Stockland Corporation Ltd

ASX:SGP

Earnings Call Transcript 2022-Q4

[Tarun Gupta, executive]

Good morning. My name is Tarun Gupta, CEO and Managing Director. Welcome to Stockland's financial results update for full year 2022. Before we begin, I would like to acknowledge the traditional owners and custodians of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to elders past, present and emerging.

Joining me today is Alison Harrop, our CFO; Louise Mason, CEO of Commercial Property; and Andrew Whitson, CEO of our Communities business.

Stockland celebrates its 70th anniversary this year. We are proud of our legacy and passionate about continuing to create and curate connected communities across Australia. Stockland's 70th year has been one of delivery. We have made significant progress towards executing our refreshed strategy, while maintaining our focus on operational excellence across the organization.

In an environment of significant market disruption, we have delivered a strong FY '22 financial results, with FFO per security slightly ahead of our guidance range. And we enter FY '23 in a very robust capital position, with gearing below our target range on a pro forma basis, a well-hedged debt book and high levels of liquidity. Our high-quality and well-diversified business is positioned well to perform in another year of anticipated market volatility.

Last November, we came to you with 3 clear strategic priorities for our business: to dynamically reshape our portfolio, to accelerate the delivery of our $41 billion development pipeline, and to scale our capital partnerships. When we established these priorities, we had one objective in mind: to drive sustainable growth for our security holders. Over FY '22, we have delivered on what we set out to achieve. We have actively reshaped our portfolio. The sale of our Retirement Living business, which completed in July, reshaped the composition of our portfolio, while also simplifying our business, strengthening our balance sheet and providing the capacity to redeploy that capital into higher returning activities.

Over FY '22, we also continued to refine our Town Center portfolio, executing on almost $400 million of noncore disposals. We have leveraged the strength of our platform and extended our leadership in the residential sector. We are well progressed in growing our Land Lease Communities business into a market-leading platform.

Sales volumes and price growth for FY '22 were ahead of the assumptions that underpin the acquisition of Halcyon's business and the combined land lease development pipeline has grown to approximately 7,200 homesites. The formation of the Stockland Residential Rental Partnership with Mitsubishi Estate Asia will enable us to accelerate the growth of our land lease platform and the realization of embedded margin across our land bank.

Our Masterplanned Communities business took advantage of the strong conditions that prevailed for most of FY '22, driving price growth and positioning the business well for a moderating market in the year ahead. We enter FY '23 with record contracts on hand.

In August last year, I shared with you how excited I was by the opportunities that existed within our land bank. Across our Communities and Commercial Property businesses, we have grown our development pipeline from $33 billion to $41 billion over the last 12 months. In just the last 6 months, our focus on accelerating masterplanning opportunity within our existing asset base has seen our Logistics pipeline double to $6.4 billion, providing a clear pathway for earnings growth by the re-weighting of our portfolio toward high-quality Logistics assets. We completed approximately $300 million of Logistics projects in FY '22, and expect that number to increase to around $600 million in FY '23, tracking ahead of the 5-year average target of $400 million per annum that we set for ourselves last year.

Stage 1 of our M_Park project being undertaken in partnership with Ivanhoé Cambridge is progressing well and is expected to contribute to earnings from FY '23 onwards. We will continue to explore opportunities for additional capital partnerships across our Commercial Property and Communities platforms, with the goal of aligned capital partnerships in our operating sectors over time.

Our focus on executing our strategy at pace and conviction has allowed us to manage the potential near-term dilution resulting from the sale of the Retirement Living business. Executing the 2 capital partnerships and pivoting our portfolio to land lease and Logistics sectors has provided us with new engines of growth and visibility of much higher quality income into FY '23 and beyond.

Turning now to the FY '22 results. Funds from operations was up 8% to $851 million, and we delivered FFO per security slightly above our guidance range at $0.357, which was up 7.9% versus FY '21. Our NTA per security is up by 8% over the year to $4.31 per security on the back of solid revaluation gains across our high-quality portfolio. Our Commercial Property portfolio delivered comparable FFO growth of 3.3% and a rent collection rate of 99.7%. Our Town Center portfolio demonstrated its resilience during FY '22 with leasing spreads remaining positive throughout the year and sales growth accelerating strongly once COVID-19 trading restrictions were removed.

Our high-quality, well-located Logistics portfolio saw strong rental uplift for new leases negotiated over FY '22, and is well positioned to capture further rental growth with a 3.4-year weighted average lease expiry. Our Masterplanned Communities business is positioned well, driving margin expansion and record contracts on hand as we enter FY '23, and we have positioned our land lease business to be a key earnings driver in FY '23 and beyond.

When we reset our strategy last November, we also introduced the discipline of return on invested capital, or ROIC target ranges. For FY '22, ROIC for our recurring income streams was 10%, above our long run through the cycle target of 6% to 9%, while our development business generated ROIC of 16%, the midpoint of our target range of 14% to 18%.

ESG is at the core of everything we do, and is integral to our strategy. Stockland has a strong culture of innovation, and we are leveraging this in order to maintain and extend our ESG leadership. At Waterlea in Victoria, we have created Australia's first certified Green Star home, embedding sustainability in the heart of our communities and our M_Park development project incorporates market-leading ESG principles, including in the areas of sustainability and social inclusion. We have a strong ESG track record and are committed to continuing raising the bar. We have progressed a comprehensive review of our ESG strategy, and we'll be looking closely at how we can further enhance our efforts in areas such as climate resilience, circularity and social impact. We look forward to sharing further initiatives with you during the year.

Our people and our brand are 2 essential elements of our success. We are proud of our people and continue to drive a diverse, inclusive and high-performing culture. It is pleasing to see our employee engagement remaining consistently high at over 80%. The well-being of our people and our customers is our top priority, especially during a year that presented a wide range of challenges for our people, our customers and our communities. As a customer-focused organization that reaches 1 in 5 Australians every day, our position as a top 10 brand provides us with a key competitive advantage as we look to drive further growth of our platform.

Before I hand over to Alison, I'd like to note that we farewelled our colleagues in the Retirement Living business last month. I would like to thank them for the incredible work and dedication they have brought to Stockland and wish them the best for their future endeavors.

I'll now hand over to Alison to take us through what is her first full year financial results as Stockland's CFO.

[Alison Harrop, executive]

Thanks, Tarun, and good morning, everyone.

We start FY '23 in a very strong capital position. We have deleveraged the balance sheet materially, with gearing currently below our target range. We have $1.9 billion of cash and undrawn facilities, and we have extended the duration of our hedging in an uncertain interest rate environment. As Tarun has highlighted, we ended the full year with gearing at 23.4%, toward the lower end of our 20% to 30% target range and available liquidity of $1 billion. On a pro forma basis, following the disposal of the Retirement Living business, which settled on the 29th of July, we have reduced gearing to approximately 18%, and available liquidity has increased to $1.9 billion.

Our weighted average cost of debt for FY '22 was 3.4%, slightly lower than the 3.5% we forecast in February. And we expect our FY '23 weighted average cost of debt to be approximately 4.4%. This is assuming a BBSW rate of approximately 3.2% for the year.

Our fixed hedge ratio over FY '22 on our debt portfolio was 64%, and for FY '23, we expect this to be approximately 65%. Over the half, we rebalanced our hedging portfolio, reducing the absolute level of hedging in place for FY '23 by around $800 million, and increasing our hedging for FY '24 and beyond. This has extended the effective duration of our hedging to more than 4 years at more favorable rates than currently available in market.

On to cash flow. Operating cash flow of $918 million was above FFO, and comfortably covers our distribution for the year. It was broadly in line with the strong FY '21 cash flow result, both before and after allowing for land acquisitions. Funds from operations for FY '22 was up by 8% to $851 million. The FY '22 result reflects strong operating performance.

Turning to the key P&L line items. Logistics FFO rose by 37% (sic) [ 37.2% ] to $155 million. The portfolio delivered comparable FFO growth of 5.5%, with occupancy remaining high over the period and further market rental growth being captured by new leases and renewals. The Logistics contribution for this period also includes $31 million of trading profits relating to our developed-to-sell project at Gregory Hills. We expect trading profits to again be a feature of the result in FY '23 as we settle the developed-to-sell component of Melbourne Business Park.

Workplace FFO was flat on a comparable basis. New leases and renewals resulted in average growth of 2.3% versus previous passing rents. However, the result was impacted by the downsizing of a major tenant at 601 Pacific Highway St. Leonards, which drove an increase in vacancy. Town Center FFO was down by 6% in absolute terms. And this primarily reflects the impact of noncore disposals over FY '21 and FY '22. On a comparable basis, FFO was up by 3% over the period.

Leasing spreads remained positive for the second half. Sales growth rebounded strongly post the removal of COVID trading restrictions, and [ debtors ] finished the period of pre-COVID levels. The net impact of COVID-related abatements and expected credit loss provisions was an $18 million reduction to FFO in FY '22 versus a $9 million reduction in FY '21.

The Masterplanned Communities business delivered FFO up 1.5% to $336 million. Settlement volumes were down slightly versus FY '21, and this was offset by higher revenue per lot and a stronger average margin. Our integrated Stockland Halcyon Communities platform delivered FFO of $15 million for FY '22. This reflects the part-period contribution from the Halcyon acquisition, which settled in August 2021, as well as settlement deferrals due to wet weather and COVID-19-related construction delays.

The contribution from Retirement Living was up by $43 million or almost 80% versus FY '21. This increase primarily reflects village disposal profits that were secured in FY '21, but settled in FY '22 as previously flagged. The underlying contribution from the business also improved over the period with settlement volumes up by 5% relative to FY '21.

Both Commercial Property net overheads and unallocated corporate overheads were up significantly versus FY '21. Following COVID-19 cost savings measures in FY '21, there has been a subsequent normalization of our cost base, particularly for variable and discretionary costs. Other drivers include investment in technology, increased insurance premiums and our investment in additional capabilities for growth.

Net interest expense reduced by 16.3% relative to FY '21. This reflects lower average borrowings over FY '22, a lower weighted average cost of debt and an increase in the proportion of interest payments that were capitalized due to higher production levels. Our total distribution per security was up by 8% to $0.266. This reflects a payout ratio of 75% at the bottom end of our targeted range of 75% to 85%.

Finally, with the sale of the Retirement Living business and the accelerated reshaping of the portfolio, Stockland Corporation will return to a taxpaying position in FY '23. And in that year, we will have the benefit of some remaining carryforward tax losses. We estimate that in FY '23, tax payable will be in the range of 5% to 10% of pretax group FFO. So in summary, a very pleasing FY '22 results and a strong balance sheet position.

I will now hand over to Louise to take us through the Commercial Property results.

[Louise Mason, executive]

Thanks, Alison, and good morning.

Commercial Property delivered strong results across all 3 sectors in FY '22 and continue to deliver on the key strategic focus areas. This overall result is a byproduct of strong operating performance across all sectors, underpinned by high exposure to Logistics and the resilience of our essentials-based Town Centers. In Logistics, we've delivered on the development pipeline, growing from an historic $150 million per year to completing just over $300 million of projects this year and we're well underway to deliver $600 million of completed projects in FY '23.

In Workplace, construction is advanced on the first 2 buildings in Stage 1 of M_Park, with the final 2 buildings in this stage to begin later in FY '23. We achieved the DA for Affinity Place in North Sydney and continue to make good headway on the Piccadilly approval process. We continue the repositioning and re-weighting of our Town Centers with $388 million of noncore disposals in FY '22 and a further $300 million now in the early stages of being marketed for sale.

Over the past 4 years, we have divested $1.5 billion of noncore assets, and our remaining core assets show ongoing resilience due to active remixing, with over 75% of sales coming from the essentials categories. We've also completed masterplans on the Logistics, Workplace and retail assets with land bank opportunities for both densification of logistics and mixed-use. In Logistics, this has increased the previously announced $3.2 billion pipeline to $6.4 billion. Future Town Centers associated with the Communities business are also proceeding through the planning phase.

The $10.7 billion Commercial Property portfolio delivered 3.3% positive comparable FFO growth. This was underpinned by 1.5% positive leasing spreads in Town Centers, 8.5% average rental growth on new Logistics leases negotiated in FY '22, and rent collection across the portfolio of 99.7%. The portfolio delivered a net valuation uplift of $725 million in FY '22, a 7.3% increase on the June '21 book value. 98% of assets were independently valued in FY '22.

In logistics, cap rates compressed 50 basis points to 4.1%, and with good rental growth, the Logistics portfolio added $391 million in value. Workplace compressed 20 basis points to 5.3%. And Town Centers also compressed 20 basis points to 5.9%, with the $297 million uplift, driven by strong performance across the essentials-based assets and retail transaction activity across the year, supporting the cap rate compression.

In Logistics, we've delivered comparable FFO growth of 5.5%, underpinned by the 8.5% rent growth on new leases and the strong margins on the Gregory Hills trading project. Over 430,000 square meters was leased across the year, and occupancy remained at historic highs of 99.9%. Rent collection was also at 99.9%. The portfolio WALE at 3.4 years allows us to capture further rental growth.

I've been talking for some time about both the Logistics capability we have and the land bank we've built up over time. This is now translated to the Logistics development pipeline increasing from $3.2 billion, noted at the half year, to $6.4 billion now. This growth has come from significant densification opportunities currently in the masterplanning and planning phases at Padstow and Yennora in Sydney, and Brooklyn in Melbourne. Over 60% of the Logistics pipeline to be delivered in FY '23 is now leased and more than 40% of the FY '24 pipeline. And we're seeing strong rental numbers further supported by reduced incentives on these developments. These development opportunities in very well-located sites underpins the strategic objective of re-weighting the portfolio to the logistics sector, with the majority of the $6.2 billion pipeline targeted the delivery between FY '22 and FY '27.

Whilst comparable FFO was flat at 0.2% in Workplace due to the development nature of the assets, it showed good occupancy at 91.3% and rent collection at 99.9%. Rental growth of 2.3% was achieved on the 31,000 square meters leased. The WALE across the portfolio is 4.4 years. The $5.8 billion development pipeline in Workplace is progressing well, with the ongoing delivery of Stage 1 of M_Park and the lodgment of the development proposal for the $1.3 billion Stage 2. In early June, we received development approval for Affinity Place in North Sydney, and we're now undertaking leasing discussions with potential tenants and detailed design work. And Piccadilly is progressing through the planning with the City of Sydney.

Our capability in managing detailed approval processes is adding value to these assets, whilst we control timing and commencement based on market conditions. Our Town Centers have shown ongoing resilience despite lockdowns in New South Wales and Victoria, causing a dip in sales July to October 2021. As shown here, when we compare like-for-like periods, total comparable sales post lockdown were up 8.1% and specialty sales up 10.1% versus the pre-COVID corresponding period. 75% of sales is in essentials-based categories, and this remixing outcome, combined with the disposal of noncore assets, has led to the strong sales performance.

In Town Centers, we delivered comparable FFO growth of 3% and positive leasing spreads of 1.5%, with 4.3% rent growth on new leases. Occupancy is at 99.1%. Rent collection is now at 99.5% and the debt position in line with pre-COVID levels. The specialty occupancy cost is well positioned at 15.8%, and incentive levels have decreased to 10.5 months. Our remixing and repositioning of the Town Centers portfolio has created the resilience, which has underpinned performance over recent years.

Overall, I'm very pleased with the FY '22 results for Commercial Property, which highlights our strong operating performance delivered by assets and sectors, which we have strategically positioned for growth. The focus of Commercial Property in FY '23 is to continue to accelerate the Logistics development pipeline, maximizing income generation through rental growth on the existing portfolio, and progressing the $6.4 billion pipeline, completing $600 million of developments in the year, noting that 60% of this is delivered in the last quarter of FY '23.

In Workplace, we'll continue to add value through planning and design of both Affinity and Piccadilly and delivery of Stage 1 of M_Park, whilst aiming to accelerate Stage 2 with commencement forecast in FY '25. And in Town Centers, our essentials-based remix assets will continue to show resilience in an inflationary environment.

I'll now hand to Andrew Whitson.

[Andrew Whitson, executive]

Thanks, Louise, and good morning, everyone.

November last year, we made a commitment to 3 key strategic priorities. And since then, we've made significant progress, including extending our leadership position in masterplanned communities through taking advantage of strong market conditions, rapidly scaling our land lease business and introducing a high-quality capital partner and completing the sale of our Retirement Living business. This has positioned the Communities business strongly, with record contracts on hand across masterplanned communities and land lease, setting the business up for further growth over the next 12 months.

On to the results for the Masterplanned Communities business. This result highlights the strong market tailwinds for the majority of the past 12 months, with settlements in line with guidance, the default rate materially below the long run average and record contracts on hand with an average price 13% above prior year settlements. This provides us with good earnings visibility for the year ahead. Our FY '23 FFO margin guidance is around 18% and settlements around 6,000 with a skew to the second half. This outlook has been impacted by wet weather and supply chain disruptions over the past 12 months.

Taking a closer look at sales and settlements. As forecast, we are partway through a cyclical moderation. Over the past 4 months, new inquiries moderated back to pre-COVID levels, and the sales process is lengthened. This moderation hasn't been uniform with stronger demand being experienced in South East Queensland, Geelong and the Illawarra. These markets have benefited from both post-COVID net migration trends and an affordability advantage. So overall, we've experienced subdued demand to start FY '23, and we expect purchases to remain cautious in the near term.

Our Masterplanned Communities business enters this stage of the cycle in a strong position due to our competitive advantage, which is built on a combination of 3 elements: the first, our land bank. Having restocked well at the start of COVID, acquiring 25,000 lots, we further strengthened the embedded margins in our pipeline. And with first settlements from 10 new projects over the next 24 months, taking total activation of our land bank back above 80%, the business is well positioned to capitalize on a market recovery when it comes.

The second, our brand, which is built on the quality of the communities that we've created over the past 70 years, and we know from prior cycles there is a flight to quality as the market moderates. This has driven a 3% to 4% increase in our market share in the prior 2 cycles. And the third, our scale. This is a competitive advantage in [indiscernible], and enables us to generate deep primary source data which we can leverage to understand what our customers want, increase the conversion rate and lower our cost per sale.

So whilst we've been able to take advantage of the market tailwind since the onset of COVID, we expect our competitive advantage will continue to drive performance as the market moderates.

Our outlook for the year ahead. A number of the market fundamentals remain positive, including supply, population growth and employment. However, these will be offset by further interest rate increases, and we generally expect some price moderation and further sales volume declines over the next 12 months. In Victoria and New South Wales, affordability constraints are expected to impact price and volumes in the near term with under supply, putting a floor under these markets. These markets will benefit first from an expected increase in net overseas migration.

In Western Australia, the significant affordability advantage to the Eastern markets will limit price and volume declines. And in South East Queensland, we're forecasting relative outperformance on the back of ongoing net interstate migration and the most acute undersupply in the country.

Turning to land lease, 12 months ago, we set out to scale our business at pace, and that's exactly what we've achieved, setting our business up with strong FFO growth over the coming years. We've taken advantage of market tailwinds over FY '22 and carry 499 contracts on hand to start the year at a price 18% of prior year settlements, both ahead of our forecast when we acquired Halcyon.

The strength in price growth has been greater than cost increases, and this is translating to margin expansion. We're near completion of the integration of the Halcyon business and this is delivering significant synergies in establishing a market-leading land lease platform. We've also established a capital partnership, which will not only enhance returns, but also allow us to accelerate the organic and inorganic growth of the business.

The sales and inquiry trends over the past year have demonstrated the resilience of the over-50s market, and we expect the demographic tailwinds and growing lifestyle preferences of the retiring [indiscernible] will drive outperformance compared to the broader residential market through this cyclical moderation.

The total portfolio has continued to grow through both increasing the scale of the villages on our existing land bank and new acquisitions. The team have progressed our development pipeline, and we're on track to launch 7 new communities over the next 24 months, more than doubling the number of projects in active development and significantly increasing year-on-year settlements. The number of established home sites in our portfolio has also continued to grow and the quality of the rental income is demonstrated through 100% occupancy and rental growth in line with inflation.

So in summary, we've made significant progress in reshaping the business through the execution of our strategic initiatives and the Masterplanned Communities business and land lease business are both strongly positioned for further growth in FY '23.

I'll hand back to Tarun.

[Tarun Gupta, executive]

Thanks, Andrew.

So last November, we set clear targets for capital allocation, income mix, returns and balance sheet position. We are tracking well against all of these targets. The sale of the Retirement Living business has helped us to rebalance our sector exposures and the rollout of our expanded Logistics development pipeline, along with the embedded growth within our land lease platform, will drive an increased weighting towards these sectors over time. We will continue to reduce our overweight exposure to Town Centers. And as Louise has highlighted, we expect to complete approximately $300 million of additional noncore disposals over FY '23.

So in summary, we are pleased to have delivered a strong FY '22 results, while also making significant progress against our key strategic priorities. In an uncertain macroeconomic environment, we have a number of key strengths that position us well for the future: the diversification and quality of our portfolio, which, as today's result, demonstrates is performing strongly, we have a highly engaged and diverse team, access to high-quality capital partners; and a very strong balance sheet.

Now turning to guidance. We expect FFO per security for FY '23 to be in the range of $0.364 to $0.374, on a pretax basis. As we have previously advised, we expect tax payable to be in the range of 5% to 10% of pretax group FFO for FY '23. We expect the distribution per security for FY '23 to be within our target range of 75% to 85% of post-tax FFO per security.

Finally, I would like to thank the Stockland team for their efforts during the year. Our team has delivered strong performance against a backdrop of COVID-19 trading restrictions, which impacted 60% of our Town Center portfolio for more than a quarter of the year. We had severe wet weather impacts, which saw us lose almost 40% of the year's workdays on our South East Queensland projects. We had supply chain disruptions, rising costs, and the ongoing impacts of COVID-19 on our team and the wider community. The quality and resilience of our team positions us well to deliver on our objectives in the year ahead.

So operator, we'll now open the lines for question and answers.

[Operator]

[Operator Instructions] Our first question is from Tom Bodor.

[Tom Bodor, analyst]

First question might be 1 for Andrew. I just wanted to ask about the contracts on hand in the residential business [ at 5,900 ]. [indiscernible] were very low, but I just would be interested in how much those contracts are locked in? And what sort of the potential is for those contracts to fall over or be canceled even if it's on a state basis that they're a bit different?

[Andrew Whitson, executive]

Yes. Yes. Thanks, Tom. Of the 6,000-odd contracts on hand, as you pointed out, 5,000 of those are due for settlement in FY '23. In New South Wales, Victoria, the majority of those are unconditional. In Western Australia, there they tend to be conditional up until 3 months out from settlements. So we're carrying a large number of conditional contracts there and also in Queensland. The exact split of conditional and unconditional I'll have to come back to you on, Tom.

[Operator]

Our next question comes from Lauren Berry.

[Lauren Berry, analyst]

So Tarun, I was hoping if you could give any more color on any progress around the retail funds that you'd flagged at your strategy update.

[Tarun Gupta, executive]

Thanks, Lauren. Yes, firstly, as you know, we've been very pleased with the strategy implementation with key partnerships already launched in the sale of the Retirement business. We are progressing, and our goal is to have capital partnerships right across our platform, in our sectors and our key thematics. And we are engaged with capital partners. In Town Centers, we are committed to the 20% to 30% down weighting over time. We're selling another $300 million of assets. And with the redeployment of our balance sheet over time, we see that moderating in any way.

Lauren, in terms of timing, we never gave exact timing, and I won't be giving that, except to say unlikely we'll be doing a partnership in FY '23. But that essentials portfolio, as Louise has highlighted, is performing exceptionally well, particularly the smaller subregional and neighborhood centers that are actually showing approximately 5% FFO growth. So we are very comfortable with the holding position of those assets.

[Operator]

Thank you, Lauren. Any further questions?

[Lauren Berry, analyst]

Yes. Just in terms of the developments in Logistics, I know you've said you've got $600 million completions in FY '23. Can you talk about how much you intend to start in FY '23? And if you've made kind of any changes to that target of $400 million per year?

[Louise Mason, executive]

Yes. So Lauren, at the half, we talked about -- it's Louise here. Thanks for the question. We talked about going forward having an average of around $400 million a year with the increase in the development pipeline because of the further opportunities on our land bank. That's increasing. So we will complete -- and they only take about 12 to 18 months to go from start to completion. So we would have started some of that $600 million in FY '22. And then we will complete it in FY '23. And the split will be about 20% will be completed in the first half, 20% in quarter 3 and about 60% in the fourth quarter. And then we're forecasting similar numbers in FY '24 in terms of development pipeline completion for Logistics.

[Tarun Gupta, executive]

So Lauren, just if I can add -- I was just going to add that. So that $600 million will complete more or less at the back end of FY '23. So the earnings accretion, we're targeting 5% to 6% yield on costs will start to flow through in FY '24.

[Lauren Berry, analyst]

Got it. And just on the residential business, you've been tracking at about 1,500 to 1,600 sales per quarter. Andrew, do you have a view on where that's going to track over the next 12 months or so?

[Andrew Whitson, executive]

Yes. Thanks, Lauren. What we're seeing at the moment, when you look at the July numbers, and July was impacted by a couple of factors, lower releases, the normal winter trading, but also buyers are more cautious. So while inquiries being reasonable and it's back at sort of pre-COVID levels, we're seeing people pausing that purchasing decision. When we look back over the last 2 cycles, there's only been a couple of quarters where we've traded below 1,000 net sales for the quarter. I expect until we see a stabilization of interest rates that we're looking at those sort of numbers. But we know from the undersupply that, ultimately, that pent-up demand will convert to sales.

I think the other thing to think about is the contract on hand position. We enter this stage of the cycle in a very strong position with those record contracts on hand and also the new launch projects. So with 10 coming online in the next 24 months that's going to help drive sales as well. And the contracts on hand gives us the ability to trade through this trough with settlements. Just coming back to Tom's original question around conditional, unconditional split. About 75% of the contracts on hand are unconditional. And of that, around 50%, we're carrying more than a 10% deposit as well.

[Operator]

Thank you very much, Lauren. Any further questions?

[Lauren Berry, analyst]

No, but thank you.

[Operator]

Our next question is -- Tom Bodor back on the line.

[Tom Bodor, analyst]

I'm glad people would like to see a brief call. So I just was interested in [indiscernible], your inquiry dropped about 25%, so not as much as the Communities business. I'd just be interested in how sensitive you expect that business to be to the broader residential conditions as we head into a softer period?

[Andrew Whitson, executive]

Yes, Tom, there's obviously a correlation to the broader residential market, but we expect it to be less impacted through this moderating stage of the cycle. Our inquiry is down in the sort of 40% range from where it peaked in the first quarter. So it's pulled back, but not as much as we've seen within our residential business. So yes, there is those demographic tailwinds. Our buyers do have to sell a home, so there's obviously a correlation there to the broader market, but we think it's going to be more resilient. And that's been our experience within our Retirement Living business, and it's also the experience from the housing team that have obviously traded through a number of cycles.

[Operator]

Our next question comes from Sholto Maconochie.

[Sholto Maconochie, analyst]

Just a follow-up. On the contracts on hand, I appreciate they're conditional. But what do you factor in for defaults where people can't [ settle ]? Obviously, rates are rising, construction costs are up, the builders going under every week. What's your sort of assumption on the -- those contracts on hand on the default rate for '23?

[Andrew Whitson, executive]

Yes. Thanks, Sholto. The -- yes, our default rate for '22 is being below long-run averages. We're in single digits. So we expect it to rise. The important thing to think about when you're thinking about the FY '23 outlook is that it's very much a production-led guidance number that we're giving. That's one factor that's constraining it. The other 1 is really Q4 settlements. So yes, we've got skewed to the second half. Settlements' performance in Q4 is the factor that we've looked at. And we've allowed for those default levels to rise back to levels that we have seen through '19 and then back to the GFC. So we saw it around 10%. The default levels back in those peaks, and that's what we're factoring into Q4. It's not really a full year number because we can -- we've got more contracts from a production point of view. It's really what happens in that Q4 period.

[Sholto Maconochie, analyst]

Yes. That's really helpful. And then just on the guidance. It's quite a strong -- it's a very good year. You've executed really well strategically. The guidance is sort of ex-tax 2% to 5% growth. Resi is slightly flat if you look at the settlements in margin. What are the guidance for -- I appreciate you've got lower average debt but a higher rate, you got the full year benefit of Halcyon without the COVID hit. What are the guidance blocks for this year on that growth?

[Alison Harrop, executive]

Sholto, I can take that. So yes, you're right, what you've kind of called out already are obviously some of the components. If you think about -- there's a couple of other things to think about. So M_Park, obviously, we're going to start recognizing the initial development-related fees and realized profits at M_Park. Land lease, as you've called out...

[Sholto Maconochie, analyst]

[indiscernible] July -- sorry to interrupt, it settled in July. What was the profit number that comes into this year for that impact?

[Alison Harrop, executive]

It's approximately $40 million for that 1 for FY '23. So land lease, as you already talked about, we're getting a full year contribution, higher settlement volumes. We'll also get some fees from the new partnership in that space. As Andrew has talked about, we've guided to similar volume and margin in MPC, but don't forget the contracts on hand are also at a 13% higher average price point. We will get some additional NOI from the Logistics completions. We're probably -- we're also assuming that we won't have to provide as much COVID-related abatements, fingers crossed that COVID is behind us.

[Sholto Maconochie, analyst]

What are you assuming in COVID abatement this year?

[Alison Harrop, executive]

It's not material. So we're really assuming that it's not going to be a [indiscernible], yes. And I forget that you will -- you'll get some organic NOI growth from the portfolio as well. So that's sort of the composition.

[Tarun Gupta, executive]

And Sholto, if I can come in there. Just as you can see, the business is diversifying into new engines of growth, Logistics, land lease and of course, the core businesses are performing well. So I think this is -- that's allowed us -- Retirement Living was $97 million FFO last year, and we've been able to absorb that in '23 and still show year-on-year growth, which is the strategy in action.

[Sholto Maconochie, analyst]

Yes. Pretty impressive growth on the back of that. And then just finally for me, on the resi inquiries factor that -- if you look at the -- a lot softer on the previous July, but if you look at the deposits on sequentially, we're down sort of 19% on the half. And if you look at inquiries from 50% down on the half and [ 30% ] on the last quarter in 4Q '21, but obviously cycling some tough comps with all the stimulus and homebuilder. Would you -- just from Tom's question, do you expect sort of net deposits around that sort of [ 1,000 ] mark on average for the year...

[Andrew Whitson, executive]

Yes. Yes. The next quarter, Sholto, would expect it to be below [ 1,000 ] from what we're seeing at the moment. As I said, until interest rates stabilize by the cautious year. We've got reasonable inquiry out there, but people are just pausing their purchasing decision until there's some certainty in that outlook.

[Operator]

Our next caller is a [ Caleb Weekly ].

[Unknown Analyst]

First question probably just for Andrew, just on your commentary around embedded margins in resi. I'm conscious you've guided to 18% through FY '22. But how should we think about FY '23 and moving forward, you got land price growth potentially coming off in a few key geographies, maybe a mix shift away from New South Wales, which is typically high margin and construction costs coming up. So how you're thinking about the long-term outlook for margins in residential?

[Andrew Whitson, executive]

Yes, [ Caleb ], I think there's a couple of factors to think about in there. We've come through a period of strong price growth. The Eastern Seaboard, we've seen -- you look at the chart that we've got in the pack. We've seen 20% to 30% price growth across those Eastern markets over the past 12 months. And we obviously also saw price growth really from the start of COVID when you go back to mid-'20. We've restocked really well through that period. The 25,000 lots that we bought, the bulk of those were in the '20 financial year -- sorry -- yes '20 financial year.

So yes, we've got a pipeline that's got stronger embedded margins, and we're going to transition off some high-margin projects and we're going to bring on some other projects that are delivering solid margins as well. So when you think about the portfolio, you need to think about the transition as well, which is going to underpin those margins that we're seeing. And that's flowing through to our '23 guidance as well with a 13% increase in the price of contracts on hand.

We've been able to manage cost increases over the past 12 months. Yes, civil construction's been up about 15%, but civil construction, when you look to the revenue ratio, it's sort of a 3:1 split when you're thinking about that. So a lot stronger revenue growth. Yes, there's been cost growth, but we've been able to absorb that and still deliver some margin expansion.

[Unknown Analyst]

So all that considered, it sounds like medium term, you're still previously confident in being at least the upper end of that sort of 14% to 18% target range. Is that a fair conclusion?

[Andrew Whitson, executive]

Yes, it's going to be around that.

[Unknown Analyst]

Fantastic. Second question, which is around the outlook for development expectations. I'm conscious you've got the Logistics [ completion ] through this year, and you said some rental growth coming through to offset any of that cost inflation. But just interesting to hear how you're thinking about you've seen any places in Piccadilly, a much larger size and much longer dated? How are you expecting or viewing returns to come through on those projects given potentially a softer fundamental office market with that construction cost inflation coming through?

[Louise Mason, executive]

Yes. I think -- it's Louise here. So it's all around the timing and great development, great locations. Just got the DA on Affinity and now having early tenant discussions. Piccadilly still got a longer runway in terms of authority approvals. So at the earliest, as I've said previously, to start Affinity would be mid to late next year and Piccadilly a year after that. That's the earliest. But that's based on tenant pre-commit and capital partnering. And obviously, that comes off the back of the financial feasibility. So all those things have to align for us to get to the starting point. We're very positive about those projects, as I said, great sites, great locations. So we will continue to work through those elements and just keep you informed each results as to progress.

[Unknown Analyst]

Would you say at this stage, those returns are still stacking?

[Louise Mason, executive]

Well, that's right. We've got to look at any cost increases where the rental levels are, and we continue to monitor those. And while you also value engineer the cost of the project. So it's a moving piece, but we keep track of that, and that's something, as we get closer, we'll be able to give more color on.

[Unknown Analyst]

And just final question for me just around the outlook for industrial leasing. Obviously, a good result in terms of your reversions there, getting towards 10%. You're able to speak to the level of under-renting across the portfolio? And any color in terms of what you might be expecting for re-leasing spreads moving forward given strong fundamentals in the space?

[Louise Mason, executive]

Yes. Certainly, as you said, the tailwinds are still there for Logistics and being able to say, as I did in the presentation, that the FY '23 completions are already 60% pre-leased and FY '24 is 40% pre-leased. And we're certainly seeing double-digit rental growth come through there. So we're positive about the outlook on Logistics through this pipeline. And the e-commerce growth is certainly still underpinning that as well as the -- it used to be just in time, now it's just in case. People have to onshore more in order to be able to back up supply. So that's still looking very positive for Logistics. And it's only -- in the portfolio this year, there's about an 11% expiry. So we'll also be expecting good rental growth out of that.

[Unknown Analyst]

Do you have any high-level expectations of where the portfolio sits relative to market?

[Louise Mason, executive]

It's probably slightly under rented, I think, yes. And so -- and we're starting to see, I think, we getting now those double-digit growth coming through in more recent deals. I think we're starting to see that come to fruition. So I think we're still a little bit of room to move there.

[Operator]

Our next call comes from Richard Jones.

[Richard Jones, analyst]

Just a couple of questions. Just in relation to tax. Just wondering why the guide is so [indiscernible] looks like it somewhere between $40 million and $90 million tax that's in that range?

[Alison Harrop, executive]

Yes, it's Alison here. Yes, look, tax, as you know, Stockland is only just started to come into a tax paying position. We're still actually finalizing the gain on the sale of the Retirement Living business. So you can't actually finalize that until you settle. As you know, we settled that on 29th of July. So obviously, until you finalize the gain on that business, how much of our brought-forward tax losses that uses up, and then you're right, we have to then obviously project how much income we're going to make in the corporation for '23. So we've given a range just because it's -- some of that is yet to be finalized and it's hard to ultimately predict exactly how much we're going to make in the corporation.

[Richard Jones, analyst]

Okay. Can I just follow up on with slightly related question? Just in terms of the earnings mix, I think you called out 37% of the profit for the year was development. Looking into FY '23, I imagine that number is going to be higher given you've got M_Park and you've got another industrial trading profit as well as I would imagine some industrial [indiscernible] into land lease. Just conscious...

[Alison Harrop, executive]

It will be a little bit higher. [indiscernible] It's not going to be significantly higher. It will be a little bit higher. So we're obviously aiming for 40% trading income, 60% recurring. That's kind of what we aim for over time. So if you -- to get back to the tax thing. If you assume that 40% of our earnings are trading, that's essentially what's subject to tax. If you take a 30% on that, you get to a normalized range going forward, not this year, but normalized of sort of 10% to 12%. So going forward, it's going to be more in that range. Does that help?

[Richard Jones, analyst]

It does help. It's going to -- it's going to be a headwind again in '24, I guess, what you're calling out. Just on the industrial development, can you clarify what the yield on cost was on the completions this year?

[Louise Mason, executive]

Yes, [indiscernible] 5% and 6%.

[Richard Jones, analyst]

Okay. And you're guiding for that to hold in your forward [indiscernible] projects?

[Louise Mason, executive]

Yes, that's right. That's what we're seeing going forward. Yes.

[Operator]

Our next question comes from James Druce.

[James Druce, analyst]

Just on [indiscernible] some of the comments with [indiscernible]. Can you give me more color on the sort of trading profit number coming from Melbourne Business Park and maybe some guidance on superlot revenue for this year?

[Louise Mason, executive]

Yes. So I'll take the Melbourne Business Park -- it's Louise. So it's about $34 million on Melbourne Business Park in FY '23.

[James Druce, analyst]

And then, maybe on super....

[Andrew Whitson, executive]

Yes. So superlots are going to be similar to the prior year. There's a little bit of variance year-on-year just depending on what we're selling in that period, but we don't expect there to be a significant uptick in superlot transaction. Our strategy now has been very much to leverage our land bank and retain a lot of those superlots where we can, developing them and generating recurring income. And we're seeing really good yields on costs for anything that we're doing on our land bank, it's childcare, it's medical, we're getting 7% plus yield on cost there.

[James Druce, analyst]

Yes. Okay. That makes sense. And then maybe just a follow-up. I think Alison made a comment that you just [ recut ] the hedge profile. Is there a capital cost to that? It sounded like you sort of cut in '23 and blended that to '24?

[Alison Harrop, executive]

Sure. Let me just take you through what we did. So yes, we rebalanced the hedge book, and that was really to take into account the receipt of proceeds from the disposal of Retirement Living. And we also wanted to put in place some additional protection for future years and bring the FY '23 hedging down to a more normal level. So as part of that, we moved -- we amended the start date of a $600 million swap and moved it into FY '25 rather than this year. And you're right, we terminated some swaps.

The capital cost that was very minor. It was less than $15 million to terminate that sort of $200 million of swaps. And so we're kind of really pleased with that because if you now take into account those forward start hedges, we've effectively extended the duration of the hedge book to over 4 years at rates that are more favorable than those currently available in market.

[James Druce, analyst]

All right. That's clear. And then 1 more if I may. Just on the payout ratio, you've typically been at the lower end of your range. Do you expect that to continue?

[Tarun Gupta, executive]

Yes, James. Again, our policy, as we've confirmed is 75% to 85% of post-tax FFO going forward, where in the range will really depend every half year when we sit down with the board, our capital position and outlook. So I think you'll have to wait and see where in the range we land in future distributions.

[Operator]

Our next question comes from Ben Brayshaw.

[Benjamin Brayshaw, analyst]

Just have a question on the Logistics pipeline going through $6 billion in terms of the backlog for the period. I was wondering the drivers of that has been acquisitions or masterplanning? You mentioned in the presentation, Yennora and Brooklyn in Melbourne had our key contributors. And so secondly, just on Logistics, the $650 million of completions that you're forecasting for FY '23, how much of that you envisage will be funded by the balance sheet versus partnerships?

[Louise Mason, executive]

Yes. So the rollout of that sort of $600-odd million in FY '23, as I said, largely comes towards the back end. In relation to that growth of the pipeline and the future pipeline, vast majority of that is coming off land bank that we've held for some time. So Yennora and Brooklyn, given their geographic locations, gives us densification opportunity. So that's about densifying those sites. Padstow, we bought sort of a year or so ago, that's also a densification opportunity taking it from that 1 level and working with the authorities on that at the moment. So a lot of that has come off. Land that we've held for some time or some older assets like parts of Yennora that we'll redevelop and densify.

[Tarun Gupta, executive]

And then if I may come in there. I think I highlighted this a few months ago in the [indiscernible] strategy review. You should anticipate as we're doing more masterplanning on our land bank, our pipeline will grow. We can see visibility of some other great opportunities within our land bank. Today, we've highlighted the work we've so far done on our Logistics pipeline, but there is more to come in a secured land bank. And the $600 million that's underway is balance sheet funded. Although I should keep reminding you and the market that our ambition over time is to have a line capital partners in each of our key sectors. But currently, that pipeline is funded by balance sheet.

[Benjamin Brayshaw, analyst]

Okay. So can I just clarify, is the JPMorgan Asset Management partnership still part of, I suppose, the funding optionality that, that you have? Or could you provide any comments on that vehicle, please?

[Tarun Gupta, executive]

Yes, Ben, no, that is not a part of the forward pipeline. There is a couple of assets that were there, which we've acquired, and that will be -- that's where that finishes up.

[Operator]

Our next question comes from Alexander Prineas.

[Alexander Prineas, analyst]

Just on the Apartment sort of component of the strategy, can you just comment on where that's at and what the outlook is there in terms of opportunities and where you're at in terms of -- is it site acquisition or other projects that you're looking to kick off?

[Andrew Whitson, executive]

Yes, sure. The -- our strategy, as we announced last November, still stays the same. We're still committed to building a sustainable Apartment business. The buying window, we believe, is going to come at some stage in the future. We're looking to build that pipeline at the right time in the cycle. We know how important that is. So we've got a small, dedicated team that are both working on the 3 projects we've got within our pipeline, but also looking at future opportunities. So we remain committed to that. And as we build that pipeline, we'll have more to announce.

[Tarun Gupta, executive]

And also, if I may just add to that, I think the masterplanning that I referred to, we do anticipate once we've completed work, some of that masterplanning work will show some attractive Apartments, mixed-use sites within our land bank that we'll be bringing forward. So we look forward to sharing that when some masterplanning works are more advanced.

[Alexander Prineas, analyst]

And just 1 quick one. Thanks for the comments for the explanation of the tax situation. Would I be right in assuming that all those tax losses will be used up in FY '23, and we can sort of assume normal tax rate on the corporate earnings from FY '24? Is that a fair assumption?

[Alison Harrop, executive]

Yes. Yes, that's correct. Yes. So there's a little bit carried over into FY '22, it will all get used up, and then we'll be on a normal footing from FY '24 onwards. Yes.

[Operator]

That is our last caller in the queue. So Tarun, I'll hand back to you. Thank you.

[Tarun Gupta, executive]

Thank you, everyone, for dialing in and for the questions. Thank you for your time today, and we look forward to speaking to you this afternoon and also on the road show starting Monday. So thanks, everyone, and goodbye.