Stockland: Interim result 2018

Stockland has investments in office towers and industrial property, plus a retirement living business, but its two major divisions are its shopping centre portfolio and its residential development business.

The shopping centres tend to be the smaller ‘regional', ‘sub-regional' and ‘neighbourhood' centres. These are classifications used by the Property Council of Australia and are based on the gross lettable area of each shopping centre: in this case, the relevant gross lettable area is between 30,000 and 50,000 square metres, between 10,000 and 30,000 square metres, and less than 10,000 square metres, respectively. 

Of course, the bigger the shopping centre, the more retail options for consumers, ranging from supermarkets, department stores, food and dining options, entertainment and specialty stores.

By contrast, Scentre Group's centres are much larger on average. Its Australian shopping centres are almost all ‘super regional' or ‘major regional', being centres having more than 85,000 square metres, and between 50,000 and 85,000 square metres, respectively, in gross lettable area.

The smaller the shopping centre and its catchment and the less connected it is to major transportation routes, the more likely it will be affected by rising online sales. There is less capacity to concentrate smaller centres' offerings on a large variety of food, leisure, entertainment and other experiences which encourage people to want to hang out and shop in person there.   

This is why we prefer Scentre Group and, to a lesser extent, Vicinity Centres, to Stockland. Nevertheless, Stockland's shopping centres recorded a 3% rise in operating cash flow during the half (on a like for like basis), with re-leasing spreads – the difference between rent paid on old leases and new leases – being 1.9%.

Residential booming

But the highlight was Stockland's residential development business, where operating cash flow rose 83% to $182m. This division provided 42% of Stockland's total operating cash flow in the half, although its profit is likely to be less in the second half due to the skew of high-margin Sydney settlements to the first.

Half of Stockland's residential sales are to first home buyers and more than three-quarters are to owner-occupiers, meaning it's likely to be less affected by both the regulators and banks clamping down on investment property purchasers.

In all likelihood, though, any major housing downturn on the east coast will affect Stockland too so caution is required when projecting its residential development earnings over the cycle.  

However, with a 6.6% unfranked yield, we recommend you HOLD. 

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