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Edited Transcript of SUM.NZ earnings conference call or presentation 12-Aug-19 11:00pm GMT

Half Year 2019 Summerset Group Holdings Ltd Earnings Call

Wellington Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Summerset Group Holdings Ltd earnings conference call or presentation Monday, August 12, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Julian Cook

Summerset Group Holdings Limited - CEO

* Scott Scoullar

Summerset Group Holdings Limited - Deputy CEO & CFO

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Conference Call Participants

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* Andrew Steele

Crédit Suisse AG, Research Division - Research Analyst

* Jeremy Andrew Simpson

Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities

* Jeremy Kincaid

UBS Investment Bank, Research Division - Associate Analyst

* Stephen Ridgewell

Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research

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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 today's Summerset Group Holdings Limited First Half 2019 Results Announcement. (Operator Instructions) I must advise you that this conference is being recorded today. I would now like to hand the conference over to your speaker today, Julian Cook. Thank you. Please go ahead.

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Julian Cook, Summerset Group Holdings Limited - CEO [2]

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Well, welcome, everyone, to our half year results for 2019. Look, as usual, it will be myself and Deputy CEO and CFO, Scott Scoullar, who will give the presentation. We'll move relatively quickly through the pack itself as it's fairly self-explanatory and try to allow as much time for questions at the end. And if I'm giving page references as we move through, it's to the results -- half 1 results presentation.

So look, with that, we'll get into it, and if we move through to Slides 4 and 5 and take them together. Look, I think overall, pretty happy with the results for the half. We've seen underlying profit up slightly on prior period. The IFRS result is off slightly from the prior period. That's -- considering conditions out there, we believe that's held up very well. Operating cash flow is effectively flat. And despite previously signaling tougher conditions in the Auckland and Christchurch markets, we've actually seen pretty good traction right across the country. And I think that's highlighted by our top 2 selling villages are actually based in Auckland, being Hobsonville and Ellerslie.

Looking at gearing for the half, still staying down at the 31% level, which is considerably down and where we've been in the last few years and quite a bit lower than our sort of range where we expect to sort of move to in time. So from a debt perspective, we continue to remain in a very conservative position with a lot of headroom and a lot of potential to fund growth going forwards.

As you've seen through the half year in various announcements released to the stock exchange, we've made a number of purchases of land, which we'll talk about in a minute, and continue to position the business for growth and expect the next -- sort of next 2 to 3 years to be at around that sort of 600 level. I think particularly, the focus this year and next year is opening of new sites which we've acquired. So we have 3 villages opening this year, and we'll be doing the same again next year. So really looking to sort of set the platform for diversified growth across the country.

We'll move over to 6, which is really self-explanatory, perhaps other than to highlight when you look at some of these measures like total assets, considerable growth over the last few years in the business. And if we move to Page 8, which is really just our snapshot that we give of how we're positioned around the country. So nearly sort of 4,000 units in the portfolio currently. We have a land bank of nearly 5,000 units, which is largest in the country. And I think if I just contrast that back to when I started, when I started back in 2010, '11, we had about 1,200 units. So considerable growth since then, up to around 5,300 residents. And when you look at our existing sites plus land bank, around 38 sites around the country.

So the sites we purchased through the first half, we've purchased in Blenheim; Cambridge; Rangiora; Whangarei; Milldale, which is north of Auckland in the sort of [Orewa] which is across from the Millwater area. Quite large -- we've had a quite large development being undertaken by [Fulton Hogan and right from] Waikanae, which is Kapiti Coast, which is that sort of [half] the retirement area out of Wellington. We've also made a small additional purchase of land adjacent to our Hobsonville village, which will be a very nice little expansion of that village with a few villas being put in there.

So that sort of gives us that land bank of around nearly sort of 5,000 units across the country, largest land bank of any of the operators in New Zealand, not that that's a focus for us. Never has been, never will be. But it's just a measure of the growth and expansion of this business and the opportunities we see. And I think stepping back, we look at our land bank and the types -- villages as well and feel like we've got a pretty good geographical diversity across the country. And we really sort of look at that and split it into 3 categories, which is the urban and urban fringe-type villages, the retirement destinations which are your Bay of Plenty, your Waikanae, Nelson, Marlborough around there and those sort of strong regional high-growth areas that we sort of see as well.

Moving to Slide 9. On the consenting front, we've sort of had pretty good progress across the year. So I said fairly happy with how we've progressed to date. There's been a lot of activity in our development team with the various pieces of land that we bought, mobilizing the consent and very happy how we're tracking across those. We monitor those quite closely because that is obviously the feed for our future growth. Secured our consent in Papamoa and progressing well in New Plymouth. Two consents, which were sort of [hit or] sitting around for a little while, Lower Hutt and St Johns. So in Lower Hutt, as we've indicated, we had a court hearing early in the year, and we are awaiting a result from that shortly. So hopeful we'll get the desired result there but need to wait for the decision. And in St Johns, we've appealed the previous decline to the Environment Court and have court case coming up in September. So a lot of work happening in that area there.

On the delivery side of the business, we delivered 139 units across the country in the first half and expecting to do about sort of 350 for the full year. So it's a bit down on prior years, but a lot of that is really down to a couple of large buildings we have in Casebrook and Rototuna, where we have combined 150 units plus around 85 beds of care. So 4 care centers in each of those buildings. Those are being worked on -- those were being worked on through the latter half of last year, all of this year and will be delivered in the sort of first half of next year. So certainly, when you look at activity and spend across the business, pretty consistent and quite a bit of [stuff handling].

Scott was named CFO of the Year. So having both him and I previously being made finalist, I never made the winner, but Scott has, so that's a great result and I think sort of a testament to sort of the quality of the work he's done for us and the finance team we've got here. And I think the other thing I'll just highlight there is our Summerset magazine, which is a quarterly magazine, we've sort of seen as being very successful. We've had very good feedback from residents, prospects and other people. It won an award, as you see there, and it's actually starting to be distributed in various areas, sort of newsstands and stands around the place, supermarkets and the like. It's a real focus on village life and just looking to sort of build the brand and build the understanding about what really happens in Summerset. So that's -- if you haven't seen it, I suggest you get a copy of it. It's quite a good read.

Moving to 10 and 11. So on 10, just a couple of points I'll sort of pull out here. Continuum of care. I mean you know that this has sort of always been a big focus for us, and all of our sites have got that continuum of care on it. You also know that we've moved to put dementia, or memory care as we prefer to call it, on all of our new villages. And so we're particularly keenly awaiting the completion of the Casebrook and Rototuna main buildings. Those will both have our new concept memory care centers built in them. Currently, we only operate memory care in Levin.

When we built the Levin complex, we won an award for the best new care center in the country, and I think what we deliver there is a very high standard of care in a high-quality residential setting. Those are coming in to all of our new villages. So keenly awaiting the -- what we're going to have in Casebrook and Rototuna. I think we're sort of seeing and targeting a real lift in the quality of care we can provide for people and really sort of make a point of difference around that.

The other point I'll just touch on quickly is progress in Australia. So no announcements today. But look, I think stepping back, very happy with the progress we're making over there. Had the guys there for about a year now. So I feel like we've got a very good understanding of the market, and having been on the ground, really dug into the nuances of where the areas are different. I mean, this is not something you want to rush into too quickly. And we've always quite -- been quite conscious about wanting to do the right thing in the right time. Seeing quite a good sort of deal flow at the moment. And so overall, happy with progress and expect to make announcements at some point of time. But we're not going to make any commitment as to exactly when we'll do that, but happy with how we're moving ahead there.

Slide 11 just touches on some of the sort of commitment around the environment and the community. And I think the sort of point of this is partly this is just simply the right thing to do. But I think particularly we see with our customers, our residents, their families and also actually our staff, this stuff resonates very well. And it's important to a lot of these people that they are with a business which is doing the right thing. And that sort of purpose-driven side of the business is important for, as I say, staff and residents. It's not just a bit of greenwashing up, I would say.

So last year, we got ourselves CEMARS certified. So we were the first village care operator to do that. Effectively, what the CEMARS scheme is, is an independent certification and monitoring of your carbon emissions. Together, we're coming up with plans and strategies to reduce those over time. We've also joined the Climate Leaders Coalition, which is a collection of over 100 businesses now which have committed to tackling climate change and reduce carbon emissions in New Zealand; again, the only retirement village care operator to do this. And this year, we got ourselves carboNZero certified as well. So making good progress there. And certainly, I know when I'm out on the beat around the villages and with our staff, it's a -- this is pretty important for them.

Moving to Slide 12. From a business perspective, just touching on a few things around here in the care side, continues to move ahead well, very happy with progress there. We now have around 40% of our facilities with 4-year certification with the remainder at 3. So continues to move that ahead, and that is well ahead of the sector average of just -- for 4-year certifications, which is down in the mid-20s. We had one of our villages, Hobsonville, go direct from a 1- to 4-year certification, which is, I think, a real stamp on the quality that we can deliver. And when you step back and look at occupancy for care, we continue to sit in the high 90s. So around 96, 97 versus around that sort of 88, 89 sector average.

Summerset Connect, which we have referred to here, is a series of events and speakers which we launched last year and continue to sort of push through the business this year, being very successful for us. What we basically do is bring in a number of sort of speakers who have profiles/interest to residents. Some of the names we are having are people like sort of Grant Fox, Peter Hillary. And then we host events throughout our villages for residents and for prospects to come in and just provides that point of interest and connection with the community. So it's been very successful for us, partly from driving just a better experience for residents, but unashamedly bringing prospects in as well, show them what a Summerset villages is about.

On the nursing side, continues to be a challenging area. So quite a lot of work for us in terms of addressing nursing levels. So happy with where we're at with nursing levels currently, and we monitor these very closely and are currently sitting above our desired levels. So from an FT perspective, sitting in a good position, but continue -- we will continue to put a lot of focus in this area as we think that the general shortages out there will continue for some time. We've moved wages over the last year or so to sort of match or be ahead of the [HB] rates on an hourly rate basis, and we'll continue to do that. It's essential for us to have a quality nurse workforce to be able to deliver quality care, and a lot of work we are putting in currently around workforce development and upskilling. Pleasing to note the decision to put nurses back onto the long-term skill shortage list, which occurred earlier this year. And so we're starting to see the flow-through of that now, but only just starting to see that.

And then just a point around health and safety, which is sort of a big area of the business. And I think while it's not directly attributable to financial results, it's always an indicator of just a business operating well. And so we achieved tertiary ACC accreditation through this year, having achieved secondary last year. So that's a good result for us and I think just shows that continuing maturity in health and safety in systems and processes across the business.

Moving on to Slide 13, just a snapshot of some of the product which we've delivered around the country. And 14 and 15 is -- 14 is just, again, a sort of breakdown of where that's been delivered. And I'll just touch on the new villages. So Richmond, Avonhead, Kenepuru, all opening this year. So a lot of work on those villages and we'll particularly be seeing sales flow (inaudible) flow through from those through the second half of this year. Also, a lot of work in preparation for village launches for next year. So -- into preliminary works on our Papamoa Beach and Te Awa, which is in Napier sites.

15 is just a snapshot of some of the sites we've acquired in the first half of this year. We haven't put on the Hobsonville addition as we all know where that is. But I think, again, just sort of happy -- very happy with that sort of mix there of urban fringe, some high growth sort of regional areas and some pretty attractive retirement destination areas. And having done our sort of homework in each of these places, expect that we -- pretty good catchments, good locations and should see sort of pretty good demand for these sites as we go forward.

Development pipeline on 16 is really self-explanatory, so I won't sort of touch on that. And with that, I'll hand over to Scott to run through the rest of the presentation.

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [3]

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Thanks. I'll take sort of time the next 4 or 5 slides, but I won't take too much time on the profit, balance sheet stuff because then it makes your slides all kind of have to see the same kind of the core drivers that's a lot of profit. So I'll start with Slide 17, development margin.

You can see $27 million, up 5%. What's underneath that, our regional villages achieved an average margin around 32%. Our Auckland villages an achieved average margin of 27% for the half. The mix of units was quite different. So relative to a year ago, we sold 60% in Auckland and 40% in the rest of the country relative to the first half of 2019 where we sold 57% in Auckland. So that driver has probably driven -- that skew towards Auckland was driven by the Ellerslie, Hobsonville and Karaka villages continuing to sell down.

I think we feel that's a pretty good results given that Auckland climate has been more subdued in terms of those sort of aggregate Auckland sales. The average price per units obviously reflected that, so that's increased from $540,000 to $700,000. We've outperformed our medium to long-term guidance of 20% to 25%, and we expect to continue to outperform that through this rest of the second half this year.

Slide 18, new sales of occupation rights. We settled 136 retirement units, and we're on track to deliver our 350 unit build rate for 2019. We're selling from essentially a 7 sort of core sites in the first half of the year relative to 9 core sites last year. So we were selling from a smaller base in the first half of this year. But obviously, that changes in that second half. As Julian mentioned, (inaudible) villages come on board we'll go from essentially selling from a core 7 to selling from a core 10.

In terms of sales, mix of sales, that half of those sales came from apartments and serviced apartments, so looking in there was quite a different change, whereas a year ago and [you've got to do the it] came from apartments and serviced apartments.

In terms of top-selling villages, as Julian touched on as well, our 3 top-performing villages were Ellerslie, Hobsonville and Casebrook. And I think just to point out there in relation to Ellerslie, I had 28 settlements from Ellerslie and a further 13 contracts from Ellerslie relative to [15] settlements last year. So I'm really happy with the progress of that -- of selldown of that site.

In terms of presales, just touch on those 3 new villages. Richmond first. That's one of those we're essentially down quite a private drive so hard to see at the moment, so we've only just opened that village last week. So we've had about just over the period, (inaudible) units presold at this point. For Avonhead we've had close to 60%, and for Kenepuru we've had over 80% presales for all the units that are going to put up through the second half of the year. So we're really comfortable with the progress there. Village waitlist remained stable at around 1,000 and [new sale to settle] haven't really changed much since last 6 months.

Slide 19, new sales stock. So stocks really just remained consistent with what we saw in the end of full year '18, so 322 units versus the 319 units. I think pleasing for us really in a slower economic environment, we've held those stock levels consistent. 80% of our stock now sits in villas and apartments, which we know can sell down faster than serviced apartments. So we're sort of clearing that serviced apartments stock. And I think if you look at the serviced apartment stock, we've reduced that by about 1/3 in the first half, expect to reduce that by a further 1/3 in the second half. And by the time we saw it end the year, there won't be a lot of serviced apartments stock left. And so again, happy with that selldown rate. And that was pretty consistent with what we've said (inaudible) established you want to talk to at the full year results announcements. So it's also interesting to note that in terms of serviced apartments, we have sold well over 126 apartments in the last 18 months. So that product does sell down well, it's just -- as I said, will start to take a bit longer to sell.

Slide 20, resales. I think the gross proceeds there from 142 settlements were down from $64 million to $61.1 million. What drove that, it was just really a higher mix of serviced apartments. So you had about 42% serviced apartments relative to just about 30% a year ago, so those serviced apartments, obviously, at lower price point, dragged the overall resale gains down. But equally pleasing to note there that when you look at that resale stuff, the average resale's value's gone up from $415,000 a year ago to $430,000. Generally, we're delivering -- lots of head loss due to apartments turnover, I think that the average price is still climbing. And I think -- look, when you look at the embedded value as well, we've pretty had the same thing. If you look at that embedded value realized gain has gone from $100,000-odd to $117,000. So the stock result in the first half has been at $100,000, but the average in the portfolio is now at $117,000. So expect to at least maintain if not improve there, that result gain.

Slide 21, resales stock. Again, we see no change in resale stocks, still 1.5% of the portfolio and still with that 50-50 split of contracted amount, contracted units there. And interesting enough, if you actually look underneath that and you look at the stock and where it sits, about half the stock sits in our newer villages, so you're competing in new products -- you're still selling in those villages. So if you take that out, there's exceptionally low levels of stocks in on our existing villages. So really, really we're comfortable with the stock position for resale stock.

Slide 23, IFRS profits. I won't touch on the value movement. I will touch on that on the next slide. But total revenue, $74 million, up $8.3 million. Essentially, about 80% of that is driven by our new villages, developing villages growing, and about 20% of that is been driven by price change with those mature villages. In terms of the expense composition, that being up $5 million, $2 million of that Ellerslie and Hobsonville villages and care centers filling up; $2.5 million was pay increases, which predominantly caregivers and RNs which partly government-funded; and head office costs have remained relatively flat. We've actually managed to drive a little bit of efficiency gain underneath the -- attached the things like projects finishing last year. So we had a food project going on last year, uniform project, daycare project, bachelors projects, (inaudible).

In terms of fair value, the thing I'd point out there, $85.7 million for the first half relative to $92.8 million a year ago. Actually, if you take the 26 less deliveries, that's about $7 million in impact. That's the whole difference between all that fair value gain as the share in last year. So I think we're super comfortable with the view that it's hold up at similar levels to a year ago. And relative to a lot of our competitors, I think typically, had 20% to 50% reductions. And the last reported movements, I think that just shows a benefit for us to attached to diversified portfolio.

Slide 26 (sic) [Slide 25], underlying profit. Look, I'm not going to touch on that because I've talked about all the drivers that sit underneath that on each line. The only thing I'd just reiterate again is since 2018 and consistent with 2019, we've had a [widely understood review] of that underlying profit confirmed that is consistent. Look, we have a lot (inaudible) out of that.

Slide 26, cash flows. That net operating business cash flow you'll see down at $4.2 million relative to that $17 million a year ago, what's changed there, there's is a couple of things there. There's one that we've done a change in policy. So basically, in the past, when we had a resident exiting a village, quite often, you'll see them with someone in an existing village wants to transfer into that unit from a unit they're already in. Often, it can be in a unit, part of the site that looks great or just a special sort of type of unit. What used to happen in the past is when that resident transferred into that unit, the outgoing resident won't be repaid until that transferring resident's old unit was resold. We feel from a customer's experience perspective, it's better to repay that person at that point. Otherwise, you have the exception of a family coming into that site and seeing someone living in mom and dad's -- what was mom and dad's home. We just think it's a better customer experience. So we've taken the choice to repay all those people at that point of that transferring resident enters into that unit. There's about 15 to 20, typically, units that are in that situation at any point in time. So I think we've mentioned that in the slides. And then the other slide will unpack there as resale volumes being slightly lower, 12 units lower.

The other thing I'd probably point out in relation to this slide is just the refurb cost having gone up. There's a couple of items that sit in there which -- potentially arguable that they're more like a core construction sort of cash flow than a refurb cash flow. The first one was we built a swimming pool at our Trentham village. That sits in there. And we've done a few things like repainting our buildings in Manukau. So there's a few abnormals that sit in there, a couple of million dollars in value collectively.

Slide 27, balance sheet. I won't touch on that other than highlight for us. We hit that $3 billion mark. Investment property has gone up to 24% from $2.3 billion to $2.8 billion. Likewise, retained earnings has gone up $180 million [and 36%]. And the NTA of the company has gone up to $4.70, 20% lift.

I'm not going to touch on gearing or composition of drawn debt because I think they stand for themselves.

In terms of Slide 31, interim dividend, just to point out that $0.064 per share is still doing 30% of underlying profit and 2% DRP still in place consistent with prior year, so no sort of change really in terms of the dividend policy. Thank you.

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Julian Cook, Summerset Group Holdings Limited - CEO [4]

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Thank you, Scott. And that brings us to end of the first part of the presentation. So we'll now hand over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Stephen Ridgewell.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [2]

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Guys, you've kind of said development margin could ease a bit in the medium term from 28% percent in the first half to 20%, 25% and a bit stronger in that range in the second half. I'm just interested into kind of what time frame do you think it moves back into the range, particularly given some disclosure (inaudible) margins at regional sites were actually a bit stronger in Auckland. So at least what we're seeing at some other operators. And your mix of build was going to move towards the regional. So are you able to give us a little more flavor as to how you see that development margins continuing out in the next few years?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [3]

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Yes. Look, Stephen. It's probably not as high as to predict our -- I'll give you an analogy with Kenepuru village. The margins at the moment we're forecasting today are a little bit lower. But like having looked at that village in (inaudible) look like super strong presale rates. So if anything I think, to be honest, could probably put the price up on those villages. And says as you go through the build process you get more confident in the village and the feeling of the villages and stuff. So you probably see us setting and saying normal course of business of 20%, 25%. I think that was reasonable expectation. Whether it plays out in the next 2 or 3 years, I'm not sure, it's something that you might see for the business in the next 2 or 3 years. And as I said, it's holding at the moment quite strong and quite well. That's just totally subject to market conditions, price conditions, presale rates. So you'll see it's not on a science but it will still stay above that sort of the second half this year. As I said, still feels like it's pretty stable.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [4]

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Okay. That's helpful. And then just on delivery. The guidance for 350 for the year, you put out about 200 for the second half thereabouts and 150 units going into first half '20. Just interested if you're able to give us a little bit of a steer as to how FY '20 might play out for deliveries over the full year. And I guess sort of thinking of going into this result have been -- you might be able to -- going to look at sort of 600 units in FY '20. Is that still possible or does that require an outcome that's favorable at some recent environmental court hearings you've got at Lower Hutt and St Johns?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [5]

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No. It's not dependent on St Johns and Lower Hutt. So we could push to that if we wanted to. And I think Julian kind of characterized it well before by that 3 villages, we're opening in second half of this year and then another 3 villages next year. So 6 villages coming onstream should give you quite a bit of flexibility in capacity which kind of comes into our original diversification strategy before, of I think that we set up a position quite well. We don't have to make that call right now. We'll keep watching those sort of market conditions. And whilst they remain a bit more subdued, you might see us staying down more towards the range that we've been building in the last couple of years, equally, if we see trading conditions improve in the next 6, 12 18 months, we can make that decision to flip that lever quite quickly, and that's been sort of happening more sites onstream as you know. You can turn that tap on per village quite quickly, an extra 10 units per village in quite (inaudible).

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [6]

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That's helpful. And then just on Australia, you didn't sort of talk so much on this on the call, but -- I can kind of understand your report that along the lines the Melbourne market stabilized a bit in the last few months, and you've previously made some comments that the -- seeing your expectations were a bit high in that market. Are you seeing those expectations kind of bit more realistic, [and if you do a potential win?] Potentially looking more attractive from a price perspective, and does that stabilization give you a little bit more comfort to potentially invest in that market?

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Julian Cook, Summerset Group Holdings Limited - CEO [7]

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Yes. Look, I think on the land pricing dynamic, we've certainly seen a tempering in expectation. And I think like with any downturn, it takes a little while for vendors to factor the -- want to -- to factor the fact that the downturn is actually real to the expectation. And I -- so I think we have seen a moderation to an extent. And from a sort of confidence perspective on prices themselves, you'd look at it, absolutely, it does give us a bit more confidence of that stepping back from that as a thesis has always been, we're there to meet the demand for the aging demographic and property prices is a part of the puzzle but actually it's the demographic, and looking for good sites and good locations with good catchments of all the people who are underserved by quality, retirement village looking at care, that has always been the focus. But without a doubt, seeing that property prices have stabilized does give us more confidence. And so I mean you probably see the same stuff as we are. But for the last, I think 2 or 3 months, results out of Melbourne and Sydney is the same. Prices have inched up very slightly. So I don't think -- they're certainly not sort of trending upward, but the stabilization here it has, and they're in the sort of the 0.1% to 0.3% up. So -- and that's been consistent for around sort of 3 months now. So that's sort of a good sign. And we've also auction clearance rates, something which is watched pretty closely over in that market in Melbourne and Sydney where they had been down in the 40%, 50% clearance rates for some time. They're now setting up for -- again, it makes that sort of couple of months now in the sort of 70% range which is a very high range as it's sort of in the upper end of the clearance rates of what's been seen in Australia historically.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [8]

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Yes. And just on -- last one for me. What -- on cash flows and debt. So Scott, just on that $4 million of business cash flows in the first half, were a little bit less than I was expecting and do you have any comment around the change in refund policies [not worries]. Are you able to just call out what that impact was? So for [15 to 20 years] would that be about $7 million or $8 million? Is that sort of your [basically] impact?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [9]

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Yes. It sounds reasonable. I'd probably just take that, given an annual -- average of 17 or 18 units in terms of what average resale price for 30 years. That probably sounds roughly right. I think probably it's down at call -- I'd call out $3 million or $4 million, which really just reflects that cost growth that we've had year (inaudible) a year ago. But I think the good thing on the cost side of the business is, as I said, the office cost is pretty stable at the moment given we haven't seen a lot of costs growth outside of core wages.

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Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Deputy Head of Institutional Research [10]

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And just in terms of some sense, same. We are seeing kind of the (inaudible) in the business a pretty unbelievable increase in construction. Put the [alignment] and the cash flows at the same (inaudible). You did a -- you have to go through the (inaudible). What are the lines that you're seeing for the earnings because your year is obviously subject to sort of land acquisition activity but where do you see that landing at this point?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [11]

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Look, it's totally dependent on land amounts really around that considering (inaudible), by (inaudible) on from Australia. Could be somewhere between 515 and 600, would be my general sense.

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Operator [12]

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And the next question comes from the line of Andrew Steele.

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Andrew Steele, Crédit Suisse AG, Research Division - Research Analyst [13]

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Just first one for me is on your resales. And just looking at the, I guess, what are slower resale volumes into this year despite the larger asset base. Would you say that this is sort of a one-off lapping, you expect that to normalize over the coming periods? Or is this sort of a reflection of what is actually a relatively, I guess, new or young asset base in sort of the tenure of residents. And so we could be seeing actually a more drawn out tenure going forward?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [14]

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Okay, good question, Andrew. To be honest there I think no one actually absolutely knows the answer to that question. I think like if you give a back historically, every 2 or 3 years it does leap up. And you kind of have 1 or 2 years with a lag and then it sort of steps up. We're sort of in [unfortunate] territory where it should be taking a step up now. But everything has its point. But in just -- you can get that and it is just like a (inaudible). And I think if you go back to about, I think it was last quarter in 2017 and which was net of the quarter. So I think we don't really know. I think the main thing that we can control really is how much stock we have and how much stock we have hasn't changed. Essentially, there's contract that hasn't changed at all. So as I said, and a big chunk of that is sitting in those newer villages. And as I said, the core villages once they sell down, stay sold down really, really well. I can't really give you any insights around more than that. So I think we would expect it to actually to pick up, it hasn't done that in the first half but I thinks that will happen in the second.

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Andrew Steele, Crédit Suisse AG, Research Division - Research Analyst [15]

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Okay, great. And just on the refurbishment CapEx. I mean I'll take your comments that there are some one-off items such as the new pool, swimming pool at Trentham. But I guess these elements are also part of keeping the villages relevant and the product fresh. So how should we think about the run rate of refurbishment CapEx taking into account future, I guess, upgrades over the coming sort of 6 months, 12 months, 18 months?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [16]

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Look, I don't think you'll see that degree of -- look, knows we did a couple million dollars' worth of core [common cost edge] to building that big Trentham enclosed swimming pool. What we've gone through now, a lot of that sort of -- and I know that cycle which will we've through of lifting some of those older villages that we had in the portfolio. So we've been through a period of facility upgrades, (inaudible) introductions that will last [for 5 years]. And that village as well. Look at the (inaudible). That'll stop that village selling like in their villages, (inaudible) village, and its sell-through, that was part of (inaudible). So it wasn't so much driven by the need to kind of keep that village more than, and sort of its base standard that was more driven by when we initially looked into that village -- (inaudible) village. So all(inaudible) probably struck that out. I think we're going to see a more [second system] baseline going forward. So through that referred number was that $2 million out of it?

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Andrew Steele, Crédit Suisse AG, Research Division - Research Analyst [17]

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Okay, that's clear. And just on current market conditions. You've noted that there's been I guess a stabilization in the market. If you look at momentum and days of sale and days of settlement as you exited the second quarter and now gone into the third quarter, has there been any change or would you say that's still stable? And if you call out, if there are any differences between Auckland and other regions that'll be helpful?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [18]

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Sure. I mean the short story is yes. Look, I think we feel like it's a lot more stable on what it had been in the last 12, 18 months. I think it's moved around by about 3 or 4 days, it was by about 4 days. But to be honest that could have swing that way or back the other way from our -- it's not a material movement. So I think roughly it was slightly, I think Auckland completely stabilized and it was slightly longer base even in Christchurch. But not seeing -- seemingly consuming trends already different between outcomes. I think our Casebrook villages is one of our top 3 selling villages and Avonhead is, as I said, 60% presold. I'm pretty happy with that performance as well. So that the -- more stable generally for us. But keep watching that.

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Andrew Steele, Crédit Suisse AG, Research Division - Research Analyst [19]

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Great. And just a final one for me. Just on the Parnell site. Do you have any update as to sort of your expected timings on that project?

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Julian Cook, Summerset Group Holdings Limited - CEO [20]

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Look, roughly -- the update is we've had a concept plan and feasibility which we are happy with. So we've progressed through that stage gate, and I think that's required little bit of work with [Warren Manny] who's working with us on this project. You'll know that (inaudible) we run [Amazon and hospital], just given the future manager of this site, and also complete some sort of the construction complete to these. We brought him in plus some other costs in project management consultants as well. So that has sort of progressed that stage gate which is a pretty kind of key stage gate for the village. And when you're moving through preliminary design, with a focus on probably launching consents at some point next year. So it has been sort of slower to emerge from the consent phase. But given the site location, we want to make sure we get it right. We want to make sure we've got something that's attractive to residents while also achieving a sort of financial return for us. So through that phase now and moving into sort of the grunt work to actually get a resource consent launched. I think one of the other things we're also been quite conscious about is given this is not your typical village, we want to make sure, from a customer perspective, we really understand their perspectives. So we have done quite a bit of customers focus group research through the development of this concept plan and pretty happy we're sort of sitting with respect to that.

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Operator [21]

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And your next question comes from the line of Jeremy Simpson -- oh, I mean Jeremy Kincaid.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [22]

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I think that's me. I have 2 questions, just the first one around your cost savings, the $2 million. Some appear to be one-off in nature relating to food and uniform projects, et cetera. But the non-one-off costs, can we expect sort of further cost cutting going forward over the next 6 to 12 months?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [23]

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Jeremy, yes. It's Scott here. A couple of things, they're really like post-project just came to a natural conclusion. So things like the key -- that was that roll out of our tablet platform to our care givers. There's sort of training costs which [can't get wider than that]. And then results last year. I think that [third year uniform] complete as well. I think it's not so much that we're doing -- [contractually] doing these projects, it's just we've gone through probably a handful of projects. And I think you will see [our governance costs] costs remain more stable than what have been in the past because we feel like we're sort of geared up, more ready for that 600 over the last couple of years. So I probably the least -- [that year underneath for that]. So yes, I think if you look your just begin and I think you'll see the lease. I think it was a year ago we had 35% cost growth, we'll thereabout seeing more sort of that [6% to 8%] net debt sort of start off our annual continue in the next 6 to 12 months.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [24]

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Okay, understood. And the other one for me as far as when we look at the stats nationally, house price inflation in Auckland has been relatively flat, but in the region it's been tracking around 6%. Is it fair to say that you have been achieving similar sort of pricing increases across your villages? And I suppose that's the first question. And then b, are you able to achieve superior pricing power above house price inflation at any sort of regions or villages?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [25]

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Yes. Look, I think certainly we're seeing good growth rates outside of Auckland in those regions here, yes, we've definitely seen [repository shares increase. And then as you're generating] (inaudible) and good cost appreciation. I think it's sort of as village-by-village more dependent on the sticker size of the village, it's priced relatively to the market. And what HPI is doing. So I think I like to touch before on situation. But you're just constantly weighing out used, before it can approve it, constant -- you're constantly weighing out presales rates. How much you got on the waitlist, what your relative to years look like, what the HPI's doing in those regions. How fast are you out through them (inaudible) how much stock you've got available. So it's pretty much case by case will say. We've seen massive trends that (inaudible) has been very, very strong. As we've seen (inaudible) has been super strong, and waitlist has been strong as well in particular, (inaudible) the growth rate.

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Jeremy Kincaid, UBS Investment Bank, Research Division - Associate Analyst [26]

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Okay, sure. And just on weight list volume. You mentioned, are those increasing or decreasing?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [27]

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That's stable, really.

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Operator [28]

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And your next question comes from the line of Jeremy Simpson.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [29]

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Just a couple for me. Just any comments on construction costs, how sort of price pressure on that and any sign of things alleviating a bit perhaps in the subcontractors?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [30]

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Yes, Jeremy. Yes, I think, look, we are seeing a little bit of an alleviation on that. Like, again in Auckland has probably stabilized a little bit more and some may stay. And I think it's sort of a little bit variable like in Christchurch and (inaudible) are really seeing some very attractive rates to build that. And so I think probably that some of that continue to free up all the resourcing capacity associated with Christchurch rebuild. Everywhere else throughout the country is sort of stoked just seeing pretty normal stuff and not seeing anything out of any way shape or form. So I think probably the main thing for us is as we improve the prices in Christchurch and the alleviation of some of that kind of creating that sort of probably what we're seeing in Auckland.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [31]

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Great. And you mentioned that you had a lot of villa deliveries in May and June across a couple of villages but which ones are those?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [32]

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I'm not sure if I mentioned that or not but we might have (inaudible) something was saying. And we when you're talking about I was -- probably what I was trying to say at the time was, I think if you look forward in our stock-base if those 6 departments, we've been weighed up. We've got about overhead of about (inaudible) in that portfolio being a more traditional sort of villas, apartments or new stuff. Second to that, you will see like those 3 new villages coming onboard as well which could have been expected as when I was talking about that you're picking up on which it is though based (inaudible) villas from Q3, Q4 [months.] Just see a good chunk of our representation on those 3 villages.

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [33]

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Cool. And just sort of trying to find that which villages have -- being the other villages sort of are outliers in terms of the levels of vacant new stock?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [34]

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Our outliers?

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [35]

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Because of the late delivery.

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [36]

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When you say late delivery...

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Jeremy Andrew Simpson, Forsyth Barr Group Ltd., Research Division - Director & Senior Analyst of New Zealand Equities [37]

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Like late in the period. Just being delivered later in the period. So you haven't had a chance to sell them.

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [38]

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Look, not really. I mean obviously like (inaudible) holds some stock. Just because we've been doing big apartment fill downs. But look, as I said, pretty comfortable with that site in terms of if you look at that site, could be on track for 50 to 60 units sold at least this year and that's really comfortable levels for us. So it will take a lot of work for this stock not seeing anything untoward. And as I said, felt really like that transformed in terms of sales volumes. So I'm a little bit more and obviously right (inaudible) relatively competitive which (inaudible) ahead. But beyond that, I not seeing any elevated stock levels on any other sites.

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Operator [39]

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And next question comes from the line of [Angus Simpson].

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Unidentified Analyst, [40]

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Just one question for me. Just following on from Stephen's first one. So Julian, you commented that targeting to get to that 600 build rate in the next 2 to 3 years now. I think previously, you're sort of the rough sort of guidance was 650 delivered in FY '20. So the pull back, does that sort of reflect I guess the market and the amount of stock you're currently holding on hand?

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Julian Cook, Summerset Group Holdings Limited - CEO [41]

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Look, I think sort of Scott touched on this before. So I mean, I think in short our sort of focus currently is to keep new villages open, so we've got more options to sell across more places in the country. So for this year, obviously 3 villages opening and then next year, another sort of 3 villages opening. So it puts us in a good position to have that sort of 600 and it gives us the choice really. And then I think what we'll just continue to do is watch climate conditions around the place. So we all either deliver pretty -- in the next year, say, consistent with what we've done over the last sort of year or so, or if we feel it's appropriate we can push up to that sort of higher number faster.

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Unidentified Analyst, [42]

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So I guess there's a probably a little bit of crystal ball gazing but when do you I guess kind of expect sort of reduce that sort of new stock inventory. Is that sort of in the next 12 months or do you think that level is sort of 300, 350 sort of a reasonable amount to have over the next few years?

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Julian Cook, Summerset Group Holdings Limited - CEO [43]

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There's a couple of things here. I mean, I think, like, look, if you take kind of that stock composition, as I said, like we're right really on the call. We'll start selling in the first half of 2018 from base of 7 villages. If you take the stock that we've gotten in obviously and you take them sort of net off. I don't actually think our overall stock volumes actually they're elevated. So I kind of make that point in the sense of like any time you're building apartment blocks. You've got to suffer from having higher volumes of stock sitting here if you take that out of normalized (inaudible). And you should think remissibly got -- missed the elevated stock (inaudible) so needly to say I think all up in May, June you have. Are you going to take your time to look through that and sell that village down, but that's just normal course of business for that style of village. So I think you going to get those humps at times for us in the future. I don't think an aggregate level because of that (inaudible). You're going to see those stock will subside but also say, probably in some things, as you know, what used to be normal for us around 200 to 250 stock, it's off a lot smaller build base than this, a lot smaller size of delivery that we're doing each year. I think going forward, as we've delivered more and more units, you just sort of expect that there's probably going to be a bit more of a norm for us. And so I think, this 300 might be the new normal for us, in over time you'll build those apartment blocks, villages is a bit same thing, the tranche are probably heading on elevation beyond that as well.

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Unidentified Analyst, [44]

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Yes. Okay. That makes sense. And then just I guess any comments you can make I guess post-year-end with regard to I guess, sales and sold out. I just noticed that the contracted stock to total stock available as a percentage was probably the lowest it's been for a while at 22%. So 72 units contracted. So I just sort of guessed, what you -- what have you seen since the balance date -- since near balance date on, I guess, the sales front or inquiry front?

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Julian Cook, Summerset Group Holdings Limited - CEO [45]

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Yes. And again, 2 drivers for that. One is like, we're heading this big chunk of 6 departments. (inaudible) are going to work themselves out. So you have duty stock which was certain departments. As I said, the timing, things will work that out, and that sort of comes back to that stock going forward. More of it will be (inaudible). So I think you can probably assuring that we're going to have something like [60-lease 2 departments] stocks sitting there by the end of the year. And I think that is probably one of the biggest differences there. Yes, as we've talked about already. So just (inaudible) stock growth can comes (inaudible). And obviously, there's been quite some change in the terms of the agreements, A, B, Cs blocks. But if you look at those blocks and you build that site, you can kind of see the need to build all those at once and the synergies attached to doing that. So once you have a little bit more holding costs dripping in from are having those guys on site building and contracting all 3 of those at one go (inaudible). So kind of on that slightly trailing off. Holding more stock with, call it, efficiencies of building those together. So probably the biggest villages normalized for that and take out -- take a view that as I said, it's proportional of that low contract rate is driven by these departments and the extra portion is driven by (inaudible) you'll probably get a pretty normal picture for us.

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Operator [46]

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And your next question comes from the line of [James Sully].

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Unidentified Analyst, [47]

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I've got 4 questions for you. Just wanted to pick up on this Heritage Park sell-down process. Just in terms of the, say, mix order -- department mix that you've got, what proportion is actually dominated by Ellerslie, and can you talk about how Ellerslie's actually -- the sell-down prices is actually occurring?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [48]

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Yes. So from memory, it's Scott -- I think it would be around about 50% of that overall [6 department stock legally] attributed to Ellerslie. And look, that progressively is coming down fine. Those of it is probably...

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Unidentified Analyst, [49]

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Look, I said that you've got...

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [50]

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Pretty heavy with that sell-down. But look, about 50% of it. So you've got I think just over 30 units left. Obviously, it's departments being previously selling down which is completely sold down. The first floor of that now. And just on second floor. And I think what you typically find is as you go through that selling each floor, the more [apartments in line] you're seeking on that floor, the better it is. So it's going to go faster and faster through that. Key thing is obviously full at Ellerslie now as well. So that's going to cross-selling (inaudible) serviced apartments. So perfectly comfortable there. That'll progressively double in the next 12 months.

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Unidentified Analyst, [51]

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So you're seeing an acceleration given keys can slow now in terms these days or it's just sort of steady-state?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [52]

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No. I think we've seen an acceleration on last year, absolutely.

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Unidentified Analyst, [53]

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Okay. And I see you've got your last release coming up there now. So the final release at Heritage is being marketed as we speak. So my second question, just internal transfer cash flow impasse. Is that a -- is there a step-up or is that a one-off element going forward?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [54]

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Yes. Look, that's just a one-off timing thing because we've made that policy change now. I think that's the right thing to do from a customer perspective. You don't want people waiting to be paid out when a transferring resident has been living in that unit. So I think that's the right thing to do. When we had a look at it, I think the time we made that transfer change at any point of time in history, it's always sort of been (inaudible). So you'll see that private sell-through about next year and just be normal again. So it's just a one-off change and timing difference. We've basically said rather than that kind of normal prices work through, we like to let units sold. We've dragged all those forward and we've repaid them immediately.

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Unidentified Analyst, [55]

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All right. Third question, Julian. What do you actually need to see to commit to work in Melbourne? What is it that you -- what sort of equation you need to make things stick out?

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Julian Cook, Summerset Group Holdings Limited - CEO [56]

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Well, look, I think we were right in the moment is we're bidding on -- actively bidding on sites. We are basically at the right point of where we need to be in terms of money for venders. So (inaudible) start with the feasibility stake out and we know we're going to be competitive on terms, in terms of cash and having a couple of sites we've missed. We have some of the -- there's been some other noncash terms in the office those quite haven't hit the mark. We've been able to address how we're going to approach those things going forward, and that's really just how fast we can move that due diligence process through. We haven't shortcut any of the work. What we don't want to -- not doing any of the work properly but we want to be able to progress that as quickly as possible. So really just a matter of time before we're successful on one of these processes and then we'll be able to make the appropriate announcement and get on with it.

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Unidentified Analyst, [57]

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So you -- continuously when you look across the risk of the business in the next 12 months, what are the key ones that you're focused on, Julian, just 1 or 2 or 3?

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Julian Cook, Summerset Group Holdings Limited - CEO [58]

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Look, I think difficult to give a precise number. Stepping back, we've certainly got the capacity within the business to handle more than one so we'd be comfortable taking more than one. Whether we'd want to take on 3, possible but they have to be -- I mean, it's quite a bit of work to take on all at once in the new market. But if they were sufficiently attractive, we could potentially do that. But probably more likely we'd -- you'd see sort of 1 or 2 pop out.

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Operator [59]

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And your last question comes from the line of [Jason Hamilton.]

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Unidentified Analyst, [60]

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It's [Jason.] So this one's prompted by your slide 32. Can you just talk to what you're seeing around couples moving into the villages and how your residents per units have changed over time?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [61]

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Yes. Look, I'm not -- I think probably -- there's another slide in there which gives the inspect demographically. I think it's later on in the appendix, Jason, but not really see any changes in the trends we generally here at all. Couples with singles, entry ages, not really seeing anything material there.

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Unidentified Analyst, [62]

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Okay. And the second question just sort of last one. Just on these new villages which you're -- I guess you're trying to accelerate the building give you more optionality. What's the plans around main buildings, tier, what's the timing and phasing at those villages? Or you just want to get I guess, 10 or 20 villas out of the ground and then you get on to main building later or like some successful villages you've had in Christchurch where you bring forward that main building?

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [63]

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We'll -- on every village we'll look to start there main building key area as soon as possible. It is a longer build process, there's a bit of time there to build and occasionally there might be something in the site, where part of the site doesn't get handed over to us till a little bit later. And that might be where the main building is sitting. But where -- in every case what effectively started as soon as Australia is in blocks. I think how to...

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Unidentified Analyst, [64]

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Okay. And I obviously...

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [65]

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Sorry, I was just going to say, as well like a more land bank and a higher completed portfolio probably gives us some more optionality around it, even if we wanted to speed up that main building before we deliver the first units on site, slightly as well and reduce that lag right between when people living in a village. So you'd have a more attractive proposition (inaudible) complete and for us to fill. So it probably gives us options there as well. I'm not saying that we'll actually commit to that. But that's something that we have been for the front -- having a back-ended portfolio.

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Unidentified Analyst, [66]

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Okay. And then finally, just the trade and other payables obviously down quite materially in the half, but didn't flow through your working capital. So I assume you must relate to land or building cost to (inaudible)

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Scott Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [67]

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Definitely, that's assumption.

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Operator [68]

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There are no further questions at this time. Julian, you may continue.

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Julian Cook, Summerset Group Holdings Limited - CEO [69]

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Well, look, if there's no more questions at this time, as always, feel free to get hold of either Scott or myself, and we can deal with any other sort of queries you have on this, more than happy to chat. And thank you all for your attendance at the call today, and look forward to seeing you later. Thank you.

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Operator [70]

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And that does conclude the conference for today. Thank you all for participating. You may now disconnect.