Stockland, the country’s major housing developer, has told shareholders that the current 2009 financial year will be one to survive and forget: no growth, but more importantly it hopes no retreat or serious problems.
"Looking through the current cycle we expect to achieve higher earnings per security growth from fiscal 2010 onwards,” CEO Matthew Quinn said in a statement with the profit announcement to the ASX.
That’s understandable, the company expects just a 1% growth in its 2009 distribution. And some analysts wonder if that’s possible given the importance of residential property to Stockland and the sharpness of the slump in home building.
So the current year has been all but written off: the group, like so many in the property and infrastructure sectors, will stand still, battling the continuing fallout of the credit crunch, higher interest rates for the corporates and the customers, and a drop off in demand.
That’s the lucky companies, which Stockland believes it’s one.
The unlucky ones, like rival developer Mirvac, are looking at lower earnings and distributions and a much tougher experience.
Investors took a while to absorb the various messages from Stockland: the company’s securities traded through a range of a high on the day of $5.17 and a low of $4.68 where they ended after falling a sharp 6% in afternoon dealings, or 31 cents.
Investors decided they didn’t like the 2009 outlook at all.
Revenue for 2008 fell 19.5% to $2.684 billion, but so far the company has not had to write-off tens of millions of dollars from the value of its property portfolio or issue a profit downgrade.
Investors had been worried that Stockland would have to go through this ‘purging’ process, just as Lend Lease, Mirvac and GPT have.
“We face a tough market in the year ahead, but we are well placed to withstand these conditions with a proven business model, clear strategy and sound property skills,” Mr Quinn said in the statement.
“In FY09 cash flow and capital management will be just as important as earnings growth and we will continue to look for opportunities to unlock capital through joint venturing our retail development pipeline and our residential land bank,” said Mr Quinn.
“One of the potential benefits of this joint venture strategy is to unlock profits from our extensive residential holdings which are carried at historic cost and it is likely that profits from the sale of super-lot sites in the Residential Communities business in FY09 will be above 30% of total Residential gross profits rather than the normal 15% to 20%.”
“Taking all of these factors into account we are budgeting for a nominal increase in earnings per security in FY09, but it is going to be tough and we are assuming that market conditions do not deteriorate further,” said Mr Quinn.
"It is also expected that, due to timing of project releases and sales, the FY09 operating profit will be skewed towards the second half of the year.
“Looking through the current cycle we expect to achieve higher earnings per security growth from FY10 onwards.”
The company lifted operating profit 10% to to $674 million, compared to $611 for the 2007 year.
After significant items (revaluations and other changes) net profit for 2007/08 was $705.2 million, down 58.9% from the $1.7 billion of the previous year.
The major reason for the change was a sharp drop to $1410 million in the net gains from fair value adjustment to assets (compared to $1.03 billion in 2007). This year also included $206 million in defective financial hedges.
Earnings per security rose 5% to 46.2c.
Stockland declared a final distribution of 23.9c, up from 22.8c in the previous corresponding period. That made a total for the year of 46.5c.
Mr Quinn said Stockland was pleased with its annual result given the volatility in capital and property markets over the past year.
"We have seen a steep decline in confidence in the Australian REIT [real estate investment trust] sector in recent months and were disappointed to have been impacted," he said.
"We are intent on restoring confidence through our focus on value creation for our security holders, and our sound balance sheet puts us in a good position to do so."
Stockland said its Australian operating businesses performed in the year.
The commercial property business, which includes office, industrial and retail operations, was supported by good rental growth and high occupancy levels.
During the year, Stockland sold $787 million of non-core assets in the commercial portfolio, and expects to settle a further $114 million worth in the current year.
The proceeds are being used to repay debt and fund the company’s development pipeline.
"Our residential business also performed well despite deteriorating buyer sentiment and our ability to once again grow profits through a tough residential cycle demonstrates the quality and diversity of our business," said Mr Quinn.
Stockland’s said its retail property business lifted its operating profit to $260 million for the year.
"Active asset management and low occupancy costs should enable us to deliver further operational upside despite the recent slowdown in consumer spending," Mr Quinn said.
The office and industrial property business also increased its operating profit to $305.9 million.
Stockland said office markets are generally in good shape with low vacancies and rising rents.
But it expects demand to taper off in line with falls in business sentiment.
The residential communities business operating profit was $326.1 million.
