220 session City's 2020 Global Property CEO conference. I'm Adrian Dark here with David Lloyd from City Research. We're pleased to have Scotland and in Junior join us today. This session is for investing clients only. If media or other individuals are on the line, please disconnect now.
Disclosures are available up here and on the webcast on the disclosures tab. For those in the room or the webcast, you can sign on to liveqa.com and enter code Citi 2020 to submit any questions or you can just raise your hand. Mark and Simon will turn over to you to introduce your company and management team and provide the audience three reasons why investors should buy your stock today And then we'll turn it over to Q And A. Mark, perhaps we'll start with you.
Okay. Thanks, Adrian. So Tina and O'Rourke, our CFO has just walked in the room. And Mel Buffier, Head of Investor Relations. So Stockland's largest listed diversified real estate company Australia, 15,100,000,000 of assets, split roughly 70% commercial property, 30% communities.
Our strategy is ultimately to provide returns above the sector average, with a focus on leveraging the residential cycle. So we've got a 76,000 lot inventory. And so the largest residential developer in Australia, we're well positioned. And we've seen an increase in national inquiry of about 159% in the last 6 months. So we're seeing a pretty strong recovery.
We offer, at the moment, a 6.9 or sorry, 5.9 percent distribution yield and an 8% EPS yield. And we've got a $4,300,000,000 commercial development pipeline yielding 6% FFO yield, which will provide further long term growth.
Thank you, Simon.
Hi, I'm Simon Owen, our Chief Executive And Managing Director of Ingenia Communities. With me is Donna Bern, who heads up, investor relations, where the largest owner operator and developer of manufactured housing and RV communities in Australia. In the last 12 months to 31 December, we were the highest performing REIT in Australia returning our investors over 76% return. Our focus is on building, our manufactured housing business in Australia. We have the sector's largest pipeline of over 4 1200 Homesites, And since entering the sector back in 2013, we have considerable first mover advantage, through the, I guess, the the ecosystem that we've established with suppliers, with the owners of parks, and now we've assembled a great team.
Thank you. A question that we're asking to open each session, BSG is of increasing importance for all company stakeholders. What's one thing your company is doing to improve your overall ESG score over the next 12 months? Maybe Simon, you can go ahead.
I think, the first thing we do is committing to public reporting on our ESG framework, which we'll be releasing over the next 12 months, and that will be introduced using a GRRI framework. And then secondly, in specific actions, we're going through a process of investing several 1,000,000 of dollars of putting solar panels on every one of our 2500 RV units. So we're making significant contribution at the moment.
Thank you. Mark?
Yes. So, Stocklands are a sector leader. In Gras BendigiosI. We've been a sector leader for 10 years. I guess the key thing we're doing at the moment, we've got a $33,000,000 a rooftop solar program rolling out about 16 megawatts, of production, within 12 months.
We're also, as part of our targets to move to net 0 by 2030 in retirement living logistics and our head offices, we'll be looking to do an Australian first, which will be trading green power in front of the meter, which will incorporate a multimillion dollar roll out of, of solar onto our logistics rooftops, to augment what we've already done with that retail town centers.
Thank you. We might start just, I suppose, for the, the benefit of the audience, if you can perhaps just talk about the exposure that each of your businesses has slightly more specifically, to the residential market. In Australia, your product types that you're active in, which geographic markets and perhaps give us a context on scale as well, please?
Yeah. So the residential communities, business, we've got 40 active projects. As I mentioned, 76,000 lot inventory. Average age of inventory is about 9 years. So there's a lot of embedded margin in that.
We sold a super lot last year to grow at a 50% premium to book value. We're still illustrating, I guess, the embedded value. This year, we said our operating profit margin will be 19%. We've guided for 21, that'll be around 18%, indicating that volumes for 20 will be over 5200 Lots and that, it would be around 5800 Lots in 2021. We've got 42 active projects And I guess on the over 55s, we've got a traditional deferred management fee business, and we're moving into following Simon's footsteps.
So with the 2 1000 dwelling existing inventory for manufactured homes, which is on 10 sites within our within our master plan communities. And, we can move those up to about 4000 by extending, the individual lots and each new master plan community that we do from here we'll probably have a manufactured home or land lease component. And I guess just to step back. Our master plan communities are anything from 2000 families typically to 50,000. And we do we bring in all the enabling infrastructure the town centers, schools, parts, playgrounds, all that type of thing.
Yes. From ingenious perspective, we have, Now firstly, the largest MHE pipeline in Australia of around 4200 Homesites. We've had 6 consecutive years of growing the number of settlements that we're achieving. So even back in the financial year ended 30 June 2019, which apart from, May June was a pretty challenging year. We had a record year in terms of selling a record number of settlements at the highest price we've ever achieved.
Our margins have continued to expand and we're also charging more for our ground lease rents. Our key exposure to the residential market in Australia is is really flows through from every single one of our residents moving into an MAT in Australia has to sell their stick build home because there is no finance available for MH in Australia. So our key exposure comes down to I guess, the underlying strength of the residential market. But from our experience over the last 7 or 8 years, typically our residents are selling their home to a 1st home buyer or upgrader. At the moment in Australia, like the U.
S, you've got very low unemployment interest rates are extremely low. The banks are starting to open up the finance. So we're still seeing that, there is a buoyant market the homes that our residents are selling to fund moving into one of our communities, probably the greatest headwind that we face at the moment is just the time on market that it takes our residents to sell their family home to move in not really seeing a lot of movement there. So going back 2 or 3 years, time on market was typically around 30 days. At the moment, the average across our portfolio is around 62 days, and that just slows down the overall, cycle time.
In terms of the size of the market, our analysis suggests that 2.1% of the population in Australia 65 lives in manufactured housing. The sector is currently delivering somewhere between 1500 to 2000 new manufactured homes, of which ingenia is delivering around 400 of those to increase that penetration rate to 3% of the population over the age of 65, but the sector needs to be building over 7000 new manufactured homes a year. But the entire, supply of sites that, that Ingenia has and Stockholm has and the other key players is only 16,000 sites. So We're in a, I guess, a position where our industry at the moment is significantly supply constrained. We know that from the new communities we're launching that a, absorption rate of between 8 10 homes a month is absolutely achievable.
So we're really focused on freeing up more land supply to make sure we can continue to accelerate development.
Thank you. I think you're both touched on the cycle, but, we obviously went through a downturn in the residential market in Australia from sort of 2017 through to 2019. And had a fairly large, decline in house prices at least by Australian standards, just over 10%. But it does seem that conditions have been getting better since the middle of of last year. Could you maybe talk about the catalyst for that shift as you see it, and what your expectations are for prices and volumes going forward?
I do not trust. Okay. So the election was the big turning point. I think there was a lot of concern about the, the opposition getting in and they had very, negative housing policies. So, I guess the reinstatement of the coalition, was very important.
The ending of the Royal Commission into the Banks was significant and the progressive easing of credit, particularly for owner occupiers. It's fair to say, if you look at bank lending growth. At the moment, it's running at 4%. At the bottom of the cycle, it got down to 2 2.5%. Obviously a long way from normal, but the prior peak of cycle, loan growth was running at 22%, just to put it in context.
So, bank lending in Australia at the moment has improved. We would say it's not normal at the moment. It still takes more than a month, typically to get an approval and independent valuations are required, for each time and does make an application. But it's now clear with the brokers and the borrowers what documentation is required for the banks, and therefore, credit is flowing. And that's what's translated into those very significant uplifts in demand that I mentioned earlier.
We had a release on the weekend, in Sydney. We had campouts again. We sold out in 2 hours. That's not a good outcome. We like customers obviously not to have to be in that situation.
But it's very clear that there's an undersupply in the market, and that will become more acute because ultimately Smaller developers are not getting funding at the moment from the banks. Chinese developers are not participating either. Apartments commencements are off depending on which market you're looking at between 20% 40% and they typically have a 2 year cycle and build cycle and at least a year to 2 years in planning. So you will mathematically have a continuation of this, under build. And of course, the populations continue to grow at 1.5% per annum.
So we think that you'll see a pretty strong 4 to 6 year upcycle and we're about 6 months into that at the moment.
Simon? Echo Mark's comments, please, and a couple of other call outs is, the on the supply side, the volumes going through are still pretty limited, which is certainly putting pressure that for people who want to buy housing. There's not a lot of stock out there of mature homes. I think for Seniors, which is really the market we focus on, there hasn't been a lot of new product coming out in new market. So we, we had an open day up in Harvey Bay, which is about 4 hours north of Brisbane.
It's quite a large regional seaside town, and we had over 650 people attend our open day, and we took a record number of deposits on the day in my 17 years in the seniors housing industry that I've never seen anything like it, but seniors can be very I guess, fickle. So I would have no doubt that the coronavirus is going to inevitably leave senior staying in the family home rather than coming out and inspecting our community. So that sort of sentiment is really strong, but still haven't seen a lot of tightening in the days on market. So now I think from ingenious perspective, trading conditions are good, but they're certainly not where they were. 2.5, 3 years ago.
Simon, just the fee for you, you just touched on the increased penetration. If you're able to achieve that what that means? Are there any other structural factors that are driving the demand for your type of accommodation? I suppose relevant for Mark as well as they build out their MHE business?
Yes. I mean, when we first started, pivoting out of the deferred management fee model, which is my long term experience into manufactured housing. The key thesis there was that in Australia around 78% of seniors, people over the age of sixty five own their home outright with no mortgage or incumbents, but the vast majority of them have less than $100,000 in savings. So outside the equity they have in their home, the vast majority of them don't have access to a lot of money. So we felt that, manufactured housing provided a great opportunity for people to sell their traditional or stick build home, invest 60% to 70% moving into one of our manufactured housing communities and free up equity to fund a more comfortable retirement or help their kids.
And the conversations we had 4 or 5 years ago when we really started developing was we really had to educate the market, our residents and their families on what land lease communities were and how it worked that you didn't actually own the land. Today, what we're finding in the open days that we're running and the conversations we're having with prospective residents is they all know what MH is. They know how the model works. It's just when can I buy in? So in our larger master plan communities, our biggest challenge is keeping up with the demand.
So in our Latitude 1 community up Pargis north of. New Castle, we have typically between 23 different building companies on-site at any point in time, a couple of 100 builders just trying to keep up the demand, we're typically settling between 10 and 12 Homes a month. It's the same at our plantations community, up near our cost harbor. So I think it's 3 or 4 years ago, the conversation is very much about information. Now it's the consumer absolutely understands what MH is and that it's a really a different proposition to the traditional, GMF model in Australia, which I think DMF still has a great place because we can't build manufacturing housing communities in their middle ring, Sydney, Brisbane, and Melbourne because we just can't get the land.
I suppose your target mark has pretty well defined, but, Mark, you guys are planning to a broader suite potential buyers, 1st home buyers, upgraders, etcetera. Can you maybe just elaborate maybe on what you're seeing in those distinct sort of cohorts and maybe how your product type is likely to evolve over the next sort of 3 to 5 years?
So, I mean, the first time buyers were the 1st group to really engage with the market, as it improved last year, which is really reflecting credit availability and first time buyers are about half of our buyer group at the moment and had been, fairly, consistently around that level Owner occupiers overall at the moment are sitting at about 80% of buyers. So the other 30% to 80s, is people who are downsizing and also upgraders. So part of what we have been doing is more townhome product. To accommodate, in particular, downsized market and also to meet a lower price point around affordability. And then investors who really dropped away, I mean, they got down to about 15% of our buyers, last early last year.
They're now moving up from 20% back towards the long term average of 25%. That's they've been most active in Southeast Queensland. So they've moved to about a third of our buyers there. And that's because of the yield. So typically, yields, rental yields are about 4.5% close to 5% gross in, in Southeast Queensland.
So what sort of product that we're doing. So I mentioned townhomes, where we can work with regulators, we're also trying to focus on further densification. So in Southeast and for argument's sake, we can currently do microlot products on 70 two square meters with an entry price of about $230,000. That's proving for a three bedroom townhome with attached garage to be pretty compelling from a customer point of view. We also are looking at how we can potentially manufacture townhomes because we have supply chain issues at the moment.
We can't find builders. You can do more of them about 40 townhomes at a time, and we'd ultimately like to be doing a couple of 1000 townhomes a year at least. So we need to find a more reliable supply chain. We're also, moving, as I said earlier, into the manufactured home space. We would hope that once again, that will probably run ideally at about 1000 dwellings a year, as we ramp up to scale.
And given there's been a big pullback in the apartment market, and there's been issues with some of the build the quality of buildings. There's been high profile cases of cracking slabs and flammable facade. So Stockland's actually got the highest brand recognition in Australia at the moment of any property company. So we believe there's trust in our products having operated consistently for 67 years. And so you will see us ramp up countercyclically into the apartment's mixed use space well.
Once again, ideally, we'd like to target 1000 plus, apartments a year if you're talking over that 5 year time frame that you described at it.
Good question from, live QA. What are some of the key supply constraints you've identified in the MH sector? Do you expect these to remain intact for the next 2 to 3 years?
Yes. So when we started, in MH back in 2013, every home we built came out of a factory Unlike America, where you can go to Clayton Homes or Cavco or Champion and there's genuine robotics in the factories and their scale in Australia, every single MH Builder with the exception of Fleetwood is a family owned company with 1 factory and as we started flexing up supply, we did have some significant supply constraint issues there. Commencing in 2016, we started actually doing slab on ground, manufactured homes, which is still capable of being relocated and it has been a process of finding builders who can, understand and build to the methodology we use, which is based pouring a concrete slab, having a steel chassis and then the home is attached to the steel chassis. So it still can be relocated. There's an increasing number of builders, but the challenge is trying to when you're, in a single community, selling 10 or 12 Homes a month, it is hard to ensure the quality.
So probably the main supply constraint at the moment is we use half a dozen builders that we're very comfortable with that each of them is now probably 50% of their business is in January and that's, that's we wouldn't want to be any more than 50% of their business. So it's not an overall constraint, which is something that we're very focused on. And then in terms of the, specifically, the coronavirus, You know, we've spent a lot of time internally looking at our supply chains and over the next 6 months, our key home builders tell us that there won't be any issues, but if this is an extended, pandemic, then probably the key bottlenecks is going to be around the electrical goods that go into homes. And secondly, the plumbing and fixtures. So all the glass we use is made in Australia, but if the coronavirus continues for more than 6 months then around those two areas that there could be some either delays or potentially cost impulse.
Thank you. We sort of touched on that, but the issue of affordability used to be a really topical one in the Aussie market. Are we it becomes less of an issue is for us to come down and and interest rates have progressively come down as well. But interested in your take on the extent to which It's an issue in Australia today, and also how your, your businesses are positioned for that. Maybe Mark first.
Yes. Well, I guess the, we've always focused on affordability as a central premise where by identifying within our master plan communities, we can bring down the average price points to ensure that we are typically 10% to 20% below the median house price in the locations that we operate in. And so we've always got a high proportion of affordable products, in our communities. I guess nationally, what I'd highlight at the moment is with interest rates as low as they are, mortgage repayment obligations as a percentage of income are at the lowest levels, typically, particularly in Southeast Queensland and Perth, that they've been in 30 to 40 years. And in Sydney and Melbourne, the back down below the long term averages.
So in that context, if you buy into lower for longer, then affordability is quite reasonable. And maybe just to put it in context, there's been a lot of expenditure in Australia over $100,000,000,000 on the Eastern seaboard alone. If you look, in the last six and a half years, we've been buying land and activating projects that are on new railway lines or existing in the new, in particular, is opened in the last, or is opening as we speak that is open typically in the last 12 months. In Melbourne, you can buy from us a four bedroom brand new home with detached garage for $458,000, and that will be 30 minutes, 35 minutes from the Melbourne Cbd. So from a point of view of accessibility in Gateway Cities, that's actually pretty affordable.
And so the infrastructure changes are redefining accessibility in a number of the key cities as well. Simon?
Yes. From our perspective, I mean, the whole thesis for moving into MH was, we're trying to deliver affordable housing to Australia's aging deletion and we've always felt that cheap is deep. It's, I guess, across the 10 communities that we have under development, most of the communities in New South Wales, there's actually the highest level of demand is for the biggest homes, the three bedrooms with the study and the double carport. And when we open the community, we typically have 6 different model types that are available and by far, the overwhelming preferences for the larger homes. Conversely, in Queensland, particularly in two projects in Logan and certainly, up in Harvey Bay, there's an overwhelming preference for a more affordable home.
And we've been working very hard with our builders. And now we've finally got the bill cost per square meter to be under $1000 a square meter now. Which includes landscaping, which is the last we've ever achieved. Over the years, we have looked at importing homes out of China and we have previously imported seventy one bedroom homes, which are up in Brisbane. We actually rent those out as a build to rent model rather than sell them off.
And for a while, we were working very closely with our, U. S. Strategic partners and communities on, if you look at a company like Clayton Homes, they build something like 65,000 Homes a year across 14 factories. It takes them 3 days to build a home. We did look at the logistics of bringing those homes from the U.
S. Out to Australia just to really lower the price point because our research suggests that homebuilding prices in Australia are around 3 times what it costs in the U. S. But because of different codes, because of the depreciating Australian dollar and the cost of shipping, to date, that has improved to be viable.
Simon just touched on your relationship with some, maybe you could just, firstly, elaborate on that. And then secondly, have been in the U. S. Number of times, what are the learnings you've taken from the U. S.
And applied to the Australian market?
Yes. So back in, October 2018, we entered into a strategic partnership with SUN. So we placed 10% of our stock with SUN at a 8% premium to an all time high share price at the time. And some has the right for the next 5 years to participate in all new greenfields development that we do. We have, one community coming out of the ground at the moment, just north of Brisbane in Burpengary, our first resident moves in next month, and we have a second project just north of Newcastle.
So Sun's been a great strategic partner. Before Sun came on the U. S. Investors would have represented less than 10%. And now U.
S. Investors are, well, over 40% of our register and everyone knows sun and that's been a great opportunity for us to market over here. I guess the key learnings and the time I spent over here in the US is really, you know, in a couple of areas, you know, one of the most exciting areas for me in MH is, finance. So in, in the US, you know, Warren Buffett, on Century 21 and Vanderbilt provides, you know, channel finance for MH over here. That model does not exist in Australia, and it's something we've been working on for, for the last 4 years.
And We have looked at working with SUN, but that's given us their, I guess, all of their knowledge because they do provide finance. And then third party it on. I would hope that this year, in this calendar year, that we'll have a finance product that we can launch for manufactured housing, just touring their communities in the last few days, just looking at opportunities for incremental income streams. It's been really insight It's looked at the way we framed our strategy over the last 5 years. We've also pushed into RV being recreational vehicle communities.
So I guess all of that's refined our strategy over the last 4 or 5 years.
Can you maybe just touch on the economics of the business as you see it and perhaps how that might be similar or different to the US?
Well, in in the US, The typical cost of a new manufactured home to the consumer is somewhere between $80,001,000. And so that is less than half of the average price of a stick built home in, in the U. S. In Australia, for the last over the last six months, the weighted average sales price that we were selling a new manufacturer home for was $440,000. And that is around 80% of the median house price in Australia.
So that has been quite, I guess, that part's quite different, but many other parts of the industry over here in terms of providing affordable housing, our site rents are very similar. The penetration rate is, sorry, the sales rate is very similar. Probably the other key difference, apart from finance that I've mentioned in the U. S. 20,000,000 people or 6% of the population of the U.
S. Living manufactured housing in Australia, it's exclusively for seniors because there's no finance and the penetration rate's 2.1% of people over the age of sixty five. So If we were just to increase that penetration rate to 3%, we have to triple the amount of homes, new manufactured homes that we're building And that's why we've been focused so hard on building up our development pipeline to make sure that today we're the largest builder of MH Australia, and we want to continue that position moving forward.
We've got a question here on velocity, but I'll adapt it as well so you can both participate in the question. The question is, I suppose I'll set up with Simon and then I'll adapt it to Mark. But do you expect the low interest rate environment and inherent inherently low mortgage repayments to adversely impact demand in the MH sector. Given the anticipated recovery of the residential market for you, Simon? And then I do mark afterwards, and I'm obviously not a 25 base point rate cut yesterday, we've had 2 of the majors pass it on in full.
How have you historically seen the market react to those rate cuts? And how long, I suppose, how long is the lag between rate cuts and in response and volume? Son?
Yes. So from our perspective, our typical resident is moving in at the age of sixty seven, they're staying with us for 16 years. Outside the equity they have in their former family home, they have very little capital. So the falling interest rates whilst it does, impact the returns they're getting on their savings, the vast majority of their income is coming from the pension. So they're really sort of agnostic to where interest rates are.
Do you think lowering interest rates helps the 1st homebuyers and upgraders who are typically buying their homes? And broadly from my experience, the key determinant on demand is really how what where consumer sentiment is at the moment. It doesn't take a lot to spook our prospective customers and for them to stop coming out to our open homes. So I guess the more positive the mood in the community is the better for us for business. So overall I would say that, lowering interest rates doesn't really have any impact on our business.
So I agree with Simon. I think, the manufactured housing space has a different point of affordability because you're not having to, obviously, you pay for the land and the federal government helps qualifying, over 55s, to pay that land lease So I think that's, fair. In terms of how long it takes to translate for an interest rate, in our business. I mean, it does vary, but we always see a positive reaction if rates are cut. And employment levels are quite high at the moment employment growth is high unemployment is low.
So outside of all the macro concerns generally from what we can see anyway, buyer confidence is quite reasonable. So, we haven't got yet to measure. We'll see on the weekend, coming up, how people are responding, but, based upon the cuts that have already happened. In Sydney, since the rate cuts, the inquiry levels are up over 300%.
We might do the rapid slides another time. Thanks, gentlemen, for joining us, and, thanks everyone for coming on.