Stockland Increases Focus On Business Parks

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Stockland is deploying the proceeds of asset sales towards industrial developments as it shifts its portfolio mix.

-Residential communities expected to be main driver of performance in FY18
-Continued disruption being experienced in apparel, discount and department stores
-Sydney residential market moderating, new releases taking longer to sell
 

By Eva Brocklehurst

Stockland ((SGP)) has outlined a plan to reduce its exposure to retail centres and favour the development of logistics and business parks. The company will divest around $300m in non-core assets and take the logistics & business parks division to 20% of the portfolio, from a current 14%.

Stockland has divested $124m of retail assets in the second half to date and proceeds are being deployed back into other segments such as industrial. Over the longer term the company also intends to reposition some office assets via redevelopments. Medium density housing will also represent more than 50% of residential settlements versus the current 5%.

Macquarie assesses the risks for the business will increase as the shift to industrial, retirement and medium-density housing development takes place, although a large diversified asset base should limit volatility.

Internal rates of return on development since 2013 have only been around 10% in the industrial development segment and, whilst higher than passive rent collection, the broker suggests this area is subject to a greater risk.

While retail asset sales are of concern in the current environment Credit Suisse envisages upside in other parts of the business, and residential communities are expected to be the main driver for outperformance in FY18.

Meanwhile, headwinds and reputation issues for the retirement living industry have affected recent returns and FY18 returns are expected to be below 6%, although the company cites an improvement in recent weeks.

Retail

Stockland has experienced an improvement in sales growth over the last two quarters but now expects rental reversion on new space to turn negative because of increased re-mixing. The company has reduced its targeted capital allocation to the sector to 40-50% from 45-50%.

The company is experiencing continued disruption in apparel, discount and department stores. Supermarkets and other anchor tenants are observed to be focused more on profitability per store rather than adding stores and development opportunities in retail will be curtailed.

Over the medium term, Stockland envisages around 3.5% sales growth can be achieved. The re-mix of retail is trending towards the growth areas of services, entertainment and food catering. Health services is the one category that is considered least affected by the growth in online retailing.

Ord Minnett suggests the retail portfolio would be better placed if seven assets, valued at around $820m or 11% of the retail portfolio, were offloaded. The broker speculates Stockland may look at JV capital for some of the larger assets, and could also package up some of the lower-quality assets with stakes in larger and better-performing assets.

Industrial

Offsetting the reduced exposure to retail will be the increased weighting for the logistics & business parks segment, to 15-25% from 15-20%. This will occur through development of land already controlled by the company.

Development will come via a $590m pipeline the company has flagged. Proceeds from recent asset sales, Wallsend and Highlands, will also be directed to this division.

As there is $176m in assets recently completed or currently in development, Macquarie calculates, to reach the new capital targets, a further $900m of capital is required. Given the $590m flagged over the next five years, this implies an extra $300m is required through a further pipeline of developments or greenfield acquisitions.

Residential

Fundamentals for residential communities remain robust and price growth in three of the company's four major markets has significantly exceeded Credit Suisse's assumptions. Margin expectations have been upgraded to 17%.

In the light of strong population growth and a competitive advantage, Stockland should be increasing capital allocation to residential development, in Macquarie's opinion. The sale of this higher value product would support earnings growth.

Ord Minnett notes medium density margins are lower than margins for straight land sales but contribute a higher profit per sale, as prices are at least double the price of land. This should potentially help to offset slower market conditions.

Management has reiterated a view that the Sydney residential market is moderating and new releases are taking longer to sell versus 12-18 months ago. Regardless, despite the longer marketing period, management is confident in achieving 6500 settlements in FY18.

FNArena's database shows four Buy ratings and three Hold. The consensus target is $4.50, suggesting 5.6% upside to the last share price the dividend yield on FY18 and FY19 forecasts is 6.3% and 6.6% respectively.

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