Master plans
Stockland (ASX:SGP) have presented their FY22 report, the markets response was again positive, we breakdown the numbers and move our recommendation.
With the Australian economy now in post covid recovery and open for business the headwinds for the company have changed to now managing building cost inflation with a focus on return of capital for the Australian business.
The Monthly chart for Stockland indicates the price remains within a large consolidation area above $3.20 and below $5.20 with the price currently below the 12 month simple moving average
Funds from operations show an 8% growth to A$851m over FY22 a good result, as the company moves to post covid operating environment and moves away from the retirement living business.
Stockland (ASX:SGP) have improved its funds from operations (FFO) per security guidance slightly to 35.7 cents, beating guidance of 35.1 to 35.6 cents.
Breaking down the funds flow from the individual operations numbers, in the logistics area, revenue has increased YoY to $155m an increase of 37% with the average weighted lease expiry now extended to 3.4 years with average rental growth at 8.5% on new leases and offering scope for inflation-based increases along the way as leases become due for renewal.
Workplace funds showed little change with funds from operations of A$110m, we hold the view this should continue to improve over the FY23, as workers return to offices. Town centres has shown a 6.3% decline in revenue from A$363.0m to A$340.0m due to covid based rental relief, we note this covid based imposition is now ending with growth of 3% over the comparable period with leasing spreads increasing 1.5% along with a solid portfolio revaluation uplift of 5% or A$297.0m.
Stockland (ASX:SGP) are actively rebalancing the mix inside this portfolio with the current structure having 75% of “essential” based retail tenants covering food and clothing retailers. We have some concerns over revaluations in the current real estate cycle, this is an unknown variable and change can occur to the downside in the coming 12 months. Looking at the underlying drivers of Town centre developments we give weight to current statistics showing Australia’s retail sales continue to hold up well increasing 1.3% for the seventh consecutive month in July, this should begin to flow into to the Q1-23 results.
The logistics pipeline has expanded by A$3.2 billion to A$6.4 billion, as the company increases its master planned developments across its existing landbank. Stockland have again reported solid operational metrics across the Commercial Property portfolio, we note, along with year-to-date rent collection improving from 95% to 99.9% FY22 and the average rental growth lifting from 1.2% for 2021 to 8.5% for FY22.
The Daily chart for Stockland displays the price remaining within a broad consolidation and currently below the 200 day and 20 day simple moving average
We have noted, Stockland (ASX:SGP) has completed the divestment of the Retirement living business for $987m. The sale was to result in a proforma reduction of gearing of around 5%, this was to reduce the gearing level from 23.3% as of the end of December 2022, we note in the current results pro forma gearing has reduced to the 18% range with weighted average cost of debt now running at 3.4% with the expectation this will increase to 4.4% for FY23. We are pleased to see the dividend distribution has been lifted to 26.6 cents up a solid 8% over 2021.
In Summary:
We view the FY22 results as strong and the company moderately valued, given the business is emerging into the post covid economy. Portfolio “valuations” may remain as a large variable in the coming FY23 results. Currently, with solid occupancy and rental growth we must accept the economy is moving into an inflation cycle, this may see the current discretion spend being reviewed by households along with a risk off decline in land sales and valuations. We move Stockland to a hold and look forward to reviewing Stockland in F1-23.
We move Stockland (ASX:SGP) to a hold for Members with exposure.
Disclosure: Interests associated with Fat Prophets hold shares in Stockland (ASX:SGP).
