Stockland Results Point to Softening Residential & Retail Markets
Stockland announced their financial results for the half year ended 31 December 2018 revealing the beginning of the impacts from the slowing residential and retail markets with signs of worse to come.
CEO Mark Steinert expects the impacts from further price declines in residential land of around 5 per cent over this calendar year, (concentrated in Sydney and Melbourne) and ongoing headwinds in the retail sector to see their full year results at the lower end of our guidance range.
Stockland have also negotiated a higher LVR covenant of 50%, (currently at 26.4%) perhaps in anticipation of a softening in valuations.
Profit margins on its residential developments will increase to more than 18 per cent this year (implying valuations will likely fall), and around 17 per cent for the medium term before normalising to around 14 per cent over the long term.
Stockland sold about $113m worth of shopping centres in 1H19 and said it would look to sell $400m over the next 18 months with another $600m worth of centres on the block in future in attempt improve its asset base.
The group intends to bulk up its industrial portfolio from 21 per cent of its portfolio to a range of 25-35 per cent with a focus on acquiring assets which one day will convert to future residential sites.
Funds from operations (FFO) of $407 million, down 6.7% on 1H18 reflecting residential profit skew to 2H19
FFO per security of 16.8 cents, down 6.7% on 1H18
Adjusted funds from operations (AFFO) of $352 million, down 6.9% on 1H18
AFFO per security of 14.6 cents, down 6.4% on 1H18
Statutory profit of $300 million, down 56.2% on 1H18, reflecting losses on financial instruments, reduced commercial property valuation increases relative to 1H18, retirement living fair value changes and a tax expense (1H18 included a tax benefit)
Return on equity (ROE) of 10.6%, down 60 basis points on FY18, excluding workout projects
Net tangible assets (NTA) per security of $4.19, up 0.2% on FY18
Distribution per security (DPS) of 13.5 cents, up 3.8% from 1H18
Gearing: 26.4%, and Covenant limit now 50%, from 45%
Weighted average debt maturity: 5.3 years, compared to 6.2 years at FY18
Weighted average cost of debt: 4.4%, compared to 5.2% in FY18
FFO: $314 million up 3.8%; comparable growth of 1.7%
Retail FFO: $218 million up 4.3%, comparable growth down 1.1%
Comparable specialty sales per square metre growth of 4.8%, total foot traffic up 4%
Logistics FFO: $81 million, comparable growth of 4.5%
Workplace FFO: $24 million, comparable growth of 10.5%
Residential: Operating profit: $142 million, down 21.8%, operating profit margin: 21.6% compared with 20.9% for 1H18
Retirement Living: Operating profit: $20 million, up 8.3%
Outlook for FY19
FFO per security growth for FY19 is expected to be around 5 per cent, at the lower end of our 5- 7 per cent guidance range, reflecting weaker market conditions. This assumes no material deterioration in current market conditions.
Reaffirming an estimated full year DPS of 27.6 cents, a 4% increase on FY18, assuming no material deterioration in the current market conditions.
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