Summerset Group Holdings Limited (SUM) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Summerset Group Holdings Limited Half Year 2022 Results Investor Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Scott Scoullar, Chief Executive Officer. Please go ahead.

All right. Welcome, everyone, to our 2022 half year results call. If you hear any cheering in the background, it isn't think cheering we've put on. There's a protest going on outside, which isn't a protest, it's obviously, protest as well. It's something else. So yes, it's [indiscernible]. You guys have obviously know me, my name is Scott Scoullar. I'm CEO, and today, you'll be hearing from me and Will, our CFO. So look, with that, I'm going to jump straight into the slides. I will go to sort of and deal with Slides 4, 5 and 6, collectively together. So, look, the first point I just touch on is the last 6 months has been a pretty trying period for our staff out there, particularly guys on the frontline who have been dealing with Omicron, it's been a real sort of show of dedication and focus to bring best of life to our residents. And I'd just like to take this personal opportunity to thank everyone on the frontline for their dedication. In terms of results, there's a number of highlights really to mention. Underlying profit, obviously a record for us in the first half at NZD 82.5 million, up 9% from last year and up 26% on the second half of last year. So, up 9% on the first half, up 26% on the second half. And look, just context that relative to the environment we're in. If you think about last year in the first half of the year, we didn't really have any sort of COVID community transmission going on around the communities. So, the business wasn't really being impacted by that. But relative to what we've seen, obviously quite different dynamics. So, if you look at new sales settlements, 289 sales relative to the 223 units that we delivered in the first half and we made super great progress on that reduction in new sales stock of 66, it's lower. So, I think for me, from my perspective, we're only really getting sales, new sales less than what we actually did in the first half of 2021, but first half of 2021 doesn't have any sort of, as I said, material level of COVID transmission going on in the community relative to the first half of this year where we had quite a lot of impacts with prospects unwell at home or hunkering down for periods of time. So, I think the second point I just raise really is if you look at the number of deliveries, this half in order to sort of achieve those sales rates, we've stepped into and reduced stock levels, whereas for the first half of 2021, you had somewhere just over 320 units that we delivered. So, significant more units delivered to get to sort of sell to. So, look putting some context around first half this year versus first half of last year, I think we've done a pretty strong job. And then if you come to and look at realized development margin, the NZD 52.3 million, that's up 29% on the first half of last year and much the same realized resale gains were up 8% on the same time last year, pretty strong effort, particularly in the realized development margin space where the impact of the strength of our supplier relationships and the maturity of our procurement processes has really sort of shown through in that to get the margin that we got in the first half. We're really proud of that. You will expect to see that come back somewhat not in the second half half of this year, but then looking forward to next year, that will come back within that range of that 20% to 25%. And the key driver there for that will be the delivery of 4 main buildings, 3 next year that can approve the calendar this year. So, if you think about can prove once we deliver by the end of this year, the bulk of the selling will actually be next year as well. So, you're going to see a lot higher weighting than we would typically normally that sort of see the 4 main buildings to go to sort of, actually [indiscernible] in a year, serviced apartments, memory care apartments and care suites. And then the only other thing look I'd touch on, just at a macro level is sales prices outside of Auckland, the in-house prices have obviously contracted around 6%. We have increased prices by around 3%. Even after all these adjustments, we're very comfortable with where pricing sits across New Zealand. So, remembering a lot of that prospects are selling homes well above the median house price and they're often selling homes that are a lot bigger square meter footage as well. Then, coming into one of our homes. So -- and obviously, in Auckland, we're still seeing relative to median house price where homes are still lower than 80% to median house price. So, still feeling a bit comfortable around that. And as I said, I think that's sort of borne out and presales, which we obviously see, even in the last 4 weeks -- the last 4 weeks for us as a business would have been a record 4 weeks for us in terms of sales. So, even while these we are sitting right now really, really strong strength in the sales pipeline. Slide 7 acquisitions. Look, 3 properties here, all properties, we really probably have. The Masterton one, that's sitting in premium subdivision. It's a bit of a lifestyle, sort of, type subdivision, that 400 square meter section, richly nice homes. Look in a different residential property market [indiscernible] low income, there'll probably NZD 3 million homes, lovely sort of green boulevard entrance into with trees that nicely sits in site here. But I think would be the nicest sub within the area. The Rotorua site, obviously, historic, opposite the gondola and I think that represents itself is a really, really cool dynamic [indiscernible] people on our village being able to obviously wander on to the gondola, pop-up and having a coffee and site Mernda in Victoria, that's 30 kilometers northeast of Melbourne CBD. And that's in a real significant growth corridor for Melbourne defined by government, by state government. They announced that from memory, about 6, 9 months ago, NZD 0.5 billion investment and accounts into the hospitals like a new hospital there and a new train station there. So separate to that, if you look at sort of what's like next door to us, really real high-quality housing and the median house price in that area just under NZD 800,000. So, great [indiscernible] site wit a good median house price. And the only other thing I'd touch on is just if you -- obviously, we're still largest land bank in New Zealand. But if you think about Australia, you think about Mernda, we're up to almost 1,700 units in Australia now. And if you context that back to when I started in Summerset, or just before I started in Summerset, that's more in Australia than what we had when we listed in New Zealand. So, pretty sizable meaningful land bank we're starting to develop in Australia now. Slide 19, COVID update. Look, you can see just NZD 3 million worth of COVID response expenditure. And at the end, just reiterate that no relative to 12 months ago and in the first half of 2021, and we'll touch on costs, conversations, but we obviously had no COVID costs in that first half of 2021. So, Omicron has come with a cost and we spent about NZD 18 million now since the start of the pandemic. In terms of like other 2 things really touch on and COVID would be. The first one is, our experienced talent was going through that period of Omicron and New Zealand has been opening up, and moving off to cafes and having a bit more entertainment, a bit more enjoyment through our key facilities and a lot of those times, we're taking a choice to actually increase opportunities. So, we had sort of a times gone down to surgical masks, but then going back in to 5 months because we are cognizant of the community transmission, not wanting to ever large staff with transmission or transmission particularly key centers starting prudent around that. And we're still requiring negative rates for people to go into our care facilities. So, that's been a meaningful assistance for us in terms of managing particularly in those care environments, but has been tough on staff. And as a result of that, we set up Summerset Village Reliever Program, we're trying to essentially step in and help and support where we had any staffing shortages driven by sickness with running staff, which has worked really, really well for us. Slide 10, our residents. Look, really pleased with our continued focus on improving everything experience. Over the 6 months, we've done a bunch of sort of new stuff between just sort of evolving our Summerset Sessions entertainment program, whereby we've had concerts by Will Martin, we've had cooking lessons and recipes with New Zealand's original Master Chef Brett McGregor and with all known Kiwis hosted by Jude Dobson and also had a variety show created by New Zealand actor William Kircher. So, it's been good to sort of be able to get some of that stuff underway, whilst still in some pretty challenging times of Omicron. We've also continued to roll out our Summerset Signature exercise classes and even done a bunch of those online throughout the last 6 months. Outside of that is about NZD 4.5 million we've invested in both sort of frontline staff and new digital innovation this year, which is a combination of the Kaitiaki roles, which we announced that we were doing at the end of last year. So, we now got about 60 people in those roles across all our key facilities, helping with high-quality social and well-being sort of support, improving independence of things like mobile therapy, supporting access and participation in recreational diversional therapy, just a bunch of things that enrich the lives of those guys who are living at key facilities. And you'll also see we rolled out -- are in the process of rolling out PainChek, which is a pretty cool app that's got really essentially runs on smartphone, uses AI and facial recognition tech to basically identify the presence of pain. We've done a couple of trials on that now. It's been super helpful. It's used by over 1,500 aged care facilities across the world, but from what we understand from PainChek crew, we're the first aged care provider in New Zealand to use this tech in our key facilities. And then you'll see just rolling into Slide 11, the Lumin, portal, we're really excited about to announce the next steps for us in that journey in partnership with Lumin. That's a purpose built platform designed to complement residents lives living in our villages and independent living site. We completed a pilot on that over the last 6, 12 months and we've been working with Lumin around functionality we can access there. But a super broad range of stuff that gives us -- that gives reason to believe that sort of access to village communication across other residents living in a village, communication with our key staff, for our village staff, provides both a combination of video calling and stream options there that allows them to book activities, meals, services such as haircuts, integrates with doorbells, lights and intercoms, it can even do medication reminders and bell call functions. So that really is, [indiscernible] in terms of platform for introducing technology to enriching the lives of our people living in the community. Slide 12 on staff, I'm not going to talk about because I think it's pretty self-explanatory. Slide 13, our environment. Look, target for us back in 2017 now when we kicked us off was we had an initial target for the first 5 years from 2018 onwards to reduce our emissions intensity by 5%. That's shaping up by the time we get to into the year that it looks like we'll achieve somewhere around about 17% emissions intensity reduction. That's a massive effort and a big congrats to the people and our sustainability manager who's driven a lot of that stuff and the people who can detect within our business, but 17% emissions intensity reduction in the first 5 years is we're really, really happy with that and places us well towards our medium and long-term targets of net 60% we've committed to by 2032. So, we're on target for that. And obviously, we still remain to my knowledge anyway, the only retirement village operator in New Zealand to be carbon zero certified and member of the Climate Leaders Coalition. On top of that, really proud of, took first of integrating solar panels into our existing and developing villages where we started with our Nelson village, which is an existing village where we've practically put in solar panels on the club house tier and that sort of essentially runs more power for running the club house and for running the swimming pool as well. So, that's our first you'll see, more of that to come over the next couple of years. On the EV side of things, we've continued to make that switch to electric vehicles and continued to introduce EV charging stations across our villages. So, making good progress on that as well. Slide 15, the New Zealand development slide, look, began construction out at Blenheim village, which is [indiscernible] up to 16 villages under construction. We're making really good progress on the villages we recently started construction on. So Lower Hutt, we've got the first 2 apartment blocks being developed, and we've got a bunch of residential homes being developed on that site at the moment. Cambridge, look, we're running ahead of schedule there, we'll possibly even may deliver a couple of units before the end of this year. Prebbleton is on track to open later this year and and Waikanae is finished. All works on Waikanae, we're just starting our civil works on and Waikanae at the moment. And for our largest sort of commercial stuff, Kenepuru, main building is on track to be delivered later this year and all their 3 main buildings that I talked about lot of conversations to have 4 main buildings sort of essentially live next year. All the other 3 that are delivering next year on track as well. So yes, construction is going well. The development pipeline on Slide 21, look, I'll just reinforce, 88% of our regional land bank is fully consented now. So, we're in a pretty strong position. In Slide 23, just get to that, look, 6 Australian sites now in terms of the first village, Cranbourne, obviously fully consented. We've completed all earthworks. We're underway civils now. We had some holdups with road infrastructure that was through to the village that impacted us for a period of time there, but that's all being resolved and Melbourne Road, all those guys are doing that infrastructure now. So, that pathway is cleared, so civil works underway and expect first deliveries of villas in 2023. Consenting is progressing really well on our Chirnside Park site and we've launched now the planning application for Torquay. So, as I mentioned before, that pipeline is becoming pretty meaningful and we're starting to really get into the stages now, we're advancing sort of planning progress, consenting progress on some of those sites. So look, with that being said, I will hand over to Will to cover off the accounting stuff.

Thanks, Scott, and good morning, everyone. Moving to Slide 27. We've reported net profit after tax of NZD 135 million for the half, down from the NZD 264 million in first half '21, primarily driven by a fair value movement and investment property Total revenue of NZD 114 million was up 20% on first half '21 with increased revenue seen in care fees, village services and deferred management fees. Total expenses increased to NZD 108.6 million with almost half of that or about NZD 10 million are relating to growth in our developing villages. Of the balance, about 1/3 relates to investment in care and improvements in food quality, about 1/3 relates to those COVID costs that Scott spoke about and about 1/3 relates to general cost inflation and investments in sales and marketing for new developments delivering in future periods. Turning to Slide 28, fair value movement. Our fair value moved to NZD 137 million for the half. There were 4 main drivers of this. Firstly, the value of retirement units built of NZD 95 million. This was the value of our 223 new units delivered in the period, all of which were villas. Secondly, the increase in retirement unit pricing of NZD 55 million are reflective of continued albeit modest price increases through the period. Now thirdly, are the reversal of unsold stock discounts of NZD 13 million and finally, uplift in the value of the land bank, which relates to increases in valuation for our Australian sites. Now these were partially offset by the change in growth rate assumptions applied by our valuers. Now turning to Slide 29, underlying profit. Pleasing to announce a record half year underlying profit of NZD 82.5 million, up 9% on first half '21. Our recurring earnings from our core business functions continued to perform well. And we have seen double-digit growth in care fees and village services as well as deferred management fees. Average realized gain per unit is up 17% on first half '21 to NZD 144,000. Overall, we normalized for retail volumes and COVID costs, we see recurring earnings of NZD 36.6 million, up 5% on first half '21. If we please turn to Slide 30. Our net operating cash flows of NZD 190.4 million are down 14% on first half '21, but up 19% on the second half of '22. There are 3 main factors. Firstly, lower volumes of new sales settlements relative to first half '21, noting that receipts from resident loans relating to new sales were around NZD 23,000 per unit above the prior period. Secondly, timing variance and resale cash flows of about NZD 17.5 million and thirdly, increased expenditure relating to investment in food and care, COVID-19 and the general inflation outlined on previous slides. Overall, when adjusting for the timing of resident receipts for resales, our investment in the quality of care and food and COVID costs, the net operating business cash flow position for the first half '22 is largely consistent with the first half '21. Our investing cash outflow of NZD 267 million increased in line with growth in development, including our earthworks and civil expenditure on our new sites of Blenheim, Cambridge, Lower Hutt, Prebbleton and Waikanae. Our main building spend in Bell Block, Kenepuru, Papamoa and Te Awa. Kenepuru delivering later this year with the others expected to deliver in '23 and further construction on basement and apartment blocks at our St Johns site. Turning to the balance sheet. Our balance sheet continues to grow with total assets now NZD 5.4 billion as at 30 June. Retained earnings are now NZD 1.7 billion, up 29% from NZD 1.3 billion at first half '21, which continues to help strengthen our balance sheet. Net tangible assets, the net tangible asset slide just demonstrates the growth in NTA per share. Our NTA per share of NZD 8.91 is the highest of all listed operator in the sector and NTA has grown from NZD 1.09 we listed in 2011. Moving to Slide 33, our net debt has increased from NZD 742 million at December to NZD 860 million at June, with the primary driver for those being increased development at our new sites, particularly the main buildings and land purchases. We remain pleased with where our capital management is at the moment. Gearing is now 29.4%, up slightly from the 27.8% at December. And our core gearing ratio with Australian debt excluded is now approximately 24%. Our bank facility is approximately NZD 1.2 billion with existing NZD 375 million of retail bonds. Our total facilities have an average tenure of 3.2 years. The bank facility has undrawn capacity of NZD 640 million at June, which provides us with sufficient headroom to fund ongoing growth in New Zealand and Australia. Moving to Slide 35. The interim dividend of NZD 0.107 per share unimputed. This compares to an interim 2021 dividend of NZD 0.099 per share. The dividend policy remains 30% to 50% of underlying profit for the full year period, as previously indicated, given the growth opportunities in front of the business. At this time, dividend payments are likely to remain at the bottom end of this range. The DRP scheme will be available for shareholders with a 2% discount to be applied. Moving on to the business performance section, our retirement unit delivery, 223 villas delivered across 10 sites, which is a record number of villas for a 6-month period, but also the second highest number of first half deliveries for the company. Build grade guidance for 2022 is approximately 600 total units. Kenepuru's main building is nearing completion and expected to be delivered in Q4. This includes rec and admin areas, 86 serviced apartments, 20 memory care apartments and a care center. Our development margin for first half '22 was 28%, up from the 22% achieved in first half '21 and above the target range of approximately 20% to 25%. And if you can hear the cheering in the background, that's not for our development margin, that's the protest kicking off. The realized development margin for the half was NZD 52.3 million, which is up from NZD 40.7 million in the first half '21, a great result that we achieved on a total of 289 new sales. Margins were influenced by 2 main factors. Firstly, strong villa margins. Further strengthening of margins on villa stages with an average margin of around 35%, up from 28% in the first half of last year and 31% in the second half of last year. All regions attracted margins in line or above our target range. And secondly, mix and location of settlement. There was a higher weighting for apartment settlements outside of Auckland in FY -- in the first half '21, less than 25% of the partners settled were outside Auckland compared to almost 50% in the first half of '22. Pleasingly, construction costs have been tightly managed across the country through our strong procurement and supply agreements and this is also reflected in our overall margin returns. We do expect this to moderate back towards our target range over the short to medium term as our mix shifts back towards our assisted living and care orientated units and construction cost increases flow through. New sales of occupation rights on Slide 39. We settled 289 units in the first half of '22, which is the second highest number for a 6-month period. For first half '22, our top-selling new sale villages were Avonhead with 65 Richmond, with 42, followed by Rotorua and Kenepuru, Overall, 7 regions secured more than 20 settlements each. We also saw a 41% increase in the number of serviced apartments, memory care apartments and care suites settled in the period relative to the first half of '21. A large portion of the units to be delivered in the second half of this year have been pre-sold already and we are seeing good geographical strength across the country. Turning to Slide 40, our new sales stock totaled 314 units, over 201 units uncontracted. Now this is down from the total stock of 377 in December. What's been really pleasing to see is the reduction in overall uncontracted stock in the period. The 201 uncontracted stock represents a 23% reduction from FY '21. The uptake in villa stock was representative for timing only, but with high deliveries in the last 2 months of the period. Turning to Slide 41, our new sales performance. We've talked to most of this already. So, I really just want to highlight a couple of the charts here. Bottom left, this chart highlights my comments on closing on contracted stock. As you can see, uncontracted stock as a percentage of the portfolio is now at 3.8%, which is the lowest in 5 years. Chart on the bottom right, committed new sales pipeline was at 272 contracts at 30 June and maintaining historically high levels seen 6 months ago. Since June, this has increased further to around 332 contracts today. Now moving to Slide 42, our resale volumes were 222, down from 243 in the first half of '21, but up from the 195 in second half '21. Nothing really fundamentally different between periods, except the timing of units vacating, leaving less time to refurb and for new residents to move in. In first half '22, almost 40% of the units vacated in the period did so in the last 2 months. Our realized resale gain of 26% is up from 23% in first half '21, but does not reflect a higher proportion of reset but does reflect a higher proportion of resales in developing villages and a higher weighting to serviced and memory care apartments in the period, with only 42% of resales coming from villas compared to 51% in the first half '21. The embedded value within the portfolio is now NZD 1.5 billion, having increased from NZD 1.1 billion over the last 12 months. Embedded value per unit is now NZD 278,000. This includes NZD 197,000 of unrealized resale gains. Moving to Slide 44, resale stock. Our resale closing stock of 233 units compares to 198 at December. The increase in overall stock driven by a record number of vacated units in the period, up 24% on the first half of '21. As mentioned earlier, our closing stocks are function really of the timing of residents vacating the units and more than anything else. Our contracted retail stock of 137 units is the highest number of contracted resale units in Summerset's history. This is up 16% on '21 and almost [ 60% ] on the same time last year and puts us in a strong position heading into the second half of this year. As a proportion of our total portfolio available resale stock is 1.8%, which is in line with what it's consistently been over the last 5 years. I won't talk too much about Slide 45 because I think we covered most of it. I might pause here and see if we have any questions.

[Operator Instructions] Your first question comes from Andrew Steele from Jarden.

The first one for me is just on market conditions. Your commentary has been, I guess, reasonably upbeat in terms of inquiry levels, waitlists and your confidence in pricing. I wanted to know, are you seeing any pockets of weakness, whether that is sort of, flow momentum or any sort of areas of concerns starting to emerge in any particular locations? Or is it pretty strong across all areas?

Yes, Andrew, it's Scott here. No, look, market position is pretty good, like presales rate is really strong, inquiry level is, just the same thing. As I said, like sales in the last 4 weeks, even still a record for the company. If I was to sort of say anything, it'd probably be that I think that regional locations and outside of Auckland are probably still slightly stronger than Auckland or can be a little bit less positive, but like not sort of struggling to sell villas either. So, it's not an extremely, Auckland is terrible. I would just say the rest of the country is sort of like slightly stronger. But we continue to benefit from just large number of [indiscernible], So, we're not trying to -- as you guys know, we're not trying to push large volumes of stock through a single site. So yes, like we're not seeing any untoward factors, not seeing any pushout some settlement time frames. If anything, possibly even a little bit of a -- even possibly Andrew, a little bit of a bounce attached to Omicron, being passed Omicron, but it's hard to know whether that's the case or not. But yes, demand drivers seem very, very good.

I guess in terms of what you've seen for movement into your value gains and change in the value of assumptions. As we look forward, I guess, there is potential for a further slowdown to value gain against relative to the ramp-up in debt. And we still exist despite what we see in terms of your own market observations. I guess the broader backdrop is potentially still weak. How are you thinking about what's the sort of upper comfortable limit for gearing metrics? You're clearly at a conservative level now. Would you be happy for it to go up to 35%, 40% and what is sort of the top -- at the top end of the range for you?

Yes. Look, Andrew, I think we've said previously that we remain pretty comfortable in that 30% to 35% range. And we run a number of scenarios and we see it staying comfortably within that range. We'll obviously move up within that range as we continue to develop in Australia. And as we have some of these mid-tier sites being completed in St Johns and in Lower Hutt.

In terms of OpEx growth, it was up 29% year-on-year and you've provided a helpful breakdown of the component parts of that. How should we think about OpEx growth in 2H? Should it be similar to the year-on-year growth in 1H? Or is there a degree of, I guess, cost or no cost build in 1H, which should be benefiting from in 2H and therefore, OpEx growth?

Look, I think cost -- total cost year-on-year has tended to grow at about 20% per annum. I think it will be slightly less than that this year. But you can see from the things I've spoken about some of those you can annualize such as, obviously, investment in sales and marketing for future years, investment in our care staff and housing of food to increase the quality and where some of that costs are clearly one-offs, such as COVID.

And I guess then reflecting this, is there any particular reason why 2H underlying earnings seasonality would vary materially from history?

Look, I think we've always said that the deliveries has a weighting towards the second half. And I think you would see that sort of flow through in second half earnings.

I mean it's pretty strong for us, in fact, we've got close to 400 units that we're likely to deliver in the second half of the year, combined with really good contracted stock levels as well. So, we've got like a bit of double-whammy of positive-ness there, which -- and as we'll see previously good presale rates. So, I think pretty well placed at this point for the second half of the year, obviously watch those settlement conditions and whether those times between contracting and settlements sort of shift out further, but we're not seeing evidence of that right now. And even going back to your original question around fair value movement like in gearing, I think people place from my perspective on that. I mean if you decomposition we would get value from those values, like 2/3 of that's coming from the time units built, which is places us pretty well if you think about the number of apartments we are building in that second half of the year and [indiscernible] will extract from that. So, [indiscernible] comes from that as opposed to pricing. So, I think both on sort of the balance sheet side and on the sales side have been pretty well placed for the second half.

Your next question comes from Stephen Ridgewell from Craigs IP.

I just wanted to follow up on those comments just on potential settlement in the second half. Just on the circa 370 homes that you're delivering in the second half, can you give us a sense of what proportion would kind of caregivers units and what proportion and what apartments or other community might take a little bit longer to sell there?

I think, from memory care, so we can approve it, sort of delivering. So, if you just take a lot of the 80-odd, I think it is for memory.

Yes, 86.

Yes. From Kene, kind of the rest of that is just the local villa deliveries. You got [indiscernible] opening as well, which is often good new village as well. So, you obviously have some presales for that as well.

So, as I said, the reason would expect you see it might pick up from [ 29 ] in the second half?

Yes, yes, I think so. And look, it's early days in kind of, presales, but the short kind of presales in the last few weeks and we've just as I said, being better than what we have normally seen. And so obviously, that continued lowly penetrated in Wellington region. And so I don't know whether that tends us on good step for Kenepuru as well. But like even if you take out Kenepuru, I think we've got a good volume stock across a good number of sites with one new site being nearby, but actually, as I said, presales look encouraging for serviced apartments. Now there is always a high presale rate for whether on serviced apartments, typically because people are waiting with health conditions and often time want, but it is not apartment -- serviced apartments available that one can market either.

Just on the resale margin, it was probably one area that was a little bit softer than I was expecting in the first half. I think you called out from that favorable mix in terms of units pretty clearly in the comments. Just interested in whether you can talk a little bit to what you're seeing in the second half? Are you seeing that's more normal mix of retail units? And I guess you starting to see the ones they become available in the last few months is what you're going to -- you're actually going to sell in the second half. So, just any comments you could provide on kind of mix to see as we do in the second half on the resale side?

Yes. Look, it's interesting, Ridge, I think the villa margins will continue to track above that sort of 33%. In FY '20, 25% of our resales came from developing villages. In the first half of this year, that was 45% from developing villages. So, you're really -- what you're seeing there is kind of the impact of having more turnover in those developing villages and their sort of their shorter stays in the village. So, that will be a trend that continues, I think, but the exact quantum of that may vary sort of depending on half and where we get those exact terminations.

In all honesty, it's still pretty early days to figure out what stocks come in and when it's going to settle and timing of when it's -- sale process and all that sort of stuff. So, it probably bit of benefit from there, 1.5, 2 months' time.

And so I just wanted to follow-up with on Andrew's kind of question on the OpEx. I mean, 29% is a big number. And we have seen a lot of pressure on operating margins in the sector in the last few years and I understand growth business where I can see growth regardless, but those seem high. We now we're going to start to see operating margin stabilize and [indiscernible] will start to pick up at some point.

Yes. Look, so I think there's 3 buckets. We've spoken about previously that we're taking a deliberate decision to invest in the quality of our care and our customer experience. So, we've spoken previously about the [indiscernible] role about the increased number of cleans and our care facilities and about in-housing food to deliver higher quality of food across our care centers. So, none of those costs should have really been a surprise. We've spoken previously about the increase in sales and marketing, not for developments that are delivering this year or necessarily next year. But those sort of 24 deliveries where we've got some large sites coming online. So again, net sales and marketing has been well flagged. The COVID spend was probably more than we would have liked, but the Omicron wave really hit us and probably more so than previous COVID waves. And so really, the existing cost base, the CPI on that was only a very small part of the overall cost increase. We're talking kind of NZD 3 million. So, I think we're reasonably well controlled in our operating costs. And what you're seeing there is selective investments, Scott can add length about the previous leads in the market.

I guess, just on that though, I mean, so you are increasing OpEx for various things to identify, but are you going to start getting back from residents or the investors going to stack that additional cost.

I think actually, Ridge, the stuff you're talking about, customer experience, which is a component of that cost that I was talking for, I think, technical term, you're probably doing stacking a lot of that stuff after differentiation ultimately.

I think our really high-quality care team enables us to sell those independent living units for a premium. And I think it's really important and it's the right thing to do to continue to invest in care to deliver the sort of best end market care.

We will continue to assess the volume of care that we're delivering on site going forward, though, because it's fair to say at the moment for us, and I mentioned this before, goes individually that 60% to 70% of those will sell to people who don't necessarily come from within the village. And so you want, I think we always maintain a very premium experience in care but you might limit the volume of care that you do a little bit more. And so obviously, with those sites like Havelock North, and then we were looking to refurbish the key facilities. We are looking at putting less care wins in there, high spec with the ability, obviously, to charge more and stuff. But I think there's a bit which is, push markets, we recover the dollar we put back in. But if you limit the volume, you'd probably limit the cost damage, does that make sense?

Just one last one for me. Just on Victoria, this is spot the guide and the debt, the first villa is from Cranbourne North, now scheduled for 4Q '23. I guess a couple of years ago that the guidance might have been 4Q '22. You touched on some of the reasons earlier, but can you just give us a little bit more of a sense of the reasons for the delay there. But more importantly, I guess at a high level, can you give us some comfort there or how you're never getting dealing with counsel or the build process? Is that maybe a little bit more context when was first appreciated across the board? Or is this an isolated kind of delay that we shouldn't read too much into? And obviously, the context there is investors will be mindful of these sort of delays to getting what we've seen development programs in Melbourne from some of your competitors. So, just interested in any insight you can give us there.

Sure, Ridge, I can cover that off. So, I wouldn't say the delay that we had in Cranbourne was untypical of what we can experience in New Zealand. So, I can think of that another site had a similar degree of challenge with counsel and so like what you probably see in the New Zealand portfolio is really strong land bank where if you do get 1 or 2 problematic sites, what is the reason, you've got flex that land bank. And that's what we're trying to do ultimately build flex edge strength for land bank in Australia. So, that's when I talk about that 6 sites and [indiscernible] and being more than [ index ], we will keep pursuing down that half of strengthening the land bank to the point that it doesn't stop build rate. But obviously, being first village at Cranbourne, it's a problem that can painful with that one is the one that we have that is challenging. There's nothing for us at this point in time that says that's going to be the same store experience and other locations. But I'm sure we will get the odd site over there, which is painful. And so like, Chirnside as I mentioned, it's actually gone pretty well like that's been opened for public engagement, and there wasn't that much feedback on that site. And we think that's tracking pretty well, but it could be some [indiscernible] on that. But we actually think, if anything, Chirnside is tracking ahead of the game, fast than what we thought. That may change, as I said, so don't look that [indiscernible] has been going through very smoothly for us at the moment. So like our experiences of doing that, almost better-than-expected and one, considerably worse than expected. And so Chirnside was considerably worse than expected, but in reality, we had an unusual situation there. It was never about the size of the village, what we're building on the village, the composition of village, any of that stuff. The issue on that was they were building a bigger arterial routes down one side of the village with taking a 2-lane road and putting into 4-lane road and some challenges attached to infrastructure, us connecting into that as they were actually building that road and store motor systems. And then we are building that road there are some challenges associated with some neighbors and runoff to that, so they couldn't actually do what they needed to do to build the road until actually sorted out some issues with some other neighbors. And we got caught in the met stuff connecting up all our service systems and storm water systems to the infrastructure. And so we are a peripheral liability on the sort of side of what was going on there, which has nothing really to do with us, but held us up. And so I hope that sort of gives you a bit of color and flesh around the challenges with that site with nothing to do with some of it in the way we continued that site and what our expectations with the yield on that site, that is pretty to do with a very unusual situation. You don't typically hear every day, the time we've built in the village to head of a fall on sort of highway sort of infrastructure being developed on the side which interferes with you. So, I do think those particular set of [indiscernible] very, very frustrating for us. And it is clear that you've got like [indiscernible] and counsel over there, all dancing together in that particular issue because [indiscernible] building the roads but trying to sort of get to a sort of together, it's quite hard. But look, so that's behind us, a bit delayed a year. We will be -- we expect this point to go underway with homes construction at end of this year. We'll see next year. You never know, it might even be a little bit in Q4, but Q4 at point in time what we'll commit to. But yes, hopefully, it gives you some Stephen around particular challenges on Chirnside site.

Your next question comes from Bianca Fledderus from UBS.

Just one question for me really around the residential property market and the discount between local median house prices and to your unit prices. So I guess, obviously, that buffer is now narrowing quite quickly as resi prices fall and the unit prices continue to be slightly up. So I guess the first question, are you concerned about this? And do you have confidence you can continue to slowly lift unit prices or at least keep them flat? And then secondly, as you mentioned as well, your average resident probably sales of residential house both the median and local house price. So I'm just wondering if you have a view on what a more realistic discount or buffer would be based on probably higher residential values for your residents?

Yes. Sure. Look, we've continued to see some pretty modest price growth over the last 6 months. So sort of 3% to 3.5% on average across the board. But that varied quite a lot across the regions. And I think there are some regions that are definitely a bit more buoyant and you're able to take more price growth than potentially others as well. I think that demand dynamic in our retail villages remains really strong where there's really strong demand, strong waitlists. And you're typically only turning over sort of 10 to 15 units per annum. That's kind of one per month. You've got strong waitlist of people trying to get in. And so you've got very strong pricing tension in those resale villages. In the developing villages, I think we've seen good waitlists and continued strong demand for stages as we release them. And that's both in the villa stages that we've released this year. But also now that we've released pricing for Kenepuru main building, as Scott said, really strong demand there for service departments. And I think last week, Scott was a record week for our new sales for us. So, relatively pleased with the ongoing demand. Just in terms of buffer and how you might like to think about it, typical one of our residents isn't selling a small house. Those are typically first-time buyers, and that's all included in the median price. So, when you're selling a 4-bedroom home in an area, you're kind of more at that sort of upper quartile kind of level. And so we're continuing to see people come into our -- into our villages with a cash surplus after selling their houses. And traditionally, our resale villages have been up at for 110%, 115% of medium. So there's still some room to just get back to sort of normal levels of pricing.

And Bianca, Scott here, from my perspective, you see it's a little bit like we sort of do it and contribute stance of including the median house price. But I think if you did throw it up quartile you would see a very different picture. And I think just to supplement that, again, still, if you take the average of the 2-bedroom apartment that we're talking about and the numbers that we get to provide, you got to remember, we also have a lot of college and townhouse product that's smaller, more affordable again who are on the median house price may struggle, which is still very, very nice product. And then you get down to serviced apartments, where you're going 400,000, 500,000 often serviced apartments. So there's some real affordability options across the portfolio as well for those people who close to the median house price.

And if demand were to slow at some point in the future, are there any sort of other levers you would pull first to attract your residents before lowering your fuel prices?

Look, I think our geographic diversification is a real plus for us. We have the ability to flex where we're delivering new units in response to demand. And we also have a range of incentives available to us that all the operators have kind of used through the cycle that you can use to sort of generate interest and demand in your villages.

Looking from my sense, we only really turned on open days from the start of August. So if you think about the tools and leads from marketing pipeline, we haven't been using a couple of those major levers for like probably the best part of, I don't know, 1.5 years in terms of incentives and levels of incentives we're using at the moment. I think from our perspective around incentive use, it's probably at the lowest level loss for years upon years upon years. And so like we're in this market and we're pretty well positioned. We're not actively using any incentive tools at the moment to a material degree is the one, but it's still a very low level from my respective relative to what we've done previously. And as I said, then we've got marketing channels that we're in the process of switching back on. And as I said, to sales rates, as we said for last week in the last month, they've been record for the company. So, I think we're well positioned sort of going into that with a lot of levers that are available to us still. So, it's not like you've tacked out you've used all your levers when you go in the market might be a little bit tighter. We're not in that position at all.

And I think you've got to remember that people tend to move into our village because of life events and those life events continue to happen regardless of the property cycle. And our residents don't really have time to sit around and wait for the market to turn. So, that provides some sort of ongoing sort of backdrop to our demand.

Your next question comes from Shane Solly from Harbour Assets.

Well done on a great result in a very tough time, your team has done a great job. Can I just go back to caregiver availability? What are you seeing in terms of some of the changes that we see lately?

Yes, specifically caregivers or you are talking about whole care workforce trend?

The whole care workforce issues here rather than [ specific ]. Yes.

Yes, yes, yes, sure. Look, I think it's been tough and challenging, but from my perspective, I think there's probably more risk for the sector as a sector with the borders opening and there is sort of benefits attached to that. So you know what I mean by that in a sense is I think the net immigration inflow of nurses is possibly going to be morphed by the net outflow of people going, we can work again in the safe environment. So, I think there's probably more risk with the borders opening across the workforce on the care side of things and obviously experienced a lot of sites through that workforce and through the tightness equipped to that workforce. I still think we're obviously better placed than corporates are a bit of placing in the sector who can't obviously subsidize salary getting what exists for what we funded from the across system versus what they pay their own hospital nurses. But look, I would say out of the challenge of the 2, nurses and caregivers, it's the nurses challenges definitely a stronger challenge typically for us than caregivers but caregivers remain just got to weight of numbers in terms of caregivers, but you don't. And so that consumes time and energy and cost and training and customer experience. But the nurses are just hard to get hands on, tracking into the business and in retaining them. So there's no specific range on this.

And care funding, there's nothing going on there that we should be thinking about and the government issues there?

Look, I think there's probably a better appreciation with license from the government around the systemic issues in the sector. Those systemic issues in the sector are going to be for 25,000 beds in the sector the ratio of profits first. And therefore, a material rate at the moment, the RM is that sort of strengthens in some senses, the supply-demand care is more towards the corporate operators. But at the moment, it doesn't do us that much good if you're struggling to come and keep staffing your existing facilities because there's like new site, but 50-50. So I think the better appreciation as minister having been around and talked to quite a few ministers recent weeks, it's just the need for more intense action more quickly. So, I think some general sort of commitment and promise around here that they're going to pick some of the stuff. But at the moment, I can't really see it happening within the next 12 months, Shane, I have been on at this point in time, which I think...

Just another question if I may, then cash flow conversion. Will, can you just talk a little bit about that?

Yes. Sure, Shane. I think the key thing there is just timing of the retail cash. And so there's about a NZD 17.5 million swing that really just relates to timing around the repurchase of resale units. And then once you normalize for that and the cost increases, you get pretty similar net operating business cash flows with the first half of last year.

Your next question comes from Aaron Ibbotson from Forsyth Barr.

I got a couple of quick questions. So first of all, just on Australia on how much you've invested. Thank you for adding the little comment on New Zealand gearing, excluding Australian growth-related debt, just trying to, on the back of the envelope, get out how much that debt then was? Is it right that it's roughly NZD 200 million, NZD 250 million and got to NZD 230 million? Just how much Australian growth-related debt you actually have?

Yes, Aaron, you're probably directionally moving in the right direction, but I can't really get into specifics of segment reporting.

I was just referring to, you've given the 23.8% versus 29.4%. So, I assume we can calculate it, but I'll just calculate it then. Then secondly, just on retail margins. And I'm just curious, if you compare to the second half, what is your sort of best estimate if you say like-for-like, so ignoring the mix effect? Would it have been that the retail margins were roughly flat or anything else in particular up or down?

Yes. Look, I think that's our -- obviously, I'll put caveat around that. So you never quite know what the product mix is going to be or the mix across villages in the second half. But I think on removing that, I think we're expecting them to be broadly flat half on half.

No, sorry, I was just referring to the half just reported relative to the second half last year on a sort of like-for-like ignoring mix effects that you talked to lower dealer share, et cetera. Is it fair to assume that they were roughly flat? Or would you say that they're going up or down, excluding mix effect?

No, there was an increase, excluding mix effect. And so I think we highlighted that in my notes, expect about a 33% retail margin for villas.

And then finally, I guess you answered that to Shane, the NZD 17.5 million swing related to repurchase of unit. Was that any change in policy at all? Or was it just sort of random timing with a lot of vacancies just towards the period end.

No change in policy, Aaron, just sort of random timing of the way these things work out.

Your last question comes from Nick Mar from Macquarie.

Just a really quick one. On care occupancy that sort of slipped down a little bit is the anything behind that, you guys taking a view on how many we can actually take into care? And are there any other changes you make into emissions at the moment?

Yes. No, Nick, you've got -- and simply like that was sort of a constructive choice for us across key facilities when Omicron was going on. The staff segments to basically keep our staff and much of the customer experience remained strong as well. So, we've been definitely times [indiscernible] onto the key facilities due to the sickness and illness and stuff. And so I think you'll sort of see that stabilize and start to lift again. And so [indiscernible] and that's one of the examples right -- these that's been pretty hard. So, we have fixed occupancy, got about [ 5 ] beds there. And I say to the how long would it take him to fill in if sickness sort of clears up a little bit and got 2 weeks. And so yes, there is differently that's self-imposed production now in our recent experience that's coming through there. Looking a virtual reality probably doesn't really impact bottom line a whole heck of a lot because you kind of got this cost at times, but you've got this revenue coming through. Not so much the case if it's statically but it's staff or it's time move it's not paid, it's depend from a circumstance. But given the margins on care at the moment now, occupancy is probably a little bit less relevant.

There are no further questions at this point. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thanks, everyone.