Stockland Corporation Ltd

ASX:SGP

Earnings Call Transcript 2018-Q3

[Operator]

Thank you for standing by, and welcome to the Stockland Q3 '18 Update. [Operator Instructions]I would now like to hand the conference over to Mr. Mark Steinert, Managing Director and CEO. Please go ahead.

[Mark Andrew Steinert, MD, CEO & Executive Director]

Thank you, and good morning, everyone. Welcome to our third quarter 2018 operation update. I'd like to begin by acknowledging the custodians of the land in which we meet, the Gadigal people of the Eora Nation, and pay my respects to the elders, past and present.I'm very pleased to announce another solid quarter and highlight that the results really demonstrate that our strategy of creating liveable, affordable and sustainable communities with dynamic town centers has continued to deliver sustained growth and high customer satisfaction.For this Page 3 of the presentation, our diversified business model is delivering growth opportunities across the group. Importantly, this supports our guidance of 5% to 6.5% FFO growth per security, assuming no material change in market conditions.Our third quarter results were driven by generally positive residential market conditions, improving retail sales growth and a focus on our customers.We're operating in a variable trading environment with retail sales momentum picking up in most markets, good leasing activity in Logistics and Business Parks and generally strong residential trading conditions, albeit Sydney has moderated, as we expected, from very high levels of activity.Inquiries for Retirement Living is strong, however, the sentiment remains soft following media coverage last year, which has slowed the conversion of inquiry to sales.We continue to reshape the portfolio. Since the end of the quarter, we exchanged unconditional contracts to Highlands Retail Town Centre, excluding McDonald's, that would add a 20% premium to December 2017 book value. And we've settled the sale of Rosebud Retirement Village in Victoria at book value.Our strategy continues to build and increase our Logistics and Business Parks widening organically and to reduce our exposure to smaller retail town centers and retirement living assets to focus on scalable, high-quality properties.Customer satisfaction across our businesses remains high, with sentiment above -- or positive satisfaction above 80% in all businesses and our focus on sustainable leadership is unwavering.We also remain in a strong financial position with our stable A-/A3 credit ratings, enabling us to continue to diversify our funding sources.Last week, we issued AUD 475 million-equivalent, of 8-year European medium notes. And of course, in January, we undertook another USPP transaction, both of which has enabled us to increase the weighted average debt maturity to 5.9 years and to continue to reduce our weighted average cost of debt.Looking at Page 7, our Retail business. Very pleased to see positive sentiment and improving sales results across our Retail Town Centres, reflecting the success of our remixing and redevelopment activity.Over the quarter, we've seen comparable specialty sales increased to $9,092 per square meter, up 3% since December 2017. We've seen growth in retail sales in all states, although Sydney has been a bit patchy. Our Queensland and Perth assets have recorded good growth in retail sales, and while it's still early to call a complete recovery, we're seeing encouraging signs from these regions with the broadening of economic growth across the nation.In March, we opened the third stage of the flagship $414 million Green Hills redevelopment. This is a doubling of the center, which we undertook to address the $1 billion of leakage from the trade area. What the development shows is that if you're developing in high-quality, growing trade areas, there's still strong demand from retail tenants and shoppers alike.Lifestyles for existing retails are up almost 10% since launch and customer visits to the center exceeded 135,000 in the first 3 days. The project is expected to deliver accretive returns, with a stabilized FFO yield of 7% and an incremental internal rate of return of around 11.9%.We also recently commenced construction on the new $86 million Birtinya Town Centre on the Sunshine Coast and look forward to completing the $37 million Wendouree redevelopment in June this year. Both developments have seen a strong tenant response, given the positive trade area fundamentals that they serve.Turning to Page 10. Logistics and Business Parks have continued to maintain high occupancy and our growing portfolio exposure has benefit from 56,000 square meters of leasing activity over the period, and we're progressing a $760 million development pipeline.We recently completed a new logistics facility at Warwick Farm in Sydney, which is now fully leased, and we continue to have good leasing success across our developments, which we attribute to the strong market fundamentals in which we're developing, such as Warwick Farm and Ingleburn in Sydney, and creating a standardized product with broad customer appeal.We're progressing our strategy to grow the Logistics and Business Parks portfolio to 20% of our assets with a 5-year pipeline of over $600 million on land that we already owned. The pipeline includes a 55,000 square meter campus stage development in Macquarie Park, Sydney. We will be providing an update on our plans for this asset at our Investor Day in May, and we hope to see many of you at that day.Our Sydney office assets are close to fully occupied, with vacancy in the portfolio concentrated in the 2 assets in Perth and Canberra. The portfolio had some good leasing success in Perth as the economy over there has started to improve, with occupancy lifting to 85%.Turning to Residential Communities on Page 13. As I mentioned, trading conditions generally remain positive, particularly in Melbourne and Queensland. Sydney has seen a slight moderation in demand for new space, in line with our expectations. We remain on track to complete around 6,500 residential settlements over the full year, with an operating profit margin around 17% and strong earnings visibility over the short to medium term, with contracts on hand as of 31 March sitting at 6,367.Lower quarter-on-quarter net deposits reflect project release timing rather than market conditions, and we look forward to launching 4 new projects comprising 2,400 lots over the next 6 months. This includes Grandview and Waterlea in Victoria and Rothwell and Springview in Queensland.This quarter, we completed our first Queensland medium-density project, delivering 120 townhomes at North Lakes. Let me just highlight that all of those homes were sold prior to completion.We continue to see strong demand from our core market of first-time buyers and owner-occupiers, which are currently accounting for more than 75% of sales. And we're proud of our commitment to providing affordable, liveable and sustainable homes and communities for Australians.Moving to Retirement on Page 16. In line with guidance and our first half '18 results, reservations for units across our retirement living communities remain subdued over the quarter. Sentiment towards the sector continues to be affected by the adverse media coverage in mid-2017. Importantly, we're seeing a gradual improvement in sentiment and our inquiry levels remain high, but the conversion period to sale of units in our villages remains extended. We expect this will impact full year results for Retirement Living, and due to the current poor market sentiment and slow sales conversion, we believe we're unlikely to achieve that target of 7% return on assets in FY '19 for our Retirement Living business.All other aspects of our Retirement Living strategy performing well, and we continue to focus on broadening our customer reach by providing more diverse living options and choices of homes, location and contract models.Earlier this month, as I mentioned, we sold the Rosebud Retirement Village in Victoria, and we continue to assess options to divest other noncore villages to recycle capital into our development pipeline and focus on scale properties.We're also always looking for ways to provide more options for our customers, and we recently launched a choice of contracts for new Retirement Living customers in all of our villages and the new range of Aspire homes. Aspire offers custom-designed communities with low-maintenance living for over 55s with no deferred management fees.Our 2 new contracts comprise, one, capital share, where residents share in capital gain or loss with Stockland, and the DMF is capped at 35% over 7 years with a buyback guarantee. And the other is Peace of Mind, offering financial certainty for our residents. The deferred management fee is capped at 25% over 5 years with a buyback guarantee.We remain confident in our Retirement Living communities, given the aging demographic in Australia, a differentiated lifestyle with more than -- with 80%-plus of our residents expressing positive satisfaction: typically good affordability with a discounted community house prices, full-time village management, no stamp duty and no agent selling costs.In terms of the outlook, in line with guidance, we're on track to achieve, for the group, funds from operation growth of 5% to 6.5% for the full year, and we're targeting a distribution per security of $0.265, representing 4% growth in FY '17, assuming no material change in market conditions. Our ongoing commitment to creating liveable, affordable and sustainable communities and vibrant town centers across the country continues to underpin our profit growth outlook.That concludes the presentation. I'd now like to open up the lines up for questions, and would note that the whole of the executive team is here, including Tiernan O’Rourke, our CFO; John Schroder, our CEO of Commercial Property; Andrew Whitson, CEO of Residential; Stephen Bull, CEO of Retirement Living; and Simon Shakesheff, Head of Strategy and Stakeholder Relations. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Richard Jones from JPMorgan.

[Richard Barry Jones, Vice President]

Just a question perhaps for Andrew, just in relation to, just trends on prices in communities. Can you just give some color as to what you're seeing through the quarter through to the March?

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

Yes. Thanks for tuning in. It varies, varies by state, really. In New South Wales, prices have been flat, generally, where you've got some non-standard products, that's probably where we've seen -- where we have seen some buyer resistance. So you have irregular shape lots in those locations, but yes, prices have been flat across New South Wales, generally. Victoria, we've still continued to increase prices on the back of the strong demand that we had across the quarter. In particular, the new inquiry that we saw in January. Queensland as well has seen price increases, and Western Australia has been flat.

[Richard Barry Jones, Vice President]

Okay. And then just on retirement, just I don't know whether you can state it and perhaps you could give some color just on what the earnings outlook looks like over the next 15 months. I know you've kind of backed away from your FY '19 target, but obviously, there hasn't been any sort of material recovery in reservations in Q3. So just, I guess, how are you thinking getting to tracking the second half? And then how far short you think you're looking at '19?

[Stephen Bull]

So thanks, Richard. So, obviously, we don't give specific guidance, but a couple of things to think about. There are 2 things really affecting performance this year. One is sentiment, as we discussed, and the other is just the timing of that development pipeline. So there's a significant increase in development activity with projects completing in FY '19. So you should expect a significant uplift on the development side of the business. We've got the 10-year completing, we've got the next stage of Cardinal Freeman completing, we've got the first stage of Newport completing as well as Elara, our Aspire growth at Elara. So you'll see a significant uplift in that part of the business during FY '19. So we are expecting pretty, pretty reasonable growth into FY '19, just not to the levels that we were expecting previously.

[Richard Barry Jones, Vice President]

And is the second half looking worse than what you were thinking?

[Stephen Bull]

The second half of FY '18?

[Richard Barry Jones, Vice President]

Yes.

[Stephen Bull]

So as Mark said, the conversion through our kind of summer campaign was slower than we would have anticipated. Again, we've seen the last kind of 5 to 6 weeks being pretty on par with the previous year, which is encouraging. But I'm reluctant to think that until we see that for a longer period of time. So the start of the second half was certainly softer than we would have liked, but it's starting to stabilize at the moment, and we'd monitor that.

[Richard Barry Jones, Vice President]

Okay. And then can you just elaborate, maybe sale for Omaha. Just on the comments about potentially looking to broaden exposure to retirement in terms of, obviously, you've said you've sold Rosebud. But just, I guess, how many other villages may -- you look to sell and how much quantum of capital might you look to lighten into retirement?

[Stephen Bull]

So we don't disclose the number or specifics about the assets we look to sell, for a number of reasons, obviously. But we are looking at recycling a reasonable amount of capital out of existing villages into either development activity in the retirement space or other parts of the business, but we don't put a specific quantum on that.

[Operator]

Your next question comes from Sholto Maconochie from CLSA.

[Sholto Maconochie, Head of Australia Real Estate]

Just a quick one on the retail sales. Obviously, the sales of specialties picked up, and your view is some of your peers broken out that over 400 square meters which had been ages before. On the comps, especially, the 9,092, is that based on the less than 400 square meters or the total? And is that comparable with the December number?

[Mark Andrew Steinert, MD, CEO & Executive Director]

Sholto, it's less than 400 square meters, and it's comparable to December.

[Sholto Maconochie, Head of Australia Real Estate]

And the same for op cost as well?

[Mark Andrew Steinert, MD, CEO & Executive Director]

Yes, it's 24 months. It applies to the same basket.

[Sholto Maconochie, Head of Australia Real Estate]

Okay, great. And then any count on the leasing spreads for the quarter, could you disclose that, positive or directionally?

[Mark Andrew Steinert, MD, CEO & Executive Director]

You might remember when I got asked that question at February results, I've said that the renewal was still -- is still tracking positively, but there's downward pressure on the new deals, the new sites and the remixing side of it, and that continues. As we reset some rents and strengthen the mix, which you can see is flowing to positive retail sales momentum, there is negative revision there.

[Sholto Maconochie, Head of Australia Real Estate]

All right, great. And then on the asset sales in Q. You got half of Shellharbour to sell and you had Jason, you took that off it. Is there an update on where the asset sales are and which assets you still have a marking to sell at the moment?

[Mark Andrew Steinert, MD, CEO & Executive Director]

Yes. Thanks, Sholto. So obviously, we've said we're committed to $300 million of noncore divestments, so we've done about $110 million so far on the number of other assets in market at the moment, so we think we'll continue to progressively achieve to the 300. And progressively, we'll announce those and I guess, we've got about 9 months, 10 months left to do that, based upon what we said last year. I will also say that Capital Partners, one of the larger assets. So combining those 2 initiatives will free up $600 million, $700 million, and that will primarily go into organically growing the Logistics and Business Parks capital allocation. But of course, looking at the difference between where we're selling assets and our current cost of equity, we'll also, with the board, continue to look carefully at that equation and what other capital initiatives may be prudent for the group to execute on over time.

[Sholto Maconochie, Head of Australia Real Estate]

That's a good segue to the other question for that later on. So you got -- on that note, you've got a gearing of 23, low -- quite low for the sector discount NGA was 4 before you add them today. Would you be happy to buy back stock once you sell more assets? Or what's the board's view or your view on the buyback?

[Mark Andrew Steinert, MD, CEO & Executive Director]

Clearly, we are always looking at the capital strategy together with the board and at the executive level, yes. And it's clear that, at the moment, we've got a pretty high cost of equity. So to the extent that we're able to divest assets through time and to reflect a lower yield than the yield in total return of the equity is reflecting, then it would be potentially prudent for us to look, as I mentioned, at other capital strategies that you've described.

[Sholto Maconochie, Head of Australia Real Estate]

All right, great. And just moving on to the resi. On Cassina tales, your JV, do you expect to book the profit? I know you got a preferred equity status at book to profit in '18 results for that project?

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

No. That will be '19, Sholto.

[Sholto Maconochie, Head of Australia Real Estate]

Okay, that's '19, okay. And then on some of the Jones’ questions. On, let's say, the contracts on hand were up quite a bit the 31 March, 4 months from December. On the Sydney front, the Sydney ones, is it a function of just the pricing, people -- because there were fewer leases, but also just less demand? What was the big driver, people just reluctant to commit? Was it a production issue? I'm just trying to...

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

On net deposits?

[Sholto Maconochie, Head of Australia Real Estate]

Yes, for Sydney and the New South Wales, yes.

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

Yes. There is a mix of factors in there, so if you go back to the prior corresponding period, we were trading from effectively, 6 projects at that point. So you had contributing EMEA out tribe land, will I dial in the Elara and in the debt draw project book's reach as well. This period, we're only selling from 2 of those, so that's affected it. But also, underlying demand has moderated, as Mark said. So yes, there's those 2 factors that are affecting the New South Wales net deposits for the period.

[Sholto Maconochie, Head of Australia Real Estate]

And so the new launches, nothing obviously in Sydney, but when do you expect to have any more project stage or launches in New South Wales market?

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

So the next new project that we will bring will be Marsden Park North, which is still 12 to 18 months away.

[Sholto Maconochie, Head of Australia Real Estate]

All right. And then another thing to press here finally, so on the -- you've got some JV with the McDonald's side, Parramatta was it? And another one as well. When do you expect to commence presale of those department projects?

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

So the 2 in New South Wales are Rosebery and Parramatta, as you mentioned. So Rosebery, we are an outright, which is going through stage 1 DI process at the moment. So that would be looking for presales in 2019. And the Parramatta JV with McDonald's, which is, yes, subject to re-signings, subject to presales, has got a rezoning process to go through, so we'll be several years away.

[Operator]

Your next question comes from Paul Checchin from Macquarie Group.

[Paul Checchin]

I know you haven't called it out, but it was interesting that last week, bad cold wet weather throughout Queensland is an issue for them. Just wondering if you have had any similar issues, weather-wise, for Queensland in the quarter as well.

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

Absolutely, Queensland has been particularly wet. So I think, in February, we were at a total of 4 days that weren't wet during February. And during March, it was about 50% almost lost from wet weather. And in civil works, getting back on wet ground is challenging, so productivity over those 2 months was quite low. So that's put pressure on a number of settlements, number of stages that are due to settle at the back end of this financial year.

[Paul Checchin]

And you're still confident, Andrew, that they'll settle at the back end of this financial year?

[Andrew Whitson, Group Executive & CEO of Stockland Communities]

So we'll be pushing those all the way. Yes, we're still confident in landing around 6,500 lots for the full year and that operating profit margin that we guided to.

[Paul Checchin]

Great. And then just a second question for John now, that Green Hills is up and going. I'm just wondering is there any update or change of your progress in terms of when you expect to achieve that stabilized target yield of 7%?

[John Schroder, Former Group Executive]

Paul, it's not finished yet. H&M -- the 2 local H&M store opens next month. HOYTS Lux opens in June. And the remaining specialty shop, Lone Star, which is progressing exceptionally well, should all be complete by June. So all going well, I would expect that the 7% incremental yield will be achieved year after next.

[Operator]

[Operator Instructions] There are no further questions at this time. I'll now hand back -- pardon me, we've had just had one. This comes from Kateryna Argyrou from Crédit Suisse.

[Kateryna Argyrou, Research Analyst]

Most of the questions had been asked, but I just have one on child care. There was news in the press that you guys are looking to expand into that. So I just wanted to see if you could elaborate on that vision and perhaps mention how much capital you envisage that strategy will require?

[Stephen Bull]

Stephen Bull, here. So we have started the process of identifying sites within our communities that we think is suitable for child care but also for large-scale medical care facilities. We will develop an owner-operate sites, but we will obviously lease out the operations of those facilities to suitable operators. It's very small at this stage, we've just had our first couple of sites, and we'll look to do more of them. So from a capital point of view, I'd say immaterial at this stage. But we think it's important for a number of reasons. One, it provides really important and high-quality amenity to our residential communities and to our residents that live there. Two, it's a sensible and a strategic decision for us to take in the sense that, that's our cross skill set and it provides us with a very good ongoing recurring yield. So from a capital point of view, these things are small at the moment and will take several years to get to some scale.

[Kateryna Argyrou, Research Analyst]

Okay. And I just wanted to check very quickly on the factors underpinning your FY '18 guidance. I noticed that you've reiterated the 6.5% expected settlement in the '17 step margin. However, there was no mention of the 2% to 3% commercial property comp-off propel growth. Has something changed there? Or am I just reading into it?

[Mark Andrew Steinert, MD, CEO & Executive Director]

No, nothing has changed there.

[Kateryna Argyrou, Research Analyst]

Okay. And then also one last question. Mark, you mentioned that retail sales are picking up in most market. Could you just possibly shed some more light on which market you're still seeing a drag in?

[John Schroder, Former Group Executive]

It's John speaking. The Queensland from the Gulf Coast, up to probably, Rockhampton is showing above-average growth. Our assets in Townsville and Cairns that are markets that are recovering that has more supply floor space are proving more challenging. Assets in Victoria, Ballarat, Point Cook and Metro Melbourne are trading up and trading well above-average, and we're pretty comfortable with where we're at with those assets. And as Mark alluded to, our assets in Perth, which are in the southern part of Perth, we don't have anything in the North yet, are showing signs of recovery. And indeed, new assets like Harrisdale that we created approximately 2 years ago are showing double-digit growth, and we're very pleased with that. New South Wales was patchy in the last 2-month period. It's probably the lowest amount of growth that we have observed in New South Wales and still very strong assets with strong productivity, but the growth has clearly come off. It's also an issue to bear in mind with Easter timing. Easter last year fell in April. This year, most of the expenditure fell in March, which underpinned above-average growth at the discount department stores. However, it was 2 less trading days in March compared to last year. So there's a few anomalies there that you need to keep in mind.

[Mark Andrew Steinert, MD, CEO & Executive Director]

Probably the only other thing is to add, I guess, it's early days, but we've seen, it would appear as well, pretty encouraged by the improvement in discount department store trading. We saw a lot of changes being undertaken and some rationalization at Big W, and that's now translating into comparable growth, and Target achieving headline growth and once again put a lot of effort into their business model. And so the only other thing is a lot of the trade areas that have seen some competition the last few years from either new centers or a new extension of existing centers, which, while it didn't challenge the economics of our shopping centers, it did obviously take away from headline growth. And looking forward, the fact that, particularly west farmers and movers have committed to certainly less openings than what they were looking at 5 or 6 years ago, with a very heavy focus on profitability. And a lot of the other chains also looking at profitability and being very selective about where they open new stores. We think that's a very important trend, very important part of the retail market in Australia. I'm looking at the medium to longer term and, it's one of the key reasons why we think, given the population growth of about 1.6% per annum nationally, that there is room in the Australian market for both shopping center growth and the continued growth in online.

[Operator]

There are no further questions at this time, so I'll hand back to Mr. Steinert for closing remarks.

[Mark Andrew Steinert, MD, CEO & Executive Director]

Well, I just like to thank everyone for taking the time to join the call. Hopefully, we've answered all of your questions. As we've talked about, we're very confident that our strategy of building strong communities across the nation with strong town centers will continue to deliver growth in profit into the future and that the underlying fundamentals of that business are good.Certainly, if there's any unanswered questions, we're happy to take queries off-line at any time. And we look forward to, hopefully, seeing you all at our Investor Day on the 10th of May. Thank you.