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Stockland’s third quarter market update highlighted that Group results remain on track for FY19 but their outlook is challenging with weakening residential markets and negative retail rental reversions likely to impact the business in years to come.
Stocklands strategic decision following the GFC to focus on residential, retirement and retail and to steer clear of commercial and logistics assets is coming home to roost with an insufficient buffer in the business to overcome the combined weakness across the three assets classes.
The market has moved against Stockland with the share price falling -10.9% over the past 12 months whilst the AREIT 200 Index is +10.9% higher over the same period. (See chart below)
The business is suffering from negative retail rental reversions despite comparable specialty sales are up 3.8% for the year to 31 March 2019 at $9,253 per square metre. This is lower than the 4.8% increase reported in the 12 months to December, reflecting a more recent deterioration in sales as has been reported by other REITs.
Stockland have taken a clear view of core and non-core assets, defining core assets as leading town centres with strong and growing trade areas with limited competition, and where they have the opportunity to enhance the asset to generate sustainable income growth over time. Other assets are likely headed for exit.
Managing Director and CEO Mark Steinert said: “We are delivering on our strategic priorities, having achieved a cumulative $284.5 million of non-core retail town centre divestments, and are actively progressing capital partnering opportunities across all sectors represented in our business.
In the residential business, Stockland have seen sales decline by 26% below the second quarter and are expected to remain weak for calendar year 2019, with risk to the downside given current challenging market conditions, reduced credit availability and buyer uncertainty due to the upcoming Federal election. Stockland believe that they will remain on track to complete over 6,000 residential settlements over the full year, and achieve an operating profit margin over 18 per cent, however with cancellation rates increasing and sales decreasing there is a risk to achieving these results.
In the retirement business, Stockland have seen an improvement in development sales in response to new high-quality product choice and re-pricing strategies, however established village net reservations were down marginally for the period, and continue to reflect lower volatility in the retirement village sector in comparison to the established housing market. Stockland are continuing to progress discussions for a capital partnership for our retirement living business, but not deals have been completed.
Stockland are reshaping the business to increase their exposure to include more workplace and logistics with a targeted 25- 35 per cent of our total assets in the next five years. They hope to via achieve this via a development pipeline, the recent completion of the Willawong Distribution Centre in Brisbane during the period is an example of this.
As the business is trading at a discount to NTA, Stockland are progressing a securities buy-back with $169 million of $350 million buy-back target completed.
Stockland expect FFO growth per security to be around 5 per cent for the full year, at the lower end of previous guidance range reflecting weaker market conditions, and are targeting a distribution per security of 27.6 cents, representing 4 per cent growth on FY18, assuming no material deterioration in current market conditions, however the market is well aware that conditions are unlikely to improve in the short term.
SGP Trading Chart vs ASX200 AREIT Blue - SGP, Purple ASX200 AREIT