Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

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

Thank you, and welcome, everyone, to the FY '22 conference call. I have Darren Rowland with me as well, who is our CFO and also Joint Company Secretary. I've got to say, over 20 years of Lifestyle Communities -- or nearly 20 years, perhaps this is one of the more interesting years that we've been through. It was -- we started the financial year in Melbourne with 4 months of lockdown and then worked through the ramifications that this had on both the morale of our team but also on the [indiscernible] of customers. We had sort of challenges that front and center of sort of labor and supply chains. And then now we're sort of facing constant reports of sort of softening property markets and rising interest rates and all the rest of it. It's kind of -- for us, we've got a lot of muscle memory around years like this, and it doesn't trouble us, but -- and it sort of really does lead in to our setting, giving us confidence about the way we've set up Lifestyle from the get-go. And I'll come to that a bit later. In light of all this, I have to say I feel extraordinarily proud of the Lifestyle Communities team. And they have really just smashed another year out and hit our settlement goal of 401 settlements as well as a whole other milestones. Certainly extraordinarily proud of our marketing team who really showed amazing resilience and strength by doubling down during lockdowns and really reaching out to our customers to keep them engaged, obviously supported by our amazing referral reps that kept the phones ringing, and then open the betting with a new website, digital platform and above-the-line strategies, which kept attracting new customers and drove conversion. The hustle and innovation they showed was just next level. Also, I'm incredibly proud of our wonderful sales team, who pulled our stops to ensure that we kept selling no matter the challenges and then deep into what we had learned in the past prior lockdowns all of that to make sure that we continue to prosper. Our strong referral reps certainly aided their endeavors as they're increasing brand awareness. They achieved enough sales to deliver the 401 settlements and further 267 settlements bagged for FY '23. Our resales team delivered 156 sales in total, 143 which attracted a DMF. And that was at the time also where we're finding this whole resale market is really strengthening post COVID. People just want a home and to move in and so that's really supporting our resale market. Super proud of our projects team, who worked with all our different contracts to ensure that we have the programs to deliver the homes that we needed on time and then release the home at the settlement date. They found numerous workarounds when the situation required and were supported by the strong contract supplier back that we've built up in nearly 20 years. Our single builder strategy -- oh my God, I'm so glad we had that because that really continued to pay off in ensuring that the supply chain issues didn't delay any sales. And this year, we actually celebrated Todd Devine building its 3,000th home. It's a bit of a milestone of what is probably one of the true unique partnerships around. And moving forward, that partnership only strengthens. Also really proud of our community management team, who looked after our communities through lockdown, but also working to ensure that we sell the homes on time and deliver the service level that continue to drive our 50% referral rate on new sales and a 60% plus referral rate on resales. They also continue to focus on the 30-year refurbishment plan for each community. We spent about $1.5 million on new carpets, furniture, bathrooms right across the suite of completed communities just to maintain the quality, presentation and also helped drive our capital growth and, again, our ongoing referral rates. Really proud of acquisition team, who acquired 4 sites over the period, which increased our pipeline of sites to be developed to 2,200. Our current settings enable us to keep acquiring up to 3 sites per year, and we're constantly in the market using our proven network of landowners to achieve this. We continue to look at the land around Melbourne and Geelong as well as regional coastal Victoria as the tree change and sea change market strengthens post COVID. I'm also incredibly proud of our finance team, who drove our project management accounting process to ensure that we're always focusing ahead with price increases and keeping our projects at cash breakeven. At the same time, this team implemented a new SAP system and were also instrumental in implementation of the new CRM system, Salesforce, which will be a game changer over time in the way we manage inquiries and leads as well as our homeowner interface on the homeowner portal. Finally, this was all backed by our fantastic people experience team, who onboarded about 15 new team members over this period to resource our future growth across all our projects and communities. The quality of these resources has really never been higher, all attracted to Lifestyle by our laser focus on our purpose, our team and customer-centric culture. But most of all, I have to say, the whole team achieved all the above with group determination, innovation, humor, care and empathy, at all times ensuring our customer homeowner always came first. That is what I'm most proud of, and I have no doubt that what the team has learned over these past years just sets us up so well for the future. So before closing remarks, I'll now pass over to Darren to talk more about the financials and the year that was.

Thanks, James. I certainly echo those comments. It was one for ages this year, and from our perspective, it's a privilege to be able to pull together the results and show off the hard work of the team. So it's one of the great parts of my role here at Lifestyle. Just on the P&L, so it's obviously the continued growth in the portfolio of homes under management is the primary driver of our results this year. There are 401 new home settlements compared to 255 last year. It was a great uplift in activity levels. The increased portfolio size flowed through to higher operating results, increased number of resales. And we're also pleased to see homeowners achieving sales or continuing to achieve sales price growth when they sell their home and move on. We've certainly seen some inflationary pressures in the building industry this year, particularly timber and steel and other supply chain challenges. But with a strong property market during the early and middle parts of the year, we've been able to recover those increases and maintain our cash cost recovery model. We didn't chase the market up with our sales pricing during the upswing, and this leaves us with a bit of room to absorb inflation and interest rate rises as they come through. It was pleasing to see the gross margin from new home sales and also our community operating margins remaining steady during this environment. Overheads definitely had some increases, and you'll see that coming through in the P&L. The primary drivers of this, insurance, particularly D&O as the share price has increased and the market cap has grown. We've also had an increase in the accounting expense related to our employee share scheme. As we look forward to FY '23, we expect the sales and marketing costs to continue to increase as we launch 7 new projects for sale during the year. These costs typically front run the settlements coming through. And we're also expecting a continued growth in our overheads to support the increased activity levels through FY '23. On the balance sheet, we made a deliberate decision during lockdown to continue building, increase our inventory levels. This gave us homes ready to sell when the lockdown period ended, but it also gave us a bit of latency in our supply chain, which helped us manage our way through those challenges in the second half and keep the build program on track. We also made a deliberate decision to keep our trades engaged during lockdown, and that played through in the busy period post lockdown, where we maintained that loyalty with our trade base. This all saw us well placed to service customers as we emerged from the lockdown, with homes ready to sell and certainty of delivery date, which is an important factor when people are making what can often be a very emotional move from the family home into a new home, with us delivering certainty as a core part of our promise. We've settled on several land prices in the pipeline during the period as well as signing 4 new contracts, as James mentioned. And you'll see these replenish the future pipeline and set us up well for growth over the next 3 to 5 years. The gearing levels reduced a little bit in the second half of the year as we saw those sort of higher settlement numbers come through and the capital recycling model played through. We also had some uplifts in the valuation of the property portfolio. We do expect the gearing to creep up a little bit in the course of FY '23 as the land settles for the contracted sites and the development activity ramps up as we launch those projects. Like in many businesses, we're very mindful of the rising interest rate environment at the moment. And we've set our sales prices to include future allowances to upward movements as rates normalize off their pandemic lows. And to assist us with the pipeline, we finalized an extension to our debt facility in August '21. And we'd once again like to thank our lenders, the NAB, HSBC and the CBA for their continued support. The current facility that we've got is sufficient to fund all the projects that we've got in development pipeline as well as future land acquisition. So we're well placed there. Finally, on the cash flow, you can see the increased settlements flowing through the operating cash flow line, with strong cash collections at Mount Duneed, Kaduna Park and St Leonards that they settled out in the second half. Overall debt levels increased, as I mentioned, with the settlement of the land acquisitions of Wollert, Phillip Island and Woodlea. And then moving into FY '23, we do expect operating cash flow to remain positive during FY '23, but it will reduce relative to FY '22, just as the construction period ramps up for the 7 new projects that we're launching during the year. And we expect our debt levels to sort of follow that trajectory. And then for a detailed breakdown of the cash flow by property, I'd just encourage everyone to look at Slide 36 of the pack, which breaks down our cash flow by property. Just in closing for me, I'd like to give a big shout out to our team and the broader Lifestyle team for the enormous effort during the period as we implemented the new IT systems. These implementation projects take a lot of discretionary asset over and above people's day jobs, and certainly, I was very proud of the way the team have embraced the changes, and it sees us really well set up for FY '23 and beyond. Thanks. James?

Thanks, Darren. And just before questions, I'll just close on a couple of thoughts. It's interesting, when you've been doing it as long as I have been doing it and still just as passionate as the day we started, I reflect back on all the other times of turbulence that we've had, and there's a little bit of turbulence coming up with interest rates and inflation, all those other things. The business model we set up from the get-go was a really simple one: to sell really cheap homes in -- affordable homes, I should say, in fantastic communities that were aspirational to people downsizing, look into little bit of life. Where this model has always worked for us is that 2 key drivers. Our homeowners can always sell their homes to a first homebuyer, and they're the ones who buy 99% of all our customers' homes. And they're always in the market, and already government's reaching out with first homebuyer to make sure that that's still stimulated. The other issue being that's happened to first homebuyers, they're now pretty much excluded as the new home market. It's just got too expensive for them. So they're now mostly focused on the established market, which is really helping our customers sell their homes. The other part of the model has always been selling at [ 80% of the in-house price ], which means that our homeowner can sell their home, free up equity and live a bit of life. And the imperative on them to move is no different than it was from the get-go, which is, time's not -- time is not a last dress rehearsal, so we have to seize the moment to think about when they do that. That's been really helped post COVID. And I think the silver lining in that has been that it's been sort of come to chase this moment for any baby boomer, and I'm 63, and I think about it is that, how do you tick off the bucket list in the years to come and you've got to kind of get on with it. And I think it's very much evident in the minds of our customer. So that model serves us extremely well and continues to serve us extremely well in the future. It's why I'm feeling very positive about the model ongoing. That discipline is sticking to those settings and served us just so well the nearly 20 years and just, again, gives us just so much confidence about the years to come. As Darren has mentioned, we're launching 7 projects, which is the most we have launched, and it's with great excitement that the team look at this. The innovation that's going into our designs, you can see from the presentations, and what we're doing is just next level. And we're really adapting all what we're doing to look at what the aspirational baby boomer is looking for, and we've very much adapted our product and our facilities to meet that. Over the next 3 years, we are forecasting to deliver somewhere between 1,400 and 1,700 new home settlements and 550 to 750 resale settlements. As I mentioned before, we've been gearing up to resource and get match fit to deliver those. We also continue to make real inroads on our ESG strategy. And the one project I love the most is the integrated micro grid at Meridian. This is one of the largest integrated residential micro grids in Australia, and we'll see us installing 450 kilowatts of solar actually on our homeowners' roofs. We'll own the panels. As well as 150 kilowatts of centralized batteries. Particularly at this time when energy costs are just so current and relevant, this -- and topical, this should decrease our homeowners' variable energy bills by up to 50%. It's a really timely outcome -- opportunity that's going on. We also continue to welcome new competitors to Victoria in the belief that this will help further educate the addressable market on the benefits of downsizing to a landless community. And also, we continue to evolve all our products in light of the changes in demographic and that we're trying to attract. And really, again, excited by this new product range that we've launched our latest project at Meridian. So in closing, oh my God, this year, we just saw Lifestyle at absolute best, with about 140 team members now who are just doing a fantastic job. I'm proud of every one of them. We also have 4,500 homeowners living in Lifestyle's communities. And I, again, feel though that we've seen more right than wrong with where our referral rates sit and still this discipline of going out to every community every 6 months and meeting all the homeowners and getting across issues they might have. And this has put us in really good stead for ensuring that we always are optimizing, maximizing and focused on the home experience in our communities. Thank you again for joining us on this call. I'm happy to take any questions that you might have. Thank you.

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

Congratulations on the results. Just a question about costs and development margin to start with. Just thinking about, you probably know broadly or pretty well what those margins will be on the homes that are awaiting settlement. Can you tell us a little bit of what's happening with construction costs and house prices? And what should we expect for that development margin as we head into '23?

Hello, Michael, thanks for joining us. Yes, interesting times. Definitely, we feel like construction costs, while we certainly are not going to call that the inflationary environment has finished, we do feel it's leveling off a little bit. And yes, we're not expecting a similar sort of run in FY '23 that we had at that sort of early part of calendar -- yes, sorry, the second half of FY '22. In terms of the margin, I mean, ultimately, our pricing model hasn't changed. So the cash cost recovery model continues. So we're not expecting major differences in our model. Largely from period to period, we do see the margin move around a little bit sometimes, which can be down to a mix of projects settling and some of our pricing strategy playing through. So as an example of Meridian, it's the latest project that's just started settling. We typically price the homes slightly cheaper at the start of the development. So they make a slightly lower margin and then it ratchets throughout the development. So I guess from that perspective, we've been able to pass through the cost increases in the form of small price rises, the falling market in the early part of sort of FY '22 through to the period post Christmas, we didn't really chase that with our sales process, so that sets a bit of room for some small increases just to recover any inflation. So I guess, a long way to say we're not expecting major changes next year.

Okay. Great. Just on the community operating margin, you managed to increase that through the year despite having no rent increase. You got 3.7% in rent increases of 1 July. So should we expect a little bit of margin expansion here? Or you're likely to reinvest that into some of the older communities, on refurbishments, et cetera?

We did actually get an increase last year as well. The no increase was the year before, yes. So that has played through this year a little bit. But yes, I mean, our plan really continues there as well, to be honest. We continue to reinvest back into those older communities. And as we build a bit more scale and the rate of new settlements is increasing, it does increase the pool of funds available for refurbishments a little bit. So we're definitely continuing to reinvest back in those older communities. But again, we're not really expecting major movements in those margins this year. We've got -- we've just been through our sort of reviews, and we've set the budget for this year. And yes, we've got a good solid plan in place to sort of keep that margin steady for this year.

Final one for me. Just on average equity release, I know you obviously focused on that 80%. But in reality, you probably -- the homeowners are selling their homes at a deeper discount than that. So what's the sort of dollar average equity release that you delivered maybe this year and why not the whole percentage discount to the median?

Yes. So the dollar figure of this year was $240,000, which was a slight increase on the years prior. We're definitely not seeing the discounting play through in the outer suburbs yet. So it hasn't really affected the equity free up that our customers have been getting yet. We're mindful that it might move around a little bit throughout the course of the year. But equally, all of our homeowners have enjoyed the large uplift that happened in the early part of the year. So it sort of went up like a rocket, and now it might come down a little bit. But at the end of the day, it's probably going to level out.

Your next question comes from Andy MacFarlane from Jarden.

Look, just in terms of the launch and maybe in detail in the back of the pack, but just wondering how you're seeing, I guess, timing in terms of sale of the settlement at the moment and what it's sort of looking like now versus historic?

So Andy, you're saying sales rates at moment in terms of how the...

No, sorry, James. I'm talking in terms of book for sale and then booking settlements. So I'm talking in terms of construction time lines.

Yes. Andy, it's interesting. Is this in terms of our homeowners' existing homes staying on the market a bit longer? Is that where you're going?

No, I'm going with building time frames. Is it taking longer? Like if you're going to [indiscernible], your book is down in the first quarter. Is it following demand for then booking [ to settle ] kind of thing?

So Andy, actually, all we've done on that -- construction ones have gone out a little bit. All we're doing is ordering them a bit earlier. So we pulled forward the order book rather than if we've got a home to deliver in March, we'll now order it. And we would have ordered in September, then we're now all going to in order in August to make sure we still deliver it in March. So we've just changed our internal processes and ordering process to accommodate, just a slightly longer construction time. Most of it's actually around windows, funny enough. Our supply chain is pretty good. It's -- we just got a little problem with getting windows. Doesn't -- with the Todd Devine relationship, which basically franks our order book because we've got purchasing power sort to sort of give us a much better steer on supply and guarantee of supply. It's just this one element here that's just giving us a little bit of grief, but in all my reading is that by next year, we'll start to see that soften out again. That should start to bring off pricing as well, as well as give us more certainty on supply chain to bring construction times back a bit.

Yes. Fair enough. I know you were talking before sort of around the 30 June, just in terms of we've been seeing a slowing and getting ready to market. What are you seeing in terms of -- you talked about just before, but what are you seeing in terms of a pull forward of sales? I know there were some comments around people actually bringing the sales forward because they thought the market might get weaker before it got better again. What are you seeing, I guess, in terms of that decision making in your inquiries? And how do you sort of think about that in terms of your sales and settlements going forward for FY '23?

We're not really seeing much change, to be honest, Andy. Like in the outer 'burbs, you might have seen prices come back maybe 1% or 2%. It's nothing like the inner 'burbs where maybe, if you read the press, they're saying it's come back 10% to 15%. So it's not been as nearly as significantly out of us. As always, it is with the case when we cite off in property prices, the outer 'burb goes down much less than the inner 'burbs. You tend to find it slightly harder to sell in this falling market probably because you're sort of -- you're dealing with homeowners' expectations. They thought their home is worth $700,000. Now the agents say $680,000. We've always had a selling process through these times where we're actually posting the equity free up rather than actual prices because what matters to them is what they thought they're going to put into their bank account, not what they're going to sell their home for. So we will propose a slightly smaller, more affordable product given the same equity free up. And we use CoreLogic a lot in that process to the customer's home, get the best read, what the value is going to be. And then we do the arbitrage between what they'd like to free up in equity and then what home they can afford. So -- in that case, we wouldn't be showing them a 3-bedroom home. We'd be showing a 2.5 bedroom home, or we'll be showing them the 2.5 bedroom home. We'll be showing them a 2-bedroom home to make sure they still got a equity free up. So our team's really well trained when we've got a slightly falling market. In terms of the ability to sell their homes, we're not seeing much of a change at the moment, Andy. The first homebuyer is still very, very strong, certainly around the out of suburbs in Melbourne, and that just continues to sort of move forward.

To -- I'd like to move to 2 data points. One, just wondering what the current referral rate's running at? I know you sort of look to disclose it and running in the 40% sort of zip code. What does that look like today?

It's still around the 50% mark, Andy. It did drop a bit through lockdown, just when we couldn't run any of the events that drive their referrals. But in the second half of the year, it's sort of crept back up again. So it is just slightly below 50% but still in that sort of range.

Perfect. And then just the last one, just on the SGA. What -- you talked around to the headcount op costs, sort of operating costs are going up. Obviously, that's going to be representative of sales and marketing. But how should we sort of think about it going forward? I know you've talked before about buying 4 sites last year, thinking going forward buying 3. I realize there can be a bit of flex in that. But what are you thinking in terms of what is that SGA today? And how do you sort of think about that as you go forward on SG&A?

So most of the SGA is really associated with the new projects which gets expensed against the projects. In terms of corporate overheads, we've had a very small growth in the numbers in the corporate overhead, maybe 3 or 4 people. So we kind of match fit at the corporate level. It's really just adding resources into the projects as we need and able to get expenses in those projects, so -- and recover through the sales price of the home. So the kind of -- yes, it just flexes with our -- the number of new projects or projects we have under management -- or [ to be under ] management.

Your next question comes from Tom Bodor from UBS.

I just was interested in sort of the discussion around potentially no DMF options for customers that might prefer a higher upfront contribution. Is that something you are considering? Or is it still off the table?

So yes, we've never -- it's an interesting one, certainly against operators in Victoria with no DMF but tracking much higher upfront prices. We've found that our consumers, our customers vote with their wallet. They have the money in their pocket upfront and be able to enjoy bigger life of that money and pay at the end than pay a much higher upfront price and have less money when they downsize and that they have less money to enjoy when they downsize. So I think with the Y gen, that might have been less relevant. With the baby boom generation, that's much more relevant. So we've seen that equity free up of $230,000, and if our house prices were that much more, then obviously they wouldn't be freeing up anything like that sort of equity.

I'm just thinking for people that have sold their houses for a bit more and free up more equity, do they run into problems with pension eligibility and not being able to claim rent assist if they sell a house for too much and they might prefer to put it into the house upfront?

Yes. We don't really get that sort of -- that's a very rare occurrence. Again, our average equity free up is $240,000. So that's well, well below the threshold. So I think the record price some of these sold for. But it's usually fine, Tom, with those people that sort of money generally are self-funded retirees, they're less so pension. Again, 85% of our customers are pensioners. So we come across -- we don't come across that frequently. It's a nice problem to have, I've got to say, if it was.

Absolutely. It's a quality problem for those people that are leaving the pension who have too much money. Just around just funding the business going forward, I appreciate you've got the new debt facility. Just be interested as you ramp up production into -- particularly into '25 -- '24 and '25 and you're buying sites, does the size of the facility sort of dictate how you sort of commit capital? Or do you feel that there's ample headroom sort of for all scenarios, including the scenario where sales might be a bit stronger and you want to pull stuff forward?