Morningstar | Continued Tightness in Housing Credit Drags on Stockland. FVE Cut to AUD 3.90
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.An expectation of continued tightness in bank lending criteria and increasingly cautious buyers underpin our view the Australian residential housing lot market will weaken further in fiscal 2020. We predict a 10% decline in the volume of Stockland’s lot settlement versus 5% previously to approximately 5,400 lots for fiscal 2020. Reflecting the softness in Australian dwelling prices, we’ve also trimmed expected gains for each resold retirement living unit. The combination of these revisions sees our fair value estimate for narrow-moat-rated Stockland decline to AUD 3.90 from AUD 4.00 previously. At current levels, Stockland screens as fairly valued with the guided fiscal 2019 distribution of AUD 27.6 cents per security based on a 74% payout ratio of FFO.
We are forecasting negligible distribution growth over the coming three years and Stockland gradually increasing its distribution payout ratio to approximately 85% as earnings are impacted by a protracted slowdown housing lot sales.
The weakness in Stockland’s residential business is most clearly evident in net residential deposits which were 963 for third-quarter 2019, down 28% on the 1,337 net deposits for third-quarter 2018. However, we caution extrapolating this 28% drop going forward as the low activity incorporates the typical slowdown ahead of state and federal elections. We foresee the trough for Stockland’s annual housing lot sales of 5,000 in fiscal 2021, around 16% below Stockland’s expected settlements for fiscal 2019.
Stockland is engaged in owning, managing and developing shopping centres, logistics centres and business parks, office assets, residential communities, and retirement living villages. As of June 30 2016, Co.'s Commercial Property portfolio included 42 retail centres, 27 properties of logistics and business parks portfolio, and nine assets of office portfolio; and it had approximately 76,800 lots in its residentialportfolio. Also, Co. is a retirement living operator in Australia, with over 9,600 established units across five states and the Australian Capital Territory, which includes a development pipeline of over 3,100 units.
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