Gentlemen, thank you for standing by, and welcome to the Ingenia Communities Group Full Year 2018 Results presentation. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session, at which time, if you wish to queue for a question, you will need to press zero followed by one on your telephone. Please note that this conference is being recorded today, Tuesday, 21st of August 2018. I would now like to hand the conference over to your speaker today, Mr. Simon Owen, Chief Executive Officer and Managing Director. Thank you, sir. Please go ahead.
Good morning, everyone. It's great to be here, and I'm really pleased to be presenting Ingenia's results today. Without exception, this is the best set of numbers we have ever produced. What's even more exciting is that we're only just getting started. Ingenia's business model is uniquely leveraged to the intersection of three key thematics: an aging population, a housing affordability crisis, and several generations of people retiring with limited savings beyond the family home. We have an incredible growth runway in place, and our development pipeline is larger than our two listed peers combined. Ingenia has a stable and highly capable leadership team in place. A majority of the core executives has now been with the business for over four years, and we've internally developed a huge amount of sector intellectual property over this period.
I'm very confident that we're in the early phases of an extended period of compelling earnings growth for security holders. Before we go into the details, I would really like to focus on five key particular areas today. 1, Ingenia's business is underpinned by owning land and collecting rent. We presently have over 7,000 income-yielding homes, cabins, and sites, and this number continues to grow as we settle new homes or add new tourism and rental cabins in our existing communities. Every week, we collect more than AUD 1.6 million in rent, with a significant component of this underpinned by government-based payments. You can see this in our operating cash flow, which for the year that's finished, was up 56% to AUD 47.2 million. Number 2, our business is underpinned by the continuing aging of the population. Every day, some 700 Australians turn 65.
That's 700 people every day, and this will continue for the next 30 years. Active retirees and downsizers are rapidly embracing the transparency and empowerment of the land lease model, a model with no exit fees or DMFs. This is a housing solution with a genuine and meaningful cash out from selling the family home and moving into a vibrant and engaging community. This is a model which dominates both seniors and affordable housing in the U.S., but remains at its infancy in Australia. It's a model with unrivaled opportunity in Australia, particularly given our high global median house prices, and where Ingenia is not only a clear market leader but has the largest project pipeline of every single one of our peers.
You can see this appeal by the recent corporate activity in Australia, which is seeing some of the world's largest landlords try and get a seat at the table in this market. Three, what continues to set Ingenia apart is that we have already locked in our growth for the next three years. We don't need to participate in high risk and expensive M&A to find alpha. Every single approval required for 2019 is already in place, and we are busy working on 2020. Every single project that is contributing to 2019 settlements is already in market. We've never been in this position before. This year, we are on track to be the biggest developer of land lease communities in Australia, which I think is pretty amazing given that we only built our first home in 2013.
To add further context, the end sales value of our development pipeline now exceeds AUD 1 billion. I'm also increasingly confident that our business model will be resilient to the downturn in the residential property market. The current turmoil in the market is largely focused at the top end of the market, inner-ring high-rise, and product targeting offshore buyers. Our incoming residents, on the other hand, are typically selling middle and outer-ring metro, where the market remains more stable. Our incoming residents are not requiring a mortgage or refinance. They are downsizing, both in terms of property size and financial commitment. Our incoming residents are typically selling to first home buyers or upgraders, where the market remains resilient. Four, whilst all the focus is on our land lease model, we also have two other high quality, scalable businesses which produce week-in, week-out cash flow.
Our seniors rental business, Ingenia Gardens, was Australia's first commercial build-to-rent platform and collects over half a million AUD in government-supported rent every week. While some of Australia's largest REITs talk about build to rent, Ingenia already owns and manages over 2,000 rental homes, and again, we've developed considerable intellectual property in this space. Ingenia Gardens absolutely remains a core holding, enables us to internally fund our high growth, high margin development business. Our affordability-focused tourism business, Ingenia Holidays, offers high organic growth opportunities as well as an attractive consolidation play in what still remains a largely cottage-based sector. This business has no debtors, is leveraged to grey nomads and families with young children, is frequently underpinned by beachfront land, and in 2018, collected over AUD 39 million in cash rents.
Five, Ingenia has first-mover advantage in some really compelling high growth sector adjacencies, including importing flat pack homes and rental units, which of themselves could be an entire new business segment for Ingenia. We've provided color on a few of these opportunities in today's presentation, and of course, it's not that we are lacking growth opportunities to begin with. On that, let's turn to the presentation. Joining me on the call today is Scott Noble, our CFO, and Nikki Fisher, our Chief Operating Officer. There's about 10 slides that I would like to talk to today before opening the call up to Q&A. Let's start on page two, which are a few of the key highlights. Our EBIT is up 52% on the prior year to AUD 48.8 million. Our operating cash flow is up 56% to AUD 47.2 million.
The operating margin in our lifestyle and holidays business is up 370 basis points to 39%. I think this is really pleasing as it demonstrates the leverage and scalability of our operating platform. I have touched on lots of positive news, but there are always a few areas where we could do better. Over the past year, we have settled or contracted AUD 60 million or nearly two-thirds of our targeted AUD 100 million in non-core asset sales, which we are using to self-fund the build-out of our development pipeline. We still have plenty of work to do in this area. We can be more efficient in bringing new and expansion communities to market. Standardizing the design of our homes and community facilities and better integrating our acquisition and development teams has the potential to shave three months off project launch programs.
If we could now turn to page five, I am going to hand over to Scott to walk through the financials and capital management.
Thank you, Simon. Good morning, and thank you for joining Ingenia’s 2018 results call. Turning to slide five, revenue increased 26% to AUD 189.5 million, and EBIT increased 52% to AUD 48.8 million. These increases were driven by the successful integration of new acquisitions, the growth in installments over the year, and the improved performance of our lifestyle and holidays business. Underlying profit increased 56% to AUD 36.8 million, driven by an AUD 17 million increase in EBIT, offset by an increase in non-cash tax expense, which increased in line with the increase in development profit. Underlying EPS increased 36% to AUD 0.177 per share, with statutory EPS up 13% to AUD 0.165. Pleasingly, the group’s operating cash flow was strong at AUD 47 million, an increase of 56% on the prior year.
Directors have declared a final distribution of AUD 0.0565 per security, taking the full-year distribution to AUD 0.1075, a 5.4% annual increase on the prior year. Turning to slide six. Ingenia delivered strong growth in both EBIT and EBIT margins. Lifestyle holidays EBIT increased 51% to AUD 25.3 million, with EBIT margin growing to 38.9%. This improvement was driven by the contribution from our new acquisitions, the strong performance of our existing villages, which delivered both rental growth and scale efficiencies, and the investment in new cabins across the portfolio, which provided incremental rental growth. Development EBIT increased 93% to AUD 21 million, with EBIT margin growing to 24.4%. The improvement of the development result was driven by a combination of delivering 287 settlements, 76 up on the prior year, new higher-margin projects, higher sales prices across the portfolio, and cost improvements.
On a like-for-like basis, Ingenia Gardens delivered EBIT growth and continues to deliver strong cash flow to the business. The Ingenia Gardens result was impacted by the sale of the five Tasmanian villages during the year. I'm going to turn to slide eight now on capital management. During FY 2018, we increased both the size and tenor of our debt facilities. We sold or contracted dollars in non-core assets and continue to explore capital partnering opportunities to accelerate our development pipeline. At 30 June, gearing was 26.6% and LVR was 32.6% compared to our covenant of 50%. Weighted average debt maturity was 4.3 years. The cost of drawn debt was 3.8%, and we were 41% hedged through a combination of swaps and collars. Turning now to slide nine. During 2018, we externally revalued 35 assets.
We've seen the average cap rate of the lifestyle and holidays portfolio sharpen by approximately 40 basis points. Ingenia Gardens cap rates remain stable at 9.9%, reflecting the lack of recent market transactions in this high-yield, stable cash flow business. We believe the increased corporate activity in the sector will be positive for cap rates in 2019. Thank you. I'll now hand back to Simon to run through the remaining slides.
Thanks, Scott. I'm now going to move on to slide 15, which is our key lifestyle and holiday segment. Portfolio EBIT in this business was AUD 25.3 million for the year, which is up 50.6% on one year ago. Like-for-like rents, i.e., those from communities owned by Ingenia for a minimum of 12 months, is up 4.9% on the prior period. These are some really strong numbers, which demonstrate the scale benefits now being delivered across the portfolio, but with plenty more to come. We continue to reinvest in our lifestyle and holidays business. In addition to new home sales, we've also added 48 new rental and tourism cabins over the past 12 months, and we are typically achieving a greater than 20% return on capital on this investment. I'm now going to move on to slide 16, which is our Ingenia Holidays business.
This is, again, where we're really enhancing returns through active management. Like for like, i.e., same store revenue growth is up 8% over the past 12 months, and we now have a unique database of over 160,000 members who we communicate with on a regular basis. Our strategy here at Holidays is about owning the customer. It's about controlling the sales channel where possible and focusing on yield optimization and length of stay rather than chasing the market for rate. Our Holidays business is a compelling and complementary opportunity with significant attractive earnings upside. I'm now going to move on to page 17, which introduces development. Put simply, we are selling more homes at higher prices and better margins every year.
As at 17th of August, we have 173 deposits or contracts in place, which combined with year-to-date settlements, represents 56% coverage of our forecasted 2019 settlements of 350-plus homes. This gives us great visibility for the next six months settlements and confidence that even in a slowing housing market, that our settlements target, which we first articulated back in May 2017, remains on track. Our development margin expanded 730 basis points over the past 12 months, with further growth expected as we develop projects like Latitude One and Plantations. Our home sale prices are up nearly 5%, and above-ground profit per home up 30% over the past 12 months. This is as we start assertively leveraging our development runway. Moving on to slide 19, which remains one of my favorites. There's no other lifestyle community operator that has a pipeline offering anywhere near this quality or breadth of projects.
A majority of these projects have been sourced where we've got the DA, the development approval internally, and that's added considerable value. Over the next few years, we're launching an additional 10 new or expansion projects. We're focusing more intently in the Victorian market, and we've now secured two projects with several others under offer. Consistent with comments from one of our peers last week, we're also experiencing a market far more conducive for optioning land as smaller developers and land bankers get squeezed. Our strategy over the past few years has been where possible to acquire the land adjoining existing communities. Today, we own or have optioned land adjoining Chambers Pines, Bethania, Avina, Latitude One and Hervey Bay, and we are currently negotiating the expansion, so the acquisition of expansion land adjoining another four communities.
Our experience is that when you're acquiring the land next to an existing community, that it typically provides for very low risk and highly profitable development. I respect that the market remains nervous on the outlook for residential property, so I'd like to touch on slides 20 and 21. The chart on page 20 shows that the real price weakness in the market at the moment is being experienced in the top end of the capital city markets, probably where most of the brokers on today's call live. On the flip side, there remains firmness in the mid and lower deciles, which is where Ingenia plays.
There is no doubt we will have to work harder for sales, but I do think the combination of our attractive price point, our geographic diversification, demographics, the quality of our offering, and a growing awareness of both the land lease model and Ingenia will support our settlements target in 2019 and beyond. I touched earlier on Ingenia's internally developed IP and some of the sector adjacencies we are exploring. On page 22, I'd like to share a few of these with you. We presently own 819 homes in our lifestyle business, which we rent out. We have the ability to add at least another 110 of these homes across the portfolio over the next few years. Gross yields on new rental homes typically exceeds 20%.
Over the past 12 months, we have commenced procuring low-cost flat pack units out of China, which offer significant savings on locally sourced product. We are about to place our first order for new homes in our land lease business. This is an incredible market opportunity. To put it in perspective, in the U.S., where the largest factory home builder, Clayton Homes, is owned by Berkshire Hathaway, the build cost of new homes in the U.S. is one-quarter of what it costs in Australia. With scale pipeline, Ingenia Communities Group is now aggressively attacking build cost procurement, which will open new markets or expand our operating margins. I am now going to touch briefly on Ingenia Gardens, which is on page 23. Ingenia Gardens remains a core part of our platform, and we collect over half a million AUD in rent every week.
Occupancy remains firm across the portfolio, and our care strategy, which was trialed initially and rolled out in our Ingenia Gardens business, is now being implemented across the majority of our lifestyle communities. I think this is a great demonstration of how we leverage our significant operating capabilities across lifestyle, holidays, and rental. We are now finalizing the feasibility of a new modular two to three-story seniors rental village at Chambers Pines, which would be the first new non-government funded village in over 10 years and would provide real growth optionality to Ingenia Gardens. Again, this is real IP developed within the business. We are now in the closing slides. I am on slide 25, Thinking Ahead. This slide, I think, really gives you great visibility on our future earnings growth. Our challenge to finding growth is funding growth.
Over the next three years, Ingenia Communities Group's key organic growth levers include adding development profit on an extra 50 to 100 homes per annum every year. Each new home adds around AUD 300,000 to revenue and over AUD 100,000 to EBIT. As I noted previously, the sales value of our development pipeline now exceeds AUD 1 billion. Once we build out our pipeline, the rents on an additional 3,244 new homes will be a further AUD 28 million per year in recurrent revenue. Adding in another 110 new rental cabins across Chambers, Durack and Eight Mile Plains will add a further AUD 1.6 million in recurrent revenue. Finally, adding another 150 plus tourism cabins across our holiday portfolio will add in another AUD 6 million in incremental annual rent. I think there is great visibility on where Ingenia Communities Group's future earnings growth is going to come from.
I will now touch briefly on page 27, which is our 2019 guidance. We remain committed to our new home settlement target of 350 plus homes in the current year, with further growth beyond that in 2020. In 2019, we are forecasting 10%-15% EBIT growth and greater than 15% per annum over the next two years. This comes on top of the record of 50% growth achieved in 2018. We are forecasting an underlying EPS growth of 5%-10% in the current year. These are some pretty exciting numbers. Finally, on page 29, which is our management focus. Our absolute number 1 priority in the business remains on improving the performance of our existing communities. Whilst I think we have made considerable progress over the past 12 months, there remains plenty more to do.
Rolling out new homes, securing development approvals, and optioning new sites remains a continuing priority for the group. We have six people within the business focused on acquisitions and origination, which is probably as much as the rest of the sector put together. This remains a key focus area. I would also like to think that with some of our peers entangled in M&A and with the credit squeeze for some smaller operators, that this will open up some interesting opportunities over the next six months. On closing, I think this result has been Ingenia's breakout year. We have a high-quality portfolio, what I think is the best management platform in the sector, the biggest pipeline of any of our peers, indeed the next two peers combined, and at least four or five of the world's largest landlords looking for a seat at the table. I'll now hand over.
Ladies and gentlemen, as a reminder, if you wish to queue for a question, please press zero followed by one on your telephone and wait for your name to be announced. Once again, that is zero followed by one on your telephone. Your first question comes from the line of Steven Lam from CLSA. Please go ahead.
Hi, Simon and team. I've got a few questions. In terms of the guidance, can you talk about the composition of it? Where I'm coming from is in terms of number of settlements, you've got 22% growth from this year, and the development EBIT contribution was 43% of the EBIT. That alone should be 9.5%. Given that you should be getting higher margins on higher sale prices, just wondering why is the EBIT growth only 10%-15%?
Yes. Sure, Steven. Scott here. I'll respond to that. What we've allowed for in the guidance is we've currently sold and contracted AUD 60 million of that in the books in FY 2018. Certainly, we're forecasting to continue that asset sale progress into FY 2019, which will also impact the results. If you're looking at underlying EPS, you have to take into account higher debt levels and, I suppose, a growing tax expense as well. That will be non-cash.
On the average home sale price and gross profit per home, are you able to tell what you've assumed in your guidance, or is it roughly similar to this year, perhaps?
We have assumed growth on this year, Steven.
I'd say, Steven, for home sale prices, you can assume something in the sort of AUD 325,000-AUD 340,000 as the sales price of new homes inclusive of GST. Within that range, we've now got homes at Latitude One that we're selling for up to AUD 650,000, then we'll put a few homes on the market later this year at over AUD 800,000. Then we've got product down at Albury, which is less than AUD 200,000. The weighted average, if you assumed in that sort of low to mid-AUD 300s, that would be fine. In terms of the margin, as the price of the homes tends to push up a little bit, now we think there'd be maybe a 100 or 200 basis point expansion in the margin. What we saw in 2018 was quite a step up for us.
Yep. In terms of the skew in the settlement profile, is it quite skewed to the second half again, like this year?
I do think the skew will be less pronounced this year. The prime reason is that in 2018, we had three new projects which were critical to hitting our final numbers launch. That was Latitude One, where the first residents moved in in June. We had The Grange, where the first residents moved in in December or January, and then Conjola on the South Coast, where the first residents again moved in in May or June. This year, the only project where residents haven't yet moved in is Plantations, which is our new project at Woolgoolga, just north of Coffs Harbour, I would expect the first residents will move in there in probably February or March.
Okay. Can you talk a little bit more about asset sales? I think on the slides you mentioned AUD 100 million total non-core, and you've done AUD 60 of that. Is the AUD 60 the stuff that you've already announced, including the Garden Villages? Also, what's the remaining AUD 40?
At the moment, within that AUD 60 million includes Rouse Hill, where we've exchanged a conditional contract with Poly from China for the sale of that, and we expect that will close in the next probably 12 months. On top of that AUD 60 million, we do have another AUD 40 million of non-core regional and subscale lifestyle and holiday communities, which were in varying stages of negotiation with a few groups. Yeah, we're typically focusing on exiting all of the regional markets and focusing really on capital city and coastal communities. Again, over the next 12 months, I'd expect that we would execute on the majority of those divestments. Both in terms of what we sold late last year, plus what we're forecasting to settle this year, that takes about AUD 2.5 million.
Yeah. Sorry.
Be like AUD 3 million from EBIT in the current financial year, which probably answers a little bit of why the EPS and the EBIT growth is not quite as high as you're expecting.
Definitely, is that the AUD 3.4 that you refer to on slide 27?
That's correct.
AUD 3.4 million. That's the combined effect, FY 2019 effect of the AUD 100 million?
That's correct.
Okay.
Well, it's the divestment that includes the five rental villages that we sold in Tasmania in February or March last year, plus the divestment of the additional AUD 40 million of non-core asset sales that we're expecting to happen over the course of FY 2019.
Okay. Thanks very much.
Thank you very much. Once again, if you wish to queue for a question, please press zero followed by one on your telephone and wait for your name to be announced. That is zero followed by one on your telephone. Your next question comes from the line of Michael Peet from Goldman Sachs. Please go ahead.
Hi, Simon, Scott, and Nikki. Just a little confused on that AUD 3.4. Is that of the announced divestments, or is that the full AUD 100 million?
That's the announced, a portion of the AUD 40 million for next year, which we're forecasting to sell.
Got it. Just maybe, Simon, can you make a comment on capital partnering and also what sort of headroom you'll have by the end of this year if you don't do anything outside of the announced divestments?
Yeah. In terms of capital partnering, we're continuing to advance discussions with a couple of groups around that. The way we're thinking about capital partnering is that we believe there's an opportunity to step up our development. We are looking to consider working with a capital partner to increase our rate of development. The current pipeline that we have, as disclosed in the deck, that would remain fully funded by Ingenia. With a capital partner, we could potentially look at acquiring or optioning additional development sites. We're not going to be in a position to announce anything in the next day or the next week. As this sector gets more attraction from global landlords, there's certainly a lot more interest, a lot more people knocking on our door expressing interest in looking at opportunities with Ingenia.
In terms of headroom, we're quite comfortable delivering 350-plus settlements in 2019 and going beyond. Our ability to step up settlements in 2020 beyond 350 settlements would require the divestment of Rouse Hill and also additional asset sales. Where we sit at the moment, we're comfortably capable of funding the development in front of us. Our Latitude One project now is cash flow positive month on month, which enables us now to commence plantations where we're spending a bit over AUD 1 million a month at the moment, putting in the roads and the infrastructure. The builder will start building new homes at plantations in October, and we would expect the first residents to move into that project in February or March. We've already had very strong interest from the local community.
Thanks, Simon. Just a couple for Scott, maybe. CapEx for this year, what number should we be looking at there? Just the tax rate. I know it's not in cash, but maybe just give us a feel for tax.
Yeah, sure. In terms of CapEx spend, I think being consistent with what we delivered this year, in terms of circa AUD 50 million of development spend, circa AUD 6 million on cabins, and across the portfolio, and probably AUD 10 million in relation to operational maintenance CapEx is reasonable. A similar sort of level across the group. In terms of tax rate, we're forecasting a slight increase in the effective tax rate, just based on the increased development profit we're expecting next year.
Great. Thank you.
Thank you very much. There are no further questions at this point. I would now hand the call back to Mr. Owen for any closing remarks. Please go ahead, sir.
Well, thank you everyone for dialing in. We think this year is a great result and the business is very strongly positioned up for further sustained growth over the next three to five years. Donna and Scott and I look forward to catching up with all of you over the next few weeks. Thank you very much for your time today.
Thank you.
Thank you, sir. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for participating. You may all disconnect.