Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

[Audio Gap] Firstly, thank you, everyone, for coming on board and listening to the results call. I know everyone has a very busy schedule this time of year. So I appreciate taking the time out to listen to us. This is probably one of the most challenging years that I can remember in my lifetime of business with Victoria as being kind of nearly 5 months of the full year in lockdown, so certainly challenging times. It has been a tough year with the only consistent attribute really being that once we've been in lockdown, we get out and then we've been in lockdown again and then we get out and we've been in lockdown again. So it's become quite repeatable. The subsequent impact of that really has been mostly on consumer confidence, is I think people will try to become almost institutionalized and de-empowered. And so -- but the good news is every time we come out of lockdown, we see this upsurge in interest and increased sales. So bring on the jab. But then again, sometimes it takes a year like this to really prove up the mettle of the team and ingenuity of the business. And over the past 12 months, I really cannot be more proud of what amazing team at Lifestyle has achieved over this time. So the unsettlement numbers were, in some way, a proof of endeavor in December 2020, having just got out of the biggest lockdown we had. We were looking at the next 6 months going, "Wow, now how do we do it." But everyone just so dug deep. We were really were ordered with a robust property market coming to the second half or first half of FY -- of calendar year '21 or the second half of FY '21. We really launched some quite disruptive strategic marketing plans, really focused and tuning on our customer. And also, we just had this firm view that we were going to try and better last year's -- previous year's settlements of 253. And we just had that fill in our gun sight going right. We have to do something. We're going to do that. So they really digged down, double down and achieved that. But at the same time, we also launched 4 new clubhouses, 3 new -- we opened 3 new communities with homeowners moving in, 3 new display precincts and linked into all our strengths to probably in a way which is one of the biggest years that we've ever had and summing up the strengths of our team came to bear this year. We lend into our creativity. We've created the next evolution of clubhouses and houses, which, in a way, in my experience at Lifestyle, it's a long one, have actually been the first time more of a revolution and evolution, which has all been driven through feedback from our sort of baby boomer customer. We lend into our curiosity and commissioned some super informative piece of research into the baby boomers and what is their next level of motivation for downsizing. And we're getting a really, really good grasp on that now. We lend into our marketing skills. And with our new amazing head of, what I call, disruptions or marketing, we've crafted a strategy to disrupt the 93% of our current downsize and educate the 5% who currently downsize to retirement village. So we've really targeted our marketing very much around this. And the new campaigns are really new, really innovative and very disruptive, so -- which has been fantastic to see. We lend into our technology skills and executed contracts with sales force to create what I think is one of the most leading-edge CRM systems with in-build AI, which will then clearly drive our passion for our customer experiences through every EDM and touch point with our customer as well provide data to drive sales. This -- I've never seen a system so excite 120 people on the conference call, where there was a sort of universal sort of high-five, with everyone going, this is a game changer. It was just fantastic to see. We're also replacing our new SAP system, which Darren will talk about in his section. We lend into our ESG skills and have evolved our strategy announcing a carbon-neutral target to last over 2035, which sort of definitely balances the tension between the need for the provision of affordable housing as well as the average urgent needs of our dying planet. We also designed and launched our most energy-enabled and sustainable community at Lifestyle Meridian, which will have Australia's first fully integrated micro grid with solar and centralized batteries delivering homeowners roughly a 50% discount on what other homeowners paying in our other communities. This is quite a groundbreaking system and, again, super excited the team at Lifestyle Meridian, a new project we launched last month. But for us, the social component, the S of the ESG, has always been our main purpose and reflects back to the mandate on which we started Lifestyle, which was to be socially, morally and ethically responsible. And from that, we have never wavered. So that tension between the 2, making sure we maintain the S to be affordable in everything else we do is always going to be front of mind with the Board and the organization. We lend into our relationships and acquired further sites off-market, including acquiring a really key site at Woodlea, expanding St Leonards and acquiring the last development site in Phillip Island, which is one that's really excited us and took quite a deal of negotiation to get it. Both are proving up -- St Leonards and Phillip Island are really proving up the surging sea change market, which we're seeing sort of as sort of post-COVID impact, which is really interesting. We also raised an additional $100 million to supercharge our debt capacity, which will really enable our continued growth and further acquisitions, while at the same time, obviously, maintaining a conservative gearing strategy, which has been a hallmark of Lifestyle from the get-go. We actually now have 2,300 sites to be developed over the coming years, which I just found an extraordinary number and just so exciting in terms of we've got our future maps and -- but still we're always on the lookout for further sites when we can. We lend into our management team skills or team management skills and looked after our team through every step of the year with a whole range of initiatives and strategies to ensure that they were both supported physically and mentally. We launched many different care initiatives and thoughtful gifts and a whole range of different issues. At the moment, we're running a guess this film where our team are pitching themselves in home videos and you got to get to the movie. So we really try and reach out to create a hyper-engaged space that is very supportive and is looking after all our team members. We also, over that period, maintained our wages and maintained the whole team, which has managed the human and most critical component of our organization that, again, has set us up for where we're going to go in the future. We lent into our customer centricity and empathy and looked after our amazing homeowners. We were there for the support. We were there for a shoulder to cry on. We were there for the funny moments, the virtual wellness programs and for all the moments that actually form what a community is all about. And this is really what Lifestyle does so well, and we'll continue to do so. And well the enduring stuff I've got is of sort of having a happy hour with the drinks cart rolling around the streets at many of our communities on a Friday night, serving up cocktails. But finally, we -- I think most of all, we lent into nearly 20 years of experience. We're nearly there 20 years. And interesting, Lifestyle Meridian is our 20th community. And when we open the club house, it will be 20 years. And you sort of take a look at the ground to how much you learn over that period and how much you lean into it. But then also, you always are realizing clearly the emerging baby-boomer generation, how much you still have to learn. And we're selling forward to working with also credential operators like Stockland to help disrupt and grow the market in Victoria, so we continue to build this sector as the go-through option for baby boomers to downsize in the future. So there is no doubt that we've not been idle and we used what time we have been gifted over COVID to continue to build on the Lifestyle operating platform, which we're now forecasting to deliver between 1,100 and 1,300 new home settlements over the next 3 years and 450 to 550 resale settlements over the next 3 years as well. Every time that we're out of lockdown, we've seen sales surge. Australians really value what life is all about. And in a way, I've been saying that COVID is probably the biggest disruptor to the 93% that don't currently downsize into a retirement village or a land lease community. And as Darren always says, nothing like a muted experience to help you reprioritize the way you view the future. We've proven that through 5 lockdowns. So we kind of know what we're doing with lockdowns and how to get out of them and how to sell through them. So we've had a bit of practice in Victoria, which is good to see and the organization is very much up for that. So there's no doubt we have a huge opportunity ahead of us and have the land, the market positioning, the product and the people to capitalize all this. And really, we just have to get free of these lockdowns to smash out a truly wonderful year ahead. So with that all being said, I'm going to lean into Darren Rowland just to take us through the financials.

Thanks, James. I thought I'd just start by echoing your comments for the team. It has been a huge year and a very difficult one and lots for our team in the office, working from home, back to the office, out to site. And it's really changed how we do things at Lifestyle, but it's really impressive to see the way the team has embraced it and given it their best shot this year. And I think that's been reflected in the results. So we've obviously seen a material uplift in the value of the portfolio. This is driven by cap rate compression and also continued price growth in the resale of our existing communities, which is a credit to the way those communities get maintained and looked after. As we mentioned earlier, new home settlements, the rush was on to try and beat last year, and we did that by 2, which was a great result given the circumstances. We did have a slight decline in the gross margin, but this was really just due to project mix and the types of homes setting during the year. So no change to our pricing strategy. We saw the annuity income stream continue to grow. This was in spite of the lack of increase last year. So the Victorian government passed an embargo on rental increases, which meant increase that was typically due on the 1st of July on 2020 wasn't able to go through. But we did pick that up this year and we're sort of back to the normal cycle from FY '22 onwards. Really interesting to see a strong performance in the resales market, particularly in the second half of FY '21, our biggest 6-month period. It was really pleasing to see the time on market come in, but also some price growth that I mentioned earlier, and that's what's really come through in that increased DMF revenue. Now whilst we were prudent during the lockdown and we maintained our focus on cost control, we're also very conscious of maintaining our team and preparing the business to trade out of lockdown. So we did a lot of work on using that time effectively, as you said, and continuing our marketing spend throughout that lockdown period to build the database, really educate new customers that were coming to us doing a lot more research from home as opposed to coming out to site. We spent all the time we could open up and get people back to site. We had a lot of really educated customers, so some great work by the marketing team there. And we saw this strategy really play through in the sales and settlements in the second half. I've got no doubt that the work we did during lockdown really set that up when things opened up in the back end of the year. As noted, we did receive JobKeeper in that first quarter, which was due to a significant drop in revenue during the period where everything was shut, but we used that to keep all of the team intact and that definitely helped us as we come out the other side. Just on the balance sheet, we had a huge year for development. So 4 clubhouses completed, a large amount of civil works, particularly at Wollert, Deanside and St Leonards. This flowed through as planned with a ramp-up in the drawn debt and an increase in our inventory levels. We also increased our inventory a bit further, particularly during lockdown, because we wanted to be prepared for the ready-to-move market when we came out of lockdown. So having homes finished and available that people could move straight into was absolutely part of our strategy there. So we did carry a little bit of extra inventory during that period. Our drawn debt has increased further post year-end. So we've drawn another $30 million. We settled a site at Clyde and also the second parcel of land at our existing Wollert community. So we're looking forward to getting started on that Clyde side and lots of activity happening on already on the civil's front and big south launch plans for September, which will be great. Also very pleased that we've agreed terms with the lending group to extend our debt facilities by $100 million. We can't thank them enough for their continued support. They've been with us all the way through COVID and we couldn't have asked them more in the way that they've listened to what we've been going through, heard our strategy and backed us to deliver, so big thanks to them. On the cash flow, obviously, a big development year, which has flowed through into operating cash flow. I'd encourage everyone to have a look at Page 35 of our investor presentation, which breaks down this operating cash flow by project. And you can see where the development spend is going there. It's a little bit more user-friendly than the statutory cash flow presentation. And finally, for me, as we look forward into FY '22, I'm really excited about the digital upgrade that we're going to be undertaking. We'll replace a lot of legacy systems in the front end of the business and replace them with Salesforce. And similarly, in the back end, a lot of legacy systems getting replaced with SAP. This will be a huge upgrade for our business and will really help us support and grow at scale without increasing back office costs. It's going to be a lot of work to deliver it, but I know the team are really excited about it, and it's going to be a great innovation for Lifestyle. So looking forward to that this year.

Fantastic. Thanks, Darren. And just before we go to questions, I just wanted to thank the team at Lifestyle and those listening in. It's been an extraordinary year. I thank our Board for being so incredibly supportive over this year as well and being as innovative as we are in terms of picking up different solutions and making -- still keeping Lifestyle the extraordinary rather than the ordinary in terms of the way we perform, which is fantastic. And then finally, I'll just rip one more band-aid off so no one has to ask me on the road show. Yes, I'm staying forever and will be here for the next 3 to 5 years, as I always say. Yes, I just could not be more excited about where Lifestyle currently sits with 2,300 sites in the pipeline and where those sites are located, particularly [ CAF ], St Leonards and the sea change sites and Meridian, which will again be the smartest community that we've ever built and probably the smartest communities in Australia. The level of innovation in the business is probably the highest I've ever seen it. And yes, so it's a really exciting time. So with that being said, I'd love to pass back to some questions.

Your first question comes from Michael Peet from Goldman Sachs.

Congratulations on a great result in a tough time.

Thanks, Michael. Thank you.

First question, just on -- at the moment, can you just tell us what's happening out there with -- we're hearing about construction constraints as well at the moment, potentially. But are you able to keep building at the pace you would like? And also maybe how you're adapting? I mean you're pretty used to coming in and out of lockdowns, unfortunately. But how are you adapting with sales at the moment to that environment?

So yes, really good question. So on construction, housing construction, actually, the way the rules of recent means that we can pretty much continue on without any slowdown. And it just says we're going to have 5 people per site. And we can actually work that with the number of homes we've got under construction. So we don't see no slowdown there. Unlike last year where they had a limit on the number of people on commercial sites like our clubhouses, we're actually only building 1 clubhouse at the moment. So actually, we're not impacted by that at all. We're just booming club assets from St Leonards and it's actually at a stage where that kind of is not too bad with where it's at. So really happy with that. We certainly planned around timber shortages, which is another one that's been around and adapted all our processes and order cycles to ensure that we've got guaranteed supply of timber for what we need. So we've got way ahead of the game. We've been working on that strategy now for 6 months. And I think it's one of the big advantages of having a single build is that you've got 1 big volume to transact, which is attractive to the timber suppliers and trust makers. So we can lock in what we need ahead, which is fantastic. On the sales side, we -- every time we locked down, we have 2 key approaches. Firstly, is to make sure everyone who has bought doesn't get nervous and cancel, which can happen. So our team very much dives into that and puts out a huge hand of support to those that have purchased and waiting to settle or waiting to move in. Obviously, settlements can still proceed. In terms of sales, our contact center this time fires up as well and that's reaching out to database, our EDMs crank up. And as Darren just said before, above-the-line marketing, we're about to run our [ Richardson Dollar ] ad series again in a week or 2. We've got another TVC in the can just in production at the moment. So we're getting ourselves really match fit. We've absolutely dialed up our digital. So what we're really saying to people is, come onboard, come and see us when things are in lockdown, if you -- not lockdown, you don't want to talk to us virtually and some still do, and we still do make sales. But not nearly to the same level when we're actually coming out of lockdown. That's why we see this big upsurge because essentially in July, we had a really, really high level of appointments and really good sales and really good inquiry. And then obviously things didn't change. But -- so I totally expect that when we come out of this, hopefully, in September -- hopefully, early September, we'll see the same upsurge. I think the thing that -- the way we think about it, Michael, is that the customer is still there and we've still got them. It's just they can't quite transact. So we just -- we might do -- miss a month and them do double the next month as a result of this kind of the way down, and I think about it a bit. It does sort of flow through. It's not like the customer vanishes. And I think that the customer pool is actually increasing as COVID continues a little bit as they will go, "Gosh, I never want do this again." And the way we've linked into our communities and supported our homeowners is becoming a little bit of folklore in our referrals. So that certainly helps us as well where no better place to be in a lockdown than at Lifestyle Communities.

Okay. Maybe one for Darren. You mentioned the gross margin fell a bit in the year just gone because of mix, but what should we expect for '22 as that mix sort of changes a bit?

Yes, exactly, Michael. It's a hard one to predict because it does depend on whether we're settling 1 bedroom homes, 2 bedroom homes or 3 bedroom homes. But certainly, our pricing strategy hasn't changed. So we're not expecting material movement. It will just be movements within the periods driven by the mix. We do have Wollert and Deanside, which we're in early settlements. So they tend to have a little bit lower gross margin right at the front end of a project when we're selling vacant land. So we should get a little bit of an increase in margin through the year as those projects get towards the middle and back end of the settlements.

Okay. And just a final 1 for me, the upgrades that you're doing. I mean what's the sort of capital cost of those? And is there any change in your operating costs as a result as well?

Good question, Michael. There will be an operating cost change. Unfortunately, the systems are cloud-based. So we're not able to capitalize the cost of those things. So there will be a one-off implementation costs that will go through the P&L in FY '22, which will be circa $1.4 million to $1.6 million for next year. And then the operating costs going forward won't change dramatically because we will be sort of ripping out a lot of individual legacy systems and replacing them with these sort of single systems for the front end and back end. So not a material change ongoing, but definitely a one-off implementation costs as we roll them through.

Right. And so there's no other sort of capital costs on top of that?

No. Because they are cloud-based systems, unfortunately, the accounting rules don't allow us to capitalize the system that we don't own. So it all goes through the P&L in the first year.

Your next question comes from Aaron St. Muller from Canaccord Genuity.

Yes. Good. Yes. Just to echo Michael's comments. Congratulations on a good result in tough times. Look, just in terms of -- look, first of all, just in terms of your comments around the current environment, how should we be thinking about the first half, second half split on settlements? Is it fair to say that it might be second half weighting? And then just interested in the fact that you've got 250 homes sold and awaiting settlement. How many homes do you think you -- like at the moment you'll have built in ready for settlement in the first half?

So on the first question, it's going to be second half weighting, partly because of the nature of the projects we're doing as well. So yes, you're right. It's going to be probably more first half, second half, particularly with the lockdowns we've gone through and what's that sort of pulled us back a little bit. We're also seeing Meridian potentially coming into play at the end of this year, which is great or the end of FY '22. And that's going to play into that year. But the key thing for us really is lockdown and what -- how that plays out. I just wonder for a big caveat year. If we had rather -- we're rock and rolling like we've never seen some -- we've seen some really good trading conditions. But lockdown is certainly pushing things out a little bit. But the team come back like a freight train after every lockdown and are back in there chomping the bit. Our main one that is having a sales team locked at home. That's a really hard one like customers want to see the product. That's the sort of fact. But the 3 targets still there at 1,100 to 1,300, yes. Even if we lose a bit this year, that's going to push into next year and so we're a long-term business. So what we might -- if we end up missing a couple where we thought we'd get to this year, we'll get it next year, hopefully, with a jab in place and things starting to turn to normal.

Yes. Okay. All right. Great. And maybe one for Darren. Sorry, just one for Darren. I mean, community cash flow margin, Darren, was up on last year. I mean it came at about 50%, 60%. But the operating expenses just I think we're up and I think the operating expenses are up and the DMF expenses were down. Is that just a reclassification of costs?

No. So I guess, thanks, Aaron. And I'll just take you through those piece by piece. So the revenue moves around a little bit when we open clubhouses, so we don't charge rent until the clubhouses open. So with 4 clubhouses opening during the year, we did sort of pick up rent at those communities progressively throughout but we were carrying costs all the way through. So last year, we were carrying costs for those communities that didn't have a clubhouse open. So when we add revenue it does sort of lift the margin a little bit. A bit more unusual this year because there was 4 of those. We've never had 4 before. The management rental expenses really just moved in line with the growth in homes under management. So there was no sort of major changes there to how we operate or anything. It was more just new communities coming online. In the DMF part of the world, we did do a bit of a restructuring our sales team during FY '20. So those costs are largely driven by how we're selling and marketing the resale homes. So the changes that we made in FY '20, we just saw the full year impact of that flow into FY '21.

And sorry, Aaron just to back on what I was saying before. The really good news is at St Leonards, which is, that's going really, really well. That's not in lockdown and as is -- even though half the customer base comes from Melbourne who probably can't visit it, we're picking up 50% of the customers for that project on the Bellarine. So that's going to keep going. Also Mount Duneed also is not in lockdown. So we're going to be pushing those really hard as well in the interim circuit driving it through, so.

Okay. Great. And then just finally, just a quick question on corporate expenses. They were up a bit, but it seems like the bulk of that's essentially the employee share expense. Is that right? And so corporate...

That's spot on, Aaron. Probably 2 main drivers in there. As you rightly pointed out, the share price has driven up the cost of the employee share scheme. We've also had some increases in our D&O premiums like many other businesses out there at the moment, which was pretty brutal to take last year. But yes, so we're hoping to keep that under control this year as we go through renewal process again.