Stockland Corp Ltd (ASX: SGP)
Last Price: AUD: 4.26|Fair Value: AUD: 4.32
Business Strategy & Outlook
Stockland generates about two thirds of funds from operations, or FFO, from its commercial property portfolio, which is roughly two thirds retail property, the rest industrial and some office. Another third of earnings come from residential development. The development business is cyclical and its contribution to earnings swings substantially, while the commercial rental business is relatively stable. The earnings from the residential business will moderate as stimulus measures such as Homebuilder wash out of the pipeline. In late 2021, Stockland revised its target asset mix, reducing retail assets, and increasing exposure to office, industrial and residential. The new target is about one third in residential (up from 15%), one half in office/industrial (up from 35%) and less than one third in retail (down from 50%). The office and industrial as fully priced in 2019, but the move has sidestepped some of the COVID-19 damage to retail property. Stockland continues to divest retail property but faces a choice of selling assets in the near term while recent coronavirus lockdowns weigh on values for retail assets, or holding out for recovery, but facing the risk of the ongoing structural shift to e-commerce. The group’s strategy of remixing toward food, services and entertainment gave early payback, but since mid-2019 that tactic is saturated.
In residential, tougher market conditions should enable Stockland to gain market share. It is Australia’s largest residential developer, usually selling between 5,000 and 7,000 land lots per year, and some smaller players will exit or slow down. That said, the pressure on the large players, and don’t expect the scorching volume growth of 2014-18 again within the 10-year discrete forecast period. Stockland acquired Halcyon in July 2021, significantly stepping up its exposure to the land-lease communities’ business.
Financial Strengths
Stockland is in good financial health, with gearing (net debt to assets) of circa 18%, as at June 30, 2022 (pro forma adjusted for the sale of Stockland’s retirement living business in July 2022). This is below the group’s targeted range of 20%-30%, but the gearing will rise as the commercial property values are expected to be marked down by valuers. Stockland will redeploy capital raised from recent disposals, into further acquisitions, particularly in industrial, and into office developments at North Sydney and its Piccadilly site in the Sydney CBD, plus the recently closed Halcyon purchase. While debt is lower than many other REITs, that is appropriate, given exposure to development activities. Stockland’s debt metrics could deteriorate if earnings from the cyclical residential division took a major hit, though this is unlikely given the level of precommitments and deposits Stockland typically obtains before commencing major construction works. The group could be exposed to refinancing risk if interest rates or credit spreads rose substantially. However, its average cost of debt was a remarkably low 3.4% for fiscal 2022 and about two thirds of debt is hedged, meaning the impact of higher rates is likely to be felt gradually over a number of years. Given a weighted average debt maturity was 5.3 years as at June 30, 2021 this is not a major threat. Cash and undrawn debt lines totalled about AUD 2.2 billion, providing further financial flexibility.
Bulls Say
Company Description
Stockland is Australia’s largest housing developer, and this division generates about a third of the group’s funds-from-operations. Nearly two thirds comes from commercial property, mostly retail. It also has a growing land-lease business. The mix is evolving. Earnings from the residential development division are volatile and it is expected growth to moderate there. In commercial property the group is trimming retail and adding office and industrial via acquisitions and developments. Stockland-stapled securities comprise one share in the corporation that largely operates developments and one unit in a trust that holds the property portfolio.
(Source: Morningstar)
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