Release Date: August 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ingenia Communities Group (INGEF, Financial) exceeded FY24 guidance, driven by strong new home settlements and solid performance in residential communities and holiday parks.
- Revenue increased by 20% to $472 million, with significant contributions from lifestyle rentals, development, and holidays business.
- The group has a robust $2.5 billion real estate portfolio, providing a strong foundation for future growth.
- Ingenia Holidays saw a 7% increase in total revenue, with tourism revenue up by 8%, contributing to a 17% increase in group EBIT.
- The development pipeline includes over 5,300 sites, with a focus on diversified markets and price points in Queensland, Victoria, and New South Wales.
Negative Points
- Statutory profit declined to $14 million due to a $97 million impairment of goodwill related to the 2021 Seachange acquisition.
- EBIT margins in the holidays segment declined to 42.2% due to higher operating and volume-related costs.
- The development segment's EBIT margin has decreased, with some projects not meeting return targets due to cost escalation and efficiency issues.
- The group faces regulatory changes in Queensland, limiting site rent increases to the higher of CPI and 3.5%, potentially impacting future revenue growth.
- There are ongoing challenges in the Victorian market, with slower sales rates and extended sales journeys impacting overall performance.
Q & A Highlights
Q: Good morning, John and team. Thanks for your time. Maybe just sticking with this development segment contribution, which you've outlined to be 50% to 60%. You've stepped out a few of the return targets, I think, mid teens. But are you targeting a specific development segment return on invested capital? Or how are you sort of thinking about the return on capital allocated to that segment?
A: Yes. Look, I don't think we have specified the capital allocated. What we've made sure is that we can fund the development pipeline to suit market demand, so ramp up, accelerate or slow down on market demand, but we still expect significant growth in that and to allocate capital to it. So on the basis that it's a higher return than lower yielding mature assets in our portfolio, then we expect that obviously would produce better returns for the overall group. Does that answer your question or have I missed the point?
Q: I was sort of saying more on a return on invested capital for that segment, say, like a 10% return on invested capital or is there a target there?
A: Yes. I think that's in line with the IRR that we've had, which is in that, around that 15%, 16%, which we've targeted previously and disclosed that. We're still aiming to obviously deliver that going forward.
Q: Yes. And maybe you've called out a few of the sub optimal development projects that you're sort of working through. Can you perhaps just step through what returns have been achieved or expected for those projects and what you've diagnosed the problem to be?
A: Yes. Look, at a portfolio level for the most part, where some are outperforming and some are underperforming, we've identified three projects where we think on their current status and with the assumptions we currently have plugged in, it wouldn't make sense to continue to invest further capital in those developments. And we've made those assumptions around our lot settlement CAGR over the five year period. The work that we're doing on those is looking at whether we can reduce the cost of retaining (inaudible), reduce the cost of clubhouses and also get comfort around sales rates and sales prices. So, there's more work to do on those. Some of those will come out unscathed and will go into delivery and some of those we might seek to exit at some point in time.
Q: There's been some negative media attention for one of your listed peers. Have you seen any sort of flow on impact, whether positive or negative to, I guess, inquiry levels or conversion levels, particular in Victoria?
A: Surprisingly, no impact whatsoever, which, you would think that they brought a market impact. We've not seen anything in terms of inquiry levels. We've not had any customers approach us on that issue specifically. And as you'd be aware and the stuff we're producing down there, we have no deem if it's a simple transaction with no exit fees.
Q: Just a few quick ones from me. So, firstly, on the medium term targets, obviously, it's good to see five year growth target of 10% to 15% in settlements. Can you just clarify how you would fund that growth, I guess? And maybe have you looked at what sort of capital is needed to fund that growth?
A: Yes. So, Justin here. Maybe if I take that in the first instance. Obviously, as we've demonstrated over a period of time and as John alluded to, there are a number of different levers for us to fund that development pipeline. Over the last few years, we've certainly invested a lot into new projects and I think it's important that a lot of those projects are starting to actually deliver settlements now. So, they're turning income generating. We are also looking at projects that we can defer as well, particularly those that are underperforming. And we'll obviously start with that as a mechanism. And there are continued recycling opportunities. We'll look at those lower growth assets where there's opportunities to divest, to fund that pipeline, together with the fact that as we grow and we fair value our assets, we're able to leverage and draw down more debt. And as I said, we increased our facilities in the last few months, an additional $125 million, which was well supported and I expect that continued support to continue.
Q: But if you were to expand it, for example, if conditions become better, you're saying there may be some sort of constraints in the future?
A: No. We've got enough levers within the business to be able to source the funding. And I mentioned it in my presentation or whatever, to be able to fund an accelerated platform. And trust me, we've modeled that as well to see what that looks like just to make sure we're not guessing.
Q: On the costs, I guess the cost savings side, you announced $6 million per annum. From here on, is it fair to say that it's more around return optimization at a project level rather than any further cost reductions at a corporate level?
A: Correct. So the corporate reductions, obviously, it's pleasing and it's a good number, but it's obviously recurring. Most of that's driven around getting better alignment on roles and responsibilities and making sure accountability is there. So think of that as more a production measure, but obviously resulted in a significant saving which is pleasing. The main focus for us is cost outs and better opportunities at a development level. And if you look at the stuff we've done to date, I'll give you an example, but down in Victoria, we've changed our slab design, which has resulted in a cheaper building. It's taken us away from a monopoly by a particular provider of housing frames and it's reduced our civil works cost significantly because it brought the civil works down 90 millimeters across a side of over 10 hectares. So, there's one example that'll flow through the future developments. Procurement savings that are already flowing through or will flow through over the next 12 months. Then more importantly over the medium term, there are design changes we are making now for things that will go into production in the next 12 months and be produced over the next two years to three years. That's where you'll see more significant savings. It's unfortunate, but the gestation period for some of these things is quite long. So, there are things we are producing now where I almost hang my head in disgust because we're building something I know is inefficient, but you can't stop. We've made representations and those things are underway. So, you'll see a significant transition over the next two years to three years.
Q: How much of that would be corporate, Justin?
A: Probably around $2 million to $3 million.
Q: And then finally on the development margins, the gross development margins, I noticed, like, the target on that is
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
