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Edited Transcript of SUM.NZ earnings conference call or presentation 22-Feb-21 10:00pm GMT

·55 min read

Full Year 2020 Summerset Group Holdings Ltd Earnings Call Wellington Feb 24, 2021 (Thomson StreetEvents) -- Edited Transcript of Summerset Group Holdings Ltd earnings conference call or presentation Monday, February 22, 2021 at 10:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Julian Cook Summerset Group Holdings Limited - CEO * Scott Grady Scoullar Summerset Group Holdings Limited - Deputy CEO & CFO ================================================================================ Conference Call Participants ================================================================================ * Aaron Ibbotson Forsyth Barr Group Ltd., Research Division - Research Analyst * Andrew Steele Jarden Limited, Research Division - Director of Equity Research * Bianca Fledderus UBS Investment Bank, Research Division - Analyst * Shane Solly Harbour Asset Management Limited - Director & Portfolio Manager * Stephen Ridgewell Craigs Investment Partners Limited, Research Division - Head of Institutional Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by, and welcome to Summerset's FY '20 results announcement. (Operator Instructions) I must advise you that this call is being recorded. I would now like to hand the conference over to your speaker today, Mr. Julian Cook. Thank you. Please go ahead. -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [2] -------------------------------------------------------------------------------- All right. Thank you, and welcome everyone to our 2020 full year results. Look, today, you'll hear the 2 usual speakers: myself, Julian Cook; and Scott Scoullar. Obviously, this will be the last one of these results for myself. So I will probably move a little faster through and then hand over to Scott. And just before I do that, I just want to say, look, I obviously love -- I mean I have to loved working with the team and really enjoyed this business. There's plenty more to be done here. And look, I think we've certainly got the right line, Scott, to sort of take Summerset going forward. So moving to the results, and we'll move through to Page 4 of the presentation. The big story last year was obviously COVID and subsequent bounce back in terms of our business and the economy more generally in New Zealand. The detail of how we responded to COVID, we covered quite heavily in our half year result, and we have some further information in this pack on it. We don't propose to go into a whole lot of detail today, but obviously, happy to take questions. But look, I think, thanks to us being able to keep residents and staff in our villages safe, thanks to the effective public health response and government strategy of keeping COVID out, which we for supported right from the outset. And also thanks to a sort of rebound in the property market in the second half and particularly, the last quarter of the year, we have seen the business performed well. So half on half, performance in the second half has done very well, and that gives us the result here today. The key numbers there on Slide 4, underlying profit coming in slightly down on prior year, just coming in at $98.3 million. Net profit after tax then at $230.8 million, obviously, significantly up from the half year with the write-back of the -- some of the valuations there. Good operating cash flow at around $270 million. And I think particularly pleasing for us and -- is our gearing ratio actually reducing from prior year despite what we've seen happen over the course of 2020. Looking forward, we're sort of expecting a sort of good track for the business going forward. You would have seen the very strong sales results in terms of settlements we've had through the last quarter, and we continue to see very good contracting rates coming into this year. From a build rate perspective, you know we delivered 356 new units last year. We did pull that back from what we would have done, partly due to the lockdown through April and May and partly due to constructor decisions we made through that period of heightened uncertainty but expect to be in the sort of 500 to 550 units for FY '21 and expect it to lift from thereon in. So moving forward to Slide 6 and 7, which is just sort of year-end review. And obviously, January at the start of the year, who would have thought we would kind of have the year that we did in front of us. That kicked off our St Johns site with earthworks commencing having received resource consent. Late the year before, that site had gone through an environment court challenge where we successfully challenged the decline on the application, and so very pleased to be moving forward to that site. That site now, particularly for those of you in Auckland who do drive past, the site is progressing very well. We're very happy with that. And then through March, April, May, obviously, the peak of that COVID pandemic in terms of impacts here. A couple -- outside of that, a couple of highlights, despite the significant disruption that, that caused us, opened 2 new villages, 1 in New Plymouth, 1 at Papamoa; and built 2 main -- or completed 2 main buildings, 1 in Casebrook, which opened literally before -- just before the April lockdowns. And then the one in Rototuna, which was more challenging, is we had to work -- we were delayed there through the April lockdown, but also in the subsequent August lockdown in Auckland, with a number of the trades people not able to get out of Auckland to work on the site. Moving forward to the strategic update. So I'll touch briefly on Slide 9. And as you know, it's a fairly consistent strategy over time. We're always looking to evolve and adapt. But over the years, the key thrusts have been very similar. I think one of the things you'll start to see to us talk a little bit more about forwards on key bids. So you know we've been consistently focused on lifting the bar in terms of what we can provide to residents. We were one of the first adopters of certifying service departments for rest home care. We were the first people to start doing apartments sold under ORA in our memory care units, which have gone very well. Now starting to move that into the care space, and in our Rototuna main building have done a trial of a relatively small number, but a decent number, nevertheless, albeit, which we have sold and/or -- and that has gone extremely well. They have sold very quickly. So early days, but we're seeing some very good early times. And I think when we look at that model, we are quite focused on keeping it as an occupation right agreement and charging a deferred management fee. We do not want to move down the sort of refundable deposit part scheme, which others do use. We believe we're better to protect our revenue and our value in the amount of money that the business can see in terms of process bids and, therefore, invest in that kind of part. Taking this up, I believe you'll see that starting to flow through a little bit in terms of that Summerset net shop, particularly around that last bullet point, we see quite a high proportion of that care offering is -- will be coming and sold under occupation right agreement with the food management fee. So you'll see there all of our land bank of memory care apartments, obviously, will be sold under ORA. And in terms of the care bed land bank, a high proportion of that we are now calling care suites, which is really a sort of upgraded -- kind of upgraded care room in terms of size fitted out in what you get in terms of the offering, which positions us really well to be able to sell that. Moving forward through the business overview. So just touching on these really quickly. Slide 12, probably a key point to note is satisfaction results stay very high. It was a very, very difficult year for our teams and for our residents. We've previously shared a lot of the positive feedback that we've had with residents through the COVID lockdowns. But nevertheless, when you take away people's activities, events, and although that sort of value we offer in the village, it is difficult for us as well, but we've managed to keep those satisfactions up quite high, which is good. Moving through to Slide 13. I won't go through the detail of the COVID work we did last year. We've sort of covered that previously, and I think it sort of tells it out there fairly clearly. I think the key thing for us this year is the COVID vaccine rollout. Obviously, we're in discussions with Ministry of Health and District Health, both currently. And you know that the vaccination program has started in New Zealand. We don't yet have dates for the aged care sector, but we are certainly next kind of -- off the rank in terms of priority. And we are expecting a pretty good uptake amongst our staff and in our residents. And certainly, for new staff coming in, we are being very clear in our offer letters and our discussions with them that there is an expectation that they will take the vaccine. Moving through to Slide 14. Again, you'll see the resident satisfaction scores there and have continued to be good. There was a lot of focus around the activities programs through the year. With the interruptions that we saw, there was quite a change in focus to moving those online and move into those to the sort of means that you can do within the parameters of the lockdowns we saw. But we're sort of back into business as normal now, subject to the occasional Auckland level 3 lockdown. One of the other points, and I think we've sort of talked about this before, but starting to move more food to production in-house. So new villages by and large are likely to be run an in-house food model where we will be running that ourselves and just starting to spend a bit more time, a bit more focus on that and steadily sort of gear that up where we have been doing that in-house. We've seen very good results in terms of satisfaction, quality of food and resident response. In terms of the staff side of things on Page 15. Well, look, a very, very hard year for staff, particularly those out on the front line. So hats off to them, and we're very appreciative of all the efforts they put in. You'll start to see on the slide more and more talk and investment in the learning and development side of the business and what we provide staff that has been something we've been wanting to do for sort of a while now and start to see the fruits of that rollout, which is really positive. And I think stepping back when we look at some of the broader metrics on staff, we're particularly looking at things like turnover and engagement. We've seen a significant reduction in turnover over the last few years, partly -- and partly through last year, that is quite simply because the borders were shut. And I think a lot of employees have been wanting job security. There's no denying that a couple of years ago, our -- a couple 3 years ago, our turnover would have been generally a bit over industry average in the sector. We are now quite a bit under the industry average. So that is a really good position to be, and it's something we've worked quite hard to get to. And we're continuing to maintain really good engagement. So we have actually -- we have changed survey provider this year, and we continue to stay in the top 25% of companies in terms of engagement, which is a really sort of important prize for us to win. Moving to Page 16 on the environment. Again, I won't go through the details of it. Probably, the summary on that one is having started some tentative steps 2, 3 years ago in the space. We are making some very good traction there. And you know we are carboNZero accredited so we've got offsets for the carbon emissions that we do make, albeit we are not a huge emitter. Particularly of note last year, we committed to a science-based target for carbon reduction, so that see us commit to a 62% reduction in emissions on a footprint base -- per footprint basis over the next 10, 11 years. And I think importantly, I think that's very achievable, and we have a very clear road map of the things we need to do to get there, which primarily revolves around power and guest usage in the villages. Also starting to look quite heavily at solar, and we'll be commencing some trials in that as we now are actually seeing from an economic perspective that these things are feasible and they also align, obviously, quite well with these carbon reduction targets. In terms of new site land banking, so Slide 17, not so much activity last year versus prior years. But what we did pick up in Half Moon Bay up in Auckland is a great site in an area which has extremely low penetration and a really good part of east Auckland. So very much looking forward to getting to work on that site. But other than that, small, small addition beside our Richmond village, but nothing of note. Moving to Australia, continue to see good progress. I mean the Australian expansion over there has been held back a little bit through the quite extensive lockdowns in Victoria. So particularly what we saw there was for us, and we were through last year and met consenting and design phase, is just much lower productivity out of councils and out of consultants. So that has set us back a little bit. But a lot of the work we were doing last year also was effectively desktop, so we're able to continue through those lockdowns as well. Expecting development approval very shortly on our first site, and we'll be straight into earthworks after that. And our team is building quite quickly, getting ready for sales and marketing launches, and show villas lined up really for people to look at. And I would -- in terms of the wider sort of expansion over there, certainly building the team over there with a view to building a pipeline of villages and starting to roll them out, and I would expect activity over the year in terms of the land side of land banking there. On the New Zealand side of development, so really just covering slides 19 and 20. Again, largely sort of speaks for itself, probably of note was completion very early this year. And so there's a lot of work going on last year. The actual completion this year of our last block of apartments in Ellerslie. So really good to see that. Ellerslie, our biggest seller last year saw significant sales in settlements and village through the year and certainly seeing very good momentum on that site at the moment. So very, very pleased with how that village is progressing. Moving through Slide 21, I will just touch briefly on our new main building. So those of you who did have the opportunity to come through that main building in Rototuna later last year on our Investor Day, you will have seen what has been on offer. And that is really the combination of design work, resident feedback and just thinking about exactly how we can best build our offers to residents. Over a number of years culminated in the completion of 2 of these buildings last year. Significant step up on what we previously offered. I mean our previous villages are very successful, sell very well what they're providing us and residents are very happy, but we can always do better. So quite a lot of thought and effort and indeed, money gone into these new main buildings, and there will be a number of them rolling out over the next few years. We do continue to look to tweak the offering. And certainly around that care space and care suites, there will be some continued evolution and lifting up the bar of what we do provide to people. But as I sort of said, we have been quite careful to think of that in terms of we want to make investment. We want to provide value to residents, but we do need a return as well. And so that selling under ORA will be something we sort of push more into over time. And then lastly for me, just Slides 22 and 23, and there's not a lot again, for me sort of comment on. This will actually speak for themselves. On 22, I've got the key point in there that you'll see and we've talked about some time now. It's just that increased diversity of sites across the country and into Australia. And particularly, the advanced -- the more advanced status of resource consenting, I have more consents in hand, which has been a really positive picture for the business over the last few years and puts us in a really good position to lift that build rate to meet demand around the country. And then house price inflation. Again, I won't sort of comment on this too much. Generally, I think what we've seen from that property market lift through the back end of this -- of last year is quite simply easier and faster for people to sell their homes, and that's always great for residents coming in. So that's a positive. And certainly, there's better price pressure out there around the country. And I think of note, as you'll see on that graph here, a lot of the ex Auckland regions, which we are in, are performing very, very strongly in terms of property price appreciation versus Auckland. And with that, I will hand over to Scott. -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [3] -------------------------------------------------------------------------------- Thanks, Julian. Good morning, everyone. Before I start, I just want to take a moment to recognize Julian's last results announcement. And then how much from I enjoyed working with him over my the last 7 years. Julian's brought a huge amount of passion to our business and Summerset has enjoyed significant growth and success under his stewardship. Look, just I'll jump on to Slide 24. Just -- look, a couple of things to touch on there, really, like the first one, as Julian just touched on a second ago, we're strengthening that development pipeline. And you can see that sort of the 9 sites we've developed on in 2020 increases to 11 sites in 2021. The 2 extra sites being back on-site in our Hobsonville village, which essentially is that extra bit of land we purchased a couple of years ago. And then the second site being the first Australian site. So you can see that momentum in terms of that diversification of villages coming through 3 villages opened in 2020 and another 2 in 2021. Slide 25, just talk about development margin for a second. Look, for the year we achieved a development margin of $48 million on 404 new sales. The development margin, you can see, was 20% down from that 28%. We largely signaled that at the start of the year that that's going to come down. That still, obviously, remains within that medium-term target range of 20% to 25%. There's a couple of things that occurred there, the first one being we signaled at the start of the year being the mix of units changed. So we had 59% more units being sold, which was serviced apartments and memory care apartments. You get the effects from that lower sales pricing. And the second one is you also get a lot of margin as well. So there was prominently out of that, registering the Casebrook main building deliveries. And most prominently, out of Casebrook, the second one was the location of the settlement changed. So again, if you look out to the start of last year being that move away from delivery, effectively skewed from Auckland. And then the third one, with sales pricing, we effectively took a cautious approach to that sales pricing as outlined at half year and even throughout the second half of the year. So sort of if you get context around that, this meant like over 90% of our contracts that we wrote for that year were actually written prior to any increases in that residential property market. So it wasn't really like you probably reflect upon that second half of the year being quite crazy, but from a contracted and a settlement point for us, 90% of the sales were unaffected. Looking ahead, we continue to monitor residential property market prices closely, and you'll essentially see us take a pretty conservative sort of approach to that and look to just continue to maintain our buffers between sales prices and residential markets and you're out sort of pushing prices heavily in 2021. And in terms of full year '21, we expect that development margin to stay in the range of 20% to 25% as well. Slide 26, new sales of occupation rights, we settled 404 units relative to that 356 deliveries. Really a game of 2 halves for us with 128 settlements in the first half and 276 settlements in the second half. Important to probably just capture the fact that, that second half did include opening of those 3 new villages. So that contributed 43 extra settlements in the year, so you can sort of see that benefit of diversification starting to come in the second half of the year with New Plymouth, Napier and Papamoa all opening. In terms of top-selling villages, it was really Casebrook with 94 settlements, Ellerslie with 70 settlements and Rototuna with 69 settlements. And when we talk about diversification, we continue to see just an increased level of regional sites outside of that core hub of Auckland and Christchurch. So last year, 42% of our settlements were outside of those 2 core hubs relative to 26% the year prior. Days to settle, 76 days overall across the country and 103 days in Auckland. From a presales, I think just to mention that as well. Probably the strongest pricing I might have seen out here. Some sort of context for you around that in terms of the first half units, we'll be delivering in 2021. We've only got about 1/3 of the villas left to sell, [2 villas] were sold already. In terms of 2020 relative to 2019, presale rates for 2020 were 2.5x higher than what they were for 2019. In terms of weight lifts, they're up about 20% as well. Slide 27, new sales stocks. So new sales stock 296 units with 179 units uncontracted. So you're seeing 2 swings there. Overall stock there was reducing by 50 and contracted levels increasing by 40. So some 2 really good sort of signals there for us in terms of sort of strength of sell down and stability of stock level. So the other thing I'd just sort of say is, in the last quarter of 2020, we delivered 154 units. So when we talk about having 179 unit uncontracted, we actually delivered 154 units in that last quarter. And half of those were related to the main building, which as a special part of memory care, you don't really typically presell. So if you take that into account and that 179, that's pretty strong. So in terms of the 179 that we had uncontracted, we've now effectively sold 50% of those already in 2021. So still seeing really good sales from what Julian mentioned before. Looking ahead to closing stock levels for full year '21, look, don't really substantially see any opportunity to drastically reduce that from that uncontracted level at the moment. Essentially, we're on a situation nowadays where you're either delivering main buildings or big apartment blocks. So really feel of that uncontracted stocks it holds for as long as you're going to see it. Slide 28, new sales performance. Well just touch on a couple of graphs here that are new. That bottom left one, that -- since you just showed that -- the real key thing for us about to talk to was being back in 2026 -- sorry, 2016 levels. The top right one, just showing that mentum in the next second half of the year and particularly the momentum in the last quarter. And the bottom one, I think, it's probably the most powerful, which kind of gives you that sense of at the end of the year, how much units do we have under contract, but also how much new units do we have presold. And that sort of the volume of that being sort of circa 200 units is by far and away, the strongest we've ever seen. And that -- it continued on with us right now probably having somewhere around about 300, if you plot that in that chart. So Slide 29, resales. So you see here resales up 18%, gross proceeds up 23% and resale gains up 25%. Again, I'll just touch on what happened there. If you kind of context property market conditions, of the 381 resale settlements, we had 93% of them settled without any form of price change in 2020. So you're not seeing that residential market impact coming through those 2020 numbers. The mix of settlements was broadly in line with full year '19 as well. Slide 30, resales stock. 178 units compared to 132 units at full year '19. Key driver for the higher stock slightly was that higher number of residents vacating units. So we had a 24% increase in residents vacating units through the period so just a lot more stock becoming available to resell. And you can see the contracted stock levels have doubled and sign-ups as well. So the potential portfolio, it still stays right in the middle of that 1% to 2% range we've always been on. Slide 31, I'm not going to talk about that at all. Slide 33, the IFRS profit. Look, the only thing I'd really touch on here is net income tax credit of $9 million is mainly driven by that reinstated tax depreciation on commercial buildings that government did. And in terms of first half versus second half swings, essentially 1/2 that swing is those new villages coming onboard, 1/4 of it is a combination of just cost pressures on the business being the way wide stock that we did throughout the start of last year. And then the rest is additional sort of COVID spend in the second half and other projects. So a big, big chunk of that investment in that second half of the year was really just new villages and growth in the business. Slide 34, fair value movements. Just a couple of things to touch on here. First one being dual valuers for the first time for us with both JLL and CBRE undertaking sort of the valuations on the portfolio. So you'll see us continue with that full value approach going forward. In terms of some of the factors that have increased here, the unit pricing, just touched on that, the values have lifted in nominal order prices by 3.2%. But at the same time, when looking at our sales pricing of what they have taken in is about a 2.3% difference, so they've been more conservative than us. So our feeling for such conservative stance, I think the -- and in terms of stock discount assumptions, it's not so much an assumption change, they're the same. It's just the reduction in uncontracted stock that's driving that positive number coming out of there. The Slide 35, underlying profits. So as Julian mentioned, obviously, $98.3 million. I'd just sort of say, one of the things probably useful to do is just to keep backing out that COVID and additional expenditure. So when we back that out, we get back to $107.5 million compared to $106.2 million last year. So if we didn't have to incur that, it would have come out, as a result, we would have been slightly up on last year. We obviously seen at the start of 2020, not to expect to have the underlying profit growth this year. So would have just beaten that, obviously, slightly over the midpoint of that $96 million to $98 million guidance that we gave back in latter part of 2020. And I think the most pleasing thing for me in the underlying profit result is the increase in performance of the recurred earnings. So if I look at this sort of recurred earnings, up $28 million across DMF being up 16%, resales gains being up 25% and the core village and fees for services up 10%. So strength there. Looking ahead, we expect to see a double-digit growth in underlying profit in 2021. Slide 36, cash flow statement. I'd say the same thing here about that COVID-19 costs again, just emphasize that whilst net operating business cash flows were up from that $28.5 million to $29.8 million, if you back out that COVID cost, you're up close to $40 million. So the core underlying of the business seems really good in shoring up those business cash flows here. Slide 57, balance sheet. The balance sheet continues to grow with assets now $3.9 billion of 1 year ago about $600 million. So it's up 6x that $3.3 billion. It's up the same point in time, retained earnings. Took a big leap, 24% up. And now it's going past $1 billion. So the retained earnings growth continues to help strengthen our balance sheet and maintain gearing ratios. It's super encouraging that this is -- that we're sort of seeing a continued strengthening up within that property market even post 31st of December. So just another strong year of fee value gains will continue to impact gearing. Slide 38, NTA. Look, just really point out here proud to be at the highest number in the sector. It's now $5.94. I think when we listed, again, it was at $1.09. Slide 39, gearing ratios. Look, just touch your gross value to debt, $672 million, up $85 million. Obviously, a combination on the bit of land, as Julian mentioned, that we purchased. Ellerslie final apartment block being built. We built the Rototuna main building the last year, got through enrichment in Avonhead underway currently. And you've got some couple of apartment blocks in Kenepuru as well. So those are sort of the fund levers that have been driving that. Got $455 million worth of funding available to drawn on, which equates to about 40% of our overall funding still available. Really happy with capital management. I'm really pleased that the 35.8% gearing ratio at half year has obviously dropped down to 32.6%. And in terms of looking forward, we're targeting to sort of buy up to 3 sites in Australia in 2021. Last slide, interim dividend -- sorry, full year dividend, I should say, not interim -- full year dividend is $0.07. Obviously, that brings us to $0.13 for the year, up 14.1% compared to last year in 2019. So maintain that 30% -- maintained the DRP of 2% and payment on 22nd of March. Thank you. Julian? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [4] -------------------------------------------------------------------------------- All right. Thanks, Scott, and we'll now hand over to questions. Operator, if you can just prepare for those, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question comes from the line of Andrew Steele. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [2] -------------------------------------------------------------------------------- Just the first one for me is on the development margin achieved this year. You highlighted the mix effect which dragged it down to sort of the lower end of the range. Could you sort of highlight the achieved development margin by each of the buckets you talked to, the care side, Auckland and then regional? And then how you're thinking about each of those as part of your FY '21 guidance? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [3] -------------------------------------------------------------------------------- Andrew, I couldn't give you the split off the top of my head around. I think as I mentioned through the components of the sales pricing generally, which if you reflect on it, were probably like, in some senses, heading more towards 22%, 23%, but just held back completely on the sale process, throughout the year didn't do anything. And as we mentioned before on the call, you kind of can see that in the evidence of settlements being sort of about circa 90% where we just have more price move at all, which you could come back a view on the sand that you could have moved that by 3%, 4% relatively easily in the second half of that year. So I think we'll probably hit more towards in that sort of 22%, 23%, took that cautionary approach around sales pricing, but I can come back to you with a little bit of information around split of the Auckland effect. Obviously, you can see the Auckland effect predominantly in that sort of circa 10% reduction in that average sale price, and that's predominantly where that comes through. So if you kind of calculate that as being the core sort of driver of that and then there's obviously that mix effect of that 59 units sitting there as well. But I'll have to kind of come back and give you a bit more color, but you probably -- if you want to take to reverse engineer based on the average sale price being that Auckland reduction. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [4] -------------------------------------------------------------------------------- Okay. Great. And just to clarify on -- just on you just said, so take into account the, I guess, the momentum in the housing market and I guess, the leeway that gives you in terms of pricing. Did you say that you should achieve better than that bottom range, sort of more to the midpoint for development? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [5] -------------------------------------------------------------------------------- Yes. Yes. That's a fair comment. I mean, look, coming into 2021, in January, we have listed sort of aggregate cost of portfolio at around about 3%. So like I said, in a different world, we might have done that through the year in 2020. But obviously, with concerns midway through the year around the property market, we held off doing that. But yes, we've put through our 3% sales price increases to reflect that momentum in the housing market later on -- in the latter part of last year. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [6] -------------------------------------------------------------------------------- Okay. Great. Just one on the level of OpEx spend on COVID-19. You highlighted for -- in terms of thinking about the earnings result for this year that we could potentially back that out. But one thing I'm curious about is in terms of the $9.2 million of incremental spend, how much of that do you think will be required to the, I guess, ongoing OpEx because of change policies and procedures, more on an ongoing or a permanent basis? Or do you actually expect that will sort of drop out into next year? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [7] -------------------------------------------------------------------------------- Pretty much, my view is much of that will drop out. So you'll see a little bit potentially carry forward, but you might be talking -- depending on what happens in the environment this year, you basically might be talking $1 million or $2 million, but it won't be sort of a material effect in terms of overall operating costs. So most of that, I think, you'll see dissipate. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [8] -------------------------------------------------------------------------------- Okay, great. And then just on the trajectory for build rate. I think you previously sort of talked to getting back to that 600 build rate. What sort of timing do you think is still relevant to thinking of that? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [9] -------------------------------------------------------------------------------- Yes. Look, that's pretty -- a momentum, I think, depending, obviously, on what the conditions will allow for us to operate in the next few years, and we'll obviously be sensible around that. And -- but if you saw sort of our normal course of business sort of trading conditions, normal or normal course of business residential property market, there's no reason why we couldn't be at 600 in the following year. In all honesty, we probably could be in 600 this year, if we actually saw appropriate trading conditions as well. So not saying we will be there. We obviously made the current guidance of 500 to 550. But the business has a good degree, an ability to flex with that and fill the stock that we have. So if we got it good the way in and trading conditions were great, yes, we could speed up the build rate. But I think your basic expectation would be for us to return to -- I mean by that, we'll make that 600 stated build rate target by -- into 2022. -------------------------------------------------------------------------------- Andrew Steele, Jarden Limited, Research Division - Director of Equity Research [10] -------------------------------------------------------------------------------- And just a last one for me. Just related to that, with the development guidance, what's your expectation around CapEx spend for this year? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [11] -------------------------------------------------------------------------------- Look, it's -- for the 2021 year, it's fairly similar to the 2020 year. So I think it's up about $50 million. -------------------------------------------------------------------------------- Operator [12] -------------------------------------------------------------------------------- (Operator Instructions) And your next question comes from the line of Stephen Ridgewell. -------------------------------------------------------------------------------- Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Head of Institutional Research [13] -------------------------------------------------------------------------------- Just first of all, on the -- on your [FCA] for the second half, I mean you've added kind of $1 -- over $1 per NTA in the second half per share, as you say, which included a pretty decent reversal by the looks of it from CBRE compared to where they were at the interim. Do you see any further upside potential from our potential reversal of those conservative sales assumptions that subsidiary took at the interim? Or is that fully reversed out of this back to the typical drivers of NTA growth going forward? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [14] -------------------------------------------------------------------------------- Good question, Stephen. I'm not sure I know the answer to that, to be honest. But like, look, I think the one thing I'd point you out in there -- that discussion before when I was on that slide was essentially we've lifted up by 3%, but essentially at the same time, not taking in 2% of the sale pricing that we've currently got there. As I mentioned before, we can't really move sale pricing much of the whole of last year. So I would say we were pretty conservatively priced. And my personal view and, obviously, as I said, we've pushed that up 3% at the start of January. So out of that, 2% of it wasn't taken into account that largely against that 3% would have given us in terms of increase. And of course, this sort of makes sense. So we've increased that by 3%, but yes, not taking into account 2% of what we've done, I think we're pretty conservatively priced. So I think there possibly is a 2% or 3% catch up and that's the normal course of sort of business. But that's sort of my personal view. -------------------------------------------------------------------------------- Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Head of Institutional Research [15] -------------------------------------------------------------------------------- No, that's helpful. And then just maybe switching to Victoria. So thanks for the commentary that you're looking to buy up to 3 sites this year. I mean are you able to make any comments on availability, seeing sort of sites come up or potential sites come up in Victoria, if there is indication? If you're able to comment if you -- ideally, would you look for those 3 sites to be urban? Would you look to some extent to purchasing some high-identity sites on that mix of land banking? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [16] -------------------------------------------------------------------------------- Yes, good question. A couple of questions in there. I think, look, availability of sites, I mean, the biggest challenge for us in the second half of last year was that the land we did call over there, we couldn't really go outside that, I think it was a 20k radius. And so availability is actually -- our ability to actually get out -- actually, we can't go look at sites because it was actually relatively challenging. So I think he is seeing good fluidity of opportunities over the year, but we haven't probably really started to run for those to ground until more 2021. So we're a bit constrained in 2020 in some regard. So yes, I don't only think it's necessary such a challenge in terms of finding land. Obviously, finding good stuff is always a little bit of a challenge. But yes, I think in terms of your question around -- you were sort of questioning, I suppose, what was the second part? -------------------------------------------------------------------------------- Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Head of Institutional Research [17] -------------------------------------------------------------------------------- Just the mix of sites. -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [18] -------------------------------------------------------------------------------- Yes, it will be interesting to say. We would predominantly be focused towards regional. But if you've got an appropriate sort of mid-tier range per site, I guess, we would consider that actively as well. But sort of predominant sort of regional style out of the ring sort of stuff but we would consider on the middle ring sites as well. -------------------------------------------------------------------------------- Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Head of Institutional Research [19] -------------------------------------------------------------------------------- Yes. Well, that's helpful. And then maybe just moving to Julian's, congratulations to your retirement from Summerset. I guess from the company's perspective, given Julian, you've been kind of over there for a few years now in Victoria, are happy to lead that team and obviously, you've got a lot of institutional odds to the business in New Zealand but also Australia. How does Summerset retain that as best as possible going forward? I guess that's I sort of say is a bit of an operational or executional risk that the company has got. Those continuous volumes, how do you kind of mitigate that? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [20] -------------------------------------------------------------------------------- I'll start off, and Scott might continue. But we've got a lot of people in the business who have now spent quite a bit of time looking at the -- what we're doing in Australia. So I think certainly when we started the kind of IP around Australia and how the market works was probably sort of a bit more narrowly held. But we've been looking at this for a number of years now, and that certainly sort of broaden out quite broadly. So that's really positive. And we've got a couple of really good Australian hires in that business who come out of senior positions of other retirement village health care operators who know the space really, really well and have worked in one of the very rare continuum of care operators over there. So know the whole continuum of care space well. So we're still pretty comfortable there. And look, from my personal perspective, I'm happy to sort of keep doing a little bit of stuff on the side for providing my views over time for Scott. Obviously, it's Scott's ship to run, but to the extent I can sort of put my 2 cents in and he wants to hear it, I'm certainly always around. -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [21] -------------------------------------------------------------------------------- Yes. And another thing... -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [22] -------------------------------------------------------------------------------- And to add to that -- sorry. I was going to say, you might expect -- you've got Paul over there, whose got 20 years experience leading that development, construction and land acquisition, a development person who's super, super experienced in the company. You've got them running on my time. We've got from a sales perspective, someone who's gone up from being a regional sales manager in New Zealand to lead our sales, as Julian said. On operations side, we've got someone who is really a credible Australian, the operations over the year as well. And we've got New Zealand design managers over the years. So look, I think the team is going up pretty strongly. Obviously, like I said, New Zealand is developing its construction strength committees a few years now. Jim I have sort of jointly sat on the Australian steering committee. So there's quite a lot of continuity in Australia. He's sort of a phone call away. -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [23] -------------------------------------------------------------------------------- Half a phonecall away. -------------------------------------------------------------------------------- Stephen Ridgewell, Craigs Investment Partners Limited, Research Division - Head of Institutional Research [24] -------------------------------------------------------------------------------- Cool. And just one last one for me. Just on Victoria, I mean it was good to see the progress that you reported on in that market. What do you see as the key execution challenges in the year ahead and particularly, casting our mind to construction once you get approval through, can you just talk to the construction kind of execution challenges in the year ahead and solving for those? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [25] -------------------------------------------------------------------------------- I'll kick off and then, Scott, you add. Look, I think -- so construction will be new for us. Obviously, we haven't built over there yet. So that will be a new thing for us. Everything we have seen, and we've done a lot of work with contractors over there already is, generally, the construction market in Melbourne, and it's probably true of many other parts of Australia as deeper and broader. There's more capacity and more experience around. We will be running kind of what we used to do in New Zealand, which is basically outsource all the construction and we don't seem to have any shortage of suppliers sort of wanting to work for us. So we're actually pretty comfortable from that perspective. We will manage the construction very closely. We won't be the sort of "dumb client". We will have our Kiwi sort of design managers and probably construction manager overseeing what's happening very, very closely. But what we're seeing at the moment is probably gives us a set of confidence in the construction space as we go into. But I haven't done it yet. So you'll see for that. Operating control is probably the key thing for us. From the sort of sales and marketing perspective, feel like we're in a very good position. We've got some very good people over there, and that's been doing a lot of work. So I feel like that's we're in pretty good position. The next big step after that will be getting the care operation up and running. That won't come for another year or so yet. And we're obviously watching, that's more complicated. We know that. Again, we've got some good experience over there who can lead us through that, and we're watching the Royal Commission final findings and what government does with that carefully, but that's sort of another year or so away. I'd also just throw in there, like, in terms of land wise, doing civils activities over there is quite a lot less complicated than New Zealand. Obviously, you don't have the same quite -- kind of style issues. And even the construction side of things here, just context, we are building a bunch of villas as opposed to when I was talking strategy on the details of the lease-style developments as well. -------------------------------------------------------------------------------- Operator [26] -------------------------------------------------------------------------------- And your next question comes from the line of Aaron Ibbotson. -------------------------------------------------------------------------------- Aaron Ibbotson, Forsyth Barr Group Ltd., Research Division - Research Analyst [27] -------------------------------------------------------------------------------- It's Aaron Ibbotson here from For Barr. I just wanted to follow-up a bit on the questions around OpEx. That Andrew asked earlier. So first of all, how should we think about costs going into FY '21? If I understood it correctly, you basically have an no COVID costs in the second half, right? And your costs were up sort of 20% year-over-year. So you had quite a lot faster growth in OpEx versus revenues. So I was just hoping if you are -- could sort of explain how you're thinking about that for FY '21? And more broadly speaking, would you expect on a going-forward basis that your OpEx should -- that you should see some operating leverage in the business, i.e., that revenue should grow faster than that's my first question. -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [28] -------------------------------------------------------------------------------- Yes. Look, you'll probably see a little bit less growth, Aaron, in 2020 relative so relative to 2020. There's a couple of things that go on there. The first one is, obviously, we open that 3 villages last year versus opening to this year and an essential kind of probably impractical terms really only opening 1 this year because Granville like right at the call end of the year. We'll be doing first. You don't see that really have to upping cost. So if you kind of consider 2020 versus 2021 you'll see this kind of cost pressure coming through from villages opening. You will still see quite a bit of cost pressure coming through from key facilities. So obviously, Casebrook was the only time that was filling in the first and sort of like in the second half of last year, Casebrook was filling. This year, you're going to go to have essentially Rototuna filling, Richmond and Avonhead, so -- and assumption is like you will win on one side, but lose on the other. You will have less villages opening, but you'll have a bit more care costs coming through and drag on the car side of the book. So I'd probably say you'll still see a reasonable those sort of pictures combined, we still see a reasonable amount of growth attached to just volume of the business. So it might be another $7 million or $8 million attached to that next year. In terms of core operating costs, look, you obviously, $4 million sitting in there was just purely attached to that one-off payments around [lifting key] different wages, so you're not going to see that same extent of investment this year. And then with cohort costs, I think you kind of passed the point that we can read any cover costs in the second half of the year. We actually had a little bit more corporate cost in the seat than we did in the first half year. So there was that character of those staff that we were holding on board through that sort of July, August period and eventually sort of transitioning attrition or [fiber twite] as we didn't need them. So look, I think you'll still see a reasonable degree of cost growth, what am I trying to say, a reasonable degree of cost growth attached to growth in the business but will come from the key side of the villages as opposed to volatile side of the business. New cooperating cost would be -- growth will be actually relatively subdued. And you're probably not going to see a terrible lot of growth and that sort of one-off project be sort of stuff hatched coated. So you can probably take out, maybe like $5 million or $6 million of the growth that we've seen in 2020, and that's probably going to be some sort of style of number you'll see for 2021 in terms of growth? -------------------------------------------------------------------------------- Aaron Ibbotson, Forsyth Barr Group Ltd., Research Division - Research Analyst [29] -------------------------------------------------------------------------------- Okay. But how should we understand that bridge then where you normalize and you add your $9 million of c COVID costs, if you're saying that some of those costs were actually in the second half? -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [30] -------------------------------------------------------------------------------- Potentially, if you ignore over costs and you back you back now essentially I'm saying what you want to do is take off probably about another $4 million, $5 million, and that's probably the cost growth you'll get for next year. -------------------------------------------------------------------------------- Aaron Ibbotson, Forsyth Barr Group Ltd., Research Division - Research Analyst [31] -------------------------------------------------------------------------------- Okay. Perfect. And then just coming back to the development margins. So what -- I'm just curious to know, I mean, if we look at -- you had 3% price increases at the beginning of this year and presumably, there might be another one, I don't know. But overall, HPI has, I guess, we've added out being a bit better than you anticipated. So I'm just curious if there's an offset on construction expense or something like that, that sort of needs you to guide towards the lower end of the 2025 because sort of "all else equal," I would have assumed that things look a little bit better than you anticipated when you started construction and tendered for these things. So why would we not be tracking towards the upper or above the upper end of that? -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [32] -------------------------------------------------------------------------------- Yes. Like, look, context, I didn't provide any sort of guidance on that range. I'd have said it'll still expected to be within that 20% to 25% range for this year. So we haven't provided necessarily the views around would it be up or lower. I do think in some senses that it will be -- you should see it go up a little bit. So I would expect quite being more likely than the bottom into that range. But like I can see, we've got 12 months ahead of us. We're being pretty conservative around and we said around that pricing of unsense coming out, let staff prices drastically would rather have an increased buffer between residential house prices and sale prices. And as Julian said, sort of a while back at the start of the conversation, that obviously supports more people being able afford to come into our villages and the nice life and averages, so we'd rather keep stock levels down and have a bias towards that and recycle that capital quicker. -------------------------------------------------------------------------------- Aaron Ibbotson, Forsyth Barr Group Ltd., Research Division - Research Analyst [33] -------------------------------------------------------------------------------- But sorry, can I just clarify, on Slide 25, you said that for FY '21, we expect development margin to be at the lower end of the medium target range. Is that a misunderstanding then from my side or? -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [34] -------------------------------------------------------------------------------- Yes, I'm just saying like that debt is the start is in the start of the year. So if you expect to get a little bit more HPI coming in, it could be nothing better than that. But obviously, such a period of time, how the market is going to do this year. So yes, it could be anywhere between low end and mid-range. I think and essent question really is what's the housing price market going to do? And how much of that ever going to pass on, and I think as I said would specifically conservative around that. -------------------------------------------------------------------------------- Operator [35] -------------------------------------------------------------------------------- (Operator Instructions) And your next question comes from the line of Bianca Fledderus here from UBS. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [36] -------------------------------------------------------------------------------- It's Bianca here from UBS. So just a follow-up question around construction costs in New Zealand. Could you just give an indication of what sort of trends you're seeing here? And also what the difference is in construction costs in city centers and the regions in New Zealand? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [37] -------------------------------------------------------------------------------- Well, high level, I think we're still seeing a reasonable degree of cost pressure in Auckland, a little quite strong cost pressure in Wellington, risk of the country not too bad and the max at a quantum of 4% to 5%. Is sort of the average you sort of expect cost pressure to sort of be maintained that. And that's our sort of our sense as a feel of what we're seeing at the moment across the board. But obviously, like higher in some reasons than others by 4% to 5% on average. -------------------------------------------------------------------------------- Bianca Fledderus, UBS Investment Bank, Research Division - Analyst [38] -------------------------------------------------------------------------------- Okay. Great. Yes. And then also just a question on just a new sort of care suites and memory care apartments. So traditionally, after construction and sell-down of a new village, the village would try to be slightly cash positive. And so with the new concept of care suites and memory care apartments instead of care beds, do you see a change in the net cash position here at the end of construction and sell down? Like could you give an idea of how much that has improved by if it has improved at all based on Casebrook and Rototuna? -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [39] -------------------------------------------------------------------------------- Yes. So just as context, the case for promoters, it's even ours on each one of those sites that we are applying that model to. So you're talking sort of like you got $1 million to $2 million on each side. But obviously, as Julian said, there's sort of a question in front of the company as to whether we sort of progressively as a higher quality relook fit-out to each one of those units and some of the future deliveries of new main buildings going forward. So -- but I think in the case for quite a 7, you might see us start to lift those summers over a period of time. And then obviously, we'd increase that cash recycling proportionately. At the moment, it's not a drastic effect on those 2 sites. It's $1 million to $2 million. -------------------------------------------------------------------------------- Operator [40] -------------------------------------------------------------------------------- And your next question comes from the line of Shane Solly. -------------------------------------------------------------------------------- Shane Solly, Harbour Asset Management Limited - Director & Portfolio Manager [41] -------------------------------------------------------------------------------- And us, I just want to say thank you very much, Julian to your fantastic stewardship, while you've been meeting some of you leaving in a great shape. Just 2 quick questions for me. Firstly, the Retirement Commission white paper. I wondering if you've had any comments or thoughts on that? And secondly, just what would you need to do? Or how quickly could you accelerate Victoria, if you actually got a sense that you're getting some real traction there, how quickly could you start rolling it out? -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [42] -------------------------------------------------------------------------------- Thanks Shane, and thanks for that. I'll cover white paper and then Scott, cover Victoria. Look, the -- I mean, we are preparing a submission on that paper, the returnable association's obviously prepared or we'll be preparing submissions as well. And I think that's a discussion which is going to happen over the next few months, stepping back and looking at the regulation of appropriate. But we do think there are some areas which can be tidied up there mainly around things like maintenance whose responsibility is it for repair and maintenance or things within units some tightening up around complaint processes to make things faster and speedier and a bit more easy for residents to access and potentially some sort of tightening up around some of the sort of hygiene factors like continuing to charge weekly fees after exit. We do not, but some operators, typically smaller ones do. So look, we do think there are some areas for tie up the for some of the broader questions, sort of interesting DMF levels, capital gain sharing they're pretty fundamental to the model. And often, they're not really the source of resident complaints on dust satisfaction from what we see, what residents where they feel unfairly treated. And what particularly, if you'll agree as when complaints listen to when they're stoning for small charges, which they don't believe they should pay, such as a repair or another or something like that, just not there oven. It's the operators of the and that's the sort of day-to-day stuff, which actually fits you like the most and is the biggest source of kind of grievance and complaints within center. So we sort of feel that's properly where things will go and I think, again, on sort of capital gains in detraction. And so the point we make pretty strongly, well, firstly, no one has to come to village. It's everybody's choice to come to a village and you decide whether you be coming in, whether you get the value you receive or not. Number two, it's not a financial investment like buying your home. When you buy your home, the general expense, it's going to go up in value over time when you're buying into a unit. What you're purchasing and what you are paying for is the security, the companionship, the care center, the Bowling green, the 24-hour staffing, et cetera, et cetera, et cetera. That's what you're actually purchasing. And hey, there is a cost that comes to that. And model that we run allows us to keep our upfront costs entry costs very low. It allows us to keep our weekly fees very low if the back end, you've got 10 good were those things would change, and we do think that would be to the detriment of people in a wider sense. So I think over time, those issues will sort of should be dealt with appropriately. But certainly, we do believe that we'll be -- there is a bit of tidy up that could well serve the sector end residents more broadly in a positive fashion. And I'll hand it to Scott to cover Victoria. -------------------------------------------------------------------------------- Scott Grady Scoullar, Summerset Group Holdings Limited - Deputy CEO & CFO [43] -------------------------------------------------------------------------------- Shane, you look -- Australia, with Victoria and stuff, essentially, for us to do the thing, really, to do here is start to build our land bank profile, and so you can see that with us talking about our 3 sites this year here. And then, obviously, we would like to keep doing that in the years to come. And then obviously, from beyond that point, we need to kind of then start consenting at sites. So is this a part what we've strung in New Zealand in the last 2 or 3 years with that regional sort of part that we need to kind of do to build that sort of that profile really to kind of construct in Australia. So look, you're not going to see us aggressively lifting build rates next year or the year after. That's going to take us probably a couple of year period ready to go through and start pushing land and get resource consents went underway, but no need to be impaired. Obviously, we've got Cranbourne underway that will probably deliver more like 40 or 50 units, I suspect next year. And in the following year, you'd have a main building delivery on top of that, but you're probably not going to be getting out until '23, '24 before you really see the benefit of that. Banking and net resource continuing sort of start kicking into that build rate. Does that make sense? -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- (Operator Instructions) There are no further questions at this time. Julian, you may continue. -------------------------------------------------------------------------------- Julian Cook, Summerset Group Holdings Limited - CEO [45] -------------------------------------------------------------------------------- All right. Well, thank you very much. And look, thanks, everyone, for your time on the call today. Look, as always, get hold of either Scott or myself after this if you've got any more questions, and appreciate your time and talk later. Thanks. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- Thank you. And that does conclude our conference for today. Thank you all for participating. You may now disconnect.