Stockland delivered a statutory profit of $1.1 billion, up from $(21) million in FY20 due primarily to changes in valuations in Logistics and Town Centre assets over the past 2 years.
In 2020, valuation write downs, primarily in the Retail Town Centres, wiped off $452m in profit, whereas in 2021 valuation gains in the Logistics portfolio added $433m to statuary profits.
The more relevant metrics in terms of performance of the REIT is its annual earnings which was lower than previous years. Stockland delivered earnings FFO of $788 million, -4.6% lower than FY20, with FFO per security of 33.1 cents at the top end of the guidance range of 32.5 to 33.1 cents per security provided by the Group.
Managing Director and Chief Executive Officer, Tarun Gupta said: “Our performance in FY21 reflects strong sales growth across our Communities business, the resilience and quality of our Retail Town Centres and the successful ongoing execution of our Logistics, Life Sciences & Technology development pipeline. In July 2021, we announced the acquisition of the Halcyon Group’s land lease communities business, which accelerates our land lease strategy and is immediately accretive to FFO per security.”
A distribution of 24.6 cents per security was declared, 2.1% above FY20, representing a payout ratio of 75% of FFO (up from 70% in FY20).
Stockland is a transitioning business. The continue to allocate more capital to Logistics, Life Sciences & Technology and to Residential Communities and Land Lease Communities. Meanwhile the retail portfolio will continue to require ongoing management, both in disposals and tenancy re-mixing to suit a more non-discretionary offering.
The Residential business reported FFO of $331 million, down -10.9% on FY20, however excluding one off transaction profits, this represents an increase of 20.5%.
Stockland settled 6,374 residential lots in FY21, an increase of 19.8% on FY20, driven by record low interest rates, customer preference shifts towards suburban living, government stimulus and accelerated production. The Group successfully launched two new land lease communities in 2H21 – Aura (QLD) and Minta (VIC) with sales rates for both projects are tracking ahead of budget. The Group also expanded its land lease development pipeline by approximately 1,000 lots during the period (to approx. 4,000 lots) via a combination of site acquisitions and the achievement of additional yield on existing sites. In August 2021, Stockland also completed the acquisition of Queensland based Halcyon Group’s land lease communities business for $620 million.
Group Executive and CEO Communities, Andrew Whitson said: “The strong result from our Residential business demonstrates Stockland’s competitive advantage in masterplanned communities. We expect demand for affordable masterplanned communities product to remain strong through FY22.”
In the commercial business, portfolio occupancy was maintained at 99.1% (versus 99.0% at June 2020) and leasing activity returned to pre-pandemic levels. Stockland concluded 683 leasing deals during the year at an average leasing spread of -6.1%. This represents an improvement versus the 1H21 figure of -7.8%, however leasing incentives and maintenance capex was $48m higher than in FY20, impacting available funds for distributions.
The portfolio delivered comparable MAT growth of 2.3% compared to the 12 months to February 2020 (immediately preceding COVID-19 impacts), Comparable non-discretionary everyday needs MAT growth over the same period was particularly strong at +6.8%.
Group Executive and CEO Commercial Property, Louise Mason said: “The results of our Retail Town Centre portfolio demonstrates the quality and resilience of our assets in the face of the challenging and variable conditions that have emerged since the outbreak of COVID-19 in FY20.”
Managing Director and Chief Executive Officer, Tarun Gupta said: “While varying levels of uncertainty with COVID-19 remain, Stockland is in strong position to respond and adapt. Continuing residential sales momentum, a significant development pipeline and a strong balance sheet, position us well for future growth. As a leading asset creator with end-to-end capability in Communities, Logistics, Life Sciences & Technology, Workplace and Retail Town Centres, we will continue to optimise the allocation of capital across the portfolio and accelerate conversion of our $33 billion pipeline. Accelerating third party capital partnerships is a key focus as we expand our asset and funds under management and grow recurring earnings. With the numerous opportunities ahead, I will be working closely with the leadership group to complete a strategic review of the Group, with a market update on our plans scheduled for late in the calendar year.”
FY22 estimated FFO per security is forecast in the range of 34.6 to 35.6 cents.
Distribution per security forecast to be within our target payout ratio of 75% to 85% of FFO.
Stockland is not on our Top Picks List.
The REIT commenced the year with a security price of $3.31 against a NAV of $3.78 (-12% discount to NAV) and closed the year at $2.78. The REIT provided a 24.6c distribution for FY21, equating to a 7.4% yield, which together with a 40% lift in unit price would provide investors with a total return of 48.2%.
Key financial and operational highlights for the period are:
Financial highlights:
- Statutory profit of $1.1 billion up from $(21) million in FY20
- FFO down -4.6% to $788 million
- FFO per security down -4.6% to 33.1 cents – at the top end of previous guidance (32.5 to 33.1cents)
- Adjusted FFO down -11.5% to $651m due to higher maintenance capex and leasing incentive costs
- Net Tangible Assets (NTA) up 5.3% to $3.98 per security, reflecting positive revaluation gains and strong cash generation
Operating highlights:
- Close to 100% of tenant negotiations for the FY20 Commercial Code of Conduct completed
- 97%3 of FY21 rent collected across the Commercial Property portfolio (96% retail, 99% logistics and 98% workplace), after abatements
Portfolio update
Stockland’s business is broadly focused on 6 operating segments in both Commercial and Communities markets.
Commercial
Commercial Property (which includes Retail Town Centres, Workplace and Logistics segments) recorded comparable FFO of $587 million was up 3.9% as the business stabilised from the initial impact of COVID-19.
As at 31 July 2021, 97% of contracted rent had been collected across the Commercial Property portfolio (96% Retail, 99% Logistics, 98% Workplace) after taking into account rental abatement.
By July 2021, Stockland had concluded close to 100% of tenant negotiations under the now- completed Federal Commercial Code of Conduct.
Recent lockdowns in NSW, VIC, QLD and WA have had a small impact on the business so far in FY22.
Retail Town Centres
The Retail Town Centre portfolio accounts for 38% of the portfolio and delivered FFO of $363 million, up by 5.6% on a comparable basis versus FY20.
Portfolio occupancy was maintained at 99.1% (versus 99.0% at June 2020) and leasing activity in FY21 returned to pre-pandemic levels. Stockland concluded 683 leasing deals during the year at an average leasing spread of (6.1)%. This represents an improvement versus the 1H21 figure of (7.8)%.
The portfolio delivered comparable MAT growth of 2.3% compared to the 12 months to February 2020 (immediately preceding COVID-19 impacts), Comparable non-discretionary everyday needs MAT growth over the same period was particularly strong at +6.8%.
The repositioning of the Retail Town Centre assets over the last three years has underpinned this strong growth, with 75% of sales now generated by essential everyday goods and services.
The business continued to rebalance the portfolio over the period with $495 million of non-core disposals settled over FY21 including;
- 181 Reynolds Road Doncaster East Vic sold to Haben for $155m
- 47 Bowman Road Caloundra Qld sold to Haben for $97m
- Taralgan, VIC sold for $84.5m
- 375 Windsor Rd Baulkham Hills NSW sold to Mintus for $141.3m
- 38 Main Street Nundell QLD sold to Clarence Property for $16.7m
Contracts are also exchanged for the sale of the Bundaberg shopping centre ($140 million) to be settled in September 2021.
For the twelve months to 30 June 2021, the Retail Town Centre portfolio registered a valuation decline of $82 million (-1.4%), with the weighted average cap rate of the portfolio unchanged at 6.1%.
Workplace
Workplace segment accounts for 7% of the portfolio and generated FFO of $60 million, reflecting a comparable growth of 1.0% versus FY20. These asset generally comprise land & buildings for future developments.
The Workplace development pipeline has an expected end value of $3.9 billion. This comprises Piccadilly in the Sydney CBD and Affinity Place in North Sydney.
New leases and renewals generated rental uplifts of 5.8% on average. The Workplace portfolio registered a net valuation decline of $31 million (-3.0%) over the period. The weighted average cap rate of the portfolio firmed by 20bps to 5.6%.
Logistics, Life Sciences & Technology
Logistics, Life Sciences & Technology assets now represent 25% of the Group’s portfolio, with Stockland having increased its capital allocation to the sector by 60% over the past five years.
FFO of $164 million represents comparable growth of 1.0% versus FY20. Leasing demand remains strong, with over 400,000sqm of leases and heads of agreement executed over the year.
The portfolio delivered a net revaluation uplift of $545 million (+19.1%) over FY20, with the weighted average cap rate tightening since December 2020 by 60bps to 4.8%.
The Logistics, Life Sciences & Technology pipeline has an expected end value of $5.5 billion, of which projects with an end value of $1.7 billion are in active development. The initial stage at M_Park has now been 60% pre-leased, with agreements for lease signed with two international organisations and construction has commenced on phase one of the project.
Communities
Residential
The Residential business comprises 22% of the portfolio and reported a FFO of $331 million, down 10.9% on FY20. Excluding one off transaction profits, this represents an increase of 20.5%.
6,374 settlements were achieved in FY21, an increase of 19.8% on FY20, driven by record low interest rates, customer preference shifts towards suburban living, government stimulus and accelerated production.
Net sales volumes were up by 54.2% to 7,700 lots. This represents the highest volume of sales generated by the business in the last four years. The strong customer demand experienced over the first nine months of FY21 was maintained throughout the June quarter and into July 2021.
Stockland landbank equates to 77,000 lots, predominantly on the Eastern Seaboard.
The Residential Operating Profit margin was strong at 18.0% but impacted by the earlier disposal of non-core superlots and higher WA settlement volumes than expected.
With 5,620 contracts on hand at 31 July 2021 the business has considerable visibility of FY22 settlement volumes.
Timing of statutory approvals and construction industry shutdowns are likely to result in the deferral of approximately 600 settlements from FY22 into FY23. Taking into account these delays, the business expects to settle approximately 6,400 lots in the current period, with a target Operating Profit margin of approximately 18.0%.
Retirement Living
Retirement Living comprises 8% of the portfolio and generated FFO of $54 million, down 6.9% versus FY20. The decline reflects reduced development settlement volumes due to pipeline timing.
Settlement volumes for established units across Retirement Living rose by 22.3% to 690 units. Portfolio occupancy finished the period at 93.7%, up from 92.8% at June 2020 as we saw a continued increase in customer preferences towards safety and wellbeing which independent village living can provide.
Stockland will look to reduce its capital exposure to the Retirement Living business over time as it transitions the retirement business to the Land Lease model of ownership / management.
Land Lease
Stockland successfully launched two new land lease communities in 2H21 – Aura (QLD) and Minta (VIC). Sales rates for both projects are tracking ahead of budget. The Group also expanded its land lease development pipeline by approximately 1,000 lots during the period (to approx. 4,000 lots) via a combination of site acquisitions and the achievement of additional yield on existing sites.
In August 2021, Stockland completed the acquisition of Queensland based Halcyon Group’s land lease communities business for $620 million.
The transaction includes the acquisition of 3,800 sites across 13 land lease communities, made up of six established land lease communities, four communities in development and three projects in planning. This acquisition is in line with Stockland’s stated strategy to grow its land lease communities and will increase the size of its portfolio to 7,800 sites and a $3 billion development pipeline, accelerating its ambition to be a leading player in the land lease sector.
Post the addition of the Halcyon platform, Stockland now expects to generate approximately 600 land lease settlements annually within three years – double its previous target. Stockland’s deep capability in acquiring greenfield land provides further opportunity to grow this business.
As the land lease portfolio grows there will be an opportunity to introduce third party capital into the business.
Strengthening the REIT’s capital position
Gearing improved significantly from 25.4% in FY20 to 21.4% in FY21, at the bottom of Stockland’s target range of 20-30% and reflecting an ongoing disciplined approach to capital allocation and cashflow management. Stockland’s balance sheet strength provides the Group with ample flexibility to pursues strategic opportunities such as the $620 million Halcyon land lease transaction completed in August 2021.
Gearing is expected to rise to around the middle of Stockland’s target range over FY22, reflecting the impact of the Halcyon transaction and ongoing delivery of the Group’s $5.5 billion Logistics, Life Sciences & Technology development pipeline.
FY22 Guidance
The REIT reconfirms that based on information currently available and barring any unforeseen events or further COVID-19 impacts, FY22 FFO per security guidance is forecast to be 34.6 – 35.6 cps. This equates to a forecast FY22 distribution yield of 7.4% based on the opening price as at 1 July 2021 of $4.66.
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