A diversified yielder
The market response to Stockland’s third quarter update was positive as the diversified property group reported trading in line with management expectations and reaffirmed full-year guidance for key metrics. The sale of its retirement living business is progressing and set to complete towards the end of FY22 or early in FY23. We view the business as moderately undervalued at current levels and like the solid dividend.
With the Australian economic reopening having further to run, a strong outlook for the logistics business, and continued progress against strategic objectives (selling non-core assets and creating third party capital partnerships), we believe the company is well placed to weather any softening in the residential housing market going forward. Gearing is already low (December 2021; 23.3%) and the sale of the Retirement Living business to EQT Infrastructure for $987 million along with other announced transactions would reduce it by 5% on a proforma basis prior to its redeployment towards Stockland’s approximate $37 billion development pipeline.
In the 3Q22 trading update, Stockland stuck with its funds from operations (FFO) per security guidance of 35.1 to 35.6 cents, unchanged from the half year guidance. The distribution for the full year is anticipated to be in the 75% to 85% of FFO payout range.
3Q22 update
Stockland reported “solid operational metrics” across the Commercial Property portfolio, with year-to-date rent collection at 95% (net of applied Covid-19 abatements), with high occupancy rates maintained. Leasing spreads across the portfolio remained positive over the quarter. Commercial houses the Town Centres, Logistics and Workplace segments. In Town Centres (shopping malls), the occupancy rate was 99.1% at the end of March. Total comparable sales growth was 2.8% over the quarter, while rent collection was 93%, with 88% of rental support negotiations completed.
Source: Stockland (ASX:SGP)
We believe Stockland has managed its malls very well amid difficult circumstances and its portfolio has been tweaked to focus on the highest quality centres in the portfolio. The settlement of Stockland Cairns in the quarter was completed in line with book value at $146 million.
The Logistics business is humming and trends are extremely supportive of the business going forward as businesses invest in onshore supply chains. Both rent collection and occupancy were at 99% in the quarter. Upcoming lease expiries bode well for further income growth and leased area is growing strongly. Stockland is accelerating the delivery of its development pipeline, with $0.8 billion of active developments.
Workplace (offices) is an area of higher uncertainty given workers are often reluctant to head back into city offices. Portfolio occupancy was at 90.2% (lower than a year ago at 95.8%) but rent collection was strong at 99% with positive leasing spreads over the quarter. Companies are still very keen to entice workers back into the office, at least on a part time basis and we believe the pessimism towards the sector will end up being somewhat overdone.
Enquiry levels in the residential business remain elevated and above historical levels. There was also positive price momentum, reflecting strong demand for the company’s master planned communities (MPC). Residential communities’ chief executive Andrew Whitson said, “Our enquiry levels remain strong and there is considerable unsatisfied purchaser demand, given the supply constraints experienced over the last 12 months. Current market fundamentals remain positive; however, we expect the strength of market conditions to moderate over the medium term in line with rising interest rates.”
Source: Stockland (ASX:SGP)
Net sales for the quarter of 1,562 lots in the quarter fell quite sharply (-17%) year-on-year and against the quarterly average in the first half of FY22. They were effectively in line with management expectations though and the decline reflected both the timing of new project launches scheduled for the current quarter and some expected geographical elements. Settlements fell to 855 in the quarter impacted by wet weather delays. Stockland said despite this, the business is targeting close to 6,000 settlements for FY22, a modest decrease compared to the 6,400 forecast in an update last October. Importantly, operating profit margin guidance of over 18%, supported by underlying price growth and the deferral of some settlements.
Finally, the Lend Lease Communities business saw and average sales price increase of 4.3% over 3Q22, with continued demand for over-50s product. This business was bulked up last year from the acquisition of Queensland-based Halcyon and the new Stockland Residential Rental Partnership (SRRP) with Mitsubishi Estate Asia is on track for completion in late FY22. The segment is currently on track to deliver its target of 220-240 home site settlements in FY22.
Summary
Stockland is moderately undervalued at current levels in our view and with the economic reopening having further to run, the reshaping of the portfolio continuing and a strong outlook for its commercial business, along with a nice yield we continue to be positive on the stock.
The company has decent earnings visibility and a robust development pipeline in FY22. We view Stockland as relatively defensive in its space with a diversified portfolio that is being well-shaped via selective divestments and third-party capital collaborations.
We recommend Stockland (ASX:SGP) as a buy to Members without exposure.
Disclosure: Interests associated with Fat Prophets hold shares in Stockland (ASX:SGP).
