Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lifestyle Communities 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, and welcome to the Lifestyle results call. You did see next Friday week, actually marks a really significant milestone for the business. 20 years ago to that day, [ Davos ] and I caught up at Giorgios Cafe in [ Melbourne ], recognizing a real gap in the market. We see a couple of ways developing a concept for affordable downsized communities for the average Victorian. We also did this with a mandate to ensure that whatever we did, it would be socially, morally and ethically sustainable, and we've never resolved from this. And so Lifestyle Communities was born on the 24th of February 2003, and we have organically grown this business for 2 decades to where we are today. During this time, we maintained an absolute laser-like focus on 3 things: firstly, prioritizing our customers and homeowners. We are driven to provide them with superior experience in the most amazing communities that we can envisage. Secondly, investing in our amazing team to show that we recruit the most customer-centric people who are passionate about our purpose and our wonderful customers and homeowners. And finally, an absolute fundamental viewpoint of ours has been on our shareholders, ensuring that we optimize returns through not raising equity and recycling capital and then offering superior returns on the journey. Again, we've never resolved from those also 3 laser-like focuses on what Lifestyle is all about. We also intuitively knew this model was super robust, almost countercyclical. It could withstand whatever the property market through it. But our customers are always selling to first-home buyers and the desire to downsize being a life ambition, we assure that we would always have wind in our sales. This has continually been franked up over the last 20 years and even more so today. And so what a year to mark this 20th anniversary with the launch of 7 just extraordinary projects. All reimagined in retailing emerging trends post COVID. We've launched projects -- our projects [indiscernible] Woodlea, Bellarine, Phillip Island, St Leonards – The Shores and most recently Riverfield in the Melbourne Southeast. We also launched Pakenham East and Merrifield in the coming months. What we're excited being most is the team has completely reimagined the facilities that we provide as we grow on our addressable market to now start to embrace the post-COVID settlement as well as the emerging Gen X. Our newer communities, we're now seeing 20% to 40% of our homeowners are still working and leave with different experience to facilities compared to what we have previously provided. They have more time for, as a result, the gift of time has become as important as the freeing up of equity. A marketing experience strategy leans into this, which is driving stronger inquiries and leads. We also reimagined our experience offering with the forthcoming launch of Club Lifestyle, our biggest customer experience initiative in 20 years. Club Lifestyle provide homeowners free access to villas, caravan sites and motor homes located in the more sought-after destination communities around Victoria. The first to launch will be in April at Lifestyle Bellarine with 28 beautiful villas, 24 caravan sites and 2 brand-new motor homes. Understandably, the response to our homes has been nothing short of fantastic and ultimately will lead to increased referral and market differentiation. Before I pass it down, I just want to thank you, our shareholders, who we want to support over the last 20 years for believing us and walking beside us on this journey. Collectively, we created a strong, resilient visionary business that constantly reimagines and redefines what a business for purpose is all about. I'm just so looking forward to seeing the next stage of our growth, the delivery of these next 7 projects and seeing all the ideas and thinking hit the ground over the coming next year and a bit. So I'd now like to pass to Darren just to talk through the results in a bit more detail.

Thanks, James -- afternoon, everyone. It's interesting, I was reflecting on the results this morning with the team and what sort of strikes me is that the results themselves don't really reflect the level of activity that's been going on in the business is the sort of activity levels to launch new projects and get new products into the market really front runs the financial results that the settlements play through in future years. But it's definitely been a busy period and certainly one that -- it's been a pleasure to be involved in as we bring these new projects to market. On the results themselves, the settlements were impacted a little bit by project timing as we closed out older communities at Mount Duneed and Kaduna Park, which has been in development for some years. We then put new communities into the market, which haven't really started their settlement journey yet. So a little bit of a transition period in that sense. Pleasingly, we saw the site rentals continue to increase due to an increased number of homes under management from the settlements last year as well as really good cost control in the existing operations, particularly in -- as everyone, no doubt we're in quite a high inflationary environment at the moment. Also pleasing to see was a really strong demand for resales, continuing to see our products turn over in a really quick time. No major change in our time on market for resale homes. And we've also continued to see price growth in that established resale market, which has contributed to the stronger DMF revenue coming through. So that's really pleasing as we see our communities continue to create capital growth for our homeowners. On the balance sheet, quite a lot going on in the balance sheet as we launch these new projects. Early in the year, we renegotiated our debt facilities with our existing bank syndicate. So we increased that to $525 million. That allows us to continue our buying cycle within our existing capital management framework. We've also settled a number of blocks of land that were in our pipeline. So there was quite a heavy cash flow for that as we settle those contracts. No more material than contracts to settle in the second half. We just got 1 more project to go in those settlements. So that should see the cash flow for land settlement slow down a little bit in the second half. We did see a big increase in activity levels as we launched, and we created -- we completed early works on civils and infrastructure as well as ramping up the volume of house bills as we try and complete those houses to satisfy the presales. So that's resulted in an increase in our inventory levels as well as an increase in our debt draw and gearing. All of our debt is project linked. So we recovered the interest cost on that debt through the projects. And we use forward interest rate assessments to do that. So as much as we are seeing an impact of the increased interest rates that are going on out there at the moment, we have been able to nurse those through our pricing models and build it into our forward sales prices. So whilst gearing is a little bit higher than at 30 June, it's consistent with where we were this time last year and certainly not something that we're particularly concerned about. On the cash flow, obviously, in a capital recycling model like ours, the cash -- operating cash flow is heavily dependent on settlements. So we have seen a lower cash flow in the first half, but that should move around a bit in the second half as those increased number of settlements come through. Finally, I would like to thank our team for their efforts in launching these 4 new projects during first half and the preemptive efforts on the 3 coming in the second half. We've spent a lot of time and effort over the last 2 or 3 years, in particular, building systems and processes and putting in new IT systems and retraining the team and recruiting new people, all with this particular ramp-up in mind of delivering new projects and ultimately higher settlement numbers. And it's been a pleasure to watch that come to fruition in this first period, and I look forward to it continuing in the second half.

Thanks, Darren. So just in terms of the outlook, we're still seeing Melbourne as a sort of tale of 2 cities. And I threaded to bring the table cloth around again on the road show that one hasn't seen it, just to show how property markets move in terms of the city might come down, 10% or 15% in these type of property price -- property movements. But you see the out of [indiscernible] still in most of our catchments, they're either steady or actually slightly increasing. As Darren mentioned, we're seeing time on market for resales and our customers selling their own homes still to be 35, 40 days, which still talks about a very strong at suburban market. I think there's also a push into buying established housing as people are nervous about building new housing with what's happening with -- experience with builders. And I think that's also assisting our customers selling their homes as well. We are still forecasting the range of 1,400 to 1,700 settlements. And obviously, we're back-end weighted, second half weighted this year as well. And we're seeing, again, our customers ready to sell their homes are still very, very positive. It's been an interesting start to the year or the calendar year, we had a really good surge in inquiry. As I think we're leaning into customers' expectations or thinking around what's next and post COVID. And I think also this tap into, as I mentioned, people still working and be able to move to Lifestyle Communities and enjoy everything that it brings [indiscernible] the garden, [indiscernible] at home, go the gym, go for a swim and not have to drive out the gate is really resonating with that market. And that, for us, reopens up our addressable market in terms of bringing the Gen X. And again, as I mentioned, we changed a lot of Clubhouse product around that, how we're designing, building thinking about that. And the information we shared today shows a lot of those new designs, which are really, really exciting and really pushing the [indiscernible] in terms of or boundaries in terms of these types of offers to the Gen X. Like Darren, I totally agree, we've onboard a whole of new people now for our new projects in the same caliber of what we've recruited before. We're incredibly conscious of who we recruit and the culture of group into. And we now have a team of 160 super passionate, totally customer and homeowner driven who just do an agent job, whatever you do, and I'd like to thank all of them as well every day for Lifestyle. Finally, bring it on as our video says -- that's what our video says, we're not done yet. And we're certainly not. We're looking at new land opportunities, some new thinking, new ideas of where to buy land as well, as well as our traditional catchments. And also constantly reimagining in terms of what Lifestyle is about, but with always that same focus as 20 years ago of delivering amazing affordable housing for people looking to downsize to a bigger life. So with that being said, I'd like to now pass back to the operator, and we're really happy to field some questions.

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

Just the first 1 on average equity release. Could you give us a sense of where that is? And you sound like coming back a little bit in this environment?

No, pretty consistent with where it was at the full year, Michael. We haven't seen any major change in that front. And we do still monitor it. So for every customer that sells their home, we look at what they've sold it for and what they're buying with us, but no material change there in this period. Roughly [ 200 equity, 150 ] is the average equity free up.

Just on the selling price is up very strongly, 27% to [ 650 ] including GST. But just getting a sense is that -- how much of that sort of mix should we expect that sort of number as we go forward? Or is it sort of particular benefit in terms of particular homes or communities you're selling out in that period?

Yes, it's a good pickup. It's actually more to do with the mix of projects and the locations of where they're selling, particularly the Bellarine project in Phillip Island selling at a slightly higher price point, but equally, the land price was slightly higher, too. So no change in our pricing philosophy or model. We're still selling at an average of 75% to 80% of the median house price in the catchments. It just so happens that those catchments that we're moving into are slightly more expensive in this particular period.

And maybe just a final 1 for me. Just can you comment on time to build homes, what's that running at the moment? In light of some of your competitors, I think, gets blown out quite a bit. And just on build costs, what are you seeing there on homes and on civils, clubhouse, et cetera?

Yes. It's all coming back, Michael, which is great. So could go to pretty much back to where we were 2 years ago, 2.5 years ago in terms of build times. We will add an extension of time due to supply chain issues. We've now pulled that right back almost to 0 now. There's a couple of cases we were building bigger homes that were still allowed for a slightly longer time as we adjust to working at how much those -- how long those homes actually take to build. In terms of pricing and costs, yes, we don't see that level out. There definitely is a downturn in demand now for new housing and that's going to start flowing through the supply chains. And because, obviously, we're the projects -- we're increasing our build volume, and we're in a really good position between competitive price taking. So yes, that puts a really good position for the next 12 to 18 months. And Clubhouse costs, they've also leveled off as well, which is great.

Your next question comes from Andy MacFarlane from Jarden.

So in terms of projects have been released, just wondering what you're seeing coming through in terms of referrals in terms of sales?

Yes, it's a really good question, Andy. Referral is really strong. You don't -- you fill varies as you go through poses that early as you all of new customers, a lot of new faces, and then you start getting the referring customers probably more so when the project actually starts and something to be on the ground and then referrals really kick when you actually open the Clubhouse. So -- but across the board, we're still around that sort of 50% mark on new projects in and higher for established communities where we have resales. Interesting enough, Andy, we just actually appointed a referral lead within the business to actually refocus on referrals because a lot of things we could do better in terms of the way we manage referrals. It's a really exciting role, a very exciting time to be doing it because particularly the sales force coming in our ability to actually do more around that space is a fantastic opportunities.

So in terms of the team, you mentioned before you're up to [indiscernible]. It looks like you've put a few new stuff. I'm just wondering what are these like doing? Are they net new people or they're going to churn during the period or....

They're all frontline, Andy. So yes, they're not coming to support office. They're going out to the frontline in terms of project management teams, community management teams and sales teams. So we have increased our marketing team slightly as well to take on the additional volume of projects. So yes, they're all sort of frontline project-related resources.

Good. Just 1 -- last 1 for me. Just in terms of new [indiscernible], just wondering on the detail on the project. I'm just wondering, we developer, what's the fact pattern around the project and just wondering, I guess, what's in the pipeline for the rest of the year and really what you're seeing in terms of the market and is there any dislocation, revise -- and do you think that could be some opportunities for you?

Yes. Really good question. And like there is -- this is the post-COVID trend. Warragul is now is almost, say, a suburb of Melbourne. We did 1 community there [ which is our ] second or third community, and that were extremely well. Resales from that also extremely strong as well. This -- the site we bought is on the other side of Warragul, absolutely beautiful site. So, yes, we've got the opportunity of doing another sort of tree-change type offer. And also we'll slot in a bit of Club Lifestyle into that as well in terms of tree-change pillars as part of that offer as well. It has sort of broadened our thinking around what's possible with sites. So -- and that's an exciting acquisition team. So yes, watch this space. The other thing we're seeing, Andy, is a little bit as the housing market slows, the land market will slow and then that's -- or the new housing market, I should say, is slow. So that's going to potentially free up some land. And yes, we're having a couple of chats, a couple of developers at the moment who might be willing to offload tens of hectares just to bring some cash in earlier. So I think that's going to probably increase a little bit more this year. I think the banks tighten up as well. So usually do see some opportunities to blow this as well. And obviously, we can settle pretty quickly and we've got a very, very good reputation in Melbourne around dealing with in terms of acquiring land, and we've got a very, very strong acquisition team. One of who has been with us for 16 years. So yes, it is extremely well known. It's truly highly regarded, and we're very good for doing deals. So yes, what's the space for this year? I think there'll be some different locations than perhaps what we've done before.

Your next question comes from Aaron Muller from Canaccord Genuity.

Guys, just on settlements at Deanside and the Wollert North, they seem to be probably a little bit softer than what sort of I expected. What's that being in that community or that corridor, do you think? And do you think to be able to reinvigorate sales and settlements there? Yes, this is just what's happening up there in particular.

Yes. It's still at same case, Aaron, where it's a new corridor for us, it's sort of -- still sort of getting our feet under the table. Deanside, in particular has had major road issues in terms of accessibility. And for customers [indiscernible] over the last 6 months -- over the last 3 months, particularly has been a minor miracle. The good news is we've started this year very strong, we have finished last year and start this year much more strongly in terms of sales. So I think that we'll start to see that sort of turnaround. We can't necessarily know that we have to -- we've got to be spread around Melbourne and get into these corridors where there's massive population, but where we haven't got a big footprint. And we're actually doing a lot of work right now on our brand to also increase organic search as well. But getting our brand out there and about -- we're doing a lot more billboard, we do a lot more radio. So -- and that all seems to be having traction again, very, very strong inquiry month in January, which will result in sales at both those communities over the coming months as well. So yes, nothing to worry about. It's actually -- they're all right on business case, but the -- not shooting the likes out like some of the others, and they all can't be the sort of Meridian and St Leonards and the Cowes and all the rest of it. But they're right on average in terms of what our other approaches have done as well.

Yes. Thanks, James. And then just on Woodlea and Bellarine, you failed the expected commitment in the fourth quarter from a settlement point of view. Kind of that coming from a development point of view, do you think settlements that are commencing in April? Or is it more towards the end of the quarter in June?

Yes, they're all just because of their timing, they're all in sort of later in the last quarter really of the half. So full year, I should say, so yes, the more sort of May, June settlements, just really timing ability to have done the civils and on site. But I got [indiscernible] team, the team aside would be, which is heavily rocked, by the way. And they went to the rain that's to home the tempest and yes -- and we'll -- we started, I think, back in June, July, and we'll have houses certainly there 12 months later from start. So yes, it speaks volumes to our delivery capacity. It speaks volumes to our sort of -- our preferred contracts to be used for civils and obviously, to [indiscernible] just to turn stuff around which we just -- is so proficient at doing now. And the relationship with us in terms of volume, it has just never been stronger. And capacity to deliver has also never been stronger as well, particularly now you've got more homes to negotiate with suppliers. And also, particularly with some of the volume builders going to slow down, it's freeing up both supervisors and also trades for us as well. So yes, so yes, the construction business is actually a really good space at the moment. And I think it will continue to be so for quite a while.

Your next question comes from Ben Brayshaw from Barrenjoey.

I was wondering if you could comment on the potential for net capital release in the second half. Darren, you mentioned on the call, no more material land settlements skew. So does that imply that there should be a reduction in net debt over the course of the next 6 months?

No, not necessarily, Ben. It does depend a little bit on settlements, to be honest. I mean that's always the big swinger for us. So I guess the dynamics are, we've got settlements that bring cash in, and then we've got construction activity that is ramping up. So those 2 are sort of offsetting each other in a cash perspective at the moment. So we're not expecting debt levels to reduce materially, but no either are we expecting them to increase materially by 30 June, but it will depend on where settlements ultimately get to, which can be a little bit outside of our control. So something we've definitely got our right on, but doing everything we can to get settlements in the door as always. But yes, a little bit dependent on that.

And perhaps this is a question for James. I was wondering if you could maybe just talk through those factors that have contributed to lower sales rates in the last 6 months, just with reference to the second half of FY '22 being particularly strong in presales. Presales for this half also being a bit below where they would appear to have been in the prior corresponding period. So I'm just interested as to how much of that you think is a function of the broader market or whether that is also reflecting project-related timing issues?

I'll jump in on that one, Ben. It's actually largely out of the project timing issues more than any sort of major change in project sales rates at individual projects. We actually saw, I guess, it links back to Aaron's prior question around the [ alert and beam side], we actually saw the sales rate of those 2 projects pick up a little bit in this period. And then we obviously had, Phillip Island, Bellarine, Meridian doing quite well as well. So in terms of sales rates, we didn't see a massive decline. It's just more driven by the project phasing and the number of projects we have in the market at any given point in time with the sort of 2 finishing for launching before launching obviously launched a period months throughout the period. So Phillip Island as an example, only launched in December. So we're going to have 1 month of the sales there. So those things had a bigger impact on the sort of total sales number than any sort of market-driven activities.

And you previously said that FY '23 should be broadly in line from a settlement perspective with FY '22, assuming that is indeed correct, how confident are you of settling circa 260 lots in the second half? Just when you look at the profile for the remaining 4 months of the year. And the swing factor is -- just your thoughts, please, on the risk to settlement activity in the second half?

We're really comfortable, Ben. The sales team -- we kind of run a machine here a little bit in terms of -- we've got fantastic sales team. They're backed up by what we call a settlements team. They're focused on getting customers' homes to market. And we've got a whole sort of approach and systems around that, how we do that. And then the other bigger risk is can we actually deliver the homes by June 30 to actually settle. And that's where, obviously, the long-term relationship with Todd kind of frags my confidence and Dan's confidence to say, we kind of know them so well, that we can pretty much preempt -- sorry, the great certainty well what they can deliver by June 30. It's usually on Meridian, we've got 155, 160 homes under construction on that site alone, which is an extraordinary thing to see. But in terms of [indiscernible] geared up with the whole raft of supervisors and teams [indiscernible] we've geared up. And so yes, we've got a pretty good size of what's coming June 30. We're a bit short bit over. It's not on an impact. Again, we're very comfortable with our bigger number of 1,400 to 1,700. So -- and obviously, those project launches project launch, that's what's breaking that bigger number in a couple of years.

So should we be still expecting around 400 for FY '23?

Yes. We've said we'll do something similar to FY '22, plus or minus.

Your next question comes from Scott Hudson from MST.

A couple of quick questions, most of for Darren. Can you just give us a sense of the drive and yes, development expenses and corporate overheads. Is that largely done now? Or is still sort of a follow-through impact into the second half?

Yes. I think development expenses are a little bit different to the cost of sales. So we expense development expenses as incurred. So typically when we launch new projects, there's a lot of upfront work to do, employing the sales team, getting the marketing team set up and then getting all of the materials done and into the market and booking signage, et cetera. So there is a, I guess, a pretty reasonable cost per project that you launch. And then clearly, we've launched 4 in the 1 period. So we sort of multiply that by 4 this period, which we haven't really done before. So that definitely has driven that increase. But we've got a similar sort of number of projects hitting the market in the second half. So I'm not expecting that we'll see major drop-off in that line item in the second half. Yes, we're continually marketing those new projects hard. I think with corporate overheads, there's a little bit that will stick definitely. I mean we're not immune to the inflation environment that's out there at the moment. We've also got the activity levels always start run the settlement. So we do need to build the engine to deliver those numbers. So we're not sort of a CPI driven overhead business. We scale the business as we grow. So that will always continue to tick along. We don't have any major plans to onboard a huge number of additional people in the support office. But we are in the process of moving office. That will bring a bit more cost into the second half. And then we've got all those usual things playing through like insurance costs and things like that. So yes, we will continue to tick along in that overhead space.