Stockland Group produced the first of the big losses from the country’s major property groups yesterday with a bigger than expected set of write-downs and impairment charges.
The $1.8 billion of red ink it reported will be matched or exceeded by the likes of Centro, Lend Lease, Mirvac, GPT, Valad, Macquarie Airports and Macquarie Infrastructure, plus other Macquarie related trusts; the surviving trusts at Babcock & Brown and Allco, plus trusts at Colonial First State, BT, FKP, and a host of others.
In Stockland’s case there were $2.4 billion.No wonder it needed to raise nearly $2 billion from the market in June.
Much of the losses are ‘non-cash’ and the inference is given that they have had no impact on the underlying results.
If that was the case, why is there a tax benefit from the write-downs, and why have companies like Stockland raised billions in fresh capital to repay debt and satisfy nervous bankers?
The answer is that the so-called non cash items do have a direct financial impact on the balance sheets of the companies by forcing reductions in asset values and pushing companies close to or through restrictions on debt to equity, interest cover and other measures in their loans. That makes banks very nervous.
So the claim by Stockland (it’s only one of many) that the write-downs were "non-cash" should be taken with a very large grain of salt. They have hurt this once blue chip property group, as they have hurt others.
While the losses are already in the market to a great extent via guidance and downgrade statements, the sector has had the unfortunate habit of surprising on the downside for a year now.
Analysts are hoping this reporting season will represent a right sizing of asset values in Australia, the UK and perhaps the US, but the latter has yet to see a full shakeout in its commercial property sector.
The annual meeting season for these companies and trusts should be fruitful for securityholders to attend and quiz managements on over-valuations, executive pay that was linked to these asset values, and the certainty boards now have that they have asset values fairly right.
The last year to 18 months has been very expensive for securityholders who have lost billions of dollars because of the overly optimistic and overly ambitious expansion and financing plans of managements of these groups.
The next couple of years will also be expensive in terms of reduced distributions as the likes of Stockland husband resources to try and keep their business models alive. It will be tough.
Its net loss for the year ended June 30 was $1.803 billion, compared to a profit of $704.6 million in the previous year.
First half impairment charges and write-downs totalled $726 million.
The market took it in its stride, the shares down 4 cents to $3.37 at the close.
The full year underlying result before the charges and re-evaluations was a profit of $631.4 million, down 6.3%.
Managing director Matthew Quinn said that despite the large headline accounting loss, the company had delivered a reasonable operating result given the difficult economic environment.
"It has been a tough year and our 2008/09 results reflect the challenges we faced," he said in a statement yesterday.
In the statement Mr Quinn said Stockland has been focused on cutting debt, streamlining its business, hacking into costs and improving its operational efficiency to place itself in a good position for when any economic recovery emerges here and offshore (the company is in the UK, which has been a losing experience as well).
Stockland said in its statement yesterday that its 2009 "statutory accounting result is a loss of $1.8 billion. This is primarily the result of a number of negative non-cash items, including:
- $1,126 million – Downward revaluation of investment properties
- $462 million – Inventory impairment (post tax)
- $362 million – Goodwill impairment
- $334 million – Impairment of strategic investments
- $95 million – Fair value adjustments of financial instruments and foreign exchange movements.
That’s a fairly comprehensive list of losses and poor management decisions.
"We enter this financial year with record residential contracts on hand, good profits from retirement living and a strong lease expiry profile in our commercial property business," Mr Quinn said.
While housing is improving (especially new home construction) investment housing isn’t and commercial property remains weak, as does CBD property.
Stockland is forecasting earnings per security (EPS) of 28 cents in the 2010 financial year, compared to EPS of 38.8 cents in 2008-09 before accounting adjustments.
That tells us that it sees a weak outlook, especially as the company projects it will make 27 cents a unit from operations.
"Barring material adverse change to economic conditions, Stockland provides the following guidance for FY10: EPS 28 cents; Adjusted Funds From Operations (AFFO) 27 cents
"FY10 distributions are expected to be 80% of AFFO in line with the Group’s revised distribution policy as this is expected to be higher than Total Taxable Income (unless material assets are sold generating significant capital gains)."
Stockland said its gearing was now around 16% and that it had more than $1 billion of cash on deposit and $1.3 billion available from committed debt facilities.
So it
