Stockland’s Matthew Quinn appears far more sanguine about the state of property markets than many of his A-REIT peers despite the near-halving of Stockland’s security price since the credit crisis emerged.
Presenting a fairly solid set of results today, Quinn drew his reassurance from the state of the Australian commercial and residential property markets and their fundamentals – the balance between supply and demand – to differentiate the conditions that Stockland is operating in from those prevailing offshore.
He is cautious about the outlook – Stockland’s guidance is for minimal growth in earnings per security this financial year – but his relative calm contrasts with the attitude of many of his peers, who are radically re-structuring their businesses and financial strategies to respond to the crisis of confidence in the A-REIT (Australian real estate investment trust) model.
Where Mirvac’s veteran out-going CEO, Greg Paramor, has said (KGB Interrogation, July 25) this could be the worst property market cycle in 30 years, Stockland is assuming conditions don’t deteriorate much further and expects a rebound in the market from 2010.
Stockland is a high-quality REIT, with relatively modest gearing (28.9 per cent) and a distribution policy that sees it retain 10 per cent of its operating earnings. It doesn’t make distributions from profits on sales of investment properties or from revaluations.
Quinn also moved quickly to respond to the credit crisis, with nearly $800 million of asset sales helping to reduce leverage and increase liquidity. With a weighted average debt maturity of more than six years, Stockland is reasonably sheltered, or as sheltered as it can be, from the shutdown in credit markets.
The group also conducted external reviews of nearly two-thirds its commercial property portfolio. In the first half revaluations were positive to the tune of $462 million, an increase mainly attributable to rental income growth. In the second half, however, the portfolio was devalued by $122 million.
Stockland also wrote down the value of its relatively small UK business by $86 million. A differentiator for Stockland is that it was late to expand into offshore property markets and therefore, relative to some of its bigger peers, is less exposed to the very significant impact the credit crisis is having on US and European property values.
While Quinn might be confident of the position of his group, it does, however, have a very large exposure to residential property development and therefore carries a latent exposure to the general economic downturn now underway – even if a review of residential inventory resulted in only an immaterial write-down of the value of an apartment project. Quinn notes that residential markets had "come off the boil" quite markedly in March after the last official interest rate rise.
The two features of the A-REIT sector that are being unwound are financial leverage and operational leverage – which are exposed to more volatile earnings streams from development and funds management activities than the sector’s traditional rental income flows.
Stockland appears comfortable, although not complacent, about the condition and outlook for its residential development activities, relying on the shortfall in housing supply to provide a floor under the market in the medium term.
As Quinn notes, the pre-conditions for a severe downturn in the property market – high unemployment, over-supply, high vacancy rates in office and retail – aren’t evident.
At this point, a 50 basis point increase in the group’s funding costs and a 30 basis point rise in the capitalisation rates for its commercial property portfolio are the most significant negatives Stockland has experienced. Those have more to do with financial markets, generally, than they do with the condition of the domestic property market itself.
Quinn is responding to changes in financial markets by planning to look for joint venture partners for his retail centre development pipeline and residential landbank, hoping to unlock cash and profit and the capital to minimise the group’s own calls on debt or equity markets. He is preparing for a tough year but not, from today’s language, a severely threatening one; let alone any sort of sectoral crisis.
Stockland was the pioneer of the stapled trust model in this market. All around it are those who perhaps pushed that model too far – Centro, clearly, is the outlier but there were others that were quite aggressive. They are now slashing distribution payouts back towards the pure trust income they generate, retaining cash and raising equity to fund their operating businesses.
The market, however, hasn’t, so far, treated Stockland any differently to the rest of the sector. As it responds to the detail of the Stockland result and Quinn’s presentation, we will get a better sense of whether the market is as calm and confident about the outlook for Stockland – whether it endorses the implicit statement of Stockland’s differences – as Quinn appears to be.
(20min delay)
