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Edited Transcript of AOG.AX earnings conference call or presentation 28-Aug-19 12:30am GMT

Full Year 2019 Aveo Group Earnings Presentation

Queensland Sep 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Aveo Group earnings conference call or presentation Wednesday, August 28, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* David Allan Hunt

Aveo Group - CFO

* Geoffrey Earl Grady

Aveo Group - CEO & Executive Director

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Conference Call Participants

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* Matthew Johnston

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to Aveo Group 2019 Full Year Results Presentation.

Please note that this conference is being recorded today, Wednesday, the 28th of August 2019.

The Q&A session at the conclusion of the presentation is open to analysts and investors only. A separate Q&A will be held for the media.

I'd now like to hand the conference over to your host today, Mr. Geoff Grady, CEO; and. Mr. David Hunt, CFO.

Thank you, gentlemen. Please go ahead.

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [2]

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Thank you, and good morning, ladies and gentlemen. Welcome to Aveo Group's FY '19 full year results presentation.

I have with me this morning our Chief Financial Officer, David Hunt. This morning, I'll take you through an overview of our business for the year. David will talk to our financial results and capital management. I'll then briefly address our retirement operations and finalize our presentation with our forward outlook.

Key focus in our presentation this morning will be the way forward under the schemes of arrangement announced on the 14th of August. We expect that the presentation will take approximately 20 minutes, and we'll have time for questions after the presentation.

In terms of an overview of the year's activity, strong interest in Aveo's retirement product led to an increase in written sales last year. In fact, our written result of 1,140 sales compares well to prior years. Effecting settlements in a soft residential market remains our major challenge. 901 settlements in FY '19 is our lowest settlement result since the Freedom and RVG portfolios were acquired in 2017. The difference between written and settled means that the number of deposits on hand at year-end, 239, was the highest since 2017 and more than double the same time last year.

Pricing levels in the Established Business for deferred management fee and capital gain-generating transactions have remained in line with FY '18. Underlying portfolio value enhancements and management initiatives added $180 million of value during FY '19.

The challenging market environment though has led to a reduction in future property price growth assumptions and unit prices used in the FY '19 valuation, resulting in an overall decrease in the portfolio valuation, which was the major contributor to the drop in our NTA.

In terms of development, Aveo delivered on time and on budget all major development units forecast for delivery in the year, reinforcing our track record in delivery.

In terms of the sales environment. While Sydney and Melbourne auction clearance rates improved markedly in Q4 over the prior 3 quarters of FY '19 and have improved again since the 30th of June, clearance rates in Brisbane and Adelaide, which constitute 50% of the portfolio largely have not. And overall clearance volumes in all 4 capital cities remains low.

On the positive side, the conversion rate from book-to-seen appointments is on target, and the conversion rate from seen appointments to written sales is above target and well above historical levels. Our challenge is the overall level of bookings, which is a function of soft residential market volumes, and of course, increased cancellation rates. The quality of Aveo's retirement offering continues to attract good interest. Settlements remain the main issue.

In terms of our strategic review update. On the 14th of August, we announced that we had entered into a scheme implementation deed with entities controlled by Brookfield Property Group, under which Brookfield proposes to acquire 100% of Aveo's outstanding securities by way of a trust scheme and a company scheme of arrangement for a consideration of $2.195 per stapled security. This represents a premium of circa 28% to the undisturbed closing price of Aveo securities on the 12th of February of $1.71.

The schemes are subject to Aveo securityholder approvals, including for the company's scheme, 75% by number of securities voted in favor and 50% by number of securityholders who vote also voting in favor.

The Brookfield transaction is not subject to financing or due diligence conditions. If the Brookfield transaction were to complete, Aveo would delist from the Australian Securities Exchange and would be privatized.

Under the terms of the schemes, if implemented, Aveo securityholders would be entitled to receive for each of their Aveo securities either cash of $2.195 per security, inclusive of the FY '19 annual distribution of $0.045 per security or a conditional scrip consideration alternative, providing Aveo securityholders with the potential to participate in an unlisted equity vehicle, which would give them future exposure to Aveo.

Based on the cash consideration, the full Aveo Board of Directors unanimously recommends that Aveo securityholders vote in favor of the schemes in the absence of a superior proposal. And subject to an independent expert concluding and continuing to conclude that the schemes are in the best interests of Aveo securityholders. Each Aveo Director intends to vote all Aveo securities held by them at the time of the scheme meeting in favor of the schemes.

A full overview of the terms of the schemes will be provided in a scheme booklet, including the independent expert's report, which is intended to be distributed to Aveo securityholders in October 2019. The scheme meeting is expected to be held in November 2019, and if approved, the schemes would be implemented this calendar year.

I'll now pass over to David to comment on our financial results and capital management, and I'll come back shortly to comment briefly on our retirement results.

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David Allan Hunt, Aveo Group - CFO [3]

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Thank you, Geoff, and good morning, listeners. Today, the group has reported a statutory loss after tax of $213.4 million, which includes $259 million of after-tax write-downs mostly from the revaluation of the retirement investment property portfolio. This downwards adjustment was caused by adopting lower property price growth and unit price assumptions in the retirement valuation.

Underlying profit after tax for the year was $50.1 million, which is lower than the prior year due to lower major development deliveries and profitability; lower nonretirement settlements, down 55% to 212; and lower retirement settlements, down 7% to 901.

Net receipts and payments as disclosed in the cash flow statements have increased 27% to $156 million due to higher resident collections during the period.

Net cash flows from operating activities are also higher at $136 million.

Funds from operations and adjusted funds from operations results were down and in line with the decline in the underlying result.

Compared to FY '18, net assets decreased by 11%, and net tangible assets per security decreased from $3.92 to $3.50. A distribution of $0.045 per security was declared for the full year and will be paid on the 30th of September.

The retirement profit contribution was $57.2 million, down 59% on FY '18. While established business written sales improved compared to FY '18, there were increased delays in the time required for sales to settle. Therefore, revenue from the improved sales could not be recorded for the year. Established business deposits on hand increased from 67 at FY '18 to 151 at FY '19.

FY '19 development profits were affected by 87 fewer major development deliveries and a decrease of $174,000 in the average transaction value compared to FY '18. In addition, the group reported 52 lower minor development settlements.

As stock levels have risen to higher-than-expected levels, management has reduced FY '20 major development deliveries to 62 units. Nonretirement settlements are down 257 on the prior period as the nonretirement assets continue to be sold down in line with management strategy to exit this business.

Interest and borrowing expenses has increased as a result of the slowdown in development activity and higher average debt levels.

Included in the underlying profit after tax results, our profits generated by delivery of new retirement units. The replacement of profit on delivered new units with the cash received from new units sold is the major adjustment required to calculate the group's funds from operations.

During the year, $41.8 million of profit was recognized on delivery and $29.9 million of profit from settlements occurred, resulting in a negative net adjustment of $12 million before tax. For FY '20, more new units are expected to settle compared to delivered and therefore, this result will be a positive contribution to FY '20 FFO.

Capitalized interest and cost of goods sold is lower as the sell-down of nonretirement business continues.

Capacity through undrawn committed lines and cash at bank is expected to increase as the sell-down of new retirement units are settled and the commencement of future retirement developments is delayed until the residential market conditions improve. Reported gearing at 30 June is 21.3%, which is slightly above the preferred range of 10% to 20%, but will be back in line during FY '20 as previously delivered new stock is settled.

The weighted average AUD borrowing cost decreased to 3.2% due to a decrease in the BBSY rate. Australia-denominated debt remains unhedged, and all covenants have been met.

The Established Business net retirement portfolio revaluation for FY '19 decreased by $195 million. Management driven initiatives resulted in an uplift in the valuation of $180 million over the year, including delivery of new units, conversion of communities to the Aveo Way contract and conversion of villages to the Freedom Aged Care model. However, the overall valuation was down from FY '18 due to the current weak residential market, causing a $375 million decrease in the valuation as a result of lower unit prices and lower future property price growth assumptions.

In regards to portfolio enhancements, management has continued to execute on its strategy. This has led to an increase in portfolio value, including a $59 million uplift from the delivery of 419 units in FY '19, which created a new DMF income stream. A $32 million uplift from an additional 16 independent living unit communities adopting Aveo Way as its standard contract, as over 20% of the residents in each of these communities are now on the Aveo Way contract. And a $62 million uplift from the conversion of additional 4 communities to Freedom Aged Care model, where over 20% of the residents are on the freedom standard contract.

Discount rates were reviewed as part of the valuation to provide a better allocation of value between communities but had an immaterial impact on the value of the portfolio. The time to resale for service departments was adjusted from 0.5 years to 0.8 years, in line with the current occupancy trends. It is estimated that for FY '20, the rollout of the Aveo Way contract, conversion of the remaining identified 5 communities to Freedom and delivering of 62 new units, will contribute at least $50 million in valuation uplift.

Although management is making good progress in enhancing portfolio value, current market conditions led to a decrease in unit values and future price growth assumptions. A unit-by-unit price review was undertaken, and unit prices were adjusted downwards by 3.8%. This led to a decrease in the valuation by $93 million.

A downward adjustment was made to future property price growth assumptions in the FY '19 valuation. Long-term price growth decreased from 4.25% per annum to 3.75% per annum for ILUs and converted Freedom units. Serviced apartments decreased from 4.25% to 2.5%. And no price growth was assumed for all units in FY '20. This resulted in a decrease in the valuation by $282 million.

The 20-year average growth rate is now 3.38% per annum, down from the 3.96% per annum at FY '18.

As previously announced, effective from 1 July 2019, Aveo has changed the timing of recognition of revenue in underlying profit for major development units from a delivery to a settlement basis. The revised treatment was a result in revenue and profit on major developments being recognized on a cash basis in the underlying profit.

The change will make it increasingly difficult for the group to provide future underlying EPS guidance as, unlike residential sales where the exchange of contract is binding between the vendor and the purchaser, the sale of retirement units is not binding until settlement. And even then, there are cooling-off rights. There is no impact on statutory reporting as retirement communities will continue to be treated as investment property and major development units are included in this assessment of fair value.

I will now hand you back to Geoff to take you through the divisional results in more detail.

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [4]

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Thanks, David. Firstly, the Established Business results.

The Established Business, as you may recall, generates its profits through the resales of existing units to new residents, the buyback and sale of existing units to new residents and the buyback of Freedom conversion units.

Total DMF-generating transactions were down 7% last year, mostly a function of lower resales, which were down 8%. Overall buybacks increased 14%, largely a function of discretionary buybacks reducing significantly but being replaced by a higher level of mandatory buybacks, including those from the commencement of the new Queensland buyback regime and the first full year of the Aveo Way money back guarantee being operational.

In terms of settlement volumes, total resales and buyback sales at 615, were within 1% of last year.

As mentioned earlier, the written rate of 7.8% outpaced last year's written rate of 6.6%, and it also outpaced settlements, and we finished the year with deposits up 125% on FY '18.

In terms of margins. Overall trend -- I'll say that again, overall average transaction values and margins for DMF-generating transactions were in line with FY '18. Pricing for resales was down 2%, and the deferred management fee and capital gain on resales was down 7%.

The average margin on buyback sales was eroded by longer settlement periods leading to higher holding costs. The Aveo Way suite of contracts continues to be adopted throughout the portfolio, which will contribute to higher-margin growth as those residents resell their units. As a result of the dominance of the lower-margin buyback sales in the mix, total Established Business revenue was up 3%, but profit was down. Deferred management fee and capital gain and profit contribution were all down in line with the decline in DMF-generating transaction settlement volumes.

In terms of major developments, average margins pre-interest were at 23%, which, again, exceeded the target range of 16% to 20%. Due to the current market environment, new stock levels represent approximately 2 years of sell down at last year's net 271 sold number. And accordingly, management has reduced FY '20 development deliveries to only 62 units.

Minor development sales consist of the sale of Freedom units undergoing substantial refurbishment and the sale of units being converted to the Freedom model. Although settlements were at only 75, a higher average transaction value in FY '19 compared to FY '18, together with higher deposits on hand, shows a continuing if currently subdued demand for Aveo's Freedom care services. Minor development average margins were at 40%, which is at the top end of the target range of 35% to 40%.

In terms of the total result. Development contribution is lower than last year for the reasons David already outlined. Holding costs consisting mostly of vacant unit levies have increased due to a softer residential market and longer times to settlement. Other expenses are expected to reduce in future with the deferral of the commencement of future development until the residential market improves.

On Slides 25 and 26, we have images from 8 of our 10 delivery sites in FY '19, and these 2 slides between them represent over 80% of all the product that was delivered.

On the first slide, Slide 25, Hunters Green, Newcastle, Palmview and Carindale were themselves in just 4 projects responsible for over 50% of delivery. And on Slide 26, Morayfield, Redland Bay, Mowbray Links in Launceston and Robertson Park were just on 30%.

On Slide 27, we've set out our delivery profile for FY '20. Construction is about to commence for the 62 deliveries at both Newcastle and Island Point shortly.

Our development pipeline remains strong, with over 5,000 units across 18 sites. While we continue to look at acquisitions, there have been no additions since we previously reported on this list in February.

Aveo's aged care portfolio consists of 5 facilities with a total of 406 beds. Average occupancy across the mature facilities was at 96%. And Newstead, which is still filling, had 68% occupancy as at the 30th of June.

Our total Care and Support Service revenue for the year increased mostly due to the newly developed Newstead facility coming online, but offset by opening costs for Newstead and associated depreciation and amortization.

Aveo achieved new landmarks in service delivery in FY '19, over 1 million hours of care and more than 1.4 million meals delivered to residents across 65 sites.

Our nonretirement assets continue to settle down in line with strategy. Aveo's projects at Point Cook, Rochedale and Peregian Springs have had their final stages delivered and are now selling down with only 132 lots left to sell at year's end.

Currumbin with the potential 348 lots is listed in the market for sale.

In terms of our outlook. As the market leader, Aveo will continue to improve and innovate to provide greater living choices for older Australians. We're continuing to roll out our Aveo Way suite of contracts to provide greater choice and certainty to residents. We're committed to the integration of care into our communities through our Freedom Aged Care model, colocated aged care facilities and Aveo Care at Home services. And we're also continuing to deliver on our high-quality development projects.

Following the announcement of the proposed schemes with Brookfield, securityholders will be provided with a scheme booklet in early October this year. Scheme meetings are expected then to be held in November, and if approved, the schemes would be implemented this calendar year, and Aveo would delist from the Australian Securities Exchange. Management is committed to delivering on value-creating initiatives for FY '20, which include achieving settlements from the increased level of deposits, delivering on time and on budget the 62 major development units and 125 minor development units scheduled for this year, and prudently managing capital while the current challenges in the market environment remain.

Our FY '19 full year distribution of $0.045 per security will be paid on the 30th of September.

Ladies and gentlemen, we now have some time to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our next question in queue is from Matt Johnston from Macquarie.

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Matthew Johnston, Macquarie Research - Analyst [2]

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Geoff, David, just a couple, if I may. Firstly, just on the mandatory buybacks. Obviously, Queensland legislation changed. And obviously, your contracts -- obviously, the pickup is in the second half. How have you sort of seen that trend and expectations going forward? And with the Queensland legislation change, is that material?

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [3]

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Yes. So, Matt, there are 2 changes, as you mentioned, one in Queensland and one in South Australia. Only the Queensland one commenced before the end of the year. That commenced in May.

Of the 213 mandatory buybacks that we've got on Page 19 of the report, 73 of those, so fully 1/3 of those, were related to the introduction of the Queensland scheme. That represents a buildup of stock, which had been on the market vacant for more than 18 months so I would expect that to diminish over time. But nevertheless, it's going to be an imposition in terms of the buyback ratio.

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Matthew Johnston, Macquarie Research - Analyst [4]

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Yes. Okay. And then just sort of, I guess, with those state changes, does it sort of change the working capital internally, like the assumptions you have?

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David Allan Hunt, Aveo Group - CFO [5]

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If you have a look at our Aveo Way contract, Matt, we've got a 6-month buyback in that. So over time, our 6-month buyback in our Aveo Way contract is stronger than any legislation across the country at the moment.

So we've been working towards having working capital available to meet the Aveo Way contracts. And so this will have no different requirement than what we've already got in our business.

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Matthew Johnston, Macquarie Research - Analyst [6]

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Okay. And then secondly, just if you could touch on the adverse change it causes related to the deal. Obviously, NTA probably not as a risk, but I guess risk around EBITDA?

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [7]

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So yes. The net tangible asset warrants a 2% change, which, because the deal would likely be completed in November, December, the next revaluation of our retirement portfolio won't be until 31 December. So that would have a limited impact.

In regards to the forecast, EBITDA, the $10 million adjustment for forecast results, and that would trigger a material adverse change, we see that where we're writing sales at the moment. That's meeting our budget and on budget and we see no reason why that budget won't be achieved for FY '20.

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Matthew Johnston, Macquarie Research - Analyst [8]

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Okay. And just following on from that. Obviously, there's higher deposits, and the focus will be on written sales. Just trying to get -- and obviously, you just commented that you're on track. Just trying to figure out the sensitivities on are there pricing strategies to get pricings down to shift units? And how conservative have you been on settlements?

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [9]

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So in regards to pricing strategies, Matt, at 30 June, we went through and -- like every year, we did -- but we did a thorough review of our portfolio. In regards to the stock over 12 months on our balance sheet, we took material decreases in the prices for those, which then -- that was part of the overall 3.7% (sic) [3.8%] drop. But the over 12 months had a higher material decrease.

We feel that the overall 3.7% (sic) 3.8% decrease at 30 June, [which was put through], will meet the market. Our experience for the last 12 months was that we saw a 3% drop from our valuation at 30 June '18 to those transactions, which were sold during the period. So we've actually dropped our price by a greater amount than what our experience is over the last 12 months.

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Matthew Johnston, Macquarie Research - Analyst [10]

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Okay. And then I'll obviously take it that, you haven't actually given a number to the market, so you won't be disclosing the EBITDA number?

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David Allan Hunt, Aveo Group - CFO [11]

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That's correct. So in our guidance, we've said that because we've moved to a settlement basis for our FY '20 major development deliveries, that it's increasingly more difficult to predict settlements and therefore, predict cash and profit. So because of that, we've decided not to provide guidance again.

I should have said, the 3.7% was actually 3.8% previously.

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Operator [12]

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(Operator Instructions)

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Geoffrey Earl Grady, Aveo Group - CEO & Executive Director [13]

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Okay. It appears there are no further questions. So thank you all for your attendance, and we'll call the call to a close. Thank you.