Winton Land Limited (WIN) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Winton Land Limited FY '23 Annual Results. I would now like to hand the conference over to Mr. Chris Meehan, CEO. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining, and welcome to Winton's annual results call. It's a pleasure to be here today to present you our FY '23 results. And alongside me today, we have Jean McMahon, who's Winton's Chief Financial Officer. Today, I'll start off with a business update, and then I'll hand over to Jean for a financial overview and some ESG commentary, and then I will finish up with a few slides on the market and outlook. And as always, we'll be happy to take questions at the end. A quick overview for those that aren't familiar with Winton. So my wife Michaela and I founded Winton in 2009, and the company has now evolved to a New Zealand-based residential developer of scale with 26 projects across 14 communities and a current land bank of circa 6,400 units. Typically, we buy large parcels of land, not currently designed for residential development, but sit adjacent to growth corridors, water and transportation and that we think have strong prospects for rezoning. A significant part of our value creation is securing this rezoning and the subsequent resource consents on the land that we have acquired to create master planned communities. We also have 2 new business units being a Northbrook retirement business and the Ayrburn hospitality business. FY '23 was a record year for delivery and settlements during which resulted in a post-tax earnings within guidance of NZD 73.8 million and NZD 211.4 million in revenue. This is 32.5% higher compared to FY '22 and attributable to 565 units having settled. As a result of this top line growth, we delivered a gross profit of NZD 108.7 million compared to NZD 72.4 million in FY '22. We also delivered an improved gross profit margin of 51.4% compared to 45.4% in FY '22. Our NPAT was NZD 64.6 million, 78.6% higher than FY '22, which then had a pro forma impact of NZD 36.2 million. We feel that we're in a compelling and enviable position. We still have 0 debt. We had cash holdings of NZD 76.6 million. And we have gross pre-sale book as of June 30 of NZD 419.3 million, together with -- as we started a land bank of circa 6,400 units to our name. Certainly, it's been a big year at Winton in our first full year as a listed company. We delivered 116 more units than we did in FY '22, and that was achieved while navigating what was an extremely wet and disrupted construction season. Our strong pre-sale book continues to protect our future revenues. And as I mentioned on the last slide, it still stands at NZD 419 million as of June 30, 2023. We also locked in supplier contracts to minimize the effects of supply chain and inflation issues, which have served us well. We launched sales for Northbrook Wynyard Quarter, received resource consent for Northbrook Wanaka, Northbrook Wynyard Quarter and Northbrook Avon Loop projects. We continue to operate on an ungeared basis and benefit from a very strong balance sheet. We commenced leasing activities Lakeside Village Centre and this will step further in providing good annuity income to the business. We grew the Winton team to 65 people and predominantly that is to do with the resourcing of our Northbrook and Ayrburn business units. We also promoted internally to add to the management team, appointing Duncan Elley to General Manager of project delivery. We're also -- have appointed Steven Joyce to the Winton Board and we're very happy to have his wealth of financial, economic and strategic experience at the Board table with us. We've also completed our first emissions inventory and developed our first sustainability framework. Despite the extremely wet construction season, we delivered 565 units across the year, which resulted in revenue for the year of NZD 211.4 million. Following on from a busy first half of the year, in the second half, we delivered 346 units completing stage 3D at Lakeside and Te Kauwhata, stages 9 to 13 of beaches in Matarangi and stages 3 to 6 North Ridge in Cessnock and the stage 16 in Duplex Townhouses at Northlake. 78% of the revenue for the year came from residential lots, 12% from dwellings and 10% from the completion of apartments. As mentioned, our land bank pipeline has an anticipated yield of about 6,400 units, including circa 900 retirement units. At North Ridge in Cessnock stages 4 to 6 are now complete with 105 lots settled. 3 lots have settled since the end of FY '23, with the remaining 14 completed lots expected to settle by the end of FY '24. We have a resource consent underway for future stages. Launch Bay in Hobsonville is looking great and the community is taking shape with more residents moved in. Jimmy's Point progress has been good with construction of the structure up to Level 3 and Level 4 underway due for [ top out ] shortly. Our Ovation Apartments and Townhouses are now complete with the remaining few unsold units on the market. Our Launch Bay Townhouses and Apartments are also now complete. They had suffered some weather-related delays, meaning completion occurred after year-end. However, the pre-sold units have now since settled and the remaining [ 3 ] units are on the market. At beaches in Matarangi stages 5 to 13 are now complete with the majority of lots settled before June 30, and 8 further settlements have taken place since then. Works are continuing on stages 14 and 15. At Lakeside in Te Kauwhata, 186 units settled in FY '23 and 78 units within stage 3 have settled since year-end. We completed the construction of the Village Centre. And at June 30, we had 71% occupancy with a 30% development margin. Earthworks and civil works progressing on the future residential stages at pace. Northlake Wanaka is our most mature community, but there's still a lot going on. In FY '23, we completed and settled on the 28 Duplex Townhouses. We completed the Alta Villa's first suite and opened that for marketing. The first 15 Alta Villas are nearing completion and a further 12 are under construction. The Northbrook sales suite is nearing completion and will be open and hopefully accepting sales applications from the start of September. Construction of the Northlake Apartments and Commercial building are nearing completion. 2 of the apartments were unsold at year-end that are now unconditionally sold since then. At River Terrace in Cromwell all lots are sold and settled. We had built 2 5-bedroom show homes, 1 of which still remains unsold. Construction and on-site works at Ayrburn and Arrowtown in FY '23 is going well and stage 1 is expected to complete in the first half of FY '24. Now to Northbrook. After 3 years of diligently designing Northbrook to fulfill the luxurious brand positioning that we wanted it to have and enable some highly efficient construction and operations of the properties, FY '23 saw us move into construction and pre-sales of those projects. As I mentioned earlier, resource consent was obtained for Northbrook Wynyard Quarter, Northbrook Wanaka and Northbrook Avon Loop. An amendment is now underway for an existing resource consent at Northbrook Arrowtown, and we've well progressed on another amendment for our existing Launch Bay resource consent. In mid-June, we completed the full-size show apartment and sales display suite at Northbrook Wynyard Quarter and we launched our pre-sales. Opening weekend we saw hundreds of people through the show apartment and strong interest has continued and translated into strong initial sales. Unconditional sales are now north of NZD 50 million with a strong pipeline at contract/deposit stage looking for contract finalization shortly. Notably, our [ self-clear ] retirement village units have been selling at an average price equating to NZD 34,000 per square meter, which we believe has achieved an industry benchmark. Our next big milestone is opening the Northbrook Wanaka show suite, and that will take place, as I mentioned, at the start of September. This is a good overview of the first 5 locations, which have a total yield of 902 units, including independent residences, service units and care suites. The standard terms under which the Northbrook Occupational Right Agreement operates similar to the independent living and the high-tier residences is a 30% deferred management fee over a 4-year period and a 30% deferred management fee over a 2-year period for the care suites. At Sunfield, we continued progressing the 50 hectares of the property that are currently zoned future urban. And we're doing that with a more traditional master plan supported by the current regulation and zoning. Meanwhile, we continue to pursue our alternative legislative pathways to remain -- to rezone the remaining 150 hectares of the Sunfield land including under the Resource Management Act. As previously communicated, however, Winton has issued proceedings in the Auckland High Court under the Commerce Act alleging anticompetitive conduct by the government housing agency Kainga Ora. Winton is seeking court declarations that Kainga Ora's conduct is unlawful and is in breach of the Commerce Act and an order requiring Kainga Ora to consider Sunfield for assessment under the UDA as well as paying substantial damages for Kainga Ora's conduct to date, which were recently quantified by us in an amended statement of claim. Provisionally assessed amount of damages is NZD 138.5 million plus costs and interest. And this represents Winton's view of the quantum of loss it has suffered due to Kainga Ora's alleged anticompetitive conduct. This is not a process that we have taken lightly, but we believe the current conduct is fundamentally flawed. I'll turn now to Jean for the financial overview.

Good morning, everyone, and thank you for joining us. As Chris mentioned, we are very pleased to report our results for FY '23. It was a record year for delivery and settlements with 565 units settling resulting in NZD 211.4 million of revenue, 32.5% higher than FY '22. Winton met guidance, delivering NZD 73.8 million being NPAT excluding H2 FY '23 fair value revaluation of investment properties. As a result of top line growth, Winton delivered gross profit of NZD 108.7 million and a gross profit margin of 51.4% compared to NZD 72.4 million and 45.4%, respectively, in FY '22. This was due to a higher average margin from the product mix settling during FY '23. Margins on land lot settlements are typically greater than dwellings and apartments for Winton. Our volume of units will vary from year-to-year depending on the number and size of projects under development, the development life cycle of each project, the staging of construction works, the level of pre-sales in the underlying market. EBITDA increased 88.1% to NZD 95.6 million compared to NZD 50.8 million pro forma EBITDA in FY '22. NPAT was NZD 64.6 million, 78.6% higher than FY '22 pro forma NPAT of NZD 36.2 million. Rental income has increased significantly in the year as a result of the purchase of Cracker Bay and the tenanting of Lakeside Commercial totaling NZD 3.7 million. Selling expenses were 12.6% lower than FY '22 as a function of reduced marketing spend as cost was focused on completed projects and the Northbrook brand during the year. Administrative expenses will increase due to additional head count and new litigation in FY '23. Profit after income tax for the period was NZD 64.6 million compared to NZD 31.7 million in FY '22. As at 30 June 2023, cash and cash equivalents were NZD 76.3 million compared to NZD 204.8 million on 30 June 2022, with the decrease in balance a result of the use of capital raised during the IPO of NZD 350 million for acquisitions, developments and expansion. Winton's strategy to develop our 5 Northbrook retirement villages and the long-term hold of our Lakeside and Ayrburn commercial precinct are reflected in the growth of investment properties and property, plant and equipment when compared to the prior year. During FY '23, the acquisition of land and investment properties consisted of Sunfield, Cracker Bay, Northbrook Wynyard Quarter and [ the Vlad ]. Receipts from customers were strong, reflecting the record units settled. We did experience some defaults at just 2 of our communities. At Beaches, we had 4 lots default, which included the 1 lot previously reported as at 31 December 2022. At North Ridge, we have had 12 lots default. Of these 12 lots, we have already resold 4 lots, realizing on average 16% more than the original sales price, including the recovery of the deposit. We are expecting to resell and settle the other 8 lots during FY '24. The defaults experienced account for circa 2% of our forecasted FY '23 settlement profile. The Board declared a dividend of NZD 0.0216 per share for the 6 months ending 30 June 2023. This dividend will be paid on 14th September. This is in addition to the NZD 0.0206 per share dividend that was declared and paid for the first half of FY '23, bringing the total dividend for the year to NZD 0.0422 per share, reflecting 20% of distributable earnings. The dividend is in line with our dividend policy, updated on February 2023 to exclude any unrealized valuation movements in investment properties and within a payout ratio of approximately 20% to 40% of full year distributable earnings. Dividends are declared at the Board's discretion and are dependent on the company's financial performance. Winton is on a sustainability journey and is focused on delivering significant milestones over the next 2 to 3 years, driven by the sustainability framework recently adopted by the senior management team and endorsed by Winton's Board of Directors. The 3 pillars of our sustainability framework are: thriving planet, thriving people and sustainable future. They are naturally interrelated and integrated into our business strategy. Every pillar is about mitigating potential negative impacts on or from our operations and delivering positive outcomes by creating thriving and resilient communities. The annual report goes into detail about the framework and Winton's FY '23 impact. Some highlights include. We completed our first emissions inventory. We planted approximately 35,000 trees and plants throughout Winton's neighborhoods in FY '23, but have planted over 238,000 trees and plants to date. We completed the health and safety review and implemented a master health and safety system. We submitted the design for Winton's first Homestar 6 building, Northbrook Wynyard Quarter. We contributed 565 units towards New Zealand's housing supply. We supported local businesses where practical, with 93% of our on-site works for our top 20 contractors completed by local businesses. We paid NZD 11.7 million in development contributions towards improving infrastructure and long-term growth of the regions in Winton operates in. And we persisted with the car-less and solar-powered Sunfield neighborhood under the UDA pathway. During FY '24, we will implement the new sustainability framework, and as such, meet regulatory requirements, mitigate risk and deliver further positive impacts. Climate-related disclosures are front of mind for Winton as we work towards our first mandatory disclosures for FY '24. Therefore, Scope 3 emissions, emission reduction targets and an emission reduction plan are all in the pipeline. We will also introduce policies and/or processes to support the sustainability framework and use our scale to deliver more positive outcomes. I will now hand over to Chris.

Thanks, Jean. I think the New Zealand housing market has certainly faced some headwinds over the last 18 months or so. However, as we head into FY '24, there are strong indicators that the market is near to or at the bottom. The supply chain issues in the industry are cleared and the ongoing cost increases in building suppliers have certainly stopped. We do continue to see strain within the industry with an 85% increase in construction industry insolvencies in FY '23 as compared to FY '22. We feel there will likely be more particularly where some of those businesses are wholly leveraged. We believe some homeowners will continue to struggle in the near term with higher interest rates and high inflation. However, increasing immigration to New Zealand, constrained land supply and upward sentiment of rental prices will put compounding pressure on the already short housing supply. We continue to operate with financial discipline both on our land acquisition and sales, to enable us to thrive through the cycle and use it to our advantage as we build prominence in the New Zealand property industry. In the current economic turbulence, Winton is a financially stable, experienced and trusted developer delivering reliable, high-quality product. And for all those reasons, builders want to work for us and price their work accordingly. Our FY '23 results were the outcome of a number of years of development and due to a completion timing, a standout year for settlements and revenue recognition. Looking ahead to FY '24 and the timing of completed units and the type of completed units means that revenue will likely be lower than FY '23. Going forward, we would naturally keep the market informed of our plans and progress with our business, but do not expect to provide formal guidance to enable us to better focus on operating the business for maximum long-term shareholder value. That brings our presentation to an end and very happy to move to any questions anyone may have.

[Operator Instructions] Your first question comes from Nicholas Hill of Craigs Investment Partners.

Congratulations on the results and it's great to see your balance sheet in the shape it is. I'm just wondering, you've commented that there are indicators we're either near or at the bottom of the housing downturn. How have sales gone over the second half of FY '23 in places such as Wanaka, Cessnock and Matarangi?

Yes, we haven't had much stock in the market, Nick, so the Cessnock resales, we had a few come back to us and we resold those quite successfully. And Matarangi, we haven't really got any stock in the market that's complete. And the couple of parties that didn't make their settlement deadlines, we're working with them and we're pretty confident they will get across the line in due course.

Okay. And in terms of the sales at the Wynyard Quarter Northbrook, what kind of units have been sold? Is this sort of like the penthouses at the top or are these sort of like units facing the ocean?

It's across the board, fair to say. And, yes, we're pleased with the outcome today.

The next question comes from Rohan Koreman-Smit of Forsyth Barr.

Chris and Jean, congratulations on a solid end to the year. I just had a few questions and I might make them quite long so I can fit it in the 2 question cap. But if you look at the pre-sales that are coming in or pre-sales cover for '24, can you just give us an indication of that? And then, I guess, coupled with that is how or can you give us an indication of second half kind of booked pre-sales in terms of, I guess, net here, when you take the defaults out, the dollar value of the defaults offset by the dollar value of any other sales you got and then obviously less, I guess, the settlement of those pre-sales? Just trying to bridge the book to bill and then look back forward kind of [ a year ] to inform my model.

Hey, Rohan. Yes, I'm happy to comment on the pre-sales. In the investor presentation on Page 33 we have a summary across each community of what those -- where the pre-sales are sitting. And you can make an assumption that those pre-sales will be the first sales that are recognized in future years. That kind of gives you a pointer there.

Perfect. Maybe we'll take the second one about bridging the pre-sales book offline. But then just swinging back to Northbrook, look, NZD 50 million is a very solid start. Can you just give us an idea of the terms on these sales? What kind of security? Is there any -- have there been deposits paid into trust accounts? And I'm guessing it's not included in the NZD 420 million of other pre-sales that you've currently reported.

No, that's correct. The nature of the sales that we have taken both minimum 5% deposits and personal guarantees. And across the board we haven't varied in terms of our overall terms. We haven't varied from our 30% over 4 years.

[Operator Instructions] The next question comes from Nicholas Hill of Craigs Investment Partners.

[Audio Gap] and your kind of cyclical development income, have you started to see any more investment opportunities come to your required return rates?

I think it's fair to say, Nick, we've never had so much stuff presented to us in terms of acquisition opportunities than what we have in the last few weeks and yet we're still waiting. And I think I made a comment earlier we're going to be extremely disciplined about how we acquire land. We still haven't seen things come to the price that we're prepared to pay as yet. But we do feel as if there are some distressed opportunities which are heading toward that point.

That's great. And I guess how would you describe the quality of these sort of investment opportunities coming away? Is it the case where there is a lot that could provide an attractive return but the actual development is a bit messy such as consents aren't in place, the builders are going bust or the actual quality of the build is less than desired?

Well, I'll start by saying we love [ messy ]. So messy is good and normally messy means you're buying it at a better price. So we are seeing messy but we're not seeing the combination of messy, whether it be on a consenting or delivery measure, correspond to the price that we want to pay for the mess.

The next question comes from Rohan Koreman-Smit of Forsyth Barr.

Just on costs for construction, you've been waiting to tender Northbrook and you've been talking about construction costs coming back. Can you just give us an indication, I guess of what you have been seeing in the last few weeks and I guess how it compares to what you were talking to at the Investor Day and your expectation for construction costs declines kind of over the next 6 to 12 months.

Yes. Rohan, so we are seeing costs coming down. So we're seeing civil costs come down in the order of 10% to 15%. And we're not in the market as yet because we're just waiting a bit to take full advantage. But we are hoping to see a similar decline in [Audio Gap] costs and anecdotally that the inquiry we're getting from subcontractors and so on would indicate that we're hopefully on track there to see those prices come back to where we think it needs to be or should be.

There are no further questions at this time. I'll now hand back to Mr. Meehan for closing remarks.

Thank you, everyone for joining the call and thank you everyone for your ongoing support and we look forward to reporting in -- after the next half results early next year. Thank you very much for your time.

That does conclude our conference for today. Thank you for participating. You may now disconnect.