Stockland announced its first half results for the 2019 financial year.
It’s safe to say conditions remain challenging. A deteriorating housing market, tighter credit, political uncertainty, slow wages growth and weakening consumer sentiment have weighed on performance.
As a result, Stockland’s full year results will probably arrive at the lower end of its guidance range of 5-7% growth per security on funds from operations.
Here are the three key takeaways from this half year result:
1.Residential market conditions are deteriorating but Stockland can deal with it
Despite tough residential market conditions, settlements in the company’s development activities remain on track. Cancellation rates remain below the long-term average and default rates are stable at around 3%.
The company also settled 2,460 lots over the period with a forecast of 6,000 settlements this financial year. Profit margins remain stable, expected to be around 18% for the full year and about 17% for the medium term. This isn’t the impression you’d get from reading the papers but there it is.
With a buyer profile comprising of 50% first home buyers and 87% owner occupiers, and a portfolio of residential projects located in high demand, key growth corridors in Sydney and Melbourne, the forecast FY19 distribution of 27.6 cents per share should not come under much pressure
2.Retail portfolio more of a challenge
The retail market continues to experience a number of challenges, including tenant administrations, pressure from low income growth and increased statutory and operating costs. This was clearly evident in today’s result.
Due to asset remixing and higher outgoings, Stockland’s retail portfolio reported comparable retail FFO growth of -1.1%. Leasing spreads remained negative with -2.6% rental growth on new retail leases while specialty sales productivity declined moderately.
Stockland is aware of the portfolio’s shortcomings and is increasing its focus on improving it. The group has divested $113m of non-core retail centres over the first half and remains on track to achieve its $400m retail divestment target. The company has also forecast a further $600m of divestments over time.
3.Retirement business being restructured
The retirement division reported an increase in operating profit of 8.3%, driven by an increase in average re-sale prices.
Total settlements were down 12.5% on the prior period, largely reflecting a deterioration in the housing market. To better endure difficult trading conditions, the company has already reviewed its portfolio and has begun divesting non-core assets. It is also seeking a capital partner to broaden the capital base to improve overall portfolio performance.
What is the APN investment view?
This is a challenging market. Stockland should be applauded for tackling these difficulties head on. Incremental retail asset sales, continued performance in the residential portfolio and the implementation of a share buy-back are sensible steps.
The group’s focus is now on portfolio improvement through redevelopment and divestment of non-core assets, capital management in further share buybacks and a broadening of the capital base. All things being equal, these measures should show up in higher earnings growth in the next reporting period.
What is something the market is overlooking with this company?
That being the case, at a 12% discount to NTA and a 7.5% dividend yield, Stockland offers value whilst the attractive yields delivers shareholders a reason to hang on during challenging market conditions.
Despite a large exposure to passive earnings from its office, logistics and retail properties Stockland is thought of as a proxy for the Australian residential market. That view is reflected in the current share price but misunderstands the reality. Stockland’s key markets of Sydney and Melbourne are still experiencing good population growth and both are undersupplied.
Stockland is well positioned, holding residential assets on capital efficient terms in attractive and well-located, defensive markets, whilst building value in its retirement and retail businesses.