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Stockland Profits down -69% and no Earnings growth expected in FY20

August 21, 2019

 

Stockland have reported a significant profit slump in its annual results announcement this week. Whilst adjusted earnings were up 4.2%, statutory profits were down -69% due to lower valuation gains and losses on mark to market derivatives.

 

The FY20 outlook is also mixed with retail and residential markets providing no signs of growth for the business in FY20.

 

Retail

 

The headwinds in the retail sector are being felt in the Stockland portfolio. The need to remix Centre's away from discretionary retail continues with the lower rents and higher capital costs now a reality for Stockland. 

 

Valuations in the shopping centre portfolio were down -$474m driven in part by an 11bps softer cap rate but mostly due to lower forecast rental growth rates, changes to rental income and capital cost re-forecasting which will be required to remix tenancies and renew some leases at more sustainable levels.

 

The results also show that rental growth for renewing tenants is down -1.9% and for vacancies are down -4.4% with average incentives stable at 15.3%. Comparable sales growth in the Centres was 2.3% with specialties at 1.8% and Supermarkets at 3.1%. 

 

The Group has delivered on its plan to divest $400m of retail assets with $505 million of  divestments (Bathurst, Cleveland, Caloundra South, Kensington and Toowong; with contracts exchanged for Tooronga and Cammeray in July, and Jesmond in August). A further $500 million of non-core retail divestments have been identified for disposal.

 

 

Workplace & Logistics

 

The shift toward a 25-35% weighting toward Workplace and Logistic assets continues with 23% of the portfolio now exposed to these sectors. The group has completed a deal with Oxford to acquired their 50 per cent share of Stockland Piccadilly for $347 million, following the sale of 50 per cent share in 135 King Street, Sydney for $340 million.

 

The Group have generated strong comparable FFO growth of 10.4% from a mostly Sydney centre property portfolio. Rental growth on new leases has been at circa 18.2% with occupancy improved from 88.3% to 94.7%.

 

In the Logistics space, Stockland have comparable FFO growth of 3.9%, completed $99m developments at Yennora, Ingleburn and Willawong over 78,000 sqm GLA with risk adjusted IRRs over 10% and FFO yields above 7.5%. The group has secured a $1bn pipeline of development opportunities including:

  • 260 hectare Melbourne Business Park; 87 hectare planned subdivision DA lodged for stage 1

  • 3 hectare M_Park Business Campus; 55,000 sqm NLA opportunity

 

Residential

 

Stockland report a noticeable increase in enquiry in Sydney and Melbourne following the Federal election and interest rate cuts. Buyer access to credit remains challenging, impacting conversion and settlement timeframes and excess stock is expected to take time to clear.

 

Stockland settled 5,874 lots (down -8.7% from 6,438 in FY18) with a 7% default rate and disposed of The Grove (VIC), a 2,500 lot estate and Merrylands Court (NSW) a 560 apartments and retail development adjoining Stockland Merrylands. Stockland also confirmed a 50% sell down of the $5 billion Aura mixed use community on the Sunshine Coast at a 30% premium to book value, with Capital Property Group in July.

 

The business maintains a 76,000 lot landbank with an average age of 10 years, skewed towards rail serviced growth corridors in Sydney and Melbourne.

 

Retirement

 

The challenging residential market is also impacting Stocklands Retirement Village business with fewer settlements and lower pricing for its established homes and new projects. In FY19 Stockland settled 566 established homes down -8.4% on FY18.

 

The fair value of the portfolio was reduced by $53m due to repricing of stock to meet current market conditions and changes in the growth rate and vacancy assumptions.

 

Stockland maintain over 3,500 total development units in the pipeline and are offering a broadening range of products, traditional retirement villages, vertical retirement villages and land lease communities, as the business seeks to diversify away from the DMF model.

 

The business sold three non-core retirement living villages for a combined total of around $60 million (Burnside Retirement Village, Taylors Hill Retirement Village and Keilor Retirement Village in Melbourne)

 

 

Capital

  • Gearing 26.7%, within 20-30% target range

  • Weighted average cost of debt 4.4% for the period, weighted average debt maturity 5.8 years

  • Maintained investment grade credit ratings of A-/Stable (Standard and Poor’s) and A3/Stable (Moody’s)

  • Renegotiated debt documentation to borrowing capacity, with key terms and conditions updated in line with the market and peers

  • Completed $192 million of $350 million buy-back of Stockland securities to help support the resilience of securityholder returns into the future

Outlook

Stockland forecast no growth in FFO per security for FY20, due to ongoing challenges in the residential and retail markets.

 

 

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