Steinert sets up for Stockland juggle
In the lead-up to the big bang announcement on Monday morning, speculation was rife that Stockland boss Mark Steinert - who took the top job in January - would cut the group's distribution payments, tap investors for more capital and slash earnings, which would bring it to the seventh downgrade in a year.
The fears were based on a need to do something fast to turn around the company's earnings as well as an announcement late last week of a senior management shuffle that saw a few heads roll.
Instead, the strategic review held no drastic surprises. Indeed, from a shareholder perspective, the all-important 24¢ a share distribution payment remained on hallowed ground, untouched, which means a decision was made to pay out more than the company earns in 2013 to meet that payment.
Against this backdrop Steinert signalled further cost cutting of its overheads to make the company more efficient, he promised more asset sales in its poorly performing office portfolio, an improvement in the profitability of its residential business, a wind-up of unlisted retail property funds and the transfer of $500 million of capital from the trust to the corporation.
There will also be an orderly selldown of its office portfolio as the sector outlook continues to look flat in the short to medium term. "Although some office managers are reportedly observing increased levels of inquiry, we expect a challenging year ahead," Steinert said in his presentation.
The endgame is to rebuild the company into a "great property company that delivers value to all stakeholders" by serving up annual earnings per share growth as well as outperforming the REIT index on a total shareholder return (TSR) basis.
It is a gutsy goal given it confirmed on Monday it will report a 25 per cent fall in earnings per share for 2013. But Steinert is confident 2013 is a "trough" year for the company and once the restructuring is out of the way and residential starts rebounding, it will be all systems go.
But the potential stumbling block will be finding a magic formula for its struggling retirement business, which is a tough sector that few have been able to crack.
Steinert's decision to stick with retirement living has caused a degree of angst among some investors who had hoped he would abandon it and dump its 15 per cent investment in the embattled retirement group FKP Property.
It prompted at least one property investor to question whether Stockland's size - a market capitalisation of $8.6 billion - and a high dividend yield has saved it from becoming a candidate for a break-up.
Steinert is well regarded in the property sector and has inherited a lot of challenges, not the least being how to differentiate the company from other diversified listed REITs including GPT, Mirvac and Dexus, which are a lot further down the restructuring path than Stockland and arguably have a sharper focus.
Steinert believes he has two key differentiators including a big land bank, which the company will increasingly develop itself rather than sell off to other developers, along with a large shopping centre portfolio, which he argues is well placed to be a powerful growth engine for the Stockland empire.
But not all agree with the strategy or that Stockland can differentiate itself from its peers. There is no doubt Stockland is playing a catch-up game and, going by the latest strategic review, it will remain a conglomerate, with exposure to residential, retail, retirement, industrial and, to a lesser degree, office sectors.
It is this decision to remain a conglomerate that could hold it back at a time when GPT, Mirvac and Dexus have become more focused after a debt binge wreaked havoc on the entire sector during the global financial crisis.
To put it into perspective, GPT has got itself to a point where it is upgrading its earnings, while Mirvac and Dexus are busily buying up assets.
GPT has positioned itself at the quality end of office and retail and has developed a clear model that involves buying assets and putting them into its wholesale funds.
Dexus is focusing on office after exiting industrial and has a big funds management arm where it can put assets and Mirvac is concentrating on high-quality office buildings, inner-city apartments and metropolitan residential developments, after exiting hotels. It has been buying assets and raised $400 million through an institutional placement.
Stockland prefers instead to form joint ventures rather than open more wholesale funds. It means Steinert will have to develop a business model that is good at moving assets around.
If he can pull it off, the stock price will soar and earnings will start to rise, and Steinert will look like a hero. But he will be juggling a lot of different businesses.
Twitter: @Adele_ferguson
Frequently Asked Questions about this Article…
Stockland's strategic review kept its key measures largely unchanged: the 24¢ per share distribution was maintained, management signalled further cost cuts, more asset sales (notably from its underperforming office portfolio), an improvement push for residential profitability, a wind-up of some unlisted retail property funds and a transfer of $500 million of capital from the trust to the corporation. For investors this means short-term pain (the company is treating 2013 as a trough year) but the plan aims to rebuild earnings per share growth and improve total shareholder return over time.
No. Stockland kept its all-important 24¢ a share distribution intact. The company chose to pay out more than it earns in 2013 to preserve that payment, which was a relief for income-focused investors but also a sign of near-term pressure on earnings.
Mark Steinert is pursuing a multi-pronged approach: tighter cost control, selling underperforming assets (especially offices), boosting residential profitability, winding up certain unlisted retail funds, transferring $500 million of capital from the trust to the corporation, and developing more of Stockland's landbank itself rather than selling it to other developers. He also plans to leverage the company’s large shopping-centre portfolio as a growth engine while using joint ventures rather than wholesale funds to move assets.
Stockland confirmed a 25% fall in EPS for 2013, which the company described as a trough year. For investors this signals weaker near-term earnings and raises caution about relying on current payout levels. Management’s plan is that restructuring and a residential rebound will restore earnings growth, but that recovery is not guaranteed and may take time.
Yes — the company plans an orderly selldown of its office portfolio because the office sector outlook looks flat in the short to medium term. Steinert said the market is likely to be challenging ahead, so Stockland will reduce exposure to poorly performing office assets as part of the strategic reset.
Steinert decided to stick with retirement living rather than exit the sector. That includes keeping Stockland’s roughly 15% investment in FKP Property, a move that caused concern among some investors. The article notes retirement living is a tough sector where few operators have cracked the code, so this remains a potential stumbling block for Stockland.
The article notes GPT, Mirvac and Dexus are further along their restructuring paths and more focused: GPT has positioned itself at the quality end of office and retail and uses wholesale funds, Dexus has concentrated on office with a large funds-management arm, and Mirvac is focused on high-quality office and residential. By contrast, Stockland remains a diversified conglomerate with exposure to residential, retail, retirement, industrial and office sectors. Steinert argues Stockland’s differentiators are a big landbank and a large shopping-centre portfolio, but some observers question whether that will deliver the same clarity of focus as its peers.
Main risks: a 25% EPS decline in 2013, continued weakness in the office sector, challenges in the retirement living business, and the potential drag of remaining a conglomerate rather than narrowing focus. Potential upside: successful cost cuts and asset sales, a residential market rebound, effective development of Stockland’s landbank and growth from its shopping-centre portfolio. The company’s market capitalisation (~$8.6 billion) and a high dividend yield have also made some question whether a break-up might be an option, although management has opted to pursue a turnaround instead.
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