Company Interview / Ingenia optimistic on long-term growth despite profit drop

John Carfi, CEO of Ingenia Communities Group (ASX: INA) provides a detailed analysis of the company’s results after a reported 78% drop in full-year profit despite a 20% growth in revenue. According to John, this significant fall in profit is primarily due to a goodwill impairment on a portfolio they bought in 2021. The value of the goodwill, reassessed on a discounted cash flow basis, had minimal value left, leading them to write it down.

Turning to the company’s plans moving forward, John outlines a strategic shift in focus. Ingenia Communities Group (ASX: INA), which had focused on raising capital and buying assets, is now turning its attention towards stabilising, executing to create assets and generate growth through internal resources. John anticipates that future growth will primarily be organic, with the company's development pipeline boasting about 5300 lots that are already approved and ready for production.

Considering the challenges faced by Ingenia Communities (ASX: INA), John articulates various factors that led to projects remaining below target. He assures, however, they have plans in place to defer and unlock value from these projects. Addressing other issues such as planning constraints, supply constraints and the constant challenges in accessing greenfield developments, John confidently states that with patience and the right skill set, there are still good opportunities to be had. Notably, John also expresses optimism about the domestic travel sector despite existing challenges.

Full unedited transcript below:

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Julia Communities has reported a 78% drop in full year profit to $14 million revenue growing 20% to $472 million. The company has declared a distribution of 11.3 cents a share, and is targeting an adjusted earnings growth of between 10 and 15% for the next year. It said that the short term outlook has moderated due to uncertain macroeconomic environment, but long term drivers remain in place. Let's get some further detail off the back of that report. John Carthy is the chief executive of engineer. He joins us now. John, welcome. Thank you Andrew.

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How would you describe that result given obviously that sharp fall in profit. What's that attributed to you. So the statutory profit was down significantly. And that's mainly because we took a goodwill impairment on a portfolio that we bought a few years ago. I think back in 2021, when we assessed the the value of that goodwill on a on a discounted cash flow basis, we determined there was minimal value left and it took the opportunity to write that down. You've only been in the job five months. How would you describe what you inherited and what you've tried to put in place in that short time? Well, that's a good question. I haven't been asked that before, Andrew. So great question. I suppose what I inherited is a is a business in a really good sector that sort of, you know, uh, um, retirement living sector for, for want of a better word, or land lease, which is growing in Australia with good sort of fundamental macroeconomic and demographic drivers behind it. So there's a structural undersupply of housing. We've got an ageing demographic and

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affordability is an issue. So it allows retirees to unlock equity in their homes. So fundamentally a good sector. But I suppose probably the most significant thing stepping into in junior and junior had been like an asset aggregator from its inception. Then over the years, raising capital and and buying assets, and probably at a point in time it needed to stabilise and start executing to create assets and generate growth for, you know, its own internal resources. And that's probably the biggest strategic pivot. Uh, the other thing we've been able to look at is just, you know, fundamentally how we allocate capital and where we think the growth of the organization will come from here. But think of it more as organic growth from this point. So what's your development pipeline look like? So we've got a development pipeline of about 5300 lots. The bulk of that is sort of, you know, approved and almost ready to go. So at various stages of, of production, that gives us a pretty good supply, well over five years worth of

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supply. And we'll be looking to restock it, but selectively and sort of over that year six to year ten. I see you've pointed out that you're seeing development returns for some projects remain below target. Why is that and how are you going to try and turn that around? Yeah. Look, there's a million reasons and every project has got its own story. But you know, various things in some cases, perhaps we not might have been as diligent as we could have been in acquiring in some cases, we you know, we've discovered something through the post acquisition that perhaps our assumption didn't come through. So, you know, in looking at all of those and where those assumptions have been made, we've decided just to, you know, push or defer those projects for now while we are trying to unlock value. And that sort of stops us investing in, you know, lower, lower returning assets in the short term while we take some opportunity to try and unlock those, and we might unlock those through planning, we might unlock those through, uh, combining adjoining sites to create better efficiencies or a million things we can do or try and reduce the cost of surrounding infrastructure. So we're pretty confident we'll still bring those

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online. We're just going to defer those in Australia. Well, the government has set out that that ambitious plan of building some 1.2 million homes by by the end of the decade. Where do you think you fit into that picture, and are you finding some roadblocks there? Certainly other developers have just in terms of certainly planning controls, um, construction issues. Obviously, with those costs, builders going broke, there are a lot of obstacles at the moment. Absolutely. All of the above, right. So. So we're not immune? Um, we have planning constraints. Obviously there are supply constraints and all that. Probably less so supply constraints. Now, I think we've been through the worst of it in our sector, although there's still some heat in the Queensland market. But look we fit into it because you know it's all part of the puzzle. We need to provide effectively seniors living, seniors living unlocks, you know, the home that those people have been in for the last 30 years, for new home buyers or second home buyers. It's all part of the puzzle. And I think most governments, both at the federal and state level, recognize that

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some councils are being proactive around that to ensure that it's developed as part of that mix of product needs. So they've been pretty proactive. But, you know, quite often the bureaucracy makes it a little bit difficult, um, to unlock within a reasonable timeframe. Yeah. So are you seeing I mean, how readily is it to access those greenfield developments? Um, just I mean, I guess it depends on where you are in the country, doesn't it? It depends on where you are in the country. But in the areas where demand is there, it's difficult. Um the ones where someone has invested the time and effort in terms of unlocking, planning and getting them, you know, shovel ready. They're too expensive to buy and we don't need to. We've been thinking more about, you know, things to backfill for year five, year six, year seven. Those are still readily available, but they come with challenges that you need to unlock. So provided you've got the skill set and the patience to unlock those, though, there's still some good buying opportunities. So you talk about those tailwinds. Obviously we're seeing in seniors housing obviously because of Australia's ageing, rapidly ageing population. What about domestic travel sector.

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How is that looking for you. It's looking pretty good. And I think, you know, once again some of the macro factors are probably supporting that you're seeing. Obviously overseas travel is getting very expensive and a cost of living crisis. We've had some fundamental breakdown in the airline industry with some of the regional flies, you know, struggling with with solvency issues. And, you know, so to pack the car up with, with the the kids or the grey nomads to get in the car and travel to one of our destinations for three and a half to four hours is probably becoming more appealing. The only thing we've found recently is there's probably a trend towards slightly shorter stays. So if they were staying 3 to 5 days before, they're sort of saying, you know, 2 to 4 days now, and that means, you know, your cost of cleaning and linen on a per night basis goes up slightly, but still pretty strong. And forward bookings are looking very healthy. Now, I gather that you lost some communities as a partner. Essentially what it sold down a 10% stake in the company. Um, but it's saying it's going to be a development partner until

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2030. And then you're saying you're talking to other parties about filling that gap, if you like. Can you just bring us up to date with with that development? Yeah. So it's probably not quite there. So they did have a headstock position well before my time. They had a liquidity event they needed to solve. And that caused them to sell the stock down. So they're no longer a shareholder. We still have a partnership with them in the land lease development space, and we're happy with that partnership. They're a great partner, probably not something that they or us are looking to grow, where we're looking to grow partnerships. We want to invest more capital into land lease Development. So partnerships for us will come in other parts of the business, whether that's our retirement living business, our gardens, uh, portfolio or in the tourism portfolio, where we might introduce strategic partners to unlock capital there for reinvestment into into land lease

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overall. Then, John, what's your guidance for the year ahead? We're we're sort of guiding 10 to 15% growth. That's driven fundamentally by by development lot production and sales. Where do you see given what's going on on a macro level, uh, the prospect that interest rates in Australia are going to remain on hold, it would seem, until the end of the year, uh, with the prospect, perhaps we will start to see a cut sometime next year. Yeah. Um, how are you adjusting for that? Yeah. I don't know that anyone's got the interest rate forecast right, so I'm definitely not going to go there. But we've, you know, we've, uh, secured some additional hedging for next year. We're pretty comfortable with the debt and the debt pricing, but we'll be edging up in the cost of debt and also be drawing down more debt over the next 12 months, but sort of well within reasonable limits for us.