And 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. Please note that this conference is being recorded today, Tuesday, 21st 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 Ingenio's results today. Without exception, this is the best set of numbers we have ever produced. But what's even more exciting is that we're only just getting started. Ingenia's business model is uniquely leveraged to the intersection of 3 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 2 listed peers combined. And in Virginia has a stable and highly capable leadership team in place. A majority of the core executive has now been with the business for over 4 years, and we've internally developed a huge amount of sector of 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 holes.
But before we go into the details, I would really like to focus on 5 key particular areas today: 1, Ingenius business is underpinned by owning land and collecting rent. We presently have over 7000 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 $1,600,000 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 is finished, was up 56% to $47,200,000.
Number 2, our business is underpinned by the continuing aging of the population. Every day, some 700 Australians turn 65. That seven hundred people every day and this will continue for the next 30 years. Active retirees and downsizes are rapidly embracing the transparency and empowerment of the land lease model, a model with no exit fees or DMS. 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 infancy in Australia. It's a model with unrivaled opportunity in Australia, particularly given our high global median house prices, And wear a genius 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.
3, what continues to stay in junior apart that we have already locked in our growth for the next 3 years. We don't need to participate in high risk and expensive M and 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 build our first home in 2013. To add further context, the end sales value of our development pipeline now exceeds $1,000,000,000. I'm also increasingly confident that our business model will be resilient 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, and our incoming residents are typically selling to 1st homebuyers or upgraders, where the market remains resilient. 4, while all the focus is on our land lease model, we also have 2 other high quality scalable businesses which produce week in week out cash flow. Our seniors rental business in Junior Gardens, while Australia's first commercial build to rent platform and collects over $500,000 in government supported rent every week. While some of Australia's largest risks talk about bill to rent, Ingenia already owned and manages over 2000 rental homes.
And again, we've developed considerable intellectual property in this space. In G And A Gardens, absolutely remains the core holding and enables us to internally fund our high growth, high margin development business. And our affordability focused tourism business in junior holidays offers high organic growth opportunities as well as an attractive consolidation play in what still remains a largely qualified sector. This business has no debtors is leveraged to grant nomads and families with young children is frequently underpinned by beachfront land. And in 2018, collected over $39,000,000 in cash Ingenya has 1st mover advantage in some really compelling high growth sector adjacencies.
Including importing flat pack homes and rental units, which on themselves could be an entire business segment for Ingenio. We're providing 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. I'm now going to turn to the presentation. Joining me on the call today is Scott Noble, our CFO and Nicky Fisher, our Chief Operating Officer.
It's about 10 slides that I would like to talk to today before opening the call up to Q And A. So let's start on Page 2, which are a few of the key highlights. Our EBIT is up 52 percent on the prior year to $48,800,000. Our operating cash flow is up 56% to $47,200,000. And the operating margin in our Life Thousand Wholeane business is up 3.70 basis points, to 39%.
I think this is really pleasing as it demonstrates the leverage and scalability of our operating platform. I've touched on lots of positive news, but there are always a few areas where we can do better. Over the past year, we have settled or contracted $60,000,000 or nearly 2 thirds of our targeted $100,000,000 in noncore assets sales. Which we're using to self fund the build out of our development pipeline, but we still have plenty of work to do in this area. And we're even 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 3 months on project launch programs.
If we can now turn to Page 5, and I'm going to hand over to Scott to walk through the financials Capital Management. Thank you, Simon. Good morning and thank
you for joining Antonio's 2018 results call. Turning to Slide 5. Revenue increased 26 percent to $189,500,000 and EBIT increased 52 percent to $48,800,000. These increases were driven by the successful integration of new acquisitions, the growth installments over the year, and the improved performance of our lifestyle and holidays business. Underlying profit increased 56 percent to $36,800,000, driven by a $17,000,000 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 percent to $17.7 per share, with statutory EDS up 13% to $0.165. Pleasingly, the group's operating cash flow was strong. At $47,000,000, an increase of 56 percent on the prior year. Directors have declared a final distribution of $5.65 per security, taking the full year distribution to $10.75, a 5.4% annual increase on the prior year. Turning to Slide 6.
Ingenio delivered strong growth in both EBIT and EBIT margins. Lifestyle holidays EBIT increased 51 percent to 25,300,000 with EBIT margin growing to 38.9 percent. 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 percent to $21,000,000 with EBIT margin growing to 24.4 percent. The improvement in 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 continue to deliver strong cash flow to the business. The Ingenia Gardens result was affected by the sale of the 5 Tasmanian villages during the year. I want to turn to Slide 8 now on capital management. During FY 'eighteen, we increased both the size and center of our debt facilities. We sold our contracting dollars in noncore assets and continue to explore capital partnering opportunities to accelerate our development pipeline.
At 30 June, Gearing was 26.6% and LBR 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 9. During 2018, we similarly re dated 35 assets.
We're seeing the average cap rate of the lifestyle and holidays portfolio sharpened by approximately 40 basis points. In June year guidance, cap rates remained stable at 9.9 percent, 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 hear 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 $25,300,000 for the year, which is up 50.6% on 1 year ago. Life for like rents, I. E.
Those from communities owned by Virginia 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 holiday business. In addition to new home sales, we've also added 48 new rental and tourism cabins. Over the past 12 months, and we're 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.
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 rent for rate. Our whole rate businesses are compelling and complementary opportunity with significant attractive earnings upside. I'm now going to move on to Page 17, which introduces development.
And put simply, we are selling more homes at higher prices and better margins every year. As at 17th 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 6 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 7.30 basis points over the past 12 months with further growth expected as We developed projects like Latitude 1 and Plantation. Our home sale prices are up nearly 5%, and above ground profit for home, up 30% over the past 12 months.
And this is as we started assertively leveraging our development runway. Moving on to Slide 19, which remains one of my favorites. There's no other lifestyle community operated and has a pipeline offering any way into this quality or breadth of projects. A majority of these projects have been sourced, where we've got the DA, the development approval internally, that's added considerable value. So over the next few years, we're launching at additional 10 new or expansion projects.
We're focusing more intently in the Victorian market, and we've now secured 2 projects with several others under offer. And consistent with comments from one of our peers last week, we're also experiencing a market far more conducive for optioning land as small developers and land bankers get squeezed. Our strategy over the past few years has been but possible to acquire the land adjoining existing communities. So today, we own or have options land are joining chambers Pines, Defania, Avena, Latitude 1 and Harvey Bay. And we're currently negotiating the expansion, so the acquisition of expansion land are joining another 4 communities.
Our experiences are when you're acquiring the land next to an existing community, that are typically provided for very low risk and highly profitable development. I respect that the market remains nervous on the outlook residential property. So I'd like to touch on Slides 2021. 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 list.
On the flip side, there remains firmness in the mid and lower deciles, which is where a junior plays. There's no doubt we'll 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 in danger, will support our settlements target in 2019 and beyond. I touched earlier Our engineers internally developed IP and some of the sector adjacencies we are exploring. And 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 rentals, homes typically exceeds 20%. And over the past 12 months, we have commenced procuring low cost flat packed units out of China, which offer significant savings on locally sourced product. We're 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 homebuilder, Clayton Homes, is owned by Berkshire Hathaway, The build costs of new homes in the U. S. Is 1 quarter of what it costs in Australia. This scale pipeline Ingenio is now aggressively attacking build cost procurement, which will open new markets and or expand our operating margins.
I'll now touch briefly on Ingenio Gardens, which is on Page 23. Ingenio Gardens remains a core part of our platform. We collect over $500,000 in grant every week. Occupancy remains firm across the portfolio. And our care strategy, which was trial initially and rolled out in our Engineered Gardens business is now being implemented across the majority of our lifestyle communities.
I think this is a great demonstration how we leverage our significant operating capabilities across lifestyle, Holidays and rentals. And we're now finalizing the feasibility of a new Modular 2 to 3 storey seniors rental village at Chambers Pines. Which will be the 1st 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're now in the closing slides.
So I'm on Slide 25. Thinking ahead. This slide, I think will give you great visibility on our future earnings growth. Our challenge is to finding growth. It's funding growth.
Over the next three years, Ingenio's key organic growth leaders include adding development profit on an extra 50 to 100 homes per annum every year. Each new home adds around $300,000 to revenue and over $100,000 to EBIT. And as I noted previously, the sales value of our development pipeline now exceeds $1,000,000,000. Once we build out our pipeline, the rent on an additional 3244 new homes, would be a further $28,000,000 per year in recurrent revenue. Adding in another 110 new rental cabins across chambers, Durac and 8 mile clients, we'll add a further $1,600,000 in recurrent revenue.
And then finally, adding another 150 plus tourism cabins across our holiday portfolio will add in another $6,000,000 in incremental annual rent. So I think there's great visibility on where Virginia's future earnings growth is going to come from. I'll now touch briefly on our on page 27, which is our 2019 guidance. We remain committed to our home settlement target of 3.50 plus homes in the current year, with further growth beyond that in 2020. In 2019, we are forecasting 10% to 15% EBIT growth and greater than 15% per annum over the next 2 years.
This comes on top of the record 50 percent growth achieved in 2018. And we are forecasting an underlying EPS growth of 5% to 10 dollars in the current year. Builds are pretty exciting numbers. And finally, on Page 29, which is our management focus. Our absolute number one priority in the business remains on improving the performance of our existing communities.
And 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 approval, and optioning new sites remains a continuing priority for the group. We have 6 people within the business focused on acquisitions and origination, which is probably as much as the rest of the sector put together. So this remains a key focus area. Would also like to think that with some of our peers in tangled and M and A and with the credit squeeze for some small operators, that this will open up some interesting opportunities over the next 6 months.
Uncleizing, I think this result has been in changes by category. 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 4 or 5 of the world's largest landlords looking for a seat at the table. I'll now
Your
first question comes from the line of Stephen Lamb from CLSA. Please go ahead.
Hi, Simon and team. I've got a few questions. In terms of the guidance, Can you talk about sort of the composition of it? Because where I'm coming from is in terms of number of settlements, you've got 2% growth on this year. And the development EBIT contribution was 43% of the EBIT, that alone should be 9.5%.
And given that you should be getting higher margins on higher sale prices, just wondering why is EBIT growth any 10% to 15%?
Yes. Sure, Stephen. Scott here just respond to that. What was the last point in the guidance is, we've currently sold and contracted $60,000,000 of that written in the books in FY 'eighteen. Secondly, we're forecasting to continue that asset sale progress into FY 'nineteen, which will also impact the results.
Certainly as we obviously, and then if you're looking at underlying EPS, you've taken into account higher debt levels and, I suppose, growing tax expense as well. That will be non cash.
And then on the average home sale price and gross profit per home, are you able to or 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 think it's yes.
Okay, Stephen, for HomeStar Price, as you can assume, there's something in that sort of $3.25 to $340,000 as the sales process of new homes inclusive of our GST. Within that range, we've now got homes at Latitude 1, so we're selling for up to $650,000 and then put a few homes on the market later this year at over $800,000. Then we've got product down at Albury, which is less than $200,000. So the weighted average If you assumed in that sort of low to mid-300s, that would be fine. In terms of the margin, Yes, as the price of the homes tends to push up a little bit, we think there'd be a, maybe a 100 or 200 basis point expansion in the margin.
But what we saw in 2018 was quite a step up for us.
Yes. And then in terms of the SKU in the settlement profile, is it quite skewed to the second half again, like is she?
I do think the SKU will be less pronounced this year. And that's the primary reason is that in the for 2018, we had 3 new projects, which were critical to hitting our final numbers launch, and that was Latitude 1 where the first residents moved in in June. We had the Grange, where the first residents moved in in December or January, and then Cuyola 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 Walgober to North Dakota.
And I would expect the 1st residents will move your name in probably February or March.
Thank you. And then, can you talk a little bit more about asset sales? So I think on the slides, you mentioned $100,000,000 total non coin, you've done $60,000,000 of that. So is there $60,000,000 the stuff that you've already announced, including the Garden Villages and also what's the remaining $40,000,000?
So at the moment, within that $60,000,000 includes Rouse Hill, whenever you exchange that conditional contract with poly from China for the sale of that, and we expect that will close in the next probably 12 months. So on top of that $60,000,000, we do have another $40,000,000 of noncore regional and subscale lifestyle and holidays communities. Which were in varying stages of negotiation with a few groups. So, yes, we typically focusing on exiting all of the regional markets and focusing really on capital city and coastal communities. So again, over the next 12 months, I'd expect that we would execute on the majority of those divestments and both in terms of what we sold late last year plus what we're forecasting to settle this year, that takes about $2,500,000
Yes. So
$3,000,000 from EBIT in the current financial year, which is probably answers a little bit of why the EPS and EBIT growth is not quite as high as you're expecting.
Sorry, the freemium, is that the 3.4 that you referred to on Slide 27.
That's correct.
And that's the combined effect, FY19 effect of the $100,000,000
That's correct. Okay. Well, it's the divestment of, so that includes the 5 rental villages that were sold in Tasmania in February or March last year plus the divestment the additional $40,000,000 of noncore asset sales that we're expecting to happen over the course of FY 'nineteen.
Okay. Thanks very much.
Your next question comes from the line of Michael Pete from Goldman Sachs. Please go ahead.
Hi, Simon, Scott and Nicky, just a little confused on that 3.4,
is that of the
announced divestments or is that including, is that the 400,000,000
So that's the announced. And then a portion of the $40,000,000 for next year, which was worth forecasting for sale.
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?
Yes. So in terms of capital partnering, we're continuing to advance discussions with a couple of groups around that. And the way we're thinking about capital partnering is we believe there's an opportunity to step up our development. So we are looking to, consider working with a capital partner to increase our rate of development. So the current pipeline that we have as disclosed in the deck that, that would remain, fully funded by Ingenio, and then 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. But as this sector gets more attraction from global landlords, they certainly a lot more interest, a lot more people knocking on out or expressing interest in, looking at opportunities, ah, with congenium. 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, Rausch Hill. And also additional, asset sales.
Where we sit at the moment, we're comfortably capable of funding, the development in front of us. So, our Latitude 1 project now is cash flow positive month by month. Which enabled us now to, commence plantations where we're spending a bit over a $1,000,000 a month at the moment, putting in the roads and the infrastructure. The builder will start building new homes at Plantation in October. And we would expect the 1st residents to move in into that project in February or March, we've already had very strong, interests, from the local community.
Thanks, Simon. Just a couple for Scott, maybe. CapEx for this year, what sort of the what number should we be looking at there? And just the tax rate, I know it's not in cash, but just give us a feel for tax?
Yes, sure. In terms of CapEx spend, I think being consistent with what we've delivered this year, in terms of circa $50,000,000 of development spend, circa $6,000,000 on cabins across the portfolio and probably 10 $1,000,000 in relation to operational maintenance CapEx is reasonable. So it's at similar level across the group. In terms of tax rate, we're forecasting a slight increase in the effective tax rate based on the increased development profit we're expecting next year.
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 3 to 5 years. And Donna and Scott and I look forward to catching up with all of you over the next few weeks. So 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.