Company Reports

About 75% of Stockland's capital is deployed in its commercial property portfolio. Of that, approximately half is retail property, the rest industrial and a smaller amount in office. The other 25% of capital goes into residential development and land-lease. The development business is cyclical and its contribution to earnings can swing substantially, while the commercial rental business is relatively stable. Earnings from the residential business have been remarkably resilient despite interest rate rises and house price falls, in part due to relative affordability from Stockland's developments and land-lease communities, and an undersupply of housing in Australia.

Stockland’s half-year result fell short of our expectations, with funds from operations of AUD 0.11 per security well below halfway to our full-year estimate of AUD 0.33 per security. The commercial portfolio of offices, retail, and industrial performed robustly, on average, but Stockland only delivered 1,614 residential settlements versus our full-year estimate of 5,450. Another 5,400 lots in development should support full-year settlements close to our forecast. Even if there is slippage, we think it would be timing-related, with profits slipping into fiscal 2025 immaterial to our valuation.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Stockland revealed fiscal 2023 funds from operations, or FFO, of AUD 35.6 cents per share, ahead of our AUD 33.4 cents per share estimate. Despite headwinds in the housing market, no-moat Stockland maintained an attractive 26% development margin in its residential development business. Distributions per security of AUD 26.2 cents per share were slightly ahead of our AUD 25.5 cents per share estimate. Time value of money and the beat of our 2023 estimates increases our fair value estimate by 3% to AUD 4.50. After a 25% rally since September 2022, Stockland securities aren’t as cheap as they were but still screen as slightly undervalued.

The impact of coronavirus lockdowns is largely in the past for no-moat Stockland’s retail assets, which are recovering. Industrial rental growth is strong, and we believe office leasing conditions are near the lows as supply additions look set to moderate. The absence of lockdowns should also help employers to make long-term office commitments. We expect the group’s residential development business to face headwinds from rising interest rates, but limited housing supply in Australia and the return of migration-driven population growth lessens the risk of a material downside scenario for Stockland. Accordingly, we adjust our Uncertainty Rating to Medium, from High previously. Securities trade at about a 20% discount to our unchanged AUD 4.30 fair value estimate.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

Stockland generates about two thirds of funds-from-operations, FFO, from its commercial property portfolio, which is about two thirds retail property, and the rest industrial and some office. Another third of group earnings come from residential development, and a small amount from retirement living. The residential development business is cyclical and its contribution to earnings can swing substantially up and down, while the commercial property business is relatively stable. We view the residential business as coming off a cyclical high and we anticipate earnings from the division will decline.

We reduced our fair value estimate for Stockland Corp. to AUD 3.40, from 3.90 following the transition of coverage to a new analyst. We also increase our uncertainty rating to high, from medium, as there are substantial uncertainties on variables important to the group’s valuation. These include immigration resuming once borders reopen, government stimulus for the housing sector, which has been hinted at but not confirmed, and the duration and severity of ongoing social distancing measures, which impact Stockland’s commercial property portfolio.

We place our fair value estimates for no-moat Mirvac and narrow-moat Stockland under review, pending transition to a new analyst, and a review of our forecasts. The coronavirus creates a high degree of uncertainty for these two firms, in particular for residential sales volumes and margins, as well as for the group’s commercial property portfolios.

In a tough environment, narrow-moat Stockland delivered a reasonable half-year result. Management reiterated the group is on track to meet full-year guidance, and our forecasts, which are for roughly flat earnings for fiscal 2020. We make no change to our fair value estimate of AUD 3.90 and at current levels the stock looks overvalued.

Narrow-moat-rated Stockland delivered a reasonable quarterly update, in line with our expectations. The company continues to expect no growth in FFO or distributions per share for fiscal 2020, which we agree with.

Narrow-moat rated Stockland’s fiscal 2019 result was reasonable, but guidance for fiscal 2020 is lacklustre. Weak guidance is in line with our expectations, and we make no change to our AUD 3.90 per share fair value estimate. That is close to the group’s net tangible assets (NTA), which fell to AUD 4.04 per security from AUD 4.18 a year ago.

Narrow-moat-rated Stockland’s 2019 investor day highlighted the property conglomerate’s good progress in executing its revised business strategy. The focus is to revitalise the core retail malls, exit noncore assets and expand the industrial and office segment. The group also reaffirmed its fiscal 2019 funds from operations, or FFO, per share growth guidance of 5%. Stockland now expects settlement of its residential land lots to fall short of prior guidance (above 6,000 units) due to production delays, but this is to be offset by a skew in settlements towards higher margin projects in Sydney and Melbourne. We have adjusted some of our earnings forecasts in line with the updated guidance but our long-term view is intact. We retain our fair value estimate of AUD 3.90 per share.

We reiterate our AUD 3.90 fair value estimate for property conglomerate Stockland following transfer of coverage to a new analyst. Our narrow moat, medium fair value uncertainty, and Standard stewardship ratings are retained. At AUD 4.45, shares screen as modestly overvalued. Key risks are tight lending standards, which may continue to depress the housing market and impact the volume and price of residential developments, and the erosion of the value of Stockland’s malls as sales are lost to online channels.

Stockland’s operational update for third-quarter fiscal 2019 confirmed trading conditions remain extremely challenging for the firm’s two largest divisions of retail shopping malls and residential land sales and development. Against this backdrop, Stockland reaffirmed guidance for growth in funds from operations, or FFO, per security of around 5% for fiscal 2019. Our forecasts are just below guidance at 4% FFO growth.

Stockland’s first-half fiscal 2019 earnings on a funds from operations, or FFO, basis of AUD 16.8 cents per security, or cps, were down on the 18.0 cps in the previous corresponding period, or pcp, and consistent with expectations. The decline was mostly due to a decline in residential settlements to 2,096 lots compared with 3,159 in the pcp. Stockland is guiding for over 6,000 settlements for fiscal 2019, underpinning stronger second-half earnings. We continue to forecast fiscal 2019 FFO growth of 4.4%, below guidance that was lowered to growth of approximately 5% growth from 5%-7% previously. Guidance was reiterated for distributions of AUD 27.6 cps. After a five-year run of strong earnings growth, it is fair to say most of Stockland’s businesses are facing tougher operating conditions, the only solidly performing divisions are office and industrial which comprise 5% and 17%, respectively, of pre-overhead EBIT.

Conditions in the Australian housing market have turned south far quicker than we were expecting. Pressure is coming from vastly tightened bank lending standards, a collapse in demand from offshore buyers and the delivery of a swathe of apartments, particularly in Brisbane. We generally don’t put much stock in the inherently volatile auction clearance rate, but with the capital city clearance rate systematically falling over 2018 and most recently reported at 54% (a six-year low) the clearance rate metric points to further declines in dwelling prices. First homebuyers are presumably being advised to defer their purchase decision, putting pressure on vendors to further drop their expectations to secure a sale.

We've left our fair value estimate for narrow-moat-rated Stockland at AUD 4.45, with the stock screening slightly undervalued currently trading 6% below our valuation. Fiscal 2018 earnings on a funds from operations, or FFO, basis, were slightly ahead of forecast mainly due to a higher-than-expected number of residential settlements of 6,438 lots. Even though the housing market has demonstrably cooled, Stockland is guiding for fiscal 2019 settlements to remain above 6,000 lots. Residential margins look set to remain near peak 2018 levels of 18% for the next year and gradually tapering off thereafter. Margins are likely to hold up even through house prices have softened as many large projects have built up large contingencies over the past few years and these will be gradually released as the projects wind down.

We’ve trimmed near-term earnings for Stockland’s smallest division--retirement living--due to a protracted period of slow resales. Our fiscal 2018 earnings growth is now towards the bottom rather than the top of guidance for fiscal 2018 earnings growth of 5.0%-6.5%. Our fair value estimate is unchanged at AUD 4.45, with narrow-moat Stockland screening as broadly fairly valued, currently trading 6% below our fair value estimate.

Stockland’s first-half fiscal 2018 earnings on a funds from operations, or FFO, basis of AUD 18.0 cents per security, or cps, were very strong with a 17% uplift on the previous corresponding period reflecting a cyclical skew in high marginal residential settlement. The second-half earnings will be weaker on lower residential settlements. Nonetheless, the overall earnings trend is strongly positive, with fiscal 2018 guidance maintained for FFO per security growth of 5%-6.5%, implying FFO of AUD 35.1-35.6 cps, with the variability mainly around timing of residential settlements. Our forecast for FFO of AUD 35.5 cps remains at the top of the guidance range.