, Solomon. Yes, look, obviously, it's been a really tough market for our building partners, but we're, I guess, somewhat buoyed by the feedback that we're getting out there. And even on our most difficult projects that Simon outlined earlier, there are early signs that there are more trades available at the front end of the development as the pipeline of build over the last few years, I guess, starts to flush through and minimizes with the less -- the lower approval rate. So we're certainly watching that closely, but we're not necessarily assuming in our numbers that, that's just going to happen immediately. So we're taking a cautious approach there. I think as well, obviously, you'll see with our growing portfolio, and Simon touched on it briefly that our building partners are fundamental to that. So that's both the quality of the builder and I guess, the diversity we have amongst our building partners, and that's been a real focus of ours to really, I guess, not just deliver on this year, but really focused on that pipeline we have ahead of us.

Great. And second question was just on, I guess, the balance sheet and the funding position during DIC tick up a bit, but obviously impacted by the low operating cash flow. Could you just perhaps talk through when you expect the business to be sort of self-funding given you've got a bit of CapEx commitment in the short term, but you've got the ramp-up of development earnings and the nobody stream coming through, but could be interested in your latest thoughts given the current conditions?

Yes. Sure. Look, I'll make some comments, then I might ask Karen, our CFO, to add some color there. Firstly, we're categorically not looking to raise any equity in the headstock. I can't be clear on that. We've already divested 3 communities. We have an additional 4 communities where we've got offers where the purchasing entity is undertaking due diligence at the moment. And whilst all 4 of those may not proceed, we would expect that quite a number of those would. And then beyond that, we have outlined another 4 or 5 communities that we're potentially looking to divest, and that is really about maximizing the portfolio quality. There's a few geographic markets that we feel that we don't necessarily need to be in and trying to prioritize capital to be available for both development, but also reinvestment in our existing holiday communities and rental communities where we can typically get a return on invested capital with in excess of 15%. Now we remain in discussions with Sun Communities about extending our development partnership, which has now been running for over 4 years, and I'll be catching up with Gary Shiffman, who's the CEO and Managing Director of Sun Communities next month. And we're also in discussions with a number of other capital partners. At this point in time, the cash flow, as you pointed out, the first half was impacted, we have homes 506 under construction for this financial year, of which we've settled $125 million as at the first half, including 10 in the partnership. So we have a significant number of homes presently under construction and the level of working capital we have tied up in inventories is higher than what we've had previously, but that's really important to make sure that as we complete those homes, residents, we expect we'll have confidence then to proceed, and we'll be able to monetize that inventory and convert it into cash flow to enable us to reinvest into other projects. So with that, I'd like to hand over to Karen.

Solomon, there's no doubt, like Simon said, there's a number of projects that are coming out of the ground for the first time, which will require some A&W works and costs over the next 6 months. But I'll highlight that some of those projects are in the joint venture. So we will have the support of some communities from a capital perspective, but also the joint venture has nonrecourse debt facilities in its own right as well. So that's -- I guess that's the first point to call out. I think the other thing that I highlighted in the notes that I was making in relation to the capital management. We will actively manage the phasing as best we can at the projects. And we have that capacity to work with the development team as well as both the portfolio managers as to when some of this A&W works occurs across the projects. We have good relationships with each of our developments and even on the rollout of the construction of the homes that will be phased as well.

That's great. Maybe just a follow-up. So I think you guided to about $100 million or $220 million of CapEx across sort of the state and after works management is expansion CapEx. Is that broadly the run rate we should expect over the next 12 months or so? Or are you sort of paring that back a little bit given the holdups and perhaps just on the land bank restocking as well for the run rate there?

So I think on the CapEx on the A&W works, we had -- I'm just looking at it in the first half, we incurred about $40 million on A&W. So there's probably around $50 million to $60 million in the second half. But I think we do have enormous capacity to face that. And we'll be working with Von and her team to look at which of those projects given where we're looking at settlements as to how that can be phased. And that's not just in terms of the staging of some of the cities on where the homes are being built in the states, but also things like where the community facility is on.

And lastly, in terms of your last question about land banking, whilst we're not seeing any distress in terms of buying land. What we are seeing is that vendors are for willing to enter into longer-dated transactions and that is where we don't have to sign a contract until we get a DA or where we get a 2- or 3-year period of time to get a DA before the contract becomes unconditional. And so we're certainly not looking to acquire land outright without approvals and with no time to procure a DA. So the environment for, I guess, continuing to invest in our land bank, it's -- that continues to be quite favorable at the moment. 12 months ago, it was absolutely a seller's market, but what we're seeing at the moment is our ability to negotiate much better terms than we have for the last 4 or 5 years is absolutely the case. We have absolutely moderated. We stepped back our M&A program. So we don't presently have any mature communities that we're planning to acquire in the near term. We would have maybe 15 or 20 development sites that we're looking at. But most of those, I doubt we would proceed with or we would only proceed if we can get an acceptable terms on that. So we're watching our gearing our LVR very closely. Our covenants with the banks are well above 50%, but our current, I guess, target range is in that sort of around that 35% LVR, which we've still got quite a significant amount of headroom to go. The weighted average tenor of our debt is quite long, and we do have in place around 50% hedging. So I'm pretty comfortable with the balance sheet settings at the moment.

So would you look to head back some of that holiday park and lifestyle rental expansion CapEx given the E&W priority or...

Yes.

Your next question comes from James Druce with CLSA.

Just sort of the third downgrade now since July. I think it's fair to say that peers haven't had quite the same experience. I'm just trying to figure out what exactly keeps ticking the business when you're trying to forecast things out.

Yes. Thanks. James, look, I'm not sure I would say it's 3 downgrades. Certainly, last year, we left our existing guidance in place, but said that we wouldn't be at the top end of that range anymore, we were traveling towards the bottom end. But yes, I think you do make a very valid point, and some of our assumptions around our ability to bring the product to market have probably been a little bit ambitious. I've been doing -- building these communities, both retirement and MAT for over 20 years now, and this is without exception, the most challenging period and having to work through a significant shortage of qualified trades before that, it was a significant tightness in procuring the materials. We've had to deal with significant adverse weather events. So it's been really a perfect storm, but I think your criticism is fair, and we have really had to look at this forecast. And I think that's why the range that we put out to the market today. And it is very disappointing to be in a position where we have to do that. But we've put in place a broad target to really try and, I guess, put a bottom end to the range that we have very good confidence that we'll be able to achieve and also the top end of the range where I think there's an absolute pathway to achieve that. We have moderated our 3 target from what was previously 2,000 to 2,200 down to 1,750 to 2,000. And I think for the first time, we've given you a bit more granularity of the key 9 projects, which are not contributing any settlements at the moment. So there's 9 projects that will be bringing to market over the next 12 to 18 months, which will underpin that 1,750 to 2,000 new home settlements. They absolutely remain risks. I guess there's a lot of buyers out there who are waiting to see when the market bottoms. And if you look at the financial review and the broad sheet today, you've got one investment bank calling a further 15% decline in the housing market and then John McGrath's calling the bottom of the market. There's a lot of conflicting news out there, and that's why we've taken a very prudent, cautious approach in setting this guidance. But the unassailable fact is that there's over 600 people turning 65 every day of the week. Manufactured housing communities are proving to be very popular with downsizes and entire [ es ]. -- to Kate's point, these settlements will drift into the next financial year, but they're not disappearing. The number of people we've got on a purchase journey remains incredibly strong. And if you add up all of the people in Australia that are doing land lease communities, whether it's stocks, lifestyle communities, GIC and others, we're barely as an industry, delivering 3,000 new homes a year against 600 people turning 65 every day at a week -- so the demand is absolutely going to be there. We've got 6 months of turbulence. And I think we'll be very cautious when we put out our guidance for the next financial year. But I take on board your feedback.

Just talking about the sort of revised medium-term settlements. You sort of touched on this a little bit before, but can you just describe broadly the -- what normalization of build times you're assuming for that medium-term forecast and whether demand is average or below average in terms of by appetite for those assumptions.

Yes, a great question. Look, sending out the build time from 16 weeks out to 32 weeks, combined with wet weather delays, particularly in Victoria, which significantly slowed down our civils construction. So at one of those projects, beverage, we actually have to demobilize the civil contractor because the site was too wet for 3 months. That has a massive impact and that of itself, those delays probably impairs our ability to build 300 homes. The biggest bottleneck that we faced over the last 5 years and where we've put incredible focus into is making sure we have a great runway of DA-approved projects ready to launch. And a lot of those projects we're bringing to market are in markets where we will be the sole participant where we'll be a price maker. And I think the absorption rate and the ability for us to attract very high and profitable development margins is very strong. Now in the Mid-North Coast, where we've got 2 projects, there's no competition in that port Stephen, Newcastle area at Maurice, which is on the Queensland -- sorry, on the New South Wales Central Coast and the western side of Lake Macquarie -- [indiscernible] house price there is around $700,000. There's not one MAG in planning between south of that project down to [ Wungong ]. So we have got effectively the 5 million people in the Sydney catchment plus the Central Coast, and we've got the only product in town. And so our pricing power on projects like that is absolutely immense. So we've not only got the projects to bring to market to support that 1,750 to 2,000 settlements. But in a lot of those markets, we've got the only show in town, and I think that really underpins the value that we've been able to create and capture over the last 4 or 5 years when we've really had a focus on putting that pipeline in. I think even at an absorption rate of 4 or 5 settlements a month across 9 new projects, if you add that on to what we're building this year that gets you up to a number approaching 1,000 homes a year. So we've got these great pipeline of projects. Most of the new communities we're developing. There are a couple of exceptions and typically in that 300, 400, 500 homes. That means you can be in market for 4 or 5 years, consistently selling down 60 or 80 homes a year. And when you multiply that across 15 or 20 communities, the output of that becomes quite high. Clearly, we're in a period of volatility, a lot of residents are waiting for the market to bottom. They're waiting for certainty around when interest rate increases are going to pause. But balanced against that is that there's a lot of families having discussions that this is the best time to get my kids into the housing market. And so they're prepared to transact. And the Bank of Mum and Dad is the fifth largest residential home lender in Australia, and that's driving a lot of people. It's also that 90% of our development pipeline is in Queensland and coastal markets, and that's increasingly where retirees want to live and casing point around Queensland, that's where a lot of first home buyers are moving based on relative affordability and their grandparents and parents are following them. So I think we've got a great pipeline. We have to satisfy the market that we can manage the execution risk. And we do expect that over the next 6 months that selling conditions will start to improve. It's just the next short period of time is going to be a bit volatile.

I get that you've got a number of projects coming through. I'm just -- and the message there, it sounds like you are assuming a bit of a normalization for build times over the next 2 years and demand remains reasonably healthy on a sort of like-for-like basis?

That's right. If you look at the number of new home approvals, so the number of people who are lodging a DA for a house, that is dropping off. And if you look at the HIA statistics, the number of new home builds that are commencing again is dropping off. So what we've really been working through and caught up in the washing machine over the last few years is that when COVID started to impact the Australian economy, the government or state and feds pump-primed economy through stimulating the residential housing market through making available stimulus that, therefore, was a sugar hit to the construction industry. We're only now completing the build-through of that work, but there's not a huge volume of new home commencements about to roll through, particularly freestanding residential homes. And so we do fully expect that more building capacity will become available. And that's certainly not just wishing and praying for that to be the case. That's sitting down with the CEOs, the owners of the major building partners and talking to them eat their forward order book sharing with them the details of our upcoming build. That's really how we're trying to mitigate that. And then we're also sprinkling prefab homes into a number of our communities. And if that ultimately proves to be successful, then I would imagine that, that will be rolled out across a lot more projects and those prefab homes, they can typically be fabricated in 8 to 10 weeks. So I think that's a great solution that Von and her team have really thinking outside the square of brought to market.

All right. And do you have any insight as to the lag between immigration is obviously picking up in the time and actually fill down to the trades that you needs.

Look, not. Hard data, I mean, certainly, anecdotally, we have worked with a number of our building partners to help them sponsor qualified trades out of Asia with 4, 5, 7 visas, but that maybe half a dozen trades, we've helped a couple of our Queensland builders to procure. But certainly, if you look at the level of CoreLogic put out a recent report on the state of the rental market in Australia and across most capital cities, there's no vacancy signs up everywhere to your point, as you have overseas migration tick up, everyone moving into Australia needs a home to live and invariably, they rent first before making a decision to purchase. And then you've got that coupled with the Chinese government's recent decision that you can't study online anymore. So there's a significant influx of Chinese students moving into Australia with their families, and they're looking to typically acquire homes or apartments. So I think the underlying demand of the resi housing market is extremely strong. It's just -- it's been a really challenging time with build times. And whilst we see some green shoots, some emerging encouraging signs across our portfolio of 16 projects in market, there's probably on 3 or 4 that were at 16 weeks or under, and the balance are slowly starting to come in. But unfortunately, the build times for this financial year are going to preclude us hitting our previous settlement guidance.

Okay. And one more question, if I may. You might have sort of covered this a little bit with Solomon's question. But you're talking about recycling capital and some asset sales coming through. Do you get the message right, that, that was more the gardens business that you're going to look to recycle more of? Or is that just other projects that you have in the lifestyle business or otherwise, which just aren't in your geographical sort of sweet spot?

No, I didn't say that. So we've divested 3 assets to date, which is 2 Garden Villages and 1 Holiday Park. And then we have a further 4 communities that are under offer where the purchaser is currently doing hard cost due diligence. And then on top of that, there's another 4 or 5 communities that we're in the early stages of bringing to market. So the capital is going to be released from that divestment program will support the significant investment in A&W that we anticipate making over the next couple of years. We're not -- we're a motivated vendor, but we're being very sensible with pricing. The settlements we've achieved to date have been at a premium or at book value, and that's where we anticipate these settlements occurring, and we've significantly stepped back our acquisitions program and any land that we're looking at would typically be secured under a 2- or 3-year option or a contract subject to getting an acceptable DA. And those divestments would be across a mix of all the property types that we currently own.

Your next question comes from Andrew MacFarlane with Jarden.

Just 2 for me. I know we're conscious about guidance a little bit. But I'm just trying to dig in understanding of why we've got a reasonably wide guidance range even from here given the time of the year. And just kind to explore, you talked through a little bit in terms of development, but I'm just trying to unpack what's sitting in the thinking to the bottom end of the range and what's sitting in the thinking for the top end range.

Yes, that's a great question. The thinking around the bottom end of the range is really more about near-term consumer sentiment. So in terms of the homes that we are going to be able to bring to market, we have 506 homes under construction this financial year, and we'll certainly be able to fill and have ready for settlement well in advance of 30 June in excess of 430 new homes. But we are conscious that, as I mentioned, our very high-margin Victoria Point project, where we have over 60 qualified interested buyers chasing 11 initial release homes. Unfortunately, those homes aren't going to be ready until July or August, but they would have comfortably sold themselves out on a number of times if that product was available. But the nervousness and I guess the reason why there's quite a wide range is really just based on the conversations that we're having with our sales team on the ground, looking at the time on market data, which CoreLogic released yesterday, which has shown that across most regional markets where a lot of our communities are that the time on market has increased from 22 days out to 40 to 44 days. And so that's made us extremely cautious, and we really wanted to put out a range there that we felt there was absolute certainty we could achieve on the downside, but still left -- there's an absolute clear pathway to hitting that 430 settlements. It's just -- it's really hard to determine where consumer sentiment is going to go over the next couple of months. I think waiting to March and seeing what the RBA does with rates and seeing the commentary that the governor and accompanies with that. I think that's going to be really important. As I noted today, one of the Australian investment banks has called out a further significant decline in residential house prices, but then John McGrath, I think, called out that we're at the bottom. So there's a lot of conflicting views there. And we just wanted to, I guess, take a conservative perspective. And that's why we've got quite a wide range of guidance. It was -- I think yesterday, there would have been 3 or 4 conversations with the Board thinking about how wide we set that range. And ultimately, we landed at that 50 homes. But our current forecast, where we think the most likely is certainly not at the bottom end or neither bottom end of that. But we do think that we've made an allowance for a further softening in the market, should that be the case.

Got it. All final one for me. On the 3 revised target, how much of that do you expect to contribute from the JV versus your balance sheet?

Look, that's a really good question. I think of that -- so of the existing 16 projects in market, there's 3 that are in the JV. So the vast majority of the contribution from those 16 projects is in the head stock. And then of the new projects we're bringing to market, approximately half of that would be in the JV and the half would be in the head stock.

Your next question comes from Rushil Paiva with Ord Minnett.

Sorry to dwell on guidance, but just following on from a question before regarding the normalization of construction conditions or the construction supply chain. Obviously, what you've alluded to in terms of lead indicators are starting to decrease and potentially freeing up to play a completely acknowledge that. There also obviously is a backlog to work through. So I'm just wondering from FY '24 and/or '25, when have you -- I guess, what are your assumptions for the normalization of construction conditions? Do you expect that to occur from the start of FY '24? How have you phased your expectations within guidance for that normalization?

Yes, great question. I think across New South Wales and Queensland, where a significant amount of those new communities are. We would absolutely expect a normalization in construction time. So 16 to 18 weeks. Victoria, we're probably taking a bit more of a cautious approach. We're looking to introduce at least one more new building partner to -- into that market. So we've got 9 new projects that we're bringing to market, of which 2 of those are in Victoria and the other 7 are in New South Wales and Queensland. So yes, we do expect construction times to normalize, and that's based on the data around new home approvals, the HIA data around new home commencements, and also the conversations that Von and I are having every week, every month with key executives from our builders, and also the new building partners that we're looking to introduce into the mix.

Sure. And just sticking on guidance, but looking across the rest of the business. Obviously, the change in settlements will be the key driving factor there. But I just wanted to know if you had any -- if there are any changes to your expectations across the broader business? It looks like operating costs potentially are a little bit higher across the board in terms of the EBIT and EBIT margins for some of the operating segments. So I just wanted to get your thoughts on that, if there's any change either top line or the cost in within each respective operating segment?

Yes, I don't think we've had any questions on the operational segments of the business. I guess within holidays, we do think that we're probably approaching a point where rate growth has partially been captured, and now it's going to be now holding on to the rates that we've got, which are 30% or 40% above pre-COVID levels and really focusing on building out the shoulder and of peak time. So I do think to my commentary that it's going to be quite a while until Australians on mass travel overseas, flights are expensive. It's very inconvenient. And as households tighten, their budgets, the significant number of people are coming off fixed rate mortgages in the next quarter that holiday domestically because people will still holiday will become and remain increasingly attractive. I would see there's further margin expansion or certainly consolidation opportunity there. In terms of Ingenia Gardens, where the margin did track backwards. That was as a result of some significant increases in labor and utilities and food costs, and we expect some of that level of increase to normalize, but it was also impacted by volume because we divested 2 rental villages in the first half of the year across our rental communities, where occupancy is around 99%. I do think that there's going to be significant continuing opportunity to deliver to capture high single-digit rent growth just given that there's such a chronic shortage of affordable rental accommodation, and we have 6 communities in Brisbane, which has probably got the tightest capital city residential rental market in Australia. We have 3 communities in the Southeast Growth Corridor of Melbourne, Frankston, [indiscernible] and -- Chelsea. And one on the New South Wales Mid North Coast at Port Steven. So I would think there's going to be continuing top line growth and margin expansion opportunities. Again, in our Lifestyle Business as we start bringing through some of these significant step-up in the volume of new homes. We have a number of communities that haven't yet stabilized. So I do think there's opportunities there. To Karen's point, around discussing corporate costs, we have seen a significant step-up in areas like insurance, in audit fees. There were some one-off costs associated with some executive changes. So there's going to be an element of one-off costs there, but also reflecting that since the commencement of COVID, the business has nearly doubled in size, it is a much larger business today than what it was entering into the cover we're very vigilant on our cost base, but we are also making sure that we can deliver that 1,750 to 2,000 new home settlements over the 3 years. I really don't feel that's factored into the current share price.

Great. Sorry, I might just get in another 2 questions, if I can. Just quickly on the -- on lifestyle development and the profitability margins. I think prior to this, you've spoken to 300 to 400 basis points of margin expansion there. Now with the revised guidance, what are your expectations for margin growth in that perspective? Obviously, acknowledging that some of the higher-priced homes that you would be selling might be pushed into FY '24. Can you get your thoughts on that?

Yes. So typically, the aboveground margin. So the margin on comparing the revenue that we received from the incoming president and the cost of goods sold, that's typically tracking between 40% and 44%. Some of our higher margin or higher price projects, the margins in excess of 50%. The overall development margin net of all of the other costs of development and sales did contract this first half, but that is substantially just because of volume. So we're clearly expecting a significantly stronger second half in terms of new home settlements. And so that was a significant margin impact, just the higher volume of homes being settled and on a relatively fixed cost of doing business in development.

Great. And just one last one. You have talked about the Sun JV and negotiations ongoing there. In the past, you've also talked about potentially seeking further strategic relationships. Is that still something that's being considered? Or is that something still being considered?

Sorry, I just missed that question. Could you just repeat it?

Sorry. So in terms of -- you mentioned that the discussions with Sun Communities in terms of the JV continuing is still ongoing. But in the past, you've also mentioned that you -- the Ingenia's considering other strategic partnerships. Is that still being considered? Or has any thought anything changed on that front?

Look, we're absolutely in discussions with other capital partners -- we've had a fantastic relationship with Sun. They've been a very supportive capital partner right through COVID. We've learned some incredible IP of them during that period of time, and we absolutely look forward to that development partnership continuing. And as I mentioned 2 weeks ago, several members of the Sun executive team were in Australia, looking at the projects we're developing together, and they're very pleased in the next month, I'm planning to catch up with Gary and some of the other fun executives over in the U.S. So confidence based on everything I'm hearing that, that partnership will continue. And then, yes, we remain in discussions with a range of other capital partners about other opportunities across the business, whether that's in holidays, whether it's in gardens, whether it's in other parts of our lifestyle business. And again, categorically, we are not looking to raise equity in the headstock.

Great. Thanks for taking my questions.

Look, we'll have to wrap it up there. I appreciate there's a lot of questions and thank you for your time today, and Donna, Karen, and myself look forward to catching up to everyone one-on-one over the next couple of weeks. And also if you have any urgent questions or comments, please feel free to reach out to Donna or drop us an e-mail. And thank you for your time. And once again, apologies for the delay at the beginning. That was outside of our control. So thank you for your time today.

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