Stockland Corporation Ltd

ASX:SGP

Earnings Call Transcript 2020-Q3

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

Good morning, everyone. My name is Mark Steinert, CEO and Managing Director. This is take 2, and apologies to all of you who had to listen to this and you'll now get some repetition.It's my pleasure to welcome you all to our third quarter update. And with me in the room is Tiernan O'Rourke, CFO; Louise Mason, CEO, Commercial Property; and Andrew Whitson, CEO, Communities.On a personal note, it is great to be doing this from our offices having been home for a while. And I'd like to begin by acknowledging the traditional custodians of the land in which we meet, the Gadigal people of the Eora Nation, and pay my respects to their elders, past, present and emerging.I'll provide a brief update of Stockland's response to the COVID-19 pandemic and present the key operational metrics for our business for the 3 months ended 31 March. I'll also provide some commentary on April and May trends before opening it up to Q&A. Questions can be submitted during the presentation through the Menti app or the web browser. Please note, our third quarter results do not fully reflect the impact of the pandemic and associated restrictions. Navigating the current environment presents a number of challenges, and our briefing today is done under the continued withdrawal of guidance.Turning to Page 2 of the slide pack that was lodged with the exchange, it's highlighted that after a promising start to 2020, which reflected the continued execution of our strategy to maximize returns through community creation, the crisis reduced performance trends from mid-March and presented unprecedented challenges across most areas of our business.Despite this, during the third quarter, we delivered strong residential sales and settlements in January and February, strong Retirement Living sales, ongoing high occupancy in the workplace and logistics portfolio and positive comparable sales growth in retail town centers.Our most important priority since the crisis began has been the safety and well-being of our residents, customers and our team. We immediately implemented best practice safety and hygiene management, and we're proactively engaged with industry bodies and government to enable the continued safe operation of our properties.In addition, we reduced or deferred variable and noncritical expenses, including an accelerated leave program across the organization, a voluntary reduction in directors' fees and executive fixed salaries, deferring uncommitted capital requirements and deferring nonessential development expenditure. Further, we're undertaking independent external valuations of all of our Commercial Property assets as of 30 June.We've had our long-term focus on maintaining appropriate liquidity to fund our strategic priorities. And to this end, in the last 2 months, we increased our available liquidity to around $1.6 billion, raising $780 million of new debt with a mixture of short-term and long-term tenors. With these measures in place, we believe we are well positioned to navigate the current market disruption and to grow as the recovery emerges.Before turning to the business summary, I just wanted to acknowledge the great work that our team has done under very challenging circumstances, demonstrating a passionate focus on our customers and true care for the community.Turning to the Communities business on Page 4. Our Residential business performed well in January and February, with inquiries up 100% and strong sales levels. However, in March, sale center restrictions and weakening consumer sentiment combined to significantly reduce activity with inquiries at the end of March down to 20% of the February average and only 137 net deposits taken in April. Importantly, since then, settlements are completing within similar time frames to pre-crisis and the default rate in April was around 4%, slightly above the long-term average.Page 6 illustrates that inquiry levels have also recovered to be back in line with pre-crisis levels, and we had 3,853 contracts on hand at the end of April. Continued low interest rates, improved credit conditions, government stimulus and reduced supply are expected to support the market's recovery. However, the level of unemployment and skilled migration is likely to moderate the pace of improvement. And our strategic focus remains on affordable, high-quality master-plan communities targeting owner occupiers. This is the market segment that we expect will recover first, and we have a strong ability to capitalize on a recovery as we did after the federal election last year.Turning to Slide 7 in our Retirement Living business. We highlight that our priority has been best practice safety management, hygiene and quality of life. We did achieve 225 reservations for the third quarter, which was up 9% over the prior period and was the strongest quarterly result for established sales in more than 2 years. Inquiry rates softened and cancellation rates increased from late March, and we had a low net reservation number in April.Looking forward, volumes are likely to continue to be impacted by longer time frames for customers to sell their homes. However, early May results indicate that inquiry is beginning to improve, and we expect sales to increase over time, supported by an aging demographic and an increased customer desire for safe and connected community living.Turning to the Commercial Property business on Slide 9. We highlight that this also performed well in January and February before the crisis impacted, with Retail being most affected. The Commercial Code of Conduct established by cabinet has been a major crisis response to try to limit tenant hardship and potential bankruptcy. To this end, we've worked proactively with SME tenants, who represent around 30% of our Commercial portfolio, but we'd acknowledge that the process is complex and will take some time to complete. We're also working with all tenants in the spirit of the code.Slide 10 illustrates the relative resilience of the logistics portfolio, with portfolio occupancy at 98.9% and a weighted average lease expiry of 5.2 years. Also, our workplace properties have maintained stable occupancy. In line with our strategy to increase the Workplace and Logistics weighting in the portfolio to over 30%, we are continuing to progress a significant $4.4 billion development pipeline. This is strategically weighted to Sydney and Melbourne, reflecting our view of favoring both medium- to long-term demand and supply fundamentals in these markets.M-Park in Sydney will be our first major project to commence, having received development approval in December. Importantly, tenant inquiry has been very strong, reflecting the quality of the development and a submarket tenant mix, which is skewed to growth sectors of health, telecommunications and technology. We expect commencement to begin in the first half of '21.We also continued to progress our Walker Street, North Sydney, and Piccadilly, Sydney, CBD development approvals with lodgement for both expected in the first half of '21. I would emphasize that both have limited near-term capital requirements, and development timing will be carefully assessed as the recovery emerges.Turning to our Retail town center portfolio on Page 11. We highlight that the portfolio has also performed well in January and February, demonstrating that our strategy to improve the portfolio quality whilst delivering results, with leasing in line with the expectations and strong comparable sales growth and high occupancy.In March, we started to see the impact from the crisis with reduced foot traffic in sales and nonessential store closures. This was partially offset by strong performance of supermarkets and necessities. Importantly, we've kept the town centers open, demonstrating our commitment to the provision of safe, essential community services.The relative performance of our portfolio has been helped by a skew to convenience, with 70% of our tenants offering low and nondiscretionary goods and services and a 41% exposure to neighborhood and subregional centers.Third quarter sales growth was 5.2%, largely driven by supermarkets, mini-majors and discount department stores and total specialty growth -- sales growth was 2%.In mid-April, foot traffic was down 40% on pre-COVID levels and around 60% of tenants by income remain trading. With the easing of government restrictions, there are early signs of increase in foot traffic and continued store reopenings, with 75% of tenants by income now trading. The government road map to a COVID-safe Australia, we believe, will see most tenants reopen over the next few months albeit at reduced capacity.In summary, leading into the COVID-19 pandemic, we continue to achieve measurable progress on our strategic priorities. We will continue to leverage our diversified business model to underpin future growth and increase returns over the longer term. However, we do remain cautious about the shape and speed of recovery of the market. We'll also continue in a disciplined way to execute our strategic priorities, which we believe continue to remain relevant: number one, to upweight Workplace and Logistics, mainly organically; two, to improve the quality of our Retail town centers, including noncore divestments; three, to our Residential profit by focusing on affordable and livable communities; and four, to broaden our capital base.I would now like to hand it back to Mel Buffier, General Manager of Investor Relations, to facilitate Q&A. Thank you.

[Melanie Buffier, General Manager of Investor Relations]

Thank you, Mark. Just a reminder to everyone that questions can be submitted during the presentation -- or during the Q&A, sorry, through the Menti app or web browser. To submit a question, either click on the link provided in the invitation or scan the QR code on the screen. And please provide your name and company.The first question comes from Adrian Dark from Citi. You mentioned that Residential inquiry has picked up substantially in recent weeks. Could you please comment on what you're observing or expecting in relation to conversion?

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

Thanks, Adrian. Andrew Whitson here. Yes, as you would have seen from the chart in the pack, we saw a lot of inquiry mid-March, really when the restrictions were first introduced. Since that point, we've seen week-on-week increase back until the last week of April and into early May to levels that were around what we're experiencing pre-COVID levels, so through February, as you can see from that chart. Really too early to call with regards to conversion. But what we can say is we see gross sales also increasing week-on-week through that period. Yes, we're seeing access to credit still being there for our customers and customers that have now got certainty on their employment outlook are prepared to act. So there still are segments of the market that are active, and we're actively targeting those segments.Yes, from a sales center point of view, when I say it is early in the recovery phase, we've reopened our sales centers in WA 2 weeks ago, in New South Wales and Queensland last weekend, and we will reopen our sales centers in Victoria this weekend. All of that is going to increase and improve conversion. Probably the last thing to add is we had a good weekend in Victoria last week. The number of appointments that we've taken have increased week-on-week there. And we're now holding the most number of deposits on our stock list in Victoria that we had for this year. So there are some good signs.

[Melanie Buffier, General Manager of Investor Relations]

Thanks for that. And then following on another question from Adrian Dark. Can you provide any comments in relation to residential pricing. Are you making changes to pricing or incentives? And are you seeing competitors do so? If so, what magnitude of change?

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

Yes. Thanks, Adrian. Yes, at this point, we haven't been seeing broad discounting in the marketplace. We've also held our headline prices across our communities. Obviously, many of our communities are trading for more than 5 to 10 years, and we're taking a disciplined approach to pricing. What we are seeing is customers are looking for a deal out there, which is not unexpected during this phase. So we're offering, yes, modest rebates in the order of $5,000 per lot to drive some conversion.

[Melanie Buffier, General Manager of Investor Relations]

Thanks for that, Andrew. Another question on Residential. Defaults were low at 4%, but what is the level of deferrals? And also, are there more tire kickers driving Residential inquiry levels that won't convert?

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

Yes. From a conversion point of view -- so from a default point of view, as we said, it's around 4%, which is up marginally on what we saw in Q2, which was down around 3%.From a settlement rate point of view, it's settling. We're seeing stages settle at a similar rate to the first half. To give you some data points there, after 21 days, stages that we've registered that we've called for settlement in the first half, we were settling around 70% of the lots within 21 days through year-to-date now through April -- through to the end of April, that's been occurring at around 65%. So marginally lower, but we still are seeing stages settling at a similar rate. What was the second part of that question, sorry, Mel?

[Melanie Buffier, General Manager of Investor Relations]

The conversion.

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

Conversion. So yes -- and similar to the response to the first question, yes, we are seeing sales increasing, but probably too early to tell what is the conversion rate of this increase in inquiry. No doubt, an amount of that people sitting at home dissatisfied with their current living environments in really that dreaming stage. We will work them through our sales funnel over the next period of time, and it's really the next 4 to 6 weeks which will dictate the rate of conversion from that new inquiry.

[Melanie Buffier, General Manager of Investor Relations]

I think we'll stay on Residential just for the moment. So a question from Stuart McLean from Macquarie. What does the slowdown in sales in New South Wales mean for margin?

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

Yes. So New South Wales is our highest margin portfolio. So obviously, a slowdown in sales here. And you've got to look at it relatively across the whole of the portfolio. So what's the mix going to be with regards to settlements from other regions as well. So it's really going to dictate what are we going to see between -- if you look at full year margins for '20, what's your settlement rate going to be over the next 2 months? And then as we look into FY '21, really, what is the speed and the shape of the recovery is really what we'll be monitoring moving into the end of the financial year.

[Melanie Buffier, General Manager of Investor Relations]

Second question from Stuart McLean. Is Stockland going to provide any update on FY '21 Residential assumptions, which were provided at your first half '20 results that being 5,800 lots and an underlying margin of 18%?

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

Yes. As Mark mentioned, there's obviously a high degree of uncertainty in the speed and the shape of the recovery out there at the moment. And that was why we withdrew our guidance for this year and into next year. What we have seen? Yes, we are seeing customers continuing to settle lots and at similar rates to what we saw in the last half, which is good.At the end of April, we've got around 3,800 contracts on hand. So we're in a good position from a contracts-on-hand point of view. Inquiry is, in fact, at that pre-COVID level. Net sales are low, but you've got to consider that in the context that we really are just progressively reopening our sales offices.But obviously, when you're thinking about that, it's also taking that economic overlay, which is going to dictate the speed and the shape of the recovery. Yes, economically, interest rates are low. The access to credit is still there. We have seen that cumulative underbuild over the last 4 months. And obviously, our buyer group will benefit from any government stimulus, more than other segments of the market.But what's going to temper against those, you've got elements like net migration and the employment outlook. So you've got to combine all of those things when you're looking at it. Fair to say, yes, we're confident in the medium-term outlook for the Residential market. It's really the speed and the shape of the recovery, which is going to dictate what we settled both for the balance of this year and into FY '21.

[Melanie Buffier, General Manager of Investor Relations]

Thank you, Andrew. Another one from Stuart McLean, but moving across to Commercial Property. How do you think about asset sales in the current environment? You previously wanted to sell Retail. Also the last residential cycle sold resi assets. Could this occur again?

[Louise Mason, Group Executive & CEO of Commercial Property]

Thanks, Mel. Stuart, the style of our non-core Retail portfolio remains a key part of our strategy. So that will continue. We will assess any sales potential, any prospective purchases should they arise, and there still are people in the market looking for our Retail. So that will be done on a case-by-case basis. So we will.

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

Yes. Now as it relates to the second part of that in terms of the Residential Community investments. We've talked about broadening our capital base through capital partnerships. We're very pleased to welcome the capital group to partner in Aura. And we've said previously, and we continue to intend, to look at selectively partnering in other projects. I think in terms of divestments like The Grove at this point, we would envisage that.

[Melanie Buffier, General Manager of Investor Relations]

Thank you, Mark. Lauren Berry from Morgan Stanley has asked, what percent of Retail rent did you collect in April? Can you give an update on progress through SME rental rebate negotiations?

[Louise Mason, Group Executive & CEO of Commercial Property]

Thanks, Lauren. I'll post it back and talk to March first. We collect our rent. We do invoice and collect our rent in the latter part of the prior month and the start of that month. So in March, we had invoiced and collected the majority of that month's rent.For April, the code was being negotiated through cabinet, and we proactively went out to our SME tenants and told them to defer payment of their April rental, pending the outcome of the code. So that payment and deferrals and maintenance now become part of the negotiation with those SME tenants and remain ongoing, and that will remain ongoing for several weeks. Now there are -- these tenants are required to provide information under the code. And the majority of tenants continue to access that information and pull it together and sent it through to us. So the April rental really is subject to those negotiations alone, and we're not in a position to put a percentage on that at this stage.

[Melanie Buffier, General Manager of Investor Relations]

Thank you, Louise. Richard Jones from JPMorgan. Can you provide an update on current gearing?

[Tiernan Patrick O’Rourke, Chief Financial Officer]

Thanks, Richard. So look, I think Mark mentioned in his speech that we remain cautious around the shape and speed of the recovery. So uncertainty remains around the market. So there are a few things that couldn't affect gearing over the next couple of months, like the rent abatements that Louise has just talked about and the deferrals and also we're waiting for valuations later on this year. But of course, that is also offset by our ability to reduce our committed capital and development expenditure as well. So we've got a very prudent departmental framework around managing our gearing. I would say that we would be broadly within the target range of gearing, but of course, subject to evaluating the rest of this year as we work through that prior period of June.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Tiernan. Has there been any discussions at the Board level in regards to the DPS? Could you reduce it down to taxable income or remove it completely?

[Tiernan Patrick O’Rourke, Chief Financial Officer]

Who was that from?

[Melanie Buffier, General Manager of Investor Relations]

That's from Stuart McLean.

[Tiernan Patrick O’Rourke, Chief Financial Officer]

Stuart, so look, I provide the Board with a monthly report that talks about all matters, financial and including the distribution. So we talk about all financial matters on a regular basis.In terms of the distribution, though, again, we are cautious. We're evaluating the situation on a day-to-day basis. And we're -- and analyzing what that means for the short- and long-term outcomes for the business. And it's one of the reasons why we withdrew our earnings and distribution guidance.So we need to work our way through the remainder of the year before we can provide any guidance on distribution. I will say that REITs, as you know, provide information on estimated distribution prior to record date, and that is the 30th of June. So a number of days before that. I think -- and we think, the development cost to buy distribution, so on. So we may have to wait until then to get further information on that. And obviously, the mechanics of how that will work.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Tiernan. Can you talk to the prospect of first homebuyers' grants?

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

Yes, obviously government have looked at a range of stimulus out there that traditionally has been one measure on the demand side that we've seen governments to -- that governments introduce over time. And should it be introduced, we'd be in a good position to provide suitable product for the first-time homebuyers considering our focus on the affordable end of the market of first homebuyers still making up over 50% of our customer base.

[Melanie Buffier, General Manager of Investor Relations]

[Operator Instructions] Thank you. Moving on to the next question from Tom Bodor at UBS. 100% of the portfolio is being revalued. Can you discuss the range of expected outcomes for each asset class, including Retirement?

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

I think that we've said that the valuations will be due 30 June. Once again, and it's fair to say, the valuation community is looking very carefully at all transactions and all lettings, et cetera, across all Commercial segments, and is going to undertake a fulsome process. This is already evident, and it's unlikely that we'll get final valuations much before 30th of June. So at this stage, it's too early to be able to comment on what sort of subsector trends are likely to emerge from that.

[Melanie Buffier, General Manager of Investor Relations]

And can you talk about the ability to execute your strategy in a sluggish environment, specifically rotating capital from Retail and into Logistics and Workplace?

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

Yes. And that's a good question. So as Louise mentioned, particularly for grocery base, and let's say now also grocery DDS base because we've seen actually really strong performance of discount department stores through this pandemic period, that there is ongoing appetite and that continues largely because interest rates are so low. And for well-let properties, we know that there continues to be throughout counterparties, credit availability. Also, then more broadly, it's fair to say we have not seen a withdrawal of capital, looking at Commercial Property in Australia. That's quite a bit contrary. And it's fair to say interest has risen in the context of looking at the positioning of the Australian economy more broadly, the performance in containing the virus, and obviously, the very significant government stimulus and the program of reopening the economy safely and the fact that our major trading partners are about 2 to 3 months ahead of the rest of the world, in fact, reinforces the attractiveness of Australia.So at this point, we believe that we'll still be able to selectively sell non-core assets over time. And on the redeployment side, that will largely go through the -- in the first instance, the logistics development program, and we talked about the strong tenant inquiry that we've seen in Macquarie Park, which is exposed to all the categories that are growing strongly in the economy and also the $250-odd million, $230 million that we've got under construction at the moment with the upgrading of the Optus Campus in Macquarie Park and a range of projects in Brisbane also at the beginning of Melbourne Business Park.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Mark. A question from Pete Davidson from Pendal Property, one for Louise. What percent of rent deferrals will actually be collected? How will this work in practice? And will they just become incentives for a lease extension?

[Louise Mason, Group Executive & CEO of Commercial Property]

Thanks, Pete. The code is quite performing well. That's to be against negotiations with retailers, and that relates to both deferrals and the payments. And it also relates to the length and time of the pandemic and a recovery here. So too early to put numbers against that, Pete. It's really got to be on a case-by-case basis kind of formula to the SMEs and also with the spirit of the code in non-SMEs in relation to any deferrals or statements that we might negotiate. So while there are a number of weeks and months to go, we will have to wait on that.

[Melanie Buffier, General Manager of Investor Relations]

Thanks. And whilst we're on the Retail portfolio, what percentage of tenants are currently in holdover? Preferably answer this by income? And what percentage of leases expire over the balance of FY '20 and in the first half '21.

[Louise Mason, Group Executive & CEO of Commercial Property]

Okay. So in regards to the Retail, the holdover number has grown. And that's because we've seen a reduction in deal volume during the pandemic. So as of 31 March, holdovers by number of leases had increased to about 180, which is about 4% of our rent volume. Historically, we see this in strategy with strong leasing. Since March, that number has grown slightly again to around 5%, 5.5% in rental.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Louise. Can you talk to your confidence in finding tenants for M-Park and starting this in first half '21?

[Louise Mason, Group Executive & CEO of Commercial Property]

Yes. I think, as Mark touched on, we've seen very strong interest in M-Park. We are having discussions with parties, and we are confident of around pre-leasing prices done on-site in the first half of the financial year '21.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Louise. Do you have a view on stimulus by state and federal government? For example, first homebuyer grants or stamp duty, et cetera.

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

Look, we think the stimulus program has been very important as it relates to the transition to recovery. And so at a high level, job keeper, in particular, given the good terms of employees to their employer and helps with the psychological impacts of the disruption. That, combined with all the other stimulus, it's 69.4% of GDP, one of the highest packages in the world, and you shouldn't half the economy that's been broadly affected. That covers about 5 to 6 months of economic activity.Specifically to stimulus for housing, it's well recognized that particularly home construction is very fast to start and drives significant jobs and employs more than 0.5 million Australians. And so we also know that in affordable and social housing, there's very long waiting lists in all the states, and that's been the case for some time. There's also been a lot of concern about affordability.So in an environment where you can actually respond to that unmet demand, it's a very natural area for government to focus around the business where you get that economic multiplier of more than 3x. It comes very quickly, and it also has a social good in putting people into home ownership or into a rental position. So I think -- yes, we expect that this will be an area of focus for government, and we would strongly encourage them to look at stimulating housing further for those reasons. So that's a very positive thing for the Australian economy and Australian community.

[Melanie Buffier, General Manager of Investor Relations]

Thank you for that, Mark. And we're almost out of the time this morning. So there's one further question on Retail. What were the leasing spreads in third quarter '20?

[Louise Mason, Group Executive & CEO of Commercial Property]

Yes. So our leasing spreads remain within the guidance we had previously given of between -5% to -7%.

[Melanie Buffier, General Manager of Investor Relations]

Thanks, Louise. So we have no further questions at this time. I do apologize again for the technical difficulties that we experienced earlier. I will now hand back to Mark for his closing remarks.

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

Thanks, Mel, and thanks, everybody, for taking the time to join us today. We certainly believe given our community focus and emphasis on Middle Australia that we are well positioned to not only get through the crisis but to be able to respond to the recoveries we've talked about. And we look forward to discussing that in more detail in upcoming meetings. Enjoy your day, and thank you very much.