Stockland profits smashed by devaluations

Stockland profits smashed by devaluations

While developer Stockland (ASX: SGP) may have added $505 million to its cash balance from retail town centre divestments in FY19, the company suffered devaluations to its current portfolio that were approaching that figure.

The Sydney-headquartered group recorded a 4 per cent increase in funds from operations (FFO) for FY19 to $897 million, but the bottom line was plagued by the effects of declining asset values.

"Statutory profit was down 69.6 per cent to $311 million reflecting non-cash adjustments arising from devaluations in our retail town centre and retirement living portfolios, a retirement living goodwill write down, mark-to-market on financial instruments and a tax expense change," says CEO Mark Steinert.

"Our retail town centre strategy is focused on improving future income resilience and growth by divesting non-core properties, ensuring rents are sustainable, and remixing tenancies to reflect consumer trends around convenience and experience," he says.

"Our retail town centre development pipeline has been reduced by around 50 per cent, with a focus on smaller placemaking projects which will redefine customer experience and convenience."

He says the retail town centre devaluations totalled $474 million for the year, of which around half were driven by a softening of growth rates and changes to rental income and capital cost re-forecasting, while 35 per cent was driven by capitalisation rate expansion.

"Our core retail town centre portfolio FFO growth was positive, and we expect overall retail town centre income to stabilise through FY20 and grow moderately from FY21," says Steinert. 

The fair value of Stockland's retirement living portfolio was cut by $53 million, while timing of the forecast future development pipeline has resulted in a non-cash impairment of $38 million to the goodwill acquired on acquisition of the original retirement living portfolio in 2006.

Stockland shares were down 4.78 per cent to $4.38 at 11.40am.

On a more positive note, Steinert highlights good performance for the residential business with almost 5,900 residential settlements delivered. This segment generated 8 per cent operating profit growth and increased Stockland's market share from 3 per cent to 15 per cent nationally over the past 12 months.

"We are well positioned to benefit from an improving market, however we expect conditions to take some time to normalise as customers continue to experience challenges achieving loan approvals," he says.

"We continue to execute on our strategic priorities during challenging conditions for the retail and residential markets.

"We've achieved strong momentum with our planned retail divestment program, with $505 million transacted, exceeding the initial $400 million target, and we have finalised a 50 per cent capital partnership for our Aura community."

He says these initiatives are enabling Stockland to accelerate its workplace and logistics pipeline, which now exceeds $2 billion, and re-stock its residential landbank to position it effectively for the future.

Swapping out of King St for full ownership of Stockland HQ property

The company also announced today it had exchanged contracts to sell its 50 per cent stake in 135 King Street and Glasshouse in Sydney for $340 million. 

Stockland is effectively swapping into a new deal with the purchase, having also reached an agreement to acquire the remaining 50 per cent stake in the Piccadilly Centre from Oxford Properties for $347 million.

The developer's head office is in the Piccadilly Centre property, in which it now has a 100 per cent stake.

Located in the heart of Sydney, the Piccadilly Centre sits on a 4,800 square metre block with dual street frontages to Pitt and Castlereagh Streets, and excellent transport connections including Town Hall Station, Museum and St James stations, the George Street light rail, and the future Pitt Street Metro rail station.

"A key part of our strategy is to recycle capital from properties that we have optimised, for investment into higher growth opportunities with redevelopment potential like Piccadilly," says Steinert.

"As a co-owner of 135 King Street and Glasshouse, we added considerable value by redeveloping the building into two premier Pitt Street Mall shops leased by top tier retailers H&M and Platypus Shoes, and have now substantially leased the office tower, making it a good time for us to realise the uplift.

"The acquisition of the remaining stake in Piccadilly aligns with our accelerated Workplace and Logistics strategy, which is focused on unlocking development opportunities in Sydney and Melbourne that enhance long-term income growth and increase the valuation resilience of the overall portfolio."

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