Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lifestyle Communities Limited, LIC, half year results teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. James Kelly, Managing Director. Please go ahead.

Thank you. Firstly, thank you, everyone, for joining the call. It's always great to be able to catch up at this time of the year after the first half, and thank you for taking the time to actually listen in as well. For those that don't know Lifestyle Communities, we are builders and managers of affordable housing in fantastic master plan communities. Today, we have 23 communities either complete or under development, and we've settled over 2,600 homes and have about 4,000 homeowners living in our communities. We don't raise equity and we're basically capital recyclers. And at the moment, our run rate is we're buying about 2 communities every year, and that's our sort of -- at the moment, our sort of ongoing growth rates. So that's a little bit about Lifestyle Communities. So just to talk about the half. There's no doubt that the first half probably represented one of the most difficult trading periods that I've experienced in any company, particularly in Victoria with the lockdown that we had, which nearly took up 4 months of the 6 months that we had. And there certainly was a level of anxiety and uncertainty amongst our customer base. And we just right now see customer confidence start to come back and recover, but certainly it did knock around our customers' sense of what they were going to do. And I'm hoping that we'll now see in the second half -- or we're just already starting to see in the second half this start to recover. Again, during this really difficult time, it was really good to see the organization lean into its inherent strengths of sort of customer service innovation. And as a result, we're now able to move forward in a stronger position. Some of the key takeouts as a company we had or learned through this time and we're able to achieve, and especially [ sometimes ] necessity becomes the mother of invention, with 4 months' shutdown at a fix were that we shifted to a much more digital platform for sales and sharing interaction with customers. And that just has also seeded some fantastic new digital innovations on our website and selling platforms. We built a much stronger platform to nurture customers on our database and introduced some new touch points to engage with customers. We shifted our wellness program to being virtual, and we've taken some of those lessons now into this half, which is great. And also still, we're able to host some pretty amazing events, including the Lifestyle [ liberty ] prize. And we learned to raft to different ways to surprise and delight our homeowners during that time, and -- when they were locked down in their communities. And that's engendered some really significant goodwill as a result, which is great. We've learned different ways of our team working as well. And I think that's been a big wake-up call to a lot of companies in terms of getting that flex between working in the office and working at home. And going into this new year, we've very much introduced Lifestyle working your way, giving people flexibility to [ balance ] working at the office or work at home. And I think that all is extremely well for our culture and our productivity. We also had the opportunity to recruit some extraordinary talent people through this time as well, and particularly those that probably weren't treated as well during COVID by their employees -- employers, I should say. And we're really attracted to Lifestyle customer-centric culture and people-centric culture as well as our underlying and overarching sense of purpose, which is very appealing, particularly to young people these days. And finally, we also picked up an additional site at Woodlea, opposite a brand-new shopping center which has opened. And this site is always a meaningful site, which goes to reinforcing our pipeline. Finally, also, we also reopened -- my apologies, opened a new clubhouse at Mount Duneed, which heralds a whole new genre of clubhouses and -- which very much targets our base customer. We also opened to displays at the town of Wollert. It looked fantastic. We welcomed our first settlement in this community as well. And we sold our Ocean Grove and also launched new project at St Leonards, which is preselling really well or selling really well. So some really exciting achievements during that time even though we were locked down. And the team really lent into what they need to do and got it done, which was great to see. I think the thing that I'm most excited about is the fact that we have a really, really strong forward pipeline of sites to be settled, it's over 2,000 now, which sets us up really well for the next 5 years. So that means that we can move forward with quite a bit of certainty, which is great. So I'd just like to hand over to Darren now to take us through the financial results. Thanks, Darren.

Thanks, James. I would mirror those sentiments. I think the results are strong result given the circumstances that we faced during the period, particularly with lockdown. So settlement for the first half were 88, which was down slightly on the prior comparative period. But overall, good results given the circumstances. We did see a slight improvement in gross margin this period, which was primarily due to the mix of projects settling in the period as well as the size of the houses that were being purchased during that period. So no change in our pricing strategy there. It's just a mix issue. Pleasingly, we did see the rental team continue to grow during the period, and this was off the back of new homes that settled in the prior year which were coming through, and also the commencement of rents at Mount Duneed. We do normally have a rent increase that goes through on the 1st of July each year, but this year, we weren't able to do that as a result of the Victorian government's legislative embargo on rent increases during the pandemic. So our next rent increase is due to go through on the 1st of July this year. Resales performed quite strongly during the period, again, given the circumstances. We had seen some quite strong sales months as we've come out of lockdown as well, and we have 27 homes sold and awaiting settlement. And certainly, I've seen some good turnover times on those homes as they come on to the market. We had a strong focus on cost control during the period, particularly during lockdown when a number of the facilities were closed and homeowners weren't able to access them as well as keeping an eye on our corporate overheads. We have seen some increases though in insurance premiums, particularly like everyone else, I think, out there in the market at the moment on our D&O insurance. We also did see a bit of an uptick in annual lease provisions just as our team members paused holidays during lockdown. So expect that to resolve itself over the next few months as people catch up on that missed lease. And finally, we did receive JobKeeper in this period, which was a flow on from the qualification in March when JobKeeper was first introduced. JobKeeper was great for us in order to keep all of our staff actively engaged and employed, and certainly saw us well positioned to advance that quickly as the lockdown ended. So we were able to sort of get back out there as soon as the restriction eased and get back in front of customers, which was great. We did exclude all of those JobKeeper receipts from the dividend calculation made. On the balance sheet. We were expecting a ramp-up in our debt or our inventory level just as a result of the construction cycle. And we certainly saw all that come through as our developments ramped up at Wollert, Plumpton and St Leonards in particular. But in addition to that, we increased the number of stock homes that we built this year just to be ready for the ready-to-move market. The last thing we wanted to have happen was customers ready and able and willing to move in and us having no stock on the ground. So we did carry a bit additional stock coming out of lockdown, and we're working our way through that now. This resulted in our gearing increasing a little bit over and above where we're expecting but certainly well within the ranges that we're comfortable with. The higher level of cash reserves that we carried through the peak of the lockdown and through the last reporting period had been wound back, and we've returned to our more traditional working capital management arrangements now. And finally, on the cash flow, you can see the increased construction spending and the additional stock homes flowing their way through the operating cash flow line in the cash flow statement. I'd encourage people to look at Page 27 of our investor presentation, which breaks those cash flows out by project, and you can see the development activity that's going on in that slide. That's it for me, James. So I hand back to you.

Thanks, Darren. Really appreciate that. As we mentioned, the second half -- just to touch on the second half. We have seen strong inquiries starting to come through as particularly our customers sort of reprioritized and rethought through what's important in life and whether the downsizing to a bigger life is a part of that. Particularly, St Leonards has really benefited from that, and that's had a really strong start with the sea change market post-COVID. We're also seeing a [ group ] customers, yes, just particularly single females in particular, just also not wanting to reexperience what they went through last year during the 2 COVID shutdowns. So I think that's also going to all go well. And again, very, very strong [ quadrants ] single females. Obviously, with the 4 months of sales impacted in the first half, this will have a knock-on effect with settlements in the second half. And the team are really focused on landing every settlement that is possible. This has been really helped by a really strong first-home buyer led market to purchase our customers' existing homes and with low interest rates. They're incredibly active in the market, picking up our customers' older homes, and we've seen quite a dramatic drop in time on market. In some particular cases, it's gone down to sort of 3 or 5 days from listing that develop to resale. So hopefully, that will help fill the pipeline a little bit more this half as well. There's no doubt the team at Lifestyle is working extraordinarily hard. And in the month of February alone, we have 42 events scheduled across all our communities, including a new clubhouse launch at Kaduna Park and new displays being launched at Lifestyle Plumpton. I actually saw the displays at Plumpton the other day, and the ongoing evolution of our product is just extraordinary. I'd really encourage anyone who's coming to Victoria when you can to have a look at those. It's just the way we're targeting this [ debut ] in generation with the way our product presents and some of the items now including is just fantastic. It's also great to see the evolution of our new clubhouse design. And we opened the new clubhouse at Mount Duneed and that new design in October last year during lockdowns. And that's been received extraordinarily well by our customers, and we're repeating that same design at Wollert and at Plumpton. And then we've rethought a completely new design for our new community at Clyde North. So it's really good. I'm really pleased, the team doesn't just sort of sit on its hand and say, "There, we've done it." They keep innovating and thinking harder about how to deliver these fantastic facilities to ensure that we have strong sales. Definitely, a big calendar year here as well. Have a fully working 4 new clubhouses, 2 new space precincts and launching new projects. So yes, there are really exciting times ahead. We're still on track to deliver our 900 to 1,100 settlements over the next 3 years, and we have the pipeline well in hand to achieve this. Again, this is, of course, subject to what happens with COVID. I don't know why Victoria keeps getting it. But hopefully, we won't have any prolonged shutdowns, and we will be able to keep trading as we'd like. On a final note, I would just like to thank our amazing team at Lifestyle Communities. I'm really sure that we have one of the best teams on the market in Australia. And I was just so pleased, during the time of lockdowns and all through the last half, we were able to keep everyone onboard and we didn't lose anyone. And that's put us in such a fantastic position this year with our amazing human capital and team to really start to deliver on all that's before us. I'd also like to thank our Board as well for their unwavering support through all this and being able to see through the impasse all this so that we could keep planning for growth and planning for wherever the business needs to go. So that was great to see as well. So thank you. So I'd like to now hand over for any questions. Thank you.

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

I was wondering if you could give us a little bit more color about how the business operated post the lockdowns, coming out of that? How did things sort of start to pick up? And then -- and how January, February started off?

So I think we've certainly -- certainly, in January, we've made record appointments, which is great. December was slightly softer, mainly because everyone was just so focused on Christmas. It was really interesting. Everyone just wasn't thinking about anything else. And so January has been really strong, Michael, which has been great to see. And walk-ins is an interesting one. Normally, we get a lot of walk-ins coming off the street into our communities unannounced. That hasn't been as strong. And I think that's a component really of just that people still think you have to make an appointment in Victoria because we were just so conditioned to thinking that. And so, fairly enough, this weekend, we just launched a campaign of no need to make an appointment. And sure enough, we had a lockdown. So -- but we'll keep running that line pretty strong just to let people know that they can still come in and walk through. But also, with these big events coming up, that should really help start to restimulate our inquiries as well. So that's really good to see.

And you mentioned in your outlook comments that -- in your statement there, there's 164 homes, I believe, that are due for completion and possible settlement, now obviously, subject to the incoming resident being ready. But what are the bookings looking like versus that, say, running to June 30?

Look, they're running pretty much to plan, which is really good. So -- and we have seen the customers' ability to fill our home really improve, which is great. So certainly, the team is working flat out to try and push to achieve the targets we set, which is great. Obviously, it gets knocked around when you have a COVID shutdown like this. But -- so fingers crossed, if this thing goes away quickly, we'll keep flying away and helping customers push forward with their -- selling their homes and settling. So yes, look, it's pretty much sort of bounced back a bit, which is great. But still, we've got that holding settlements, which you can see from what occurred last year. With the lockdown, Victoria went back in the sales. We needed to actually fill that pipeline as quickly as we would like.

And just any land acquisitions we should expect in this current period? Or do you think you've got enough for now? Or how is that looking?

So we're always hunting for new sites, Michael, you know that. And we have some really interesting opportunities out there. And it's sort of being bolstered by the fact that this sea change market -- I quite believe sea change markets existed because everyone was sort of weighted to be next door to their grandkids in a sort of 20-minute drive. But what we've seen here is a bit different and it has been a bit of a sort of paradigm shift. So it's made us look at the coast a bit more seriously and where there's opportunities on the coast. And also even tree change is an interesting one still. So we're looking at those. And then there's always a number of sites that we're juggling. So at this stage, the team are working a way. If we can land it all on the half, that's what we'll do. So that's always the ongoing drive, 2 sites a year.

You've got your target there, around 900 to 1,100 new home settlements. I mean wondering if you'd commit to a target on the resales. I mean, you did 80 in FY '20 with a smaller portfolio. Hard to pick those, isn't it, because it's out of your hands. But what sort of run rate do you think, if any, you could guide to on that?

Oh my god. Our assets being, we've got -- Darren, any thoughts?

I was hoping you were going to fill that one, James. Yes, it's really difficult to predict, Michael. You -- I mean, you've got on that the portfolio is getting bigger and we sort of say every time we speak that we expect that to flow through. And we did see some good results in first half, and we have had some quite strong sales in the resale area post-lockdown. So without sort of giving you a specific answer to your question, we do feel that the retail is an area that will continue to grow over time as those turnover events happen and as we see the impact of the larger portfolio, which, really, if you go back to those 7 or 8 years in the portfolio, you can get a sense of how quickly the portfolio grew. So we're sort of following that very closely when we're looking at our own forecast around how that [ resales ] area might perform.

Thanks, Darren. I had an interesting story, Michael. There was a customer who sold at officer within the year. So he's got a deferred management fee and pocketed $100,000 and then bought at Bittern and then decided they're going to move to Queensland after 3 years and pocketed $200,000, taking up the DMF that would get about a profit of $220,000 over 3 years, which is not a bad -- not bad going actually, I thought. So...

Almost [indiscernible] share.

So yes, it was pretty good performance actually. So...

Yes. No, that's great. All right. No, I understand it with that. A final one, stock homes. How many stock homes have you got?

Darren?

That you could sell? That -- as you said, for walk-ins or quick sales?

It does vary by project, Michael. But we've got roughly sort of 40 to 50 at Mount Duneed at the moment and probably 20 to 30 at Wollert and Plumpton that are ready to go. And we furnished a few of them so we can sort of create an almost additional display homes to a point. So plenty on the ground ready to sell. Kaduna Park has also got a few ready and able be sold. So certainly, if customers are ready to go, we're ready to receive them.

Yes. I think that we really backed our judgment on that, too, Michael, because we've seen established sales really strong -- moving very strongly. So we think there is move market. It's going to be strong over the next half. So we've sort of backed ourselves in to say, "Let's build up a bit of stock so that we can lean into that market and get some settlements."

Your next question comes from Aaron Muller from Canaccord.