Lifestyle Communities Limited (LIC) Earnings Call Transcript & Summary

Good morning, and welcome to Lifestyle Communities' Investor Analyst Conference Call. My name is Anita Addorisio, Company Secretary of Lifestyle, and moderator for this call. This webinar will be recorded for the benefit of those who are unable to attend today, and the webcast will be available upon request. Please be advised our conference call will strictly be limited to 1 hour this morning. Due to the number of attendees, we will endeavor to address as many questions as possible during this time. We encourage you to contact the company via the Investor Center available on the company's website, should you have any queries following today's update. Our presenters today are Managing Director, James Kelly; and Chief Financial Officer, Darren Rowland, who will provide an update on the FY '24 year-end results as released to the market yesterday evening. This will be followed by a Q&A session, for which I will now outline the procedure as presented on your screen. [Operator Instructions] Please note that questions received by the Q&A function which are of a similar nature will be grouped and answered at the appropriate time. I now invite our Managing Director, James Kelly, for his presentation. Over to you, James.

Thank you so much, Anita, and thanks so much for joining the call and for your interest in our business. It's certainly been a big year for Lifestyle with the business continued to grow with the acquisition of new sites and also the launch of new projects. The same time, market conditions in Victoria have been challenging and did deteriorate as the year progressed. The residential property market felt the effects of continued high inflation with median house prices moderating or declining in most catchments during the year. These factors had a significant impact on consumer confidence, with many customers expressing interest in downsizing by preferring not to commit in the current climate. Now is not the time, was one of the biggest statements that our team heard again and again, particularly in the second half of FY '24. Despite these challenges, we achieved 375 new home sales, which is the fourth highest result in our history and also end up just slightly above our predicted range of 311 new home settlements. This result in a challenging market is a testament to the resilience of our DMF model and how strong it continues to resonate with customers. In February 2024, we announced a $275 million fully underwritten rights issue. The funds raised have been used to pay down debt and fortify the balance sheet in the short-term. Longer term, the capital enables to consider land acquisitions opportunities created by the challenging conditions. Of the 5 sites that we mentioned at the time of the raise, we've acquired one of these sites in Armstrong Creek, still considering 2 more of these, but are not proceeding with the other 2 at this stage. At the same time, we remain disciplined in the deployment of the capital raised and continue to focus on balance sheet strength. The land lease sector continues to build awareness as an asset class. We saw a number of corporate transactions and new entrants in FY '24. Demand for assets remain strong and this contributed to asset values remaining steady overall despite the changes in the macroenvironment. We continue to see new entrants enter the market in Victoria, each with their own unique offering and commercial model. We work actively with these new players as we collectively continue to educate the sizable addressable market on the advantages of the land lease model and the benefits of downsizing. Lifestyle Communities' model of not making a development surplus upfront, but charging a deferred management fee upon exit means we're able to price our homes as low as possible. We've always preferred the DMF model because it lowers the upfront entry cost for people buying into one of our communities, make them more affordable. This enables customers to release more equity to supplement their lifestyle. Capital gains made over time typically assist with paying the DMF and in FY '24, capital growth was 10%, or 9.9% on settlements -- 9.5% -- 9.2% on settlements, sorry, which goes to show the strength of what we're actually doing with our communities, the way we're looking after our communities. Customers who sold their homes in FY '24 did so in an average of 63 days and made an average profit of $88,000 after paying the DMF. Most operators in Victoria community admit that the legislation in Victoria supports this model. We were excited to ramp up the operations of Club Lifestyle during the year and have recently completed construction of the dedicated pool, recreational facilities, sporting facilities and private beach. Our homeowners have provided extremely strong feedback after enjoying a free holiday at this beautiful coastal resort. And there's no doubt it creates a unique point of difference. It helps drive sales and referrals. We finished the year with 3,860 settled homes under management across 24 operating communities. With most -- with our most recent land acquisition in Armstrong Creek, our total portfolio of completed homes under development and yet to be developed increased to 6,563. I'd now like to pass to Darren Rowland to go through the financial results.

Thanks, James. As usual, a big thanks to our team as you've done a strong job in quite difficult circumstances. As James mentioned, the market was tough, and it got increasingly tough as the year went on. New home settlements for this year were slightly lower than last year, finishing at 311 compared to 356 the year before, and this was the main driver of the decrease in profit from $71 million in FY '23 to $53 million in FY '24. The other thing that affected profit this year other than settlements was the increased marketing costs for the new projects that we launched. So these costs always hit the P&L as incurred, but the settlement revenue for these projects comes later. So there'll always be a, sort of a lag effect when we're launching new projects, and that's definitely driven that increase in the project management, sales and marketing cost line item in the P&L. The other major change we did this year was renegotiate the debt facility. So that increased the facility size from $525 million up to $700 million. And as a result of that, the facility fees have increased as we've got the carrying cost of that new debt facility. If we jump to the next slide, we've added a couple of new slides this year just to give a bit more color on some of the moving parts and trying to help people with some of the more common questions that we get. Fair value adjustments is one that we get a lot. So we've broken this down into 3 buckets. So the first 2 buckets are within our control and that relates to the rental increases that we put through, which are inflation-linked. I think -- best way to think about this is it's relative to the number of homes under management in the portfolio and we've included that detail at the top of the chart on the right there. The second bucket is fair value adjustments created when we sell new home, and this effectively converts undeveloped land into an annuity stream, which consists of the rental and the DMF. The best way to think about that is it's relative to the number of new home settlements. So this year, $38.2 million came from 311 new home settlements. The third bucket we get is changes in market value caused by our independent valuation process, which looks at market factors which are typically outside of our control, and we've separated that out at the bottom there, so everyone can see the impact. And you can see, in prior years the bucket 3 has been quite large at $39.2 million in FY '22, $15 million in FY '23, but negative $4 million in FY '24, which just shows valuations in the market are holding pretty steady at the moment. If we jump to the next slide, the balance sheet. Obviously, we've had the equity raise which has been paid down against the debt in the short-term. The other big change this year is the increase in inventories, and that's predominantly driven by the number of new projects that we've got in the market. So typically, when we launch new projects -- we -- straight into the civil program and early works, this goes to the balance sheet initially. So we'll get a spike in inventories as we work through those new projects. There's a bit more detail on the next page, so I'll park inventories for the minute. We've also got quite a number of land settlements coming up, which are detailed on the left-hand side of this slide, with estimated timings. There are some contractual conditions which need to be met. So the timing can move around a little bit. But broadly, that's what we're expecting at this stage. If we jump to the next slide, we'll just work through inventory quickly. As I said before, when we launch new projects, the civil works go to the balance sheet initially as we build out inventory, and then as we start to settle homes, we release that inventory to cost of goods sold. We've provided a detailed breakdown this year by project as well as including a phasing of which -- of the status that each project is in. So you can see on the table on the right-hand side there, we're either in inventory release phase or inventory accumulate phase. So accumulate means we're sort of in the early works phase, we're still spending, and we haven't yet got to the point where we can start settling homes in a meaningful way so that the inventory balance is likely to increase for that project. And release means that we've sort of got past the tipping point of the early works, settlement cadence is starting to increase and the inventory balance for that project will start to decrease over time. Over on the right-hand side, we've included some detail around the number of ready-to-move homes that we carry. As a general rule of thumb -- and this does vary each month with each project, but as a general rule of thumb, we try to carry roughly 25 completed homes by project. So this allows us to give customers a choice. If they want to move in quicker, they can pick a display home, or if they don't want to go through the process of customizing their home, they can choose one of the ones that we've pre-built. Typically, we pre-build homes to help with the build program. So in a street if there's 20 homes and we've sold 15, we'll build the other 5 so that we don't leave gaps in the street and create salt-and-pepper build. This helps us manage the look and feel of the community as we're settling out in the early phases. So when looking at these stock levels, most projects are in line with our sort of 25 rule of thumb, except for Deanside. Deanside was a project where we built up a lot of stock during COVID. We ran that project slightly differently to how we typically manage projects just because of the unusual times, and we're just working our way through that stock at the moment. So that will eventually be sold down over time. If we jump to the next slide there. So on the cash flow, a very heavy cash year for us, as we've pre-flagged in the past. With all those new projects launching and many projects in that inventory accumulation phase, development cash flows of $118 million. I've got a bit more detail on the development cash flows on the next page, so I'll get to that in a minute. On the annuity cash flows, you can see that the annuity continues to increase as we've got more homes under management. This year, the margin in that community part of the business held firm, and that was a testament to the inflation-linked rental increases. So ultimately allows us to preserve those margins as cost increases come through. And down the bottom you can see $77 million worth of land settlements in this year. Next year, that's likely to be higher, as flagged on the balance sheet slide. Now if we jump to the next page. What we've done here is provide some more detail on the development -- net development cash flows by project. And it's interesting when you look at this half-on-half because you can see in half one, we spent roughly $95 million as those new projects launched and those early works came through, but the cash flow profile changed quite dramatically in the second half as projects moved past their peak development phase and into their sort of settlement recovery phase. So in particular, if you have a look at the change half-on-half for Meridian and Bellarine, you can see Meridian, we spent $12 million net in the first half, but recovered $28 million in the second half. In Bellarine, we spent $19 million net in the first half and recovered $13 million in the second half. So as we look forward, we've got those projects at the top there: Wollert, Deanside, Meridian, and Bellarine will continue to recover capital as the settlements come through. And we also have Woodlea, Riverfield and Phillip Island transitioning out of that sort of peak construction phase into the recovery phase. So this development cash flow chart will look quite different when we get to the same period next year. We've also got down the bottom there Merrifield. So Merrifield has been paused for a number of reasons. The market conditions in that catchment were particularly challenging as well as some of the developments around us didn't progress as quickly as we had initially anticipated, which meant that site became a bit of an island. So we've finished the civil works there, and we'll continue to pause that project for the moment until conditions improve. So there will be no more money spent on that project in the near term. With -- Yarrawonga and Ocean Grove, both of those projects are currently in the civil phase, and what we plan to do there is continue through the civil phase until we reach a natural pause point. At that point we're going to assess market conditions and the pre-sales performance and then determine whether we press forward with clubhouse and housing construction or whether we pause those, similar to Meridian. So we'll keep everyone updated once we get through those programs. Finally, on the debt. Had a lot of questions about ICR covenant this year, so we've published the calculation for everyone on the bottom. The plan this year, as we sort of flagged in the presentation, is to really be quite prudent with the balance sheet. Those decisions that we've made around pausing projects and considering whether we move forward with Yarrawonga and Ocean Grove, are all around assessing market conditions and sales rates as we go. As we've said over the years, we've got a cyclical business, and we've been through a number of cycles over time, including GFC. We've been through the 2018 property slowdown, which was driven by the APRA changes. We've had COVID. We're very live to the levers that we've got to manage the balance sheet. We can speed developments up and we can slow them down. So we are watching all of those levers closely at the moment, particularly with sales performance post the recent media coverage. So that's the plan going forward is to really keep an eye on things. It's a little bit too early for us to tell exactly how sales performance is going to go post the events of July, and James is going to touch on that in a bit more detail in a minute. But the message is, we're going to keep things pretty prudent until we get more certainty for the short-term. Longer-term, still very confident in the model. There's still shortage of affordable housing. There's huge demand for this type of product, where we believe is in the DMF model because it creates an affordable option for people to downsize and free up as much equity as possible to help fund their retirement. So medium-term, we are still high conviction on the model, we've just got to get through some short-term challenges. So that's it from me. James, I'll pass it back to you.

Thank you, Darren. Look we are -- As Darren said, we're very cognizant of the headwinds currently facing the business, including the impact of that recent, what we say was unbalanced media coverage, the continued softness also in the residential property market in Victoria. We're still yet to determine the full impact of the ABC story on the 15th of July, and we believe that probably only about 5% of our deposit models have canceled as a result of this program, which is good. Also, early days, but we are still seeing the same amount of inquiry coming through the business, but it's just converting this to appointments that has been slower and people wanted to take a bit longer to think about this decision, particularly as they've been probably influenced by aspects of that story. There's no doubt it will have an impact on demand for our business and customers -- with customers who are looking for us to display a decision and have a stronger one. As a result, we have pulled our forward-looking guidance as a consequence. We're also running a roll-out the business to strengthen the balance sheet as well as trim the sales to make sure we optimize resourcing for the year to come. Some of these initiatives that Darren mentioned, some of these that are in place or we're bringing into place include targeted strategies to sell through inventories, decelerate the land acquisition program, which Darren mentioned, ensure build plans for communities to match known market demand. So we're pulling those levers around build rates and those sort of things. A bit focused with our marketing and rebuilding brand trust through homeowner testimonials and other means, and again, as mentioned, rightsizing the business and overheads to match what we predict will be the demand. We're also proposing an independent expert to run a roll-out the business to review what was raised in the VCAT applications as well as the media coverage and looking forward to seeing the results of this review. We're still waiting for VCAT to get back to us. We have a date for the VCAT case to be heard, but we expect this to occur in the next 12 months. I'm just mindful that this VCAT case is not determining the legality of DMF in Victoria, which we're very comfortable about. This is whether we're able to charge DMF as a result of our particular form of contract. And again, we've had this review and feel very, very comfortable with respect to this. We're also very confident that Victorian government has a strong understanding of the benefits of the DMF model and industry association is actually meeting with the Minister next week, Minister of Consumer Affairs, to reinforce the benefits of being able to create more affordable house in Victoria, which is exactly what the government is looking for by having a DMF. It has been a rough 6 months and we're not looking to repeat anytime soon, and for one, which I generally apologize to you, our shareholders and also our wonderful homeowners. The core business that I set up to build -- set out to build 21 years ago is still the same with over 5,500 homeowners living in 3,860 homes across 24 communities. We've changed their lives to downsize and live at a lifestyle community. The strength of the operating business remains incredibly strong. We will leverage this to rebuild customer shareholder trust nail by nail, wall by wall, home by home to get Lifestyle back on track to be the wonderful company that it is. This will take some time, but it's the only focus of the whole Lifestyle team. I would also like to thank our homeowners, our talented team, our suppliers and our shareholders for all their great support during the 2024 financial year. I'd also like to thank Philippa Kelly for her remarkable service to the business over so many years. I wish her also all the very best for the future. We are very lucky to have David Blight to be able to take over the Chair and help map the next stage of our journey. Thank you for that, and, Anita, love to pass it back for any questions.

Thank you, both James and Darren. We now welcome your questions and we'll commence by addressing verbal questions before taking your written questions. We do note we have received a couple of questions prior to the conference call, which have been addressed as part of the presentation. [Operator Instructions] So we do -- we have Chris from Goldman Sachs, who has a question. Chris, please proceed with your question.

Just firstly, in terms of the settlement trading update that you provided, do you mind reminding us what the settlements were at this time last year? And then also, James, interested if you could give a bit more color in terms of what customers are saying to you since the media reports?

On the settlements for July, this year is actually higher than last year, Chris, but marginally, I think, top of my head, the July number was about 20 last year. So we're slightly ahead on settlements this year.

And Chris, to your other question, most of our customers, because it was so one-sided and biased -- most customers we talk to didn't believe it, which is the good news. And the ones that are buying are saying, "We thought it was complete rubbish." We actually think it's going to lean in and really help our referral as well because our homeowners announced sort of -- having to sort of justify their decision, kind of in a way over justified, which means that, that might be more influential on people who are looking to downsize to Lifestyle community. So I think the thing that -- yes it's probably hard to predict these -- the children of the homeowners are quite big influencers on the decision of our homeowners to downsize. So it's also trying to reach out to them to try and rebuild their trust in our brand, and that's part of our new marketing focuses to reach out and tap into them as well.

And then on the 228 homes that are sold and available for settlement in FY '25, what's the timing of completion of those homes? Is it more 1H weighted? Or how should we think about that?

Well, the homes themselves are progressively sort of built throughout the year, Chris, just logically flowing the urban plan at each community. Settlements for us are typically second half weighted for a couple of reasons. Over the last few years, we've had new projects launching or commencing settlements for the first time in the second half. And you can see sort of on this Dott plot to the right here, we've got Riverfield -- sorry, Ridgelea commencing settlements in the second half year. So that will naturally lend itself to a second half weighting. The other thing, we do see a little bit of seasonality because a lot of our homeowners are moving in list their homes for sale in the spring in Melbourne, and then that ultimately takes them through a market process which gets them settling with us in the first quarter of the second half. So we do get a little bit of natural second half skew.

And then final question on the review of the business model, James. When do you expect that review to be completed? And will it consider whether you should still charge the DMF on future projects?

It's not really part of the review whether we do or do not charge DMF. I think the question for us is that -- whether that is our preferred model, has been for 21 years. We've really only had one major entrant in the Victoria market and it is not charging in DMF, and that's kind of what's stimulated part of that story if that was the only way to go. I guess the question is, Chris, do we think about giving the option to charge DMF upfront or the option to pay it when you leave? So you could say, pay 20% upfront or pay 20% when you leave, your choice. I think that's more where it will steer us, Chris, in looking at maybe the communication around how it's charged and giving people optionality around that.

We now have Suraj from Citi on the line wanting to ask a question.

A quick question. We know the settlement numbers, but I think, James, in your prepared remarks, you alluded to some cancellation numbers as well, 5% of deposit canceled. Is it possible for you to talk about the sales rate, like the confirmed sales and maybe cancellations versus prior periods?

Yes, I think -- Suraj, it's Darren here. It's interesting with what's going on post the media story. They're sort of -- on the positive side, the deposit holders have largely stuck. So as James sort of said, sort of 5% cancellations and the rest have stuck with us, which is a real positive and probably shows that, I guess, how the business was portrayed in the media isn't representative of the experience that those customers have had and certainly that would be our perspective. Where it's interesting is on the headline inquiry front, the numbers are okay. We're still seeing headline inquiry. But where we have seen a drop-off is in face-to-face appointments. So that's kind of, as people move down the funnel, they typically start as an initial inquiry, do a bit of research on the website. They might talk to the contact center and then book in a face-to-face appointment to come to site, have a look and meet one of our sales team. Those leads are the warmest leads and typically convert to a deposit next. And with a drop-off in that, it suggests that people are just holding off. They're doing a bit more research. Yes, they might be slightly cautious. And that's a bit -- it's challenging for us because -- it more than likely indicates that we're going to have a slower sales cadence in the near term, but difficult to predict at this stage exactly how long that's going to go for. So obviously, a challenge on for us to get out there, put as much information on the website as we can. I mean, our website has always been quite transparent, but trying to make sure as much information is there for people to get comfortable with any questions that they might have, but also be mindful that things just might take a little bit longer in this current climate.

Okay. Understand. And that cancellation rate, Darren, is that pretty normal, like the 5%? Or is it sort of higher than normal that you're seeing?

No, it's definitely higher than normal. I think we've always got cancellations from time to time. So as a, I guess, a rough rule of thumb, when we're at the $500 deposit stage, our cancellation rates run sort of 25% to 30%. But when we get to the $5,000 sort of nonrefundable stage, the deposit -- the cancellation rate is much lower. We definitely had a one-off sort of spike in cancellations post the media story running, but that has settled down a little bit now, and we're sort of getting back into our normal cadence.

It actually -- [ you all ] could -- it was in the first week, we lost some deposits and then it's really dropped off. We've actually spoke with all 228 homeowners who are still waiting to settle and they're all solid, saying, "No, we didn't believe the story and we're actually rock solid to continue." If you've made a decision to change your life, it's quite a big decision, and it's less about a home. It's just about that you're sort of already planning life ahead as you saw it. So it's not sort of -- it's not a transactional decision. It's more around -- I think the story is difficult to believe as it was, has certainly spooked a few, but most are sticking.

And I think the other thing -- so I think the other thing was that there was -- just good to hear from you guys around the key focus points near term. I'm just wanting to get a bit more detail on when you say rightsizing the team and for the current sales environment, what exactly does that mean? And can you sort of provide some quantum around expectations for, let's say, overheads or sales and marketing into next year and into FY '25 rather?

We're working through it. Again, this is 4 weeks, so 4 weeks old or 4.5 weeks old. So we took some steps already at the end of July around that, [ tuned back ] corporate overheads and looks at some key team members, but we've got a little way to go on that, Suraj, going forward. So yes -- but what we're doing is going to be fairly quick and meaningful in terms of just rightsizing the business to reflect sort of current demand.

Are you -- so maybe just one more question for you, James. Given the current sales environment, are there any particular communities that you're sort of pulling off that you had already put to market? Or is there anything like that? Or in fact, we had this big ramp-up of communities starting to be sold, I guess, into FY '25. Does that still remain the same? Or do we expect any change to the timing of those releases?

I think we mentioned...

Yes, if you jump to Slide 25, Suraj, we've sort of called out there that Merrifield we have put on pause, but that was before the current, I guess, the media story. The 2 that we've got on watch are Yarrawonga and Ocean Grove, 2 -- only because those 2 are the earliest in the journey and present us with the best opportunity to take a pause if we need to. Yarrawonga has got about 1 month and a bit to go on its civil program. Ocean Grove has got a little bit longer than that. So we're just going to watch the sales performance over the next couple of months and see how that goes. And if we need to, we can take a pause at those projects before we launch into the next big wave of development spend, which is clubhouses and the early housing. And so, those are the 3 that will sort of slowdown in the short-term.

I'll leave it there. I can probably come back later if there's a bit more of an opportunity.

Next, we have Tom from UBS.

I was just interested in your potential -- you've sort of put your future land payments in -- and the schedule of those land payments. What obligations do you have to purchase that land? Or is there sort of scope to push them out if market conditions don't sort of improve

No, it's more than likely those land payments will proceed. Tom, the obligations are more around obligations on the vendor to deliver services and things like that to us. So from our perspective, those land payments will all proceed.

Okay. So you don't have a -- like you don't have an [ add ] if they do what they're obligated to do essentially?

No, not at a headline level. I mean it's very complicated when you get into those land contracts, but in principle, no, we're going to proceed with those land payments.

I think the flip of that, Tom, is that they're really strategic sites for us moving forward. And we look at balance sheet capacity and very, very comfortable that it can actually pick up the settlements of those sites and map us keeping -- going forward. So yes, they're strategic for future growth, for sure.

And then just on Merrifield, when you pause a project like that, do you keep capitalizing interest? Or do you sort of, at some point, start expensing it so that you don't have -- create a problem down the road if time drags and makes the project harder and make viable?

That's right, Tom. We don't capitalize interest into a paused project because we don't -- exactly as you say, we don't want to make it unviable long-term. At the moment, with the equity raise and the debt being paid down in the short-term, the interest that's being capitalized is going across the other projects, and that's sufficient to cover the interest build that we're paying without sort of changing the economics of those projects. So we're not capitalizing anything into Merrifield at the moment.

But it's fair to say there'll be no interest expense in this year?

Nothing over and above what we've had in the past. So we've always got a little bit going through that P&L line, which is the facility fees and amortization of the establishment fees, et cetera, plus any interest on deposits and things for projects that are not yet started. So there's a little bit that goes through the P&L, but most of it goes through the balance sheet.

And then on your cancellations, I calculated, sort of 19 cancellations post balance date. Just be interested in understanding, have there been any sales post balance date? So therefore, what are your gross cancellations?

So we always run a cancellation rate anyway on deposits, that's just part of the business and that sits at sort of, consider 20% to 25% on deposits because it's a $500 fully refundable deposit. It's something we watch very closely. But no, we've still been selling post the media release. And I guess the big thing for us is to sort of start rebuilding trust with those customers and sort of start to increase sales. So it's just an ongoing journey for us to sort of again rebuild that trend -- that brand trust.

So what are you changing in your sort of discussions with customers? I understand there's a review, but today, what's different?

So the review is -- I just want to make sure that I don't only run waiting for this review is if something dramatic is going to change. This is looking just really trying to roll out the business as a result of this sort of media coverage and a result of this VCAT application just to ensure that all our declarations are really, really transparent, our marketing information is very transparent, that we're giving all the information that we can to a customer, and we're really, really clear about it. On the DMF, we have 4 individual checkpoints, people understanding the DMF. When they put their first [ part of ] [indiscernible] deposit down, they sign the acknowledgement form that they understand our fees. Then the next deposit they sign another acknowledgement form, they [ understand ] our fees. We actually sit down with every customer and read through the agreement and then they sign the acknowledgement form after that to say they fully understood their fees as well as giving them a residential tenancy notification on the fees as well. So I don't think anyone in the program, by the way, ever thought they didn't know what they had to pay. This is more about trying to avoid paying it by claiming a contract is not correct. So that's what more that's about. In terms of what we're doing in terms of -- with customers, it's -- there's a list of 20 things, which I won't take your [ brain ] through. It's long and intensive. But in terms of -- one of the best things is that we've been inundated by homeowners, not only written to the ABC and all the rest of it, but they have also inundated us. We wanted to do testimonials around how fantastic it is [ delivered ] to Lifestyle community. So we're in process of shooting those. The first ones come off the block late last week, and they were quite extraordinary actually in terms of really got into why people downsize, which we saw that, changing their lives, not selling a home or buying a home. And then we've got a whole range of -- we're changing the nurture journeys on our sales force for those that don't come on deposit. We've sort of taken them through a different nurture journey so that they understand and build trust in the brand. We're looking in different marketing channels in terms of getting those type of testimonials out as well. Yes, look, it's a long list. I won't go through them all, Tom. But yes, we've pivoted very, very quickly with our marketing to make sure that we're -- it's really about a brand, building the trust back in the brand, which is really what the ABC in terms of that coverage, that was the real damage they did to us.

And then just a final one around margins going down in development, you talked -- you called out lower settlement volumes increased interest costs. Just be interested in how you see that sort of flowing into '25 given the slower sales environment you're seeing today and also the higher rate environment we're sort of in?

Yes, there's a little bit of a true-up effect, Tom, when we get increases in our forecast because the interest that's capitalized and the infrastructure costs are all expensed on a pro-rata basis per settlement. So if the developments already got 150 settlements done and we get some cost increases, we do a true-up for the 150 that have gone before. So that's what sort of knocked the margin around a little bit this time. Going forward, it really does depend what happens on the forecast cost to complete. And as long as we continue to recover those costs through the sales prices, then the margins will sort of revert to top or even they sort of recover over time the true-up effect. So given that we haven't really changed the model and we're not really doing anything different with how we run the projects, we'll expect that margin to sort of ebb and flow a little bit over time, but should hold pretty steady.

And so there's been no major production issues or issues with Todd Devine?

No. Production is going great, actually. Todd, as always, doesn't miss a beat. So no issues on the production side of things. It's really just managing demand. So trying to dial -- and this is one of the benefits of Todd is he's really joined at the [ hip ] with us in terms of dialing up and down the build rates as we need to as things have sort of slowed. Equally, he can respond very quickly if sales pick up or if the market picks up and we get a run on sales rate. So yes, that relationship is as strong as ever, and we're working closely with Todd on these projects that are sort of having more dramatic shifts than usual, I guess.

And look, just mindful of time, so we ask if you could please just limit your questions to 2, just to allow everyone the opportunity for a chat. So next, we have Warren from Canaccord.

Just on the deposit again. Were the deposits that were pulled confined to a number of sites or a geographical region? Or was it pretty broad-based?

Pretty broad-based.

It was... Yes. And you might be looking at 2 or 3 on a project, like they weren't widespread. It's quite understandable too, like it was a pretty brutal program. So I'm a little surprised it probably wasn't even a bit more. But again, our team are really on the front foot around this and ringing homeowners next day and reassuring them that nothing has changed and what was claimed on that program was totally false. Yes, the only one that's sort of in the program [ is this thing that ] vacant homes where rent is still paid, which is common across the whole industry and councils, banks, all charges states -- various charges, even if you have a rental property or [ body ] corporate fee. So that was the only one I think for our homeowners was a bit surprising, but only because they hadn't thought about it. But we accrue that and then charge that on the end price of the home, and if they want to, we don't charge interest on that. So that's the way we've handled it.

And just -- to cover off just on the 20 new homes settled, was that just July? Or that is as at the 12th of August, so it was a 6-week period?

Yes. Yes, it's 27...

To the 12th of August, right over 6 weeks, and the 20 is against that exact same time frame.

No, the 20 I've referred to earlier was just July. We didn't have the breakdown of August partway through the month. Sorry...?

Yes, but they're probably somewhat aligned in...

Yes. I mean, typically, for us, these winter months are slower months anyway because it's -- the property market in Melbourne is seasonally slower.

I'll now hand over to Rushil from Ord Minnett.

Maybe just a couple from me. So maybe just starting -- I know the question was asked on your development costs. I'm just wondering that -- I know the development costs typically [indiscernible] the launch of projects, given that you've now paused, I guess, to varying extents the top of your projects. Just considering if that pause would also -- any potential increase in marketing cost that you might need to put through your business just given the recent media coverage? I guess, can you just talk to us about the profile of the development costs over the next couple of years? And would you continue -- despite the pause in those projects, would you still expect growth in that development cost line?

Also very mindful, we're 4 weeks into this. So before we start solving the whole business for the next couple of years, we're just going to try and work through what the true impact of this is. Certainly, by pausing projects, we save marketing costs, by pausing projects we save interest costs. So that's very prudent just in light of what's happened.

I think the other thing with the model, Rushil, is we recovered those sales and marketing costs through the sales prices of the home. So we're still very mindful of preserving that because we, I guess, turn the tap on hard, that just pushes up house prices, which ultimately makes selling harder. So that's one of the good disciplines that's in the business is trying to make sure that we manage that marketing spend very effectively. It -- we'll continue with brand marketing. We'll continue to take expressions of interest on those projects. We'll continue to sort of promote them on the website, those sorts of things. What we won't be doing is sort of the more expensive stuff with Meta or Google or that sort of marketing. Any of the local area stuff, we'll still have some sign boarding on the site, but we won't be doing billboards or radio or anything like that in the local catchment. We just preserve as much of those marketing budgets for each of those projects as we can so that we can turn it on hard again when we relaunch.

And maybe just a second question. Obviously, the market backdrop has been quite challenging over the last 12 months. So you've talked about 2 factors, potentially relaunching some of those pause communities and also working through inventory. So can I just ask firstly, what type of stock [ you would need ] to see in order to relaunch communities that have been paused? And secondly, in terms of working through inventory, do you intend -- do you have any incentives in place or intend to offer any incentives or is it working through inventory really just a matter of matching construction timelines with the market conditions?

On the latter question, a bit of both. So yes, we just buy if we don't build up too much inventory. So yes, we've sort of round the dial down on construction to make sure we can serve that. Yes, we are looking at a couple of really interesting initiatives around some -- more aging stock. So watch this space as we go into September and spring. And there's sort of just [ Klevis ] like campaigns that we've just been developing up over the last 2 weeks. And your first question, Rushil was...?

Just in relation to what you need to see in terms of relaunching communities?

Yes. You just want to start to see more positivity in the property market. So at the moment, it's -- Victoria is a little bleak on the property market. We're not seeing average house price growth in [indiscernible]. That's remained pretty flat, if not very, very slightly negative, particularly those particular projects that are located at Ocean Grove, which is a pretty beachside market and Yarrawonga on the Murray River. You just want to see that market come back a bit before we start getting back into market again. So you want to see sort of property house price growth and just more positive sentiment.

Can I just -- One last quick follow-up on that one. The -- particularly [ some of ] those homes and I guess the beachside, so those are like where the holiday homes are located. Anything you can talk about the land tax? Do you think the land tax [ impact ] increased -- or the land tax has increased since the start of this year [indiscernible] system, or do you have any idea or any estimate as to [ how ] long would it take [indiscernible] in the system?

[indiscernible], Rushil, is just -- it's caused more people to put their beach house on the market, particularly sort of young families who've bought a beach house, thought they could afford it, then after sort of interest rate rises and now the land tax on beach houses. It's meant that, that's no longer affordable. So that's seen a lot of stock go into those markets, [ particularly ] Phillip Island and down the Bellarine. That's slowly getting worked through though, and our homeowners are still selling their existing homes down those markets. It has actually opened up a new market for us because we're land tax exempt. So if you want the best beach house in the world where you can lock and leave, someone does your front gardens, you've got these amazing facilities next to the beach, but Lifestyle is the most affordable beach house you'll ever see. So yes, so we're not -- we've also [indiscernible] our summer campaign. We are working a little bit of that. Just [ Billboard ] work and other things. So let's say we -- one door closed and another door opens, or turn a lemon into lemonade, that's an opportunity for us.

We will now move to Andy from Bell Potter.

Just one question for me. A lot of color, obviously, around cancelations, it was helpful. But just wondering how you're thinking about the sales rate going forward? I know you're given a bit of color on the market still being challenging. But what are you kind of assuming for sales rate on a per month basis if we look forward this year and into the next year or 2?

It's really tough, Andy. We're, again, 4.5 weeks out. So it gives a bit of time, and we'll work that one out. So it's not like we've stopped dead. It's again, [ quarry ] is the same as it was. It's now just a matter of seeing what the conversion rates are, so what's [ your ] space.

And I guess just in terms of the cancelations you -- sorry, the contracts you do have on hand. I know you're talking about you've seen a little bit of cancelation, but are you kind of assuming a level of that on what you have to hand today for FY '25 and '26?

So we've really reached that [ to ] -- Most of the ones that [ you ] canceled by the way, was certainly in FY '26. Ones in FY '25 was sort of on a mission to [ reside ] and settle. So most of the ones did cancel were a long way out [indiscernible]. Let me have a bit of rethink about this. Having spoken to them all, we're sort of confident of getting them back, that the decision was taken quickly during the first week. Kid said, Dad -- or the [indiscernible] said, [ not ] the point, now is not the time. So yes, we expect to get most of them back over time. But yes, post that first week we haven't seen cancelation rates continue for that reason. I know we had one established home deposit cancel. I've actually been picking up the phone, talking directly to some of them and I've [ saved ] 2. That was really just uncertainty around the model. And what they were saying on the ABC correct, and it was actually pretty easy to re-explain. Again, if you do look at the 21 years, you've got [indiscernible], so we back you and sort of referral rates up to 50%, there's a lot to like, and therefore, a lot to display or not believe in the ABC story.

I mean we're in only a number of weeks in, but you've historically had a very high referral rate from existing residents. Have you got a sense of kind of the referral rate of what you're seeing post and do you have an assumption around what that model look like going forward?

It's an interesting stat. So we supplied this to the ABC, but for whatever reasons didn't run a bit. We had 9 sales or 8 sales that [indiscernible] in the month of June, and 7 of those were referred, which is sort of ironic. Interestingly enough, we've made a couple of sales of [ Wollert ] this month. So essentially [indiscernible] think wouldn't sell would be Wollert where all the attention was focused. Referrals -- I think referrals will just get stronger, to be honest, Andy, because you've got people who really believe the model and therefore, will go out and help market. We just launched a new referral scheme, which we're doing anyway in [indiscernible], really interesting. So that gets launched in the next week -- or sorry, yes, gets launched on Monday, actually. I'm actually going to every community in September and October, meeting with all the homeowners, which I do every 6 months anyway, but it's convenient -- pretty convenient time to do it, sort of reassure people. One of these things that we've seen, we see a lot -- homeowners have written a lot of complaint letters, have lodged complaints with the ABC, they've written to the Minister for Ag, Minister for Media and they did all miscommunications, just to say. And their main complaint is it's ageist what the ABC did. It treated them as being stupid, that they didn't know what they're doing. And our homeowners are really offended [ by it ]. And [ nonetheless ], the ABC was saying, because the ABC was a [indiscernible] program a nursing home, which made equally everyone look stupid. And that was kind of -- that was the big pushback we've had from homeowners in getting on board about pushing it back against [ ideal ] that somehow everyone over 65 is old, frail and stupid. I just turned 65 on Sunday. So I'm a big proponent of saying that's not true. But -- so yes, so it's been interested. So I think referrals just get stronger, Andy, because I think you're going to get people really leaning to not only support it, but also overexplain it to their friends. And therefore, I think we'll get more interest in it.

And just a reminder, we just have 5 minutes left. I'll now hand over to Lou from Jarden.

Two quick ones. Just -- you highlighted the 228 kind of deposit you had received for the FY '25 year. Is that pretty much your production rate? Or is production rate tracking higher than that?

Well, planned production would be higher than that, Lou, because we also plan to continue selling throughout the year, as we always do. But obviously, we'll continue to monitor that production rate subject to the sales rate. So the 228 is just simply deposits that we've got on hand that we know, that will be delivered as part of that production rate as it stands. But yes, there's capacity to do more than that, definitely.

And what's your current plan? I mean, is it 100 more? Or is it 50 more?

Well, it's kind of fluid, Lou, to be honest, because we review it every month based on the sales rate. Like we're placing orders for -- this month's orders will commence next month and the homes take sort of 4 months to build. So it's not like we start the year with a locked-in plan. We review it every month.

And then second one, and apologies if I missed this, but where are you with the VCAT situation? Kind of have you heard back from them about your request to accelerate this?

So no, we have -- The residential list at VCAT is long. So we're still waiting for response from VCAT as to when -- one, where will it be heard, or will it be in that form or another form? Will they hear it and then, when it will be heard? So yes, so we're just waiting for them to come back on that.

And how important is that in your conversations? Is that [ kind ] of what your potential new customers tell you, is something they're waiting for or not really?

Not really, no. We explained it so clearly around why it works and how we keep our entrance price so low. It's quite like the idea of having -- maybe bringing the option of having pay 20% upfront or 20% when you leave, either pay more, enjoy less or enjoy more and pay later. I know which way most people will go, but it kind of then debunks the whole thesis of the story that went through the ABC saying somehow people with financial business [ set ] to pay DMF where they forgot that they actually paid a very, very low [ inbound ] price from the get go. So kind of this is where we're sort of interested in this review to sort of get independent eyes on which is the best way to tackle this.

We might take one last question. And we have Murray on the line.

I was wondering whether you could just make a comment on sales pricing, please? It looks like the average house price in the second half of this year was up about 14% on the same period last year. To what extent is that a function of product mix? And to what extent is that pure inflation?

It's a little bit of both, Murray, but rather than product mix, it's also project mix. So this year, we've been selling more at sort of Phillip Island and Bellarine which -- It's really just a function of land price. So those projects, the land price was higher and that flows through into higher sales prices, but also the median house price in those catchments is higher. So the model is kind of relative. So to get into the house prices themselves, really, they have gone up with inflation, and that's the model we sort of cost recover on our development costs. So it's kind of all of those things. It's influenced by the catchment, the land price, the mix of the product, but also inflation.

And then I was wondering whether you could just comment on to what -- to the extent that you're able to look through to this at all, but the average time on markets for your customers selling a family home before they settle into one of yours and how that's been tracking?

It depends where you look, Murray. So Melbourne, Grand Melbourne, pretty good. Not a lot of stock on the market in Melbourne. So -- and there's a recent [ CoreLogic ] report that just came out on Melbourne, saw it this morning actually. So that's sort of -- it's [indiscernible]. Where we struggle a little bit [indiscernible] down on the West coast where Phillip Island is and we struggle a little bit down at Bellarine and that's pushing up to sort of 80, 100 days, 120 days. It just depends also what -- it's the time for a customer to adjust, work out what their home is truly worth. So we actually had a customer recently moving to Phillip Island where they discounted their home by 40%. Such was their enthusiasm to start living a bigger life and make the change. So yes, so it depends how far you're prepared to go to reflect what's happened in the market and therefore, what you need to do to make your home saleable.

I'm just acknowledging, we've actually just gone over our 1-hour time slot, and we thank you for your attendance. We do note we haven't gotten to a number of questions, including written questions this morning, and please be assured that you will -- your questions will be acknowledged and responded to after this call. So we thank you for your attendance and invite you to contact the company via the Investor Center available on the company's website should you have any other questions not addressed today. Thanks again for your attendance and all your questions raised. I will now close the [ weather ] down. Thank you.