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Stockland Ups Exposure To Land Lease Sector

Australia | Jul 21 2021

This story features STOCKLAND, and other companies. For more info SHARE ANALYSIS: SGP

On acquiring Halcyon, Stockland is expanding its presence in the land lease sector, which is considered a positive strategic move

-Halcyon should provide Stockland with a strong brand to scale up in this segment
-As a result there should be an improvement in rental and development margins
-A positive strategic move yet does not inspire brokers to change their views


By Eva Brocklehurst

Stockland ((SGP)) is expanding its presence in the retirement living sector, acquiring land lease operator and developer Halcyon for $620m. The acquisition comprises 1500 established sites and 2300 development sites, the majority being in Queensland.

Halcyon should significantly accelerate Stockland's scaling up in an attractive segment, Citi believes, given it provides an affordable housing solution to a growing group of ageing Australians.

Following the acquisition, Stockland will have a portfolio of 1500 rental units, all from Halcyon, and 6300 development units, comprising of 37% from Halcyon. In a land lease model the home is owned but the land on which it is situated is leased from the community operator.

Rent is paid for the right to occupy the site with a manufactured home or transportable dwelling. Stockland intends to fully integrate Halcyon while the founders will remain involved and provides consulting services for at least 12 months.

UBS notes Halcyon villages are unique and therefore arguably deserve some premium for the quality and location, although around 67% of the acquisition relates to development where the value is less clear.

As Stockland achieves scale in this area there should be an improvement in both rental and development margins, currently 55% and 10% respectively, on the initial Halcyon portfolio, Macquarie suggests.

The cost of the acquisition is elevated compared to previous transactions in this segment, the broker adds, yet it should provide Stockland with expertise and a strong brand that can be used across its roll-out.

The first tranche of the price will be paid upon completion of the transaction, expected in August 2021, with the balance of $310m deferred until July 2022. Around $200m of the transaction price is attributable to rent-collecting assets and the remainder to the development portfolio.

This reflects $138,000 per occupied site. These sites generate a margin of 55-60%, equating to a passing yield of 4.3%. Management expects to lift the margin to 65%. The passing yield is significantly firmer than the capitalisation rate of 6.25% for book values of listed peers, Ord Minnett notes, such as Lifestyle Communities ((LIC)) and Ingenia Communities ((INA))

The broker is a little surprised Stockland is investing so much in increasing its exposure to retirement accommodation, given the challenges that have existed with its own retirement business.

Still, the land lease model has a stronger track record, Ord Minnett acknowledges, and is a better fit for listed investment while being aligned with Stockland's skill set. Morgan Stanley estimates Halcyon will generate operating earnings in FY22 of $21-22m, equating to a 20x enterprise value/EBITDA multiple.

The transaction will be funded by debt at a 3% interest rate. As a result, Morgan Stanley considers the acquisition 1% accretive to current estimates for FY22 earnings per security of 36.2c.

Macquarie estimates in isolation the company's gearing moves up to 24.5% from 2.5% and towards the mid-point of the company's target range of 20-30%, still leaving some deployment capacity. Stockland has signalled it will introduce third-party capital to the business over time.

A Positive Strategically

The acquisition is considered a positive strategic move by Morgan Stanley, providing capacity to double the company's current land lease settlement target to more than 600 per year by FY24.

Residential remains one of Citi's preferred exposures within the property sector and therefore the Halcyon acquisition is considered strategically attractive. Macquarie agrees the land lease sector is attractive but, given growth in residential sales is likely to prove difficult going forward, this is insufficient to change its thesis.

FNArena's database has one Buy rating (Morgan Stanley), four Hold and one Sell (Ord Minnett). The consensus target is $4.59, which suggests 6.5% upside to the last share price. The dividend yield on FY21 and FY22 forecasts is 5.8% and 6.2%, respectively.

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