Stockland profit drops by 79% after residential write-down
DEVELOPMENT giant Stockland has announced a 79% drop in its profit after writing down the value of its residential properties by $355 million.
The company behind the massive Caloundra South development on the Sunshine Coast, as well as a string of retail, industrial and retirement village projects, said despite this, its financial position remains strong with gearing reduced to 22.7%.
Retail projects include a new shopping centre at Hervey Bay.
It is targeting earnings per security of 4-6% above the current financial year.
In a statement, Stockland said underlying profit was $494.8 million, down 27% on the previous corresponding period, reflecting soft conditions in the new housing market, the impact of asset sales, and the previously reported change in approach to capitalised interest.
Statutory profit was $104.6 million, down 79%, largely due to a previously disclosed $355 million impairment in the value of the Residential book.
Stockland managing director and CEO Mark Steinert conceded it had been a trough year for Stockland.
"This has been a challenging year and we have responded with a number of important strategic decisions that position our business for stronger future returns," Mr Steinert said.
"We significantly restructured the business to reduce costs and improve core processes and skill sharing. We reviewed our residential landbank to create a clear classification of 'core' and 'workout' projects, and also maintained our strong balance sheet and A-/stable credit rating.
"Importantly, we outlined a clear strategy to optimise securityholder returns within an acceptable level of risk through the cycle. This includes setting target asset weighting ranges that reflect our strengths and which will deliver the right balance of income and growth.
"We have a refreshed senior management team in place and are determined to execute our strategy with a disciplined focus that will deliver reliable profit and EPS growth over time."
Total Operating Profit: $482 million
The Commercial Property portfolio continued to deliver a solid and reliable stream of recurring income for the Group. Although the overall result was lower than the previous year, this was due mainly to having fewer assets generating income, having sold around $1.5 billion of non-core assets over the previous two years to reinvest in the accretive share buyback and retail redevelopments.
Net Operating Income: $324 million
Despite subdued market conditions, the Retail business achieved solid sales growth. NOI increased 5%, reflecting the contribution of newly redeveloped centres and demonstrating the resilient nature of the assets in our portfolio. Comparable NOI, which measures like for like assets, was up 2.6% (3.0% pre-IFRS3). Occupancy remains high at 99.4%.
In FY13 Stockland made important progress on its Retail redevelopment pipeline with the official openings of our centres at Merrylands in NSW and Townsville in Queensland in late 2012 and the opening of Myer at Stockland Shellharbour in NSW in May 2013.
Work commenced on a $116 million redevelopment at Hervey Bay in March 2013 with an expected 7.5% pre-IFRS3 stabilised yield and ~13.5% incremental IRR.
Group Executive and CEO Commercial Property John Schroder said: "Our ability to deliver this result in a challenging market demonstrates the strong leasing and development capability we have built over many years, our proactive approach to remixing in centres as conditions change, and our deep commitment to excellent customer service.
"We have a strong redevelopment pipeline with a further 14 projects identified, representing $1.5 billion of investment, with an average incremental IRR4 of 12-14% planned over the next five to six years."
Net Operating Income: $119 million
By tightly managing its office assets Stockland lifted comparable NOI 1.8% from FY12 or 6.6% pre-IFRS3. Occupancy increased to 96% and Weighted Average Lease Expiry was also higher at 4.6 years. Total NOI was down 16% compared to FY12 reflecting the business strategy of divesting non-core office assets that do not meet our risk/return hurdles.
Mr Schroder said: "As we announced in May, we will retain a tactical exposure to Office although we will continue to lower our total weighting. We have clearly made good progress optimising the performance of our assets and will continue to focus on this to maximise returns from our portfolio. We will also explore value-creating opportunities in our portfolio."
Net Operating Income2: $63 million
Industrial NOI decreased 18% from FY12 (comparable NOI down 10.9%) mainly due to FY12 asset sales and FY13 lease expiries. Leases were executed on 288,000 sqm of space during the year positioning the portfolio well for the future. As a result, Weighted Average Lease Expiry increased to 3.3 years (from 2.7 years in FY12). NOI is expected to grow in FY14.
EBIT: $182 million, Operating Profit: $60 million
As previously flagged, the performance of the Residential business in FY13 was significantly impacted by market softness which affected both volume and prices.
The profit also reflected the shift in sales mix with a lower proportion coming from higher margin projects in Victoria, and the previously reported change in our approach to interest capitalisation.
Group Executive and CEO Residential Andrew Whitson said: "We have actively managed through the cycle, reducing finished goods by 50%, ensuring a good mix of affordable products and accelerating the sale of impaired lots to release capital for reinvestment.
"In May we outlined a plan to make our portfolio more resilient and profitable in the future and we are putting this plan into action.
"While looking to accelerate the work out of impaired projects, we are also focused on bringing new higher margin projects to market such as East Leppington (Willowdale) in NSW and Banjup in WA.
"We have restructured our business to improve efficiency and identified opportunities to leverage the Group Project Management and Procurement capabilities to reduce costs and improve outcomes on projects. We are also identifying projects in our portfolio where we can increase revenue and broaden our market reach by expanding our medium density offering."
EBIT: $45 million, Operating Profit: $38 million
The Retirement Living business continues to deliver against its strategy with a solid result despite the soft residential market. Operating Profit was up 6% on FY12 and return on assets rose from 4.2% to 4.5% year on year thanks to a record number of settlements.
Group Executive and CEO Retirement Living Stephen Bull said: "We have a clear strategy to grow returns in our Retirement Living business by improving scale and efficiency. We have set a target return on assets of 8.0% by FY18 and are focused on progressing towards 6.5% by FY15.
"We have a strong development pipeline, we are driving referrals for more cost-effective sales, and we are improving the efficiency of processes such as reducing the time it takes to refurbish and sell vacant homes. Our resident satisfaction ratings are consistently high and we continue to use the feedback we receive to improve our offering."
Although global economic conditions have improved over the last six months, there is still considerable uncertainty and volatility.
In Australia business confidence remains low and consumer spending is relatively soft as households continue to deleverage.
We expect consumer sentiment will remain relatively subdued, however we do anticipate continued moderate economic growth. While the housing market is showing clear signs of improvement, the recovery is likely to be modest and uneven.
Mr Steinert said he expected steady improvement in Stockland's earnings from FY14 largely as a result of new Retail, Residential and Retirement Living projects beginning to contribute, recent Industrial letting, rental growth and as benefits of cost reduction initiatives come through.
However, improvement in Residential earnings will likely be constrained as Stockland continues to work through a number of impaired and low margin projects. It will also take some time to see the full benefits of the Group's new strategic priorities, particularly in Industrial and medium density housing development.
"Our decision to hold our distribution at 24 cents per share, despite being outside our target payout ratio, demonstrates our confidence that earnings should continue to improve from FY14," Mr Steinert said.
Stockland is targeting FY14 earnings per share of 4-6% above FY13, assuming no material decline in market conditions.
Source: Stockland statement to ASX