Stockland announced their 1H19 results this morning. Conditions remain challenging for the group with a deterioration in housing market conditions, reduced credit availability, political uncertainty and weakening consumer sentiment all weighing on performance. This will likely see the group’s full-year results at the lower end of FFO (an earnings/ cashflow measure) guidance range of 5-7% growth per security. 

Three key takeaways from the half-year report

1: Residential market conditions are deteriorating, however, Stockland is well positioned

Residential market conditions present as a challenge for group with tightening credit conditions and slow wages growth impacting home buyer activity. Despite this, Stockland is well positioned to respond to these challenges.  

Settlements remain on track; cancellation rates remain below the long-term average and default rates are stable at around 3%. Stockland also settled 2,460 lots over the period and have guided to a total 6,000 settlements by FY19.

Profit margins remain stable, and Stockland expect these to be around 18% in FY19 and around 17% for the medium term. We do not expect the forecast FY19 distribution of 27.6cps to come under any meaningful pressure.

In the current lending environment, Stockland is also well-positioned with a resilient buyer profile comprised of 50% first home buyers and 87% owner occupiers and a portfolio of residential projects all located in high demand key growth corridors of Sydney and Melbourne. 

2: Stockland is repositioning the retail portfolio

The retail market continues to experience a number of challenges including tenant administrations, pressure from low-income growth and increased statutory and operating costs.

Stockland is not immune to these conditions and this was evident in today’s result.

Over the period, the Stockland retail portfolio reported comparable retail FFO growth of -1.1% on the back of asset remixing and higher outgoings.  Leasing spreads remained negative over the period with -2.6% rental growth on new retail leases and specialty sales productivity declined moderately.

Stockland are aware of retail portfolio shortcomings and are increasing their focus on improving the retail portfolio.

To date, the group has divested $113m of non-core retail centres over the first half and remain on track to achieve their $400m retail divestment target. Stockland have also guided to a further $600m of divestments over time.  

3: Repositioning the Retirement Business

Over the period, the retirement division reported an increase in operating profit of 8.3% which was driven by an increase in average re-sale price.

Total settlements were down 12.5% on the prior period, largely reflecting a deterioration in the broader housing market. 

Pleasingly, Stockland have taken a detailed overview of the retirement portfolio and have commenced the process of divesting non-core assets and are seeking a capital partner to broaden their capital base to improve overall portfolio performance.

A 7.5% dividend yield and a 12% discount to NTA

We remain supportive of Stockland in a clearly challenging market. Incremental retail asset sales, continued performance in the residential portfolio and the implementation of a share buy-back are steps in the right direction.

The group’s focus has now very much pivoted to one of portfolio improvement through redevelopment and divestment of non-core assets, capital management in further share buybacks and broadening of the capital base to improve portfolio performance.

Over the next period, we will be observing progress made on improving portfolio quality and leveraging capital partners to deliver earnings growth.  

At a 12% discount to NTA and a 7.5% dividend yield, Stockland offers value and the dividend provides some support amidst challenging market conditions. 

The market is overlooking some basic fundamentals

The general market is negative on the group’s performance, strategy and prospects.

Stockland is currently trading at a 12% discount to NTA and has returned 1.50% year-on-year against the benchmark S&P/ASX300 Property Accumulation Index which is up 21.90% in the same period.

Despite large exposure to passive earnings from their office, logistics and retail properties the stock is thought of as a proxy for the Australian residential market. This is reflected in the current share price.

We view the market as overlooking these realities. The fact remains, Stockland’s key markets of Sydney and Melbourne are still experiencing solid population growth and are both undersupplied.

After a sustained period of growth, we recognise that current sales rates and margins are likely to normalise to historic levels. While there may be cyclicality in demand and pricing, the fact remains that Stockland has positioned itself extraordinarily well holding residential assets on capital efficient terms and in attractive and well-located defensive markets. 

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Disclaimer: This article has been prepared by APN Property Group (ACN 080 674 479, AFSL No. 237500) for general information purposes only and without taking your objectives, financial situation or needs into account.