Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

Thanks, Christian. We firstly thank you, everyone, for joining the call and taking time out of your busy day to listen in. I thought I'd just touch on a bit of background for those that are new to story. Lifestyle Communities commenced in 2003. We just had one stated aim of providing really high-quality affordable housing to people over 50. We've never evaded from this sort of key purpose. And over our time -- over time, our communities have evolved to better meet the needs of the baby boomer as well as we've been really focused on creating amazing experiences for our homeowners as well. The Lifestyle model is very simple, and is that really appeals to our customers, where the customer buys a home in Lifestyle community and then enters into a 90-year lease over the land. The Lifestyle model is structured. So we don't make a cash profit on the sale of a home, and we're really just focused on the ongoing annuity streams from the site rental and also a modest exit fee when people leave the community. Due to the fact that we're not raising capital from the markets and we're quite conservatively geared, Lifestyle really relies on recycling capital from project to project. And probably the best slide to look at that in the pack is on page -- and I should have made a note of that before I did that comment, I do apologize -- Page 26. So the 2 parts of the business is on the left-hand side are sort of recycling capital pool which is our development side. So we're really focused on trying to sell out as quickly as possible out of the community and then getting -- taking that capital and then building another community. And at our current sort of recycling rate, we can do 2 -- or buy 2 pieces of land at the new communities every year. The revenues that we generate from the communities are really on the right-hand side of the page, and that's very much the shareholders' component of that. We've got a very clearly stated dividend policy in the pack. And the dark blue bit is the emerging annuity income streams which are locked in for 90 years, capped at 3.5% or CPI, whichever is the greater. And the orange component is this exit fee or deferred management fee, which we receive when a homeowner leaves their home. That is 20%, goes up 4% per annum for 5 years, capping at 20%. We now have 20 communities that are either completed or under development. We have 3,500 people living in our communities. We've got 886 pets living in our communities as well. And we have a total pipeline just short of 4,000, that is 3,960 either completed homes, homes under development or land to be developed. We're focusing on Victoria due to favorable planning as well as their excess land than probably what's available in other states. There's also a very low saturation of land lease communities in Victoria, say, compared to New South Wales and Queensland, and that certainly drives our interest in remaining in Victoria for the foreseeable future. The property market in Victoria for our customers selling their existing homes or their homes before they move to Lifestyle Communities has certainly been helped by the fact that there is quite a lot of supply on the market at the moment in the outer suburbs. Also, it's really supported by the fact that the government's got an underwritten 5% deposit for first homebuyers that have taken mortgage insurance. I was reading out today that only 25% of these have currently been taken up in Australia, and that's certainly driving first homebuyers and they're the logical and natural buyer of our customers selling their established homes. So what we are seeing is that time on market for our customers selling their existing homes is certainly tightening up. As anticipated, we settled 100-odd homes, which supported generating an NPAT of $15.1 million. And at this point, I'll hand over to Darren Rowland, our CFO, just to take us through some of the financials.

Thanks, James. As James mentioned, 109 settlements for the first half. Settlements for FY '20 for us will be weighted to the back half. So the lower number was anticipated and in line with our expectations. That obviously has an impact on our profit and loss for the first half relative to the same period last year, where we had a little bit of the opposite effect last year where our settlements were first half weighted rather than second half weighted. I should note before we move further, we're pleased to welcome PwC as our auditors this half. And as a result of that, we took the opportunity to review some of our historical accounting treatments. And that exercise did result in a couple of minor changes to how we will classify things going forward. There was no change to net profit numbers. We just did make some changes to classifications within P&L category items, and the details of those are contained in Note 2 to the financial statements. So when you're looking at your prior year comparative numbers, there will be some slight differences. I'll also let you know that we've adopted the new leasing standards from this year. It didn't really have a material impact on Lifestyle's financial statements. We only have one lease, and that's for our support office here in South Melbourne that we have taken the opportunity to adopt that for the first time in this half. In terms of our revenue, our revenue is down in line with the drop in settlements for the half. The gross margin has a similar effect. There has been a slight reduction in the home settlement margin this half, which is driven by the mix of projects that contribute to that margin. We also had our project at Shepparton, which has been in play for a number of years, which contributed a sort of higher percentage of homes in this half relative to the total number of settlements. So that has impacted the home settlement margin a little bit. We're pleased to see the site rental revenue increasing in line with additional homes under management. And we also saw an uptick in the deferred management fee revenue in this half due to an increase in the number of resale home settlements. On the balance sheet, we have had our inventory increase in this half, which is again driven by project status. We've been busily building and completing homes in preparation for settlements in the second half, and that's flown through into the inventory balance, particularly at projects such as Ocean Grove and Mount Duneed, which have the highest rates of development going on at the moment. On the debt side of things, we've increased our debt from $100 million in June to $130 million as at December, predominantly funding the Plumpton settlement and the deposit for our new project at St. Leonards. Our total debt draw is now $130 million out of a facility of $225 million. And we'll continue to see our debt draw increase as we bring on new projects, such as Tyabb, St. Leonards, Pakenham and, hopefully, some future acquisitions. On the operating cash flow side of things, we're in cash draw phase for projects at Mount Duneed, Kaduna Park, Wollert and Plumpton at the moment. So whenever we're in sort of peak development mode of a project, that's the capital sort of going out of the door to complete the developments. And then as we move into the settlement phase, that's when we see that recycling pool kick in and the capital come back. So in this half year, we're in a particular construction-heavy period, and that's resulted in the negative operating cash flow. On the dividend side, we're pleased to announce that the dividend has increased from $0.025 to $0.03, and that is driven by the operating side of the business and the increasing number of homes under management and the increased DMF. So I'll hand back to James at this point to talk through the next half.

Thanks, Darren. In terms of forecast for the full year over the next half, we certainly have sufficient sales in the system to meet our settlement guidance. As previously mentioned, planning delays at Kaduna Park and Wollert pushed those projects out a bit, which was very much beyond our control. So as a result, we've condensed our construction program, which resulted in 96 homes scheduled for completion in the last 6 weeks of the financial year. And therefore, we're a little bit in the hands of our homeowners in terms of when they list their homes for sale to established homes, but we'll certainly have a better view of this over the next 6 to 8 weeks, and we'll update the market at that time if needed. I guess the good news on that side is that with the tightening or with the sort of the improving property market, Victoria has resulted in slightly tighter settlement times. So that's for established homes at each site. I think that will just help the situation. Just in closing, just some slides, I think, definitely worth checking out. Page 11, our sales rate slide, it's really good to see we're just starting to see those new projects coming out of the blocks. And you [ growth ], you can still see a bump at about -- along 27th, 28th-month where we finally got road access on that project so -- or direct road access. So it's -- very much our sales rates can be impacted by what's going on around it. But it's really good to see those new projects just starting to come out of blocks, which is great. Page 13, I'd really encourage you to see that -- watch that video. It's just seeing greenfield development, I think, at its very best, which is the one at Mount Duneed. There we've got 96 homes under construction. We've got that brand-new clubhouse style with the croissant-shaped well into construction, that's now got frames up. We've got a workshop under construction. So that is really -- I'm sort of really proud of that one, seeing a fantastic sales community and construction team working flat out to just deliver not only amazing experience to our homeowners moving in, but just that level of production of greenfield so that it's very best. And then finally, on Page 14, we've got a video of The Simpson Arts Prize. Lifestyle prides itself on generating amazing experiences for our homeowners, which is what's resulted in our very strong referral rates, above 50% and very strong customer efficacy rates. This is the Simpson Arts Prize, which we ran in August-September last year. And that just gives you a bit of a sense of it. This year, in 2020, we're doing Lifestyle Let's Dance at the Melbourne Town Hall, where we expect about 1,500 homeowners coming along and that's coming out of a competition. These sort of programs really complement our wellness program. And certainly, Lifestyle has been quite unique in that in terms of, again, creating these amazing experiences for our homeowners moving into a Lifestyle Community. So on that note, we'll really pass over for any questions.

[Operator Instructions] Your first question today comes from the line of Aaron Muller from Canaccord.

James, just a question on slide -- it's appendix 3, just the likely home settlement program. You just got there, I know you haven't given guidance for FY '22. But could you just talk about how Tyabb's, St. Leonards and Pakenham will likely -- when that will begin to settle out?

I'm just trying to find the -- okay. So Tyabb is going through planning at the moment, as is St. Leonards. We haven't given that -- we'll give that update at the full year when we've got better sight of how that planning is progressing. We're fighting the planning regime down at Victoria at the moment just because of the quite significant growth we're having and demand in terms of the housing. The planning authorities are all a bit overworked. Tyabb is subject to a third-party objective process potentially, so that one has been uncertain for us. And St. Leonards, actually, it's not subject to a third-party objective process, but we're really just relying on council there to progress that. And Pakenham, I think we indicated in the release, it's sort of late '21 sort of -- or '22 start date.

Yes. Okay. And look, I think you've been quite consistent in, obviously, delivering the 2 per calendar year in terms of new developments. But if you -- I guess if you look at the last 15 months, you've announced 4. With the funding available, is there a reasonable likelihood that you'll sort of tick that up to 3 per annum? And are there opportunities yet before you? Maybe you can just comment on the pipeline at the moment.

So certainly, Aaron, there's opportunities. There's no doubt. We're very selective. There was an interesting tender down at Toukley recently, which, yes, we put a bid for, but lost for bid. Again, we've only ever bought 2 sites on-market. The other 18 sites we bought off-market with direct relationships with the developers. So we're always off-market looking. And yes, there's definitely opportunities. At the moment, we said the market we could do 2 a year, I think if a third one, actually, Darren, if a site came along, that was a very good one, we would -- we might be able to squeeze another one in, but it'll only be from -- very much from time to time, that wouldn't be a yearly thing. So -- but eventually, as you know, when we raised the money back in 2012, we were doing 1 site every 18 months. And then we -- with our sales rate going up, we were then doing 1 site a year. Then we said to the market, we're doing 1 site at least every year. Now we're saying to the market, we're doing 2 a year. So obviously, it's very much driven around sales rate, and we're very much focused on, obviously, driving that. And that's why we're so transparent with what we're achieving with sales rates that really helps you predict how that capital recycling looks.

Aaron, I'd just say as well, with that period of 15 months, we were 1 short in the period prior to that. So we did -- and that was back when I first started. We've sort of held back from the market a little bit just because the Melbourne property market was going so red hot at that point in time. So it was one that was a bit of a catch-up for a shortfall in that prior period.

Yes. And then just...

No, I was just saying that's part of the reason why our settlements in FY '20 are less than FY '19, purely because we just missed a property in cycle. But as Darren mentioned, that for us, capital protection is everything. Overpaying for a site is not a good way to spend shareholder capital. And because we're not raising capital, we're just incredibly cautious to make sure we get it right. We just buy the sites to the right price, which means that we can sell a home for 80% of the median house price and just not get ahead of ourselves and buy sites purely because they're there to buy. So we're very cautious with our acquisition strategy.

Yes, that's good. Look, just on the DMF quickly, you mentioned that going into this half, you've got 32 retail homes that are sold and awaiting settlement. How many of those do you think will attract the DMF?

I don't have the exact number off the top of my head, Aaron, but it's roughly a similar percentage. And we tend to see that sort of 90% attracting DMF. On that point, though, the Smart Buy Guarantee, which is what allows people to move out without paying a DMF, it applies for the 12-month period. But it's really not a percentage of retail sales. It should be thought of as a percentage of resales plus new home sales because, ultimately, that Smart Buy Guarantee applies to everyone who's moving in, in their first 12 months. So just to be clear on that front.

I think works at about -- usually it's about 3% or 4% of total settlements take up the Smart Buy Guarantee, but we're really determined as a company to reduce that. We think either we've sold someone a house that we didn't qualify them properly, if they're moving up in 12 months. So we've actually just recently promoted someone in the organization to become the Community Engagement Manager. And that's all around focusing on that, the touch points in that first 12 months to make sure everyone is engaged, they're involved and they're vested because we'd love to reduce that number down to 0. So we set that as sort of a target, target 0 for our Community Engagement Manager to say that's what we'd like to hit. But often they're also due to health and death. That's something our Committee Engagement Manager can't really change. For the ones that are discretionary, they're the ones who are retiree.

Yes. Okay. And out of those 32, have you settled any so far year-to-date, that resales?

Yes, absolutely. The run rate continues as per normal in January and Feb.