Edited Transcript of SGP.AX earnings conference call or presentation 19-Feb-20 12:30am GMT


Sydney Feb 19, 2020 (Thomson StreetEvents) — Edited Transcript of Stockland Corporation Ltd earnings conference call or presentation Wednesday, February 19, 2020 at 12:30:00am GMT

* Lauren A. Berry

Good morning, everyone. It’s Mark Steinert, CEO for Stockland speaking, and I welcome you to our First Half 2020 Results Call.

I’d like to begin by acknowledging the traditional owners and custodians of the land in which we meet, the Gadigal people of the Eora Nation and pay my respect to their elders, past and present.

The format for today is Tiernan, Louise, Andrew and I will present the key elements of the results, and we’ll then open up to questions.

I’m pleased to present first half results, which are in line with our full year guidance. The results reflect a significant second half skew in residential due to lower Sydney and Melbourne high-margin settlements in the first half and the settlement of the final Grove stage and Merrylands in the second half. Retirement Living is also expected to reflect a second half skew due to mix and noncore village sales. Combined, this has largely driven the funds from operations per security change of minus 4.2% on first half ’19. Importantly, residential sales are up 60% second quarter ’20 on the fourth quarter ’19 low, providing a very strong foundation for FY ’21 settlement volumes, which Andrew will discuss in more detail.

Logistics and workplace rental growth remained strong, underpinning a $230 million valuation gain, lifting net tangible asset back in 2% and driving statutory profit growth of 68%.

Retail town center income was in line with budget, reflecting marginal income growth. And overall, distribution per security for the half is forecast to be $0.135.

Our strategy continues to focus on maximizing returns through community creation with our strategic priorities being to upweight workplace and logistics through build-to-core, improving the quality of our retail town centers, accelerating residential profit and broadening our capital base. The team will discuss in detail the progress we’ve made in executing each of these strategic priorities. Key achievements relating to these priorities in the half include: a 3% increase in workplace and logistics weighting to 26% through acquisition and development, which includes the $121 million Walker Street development site amalgamation in the strong North Sydney market. And also, the consolidation of ownership at Piccadilly for $347 million and the acquisition of 2 Brisbane developments with $140 million in value. These acquisitions and progress on other significant Sydney and Melbourne developments has doubled our total development pipeline to $4.3 billion of project costs.

In retail town centers, we’ve improved the portfolio quality, which has helped drive comparable retail sales growth of 3.3%. And in our Residential business, we’ve achieved further growth in market share up 1% to 16%, 4x our nearest competitor, reflecting our scale and brand. We’ve also executed early cycle restocking with the acquisition of 1,500 lots at Donnybrook, positioning us well to leverage the strong upcycle that we’re now seeing emerge across Australia.

In Retirement Living, we submitted DAs for our first 2 land lease projects, and retirement established sales were up 12% first half ’20 on first half ’19.

In relation to broadening our capital base, we’re very pleased to have established a joint venture with the Fife Group at Kemps Creek, Western Sydney near the new aerotropolis with $1.1 billion in value.

As you can see, there is measurable momentum on every strategic priority that we’ve set. Underpinning our operational performance, of course, is our team, who have delivered sustainability leadership, a relentless focus on customer experience and a growing innovation capability. We’re proud to be supporting communities impacted by recent fires and drought and remain focused on asset resilience, which helps reduce natural disaster risk and operating costs. Our top-tier position in all major sustainability indices recognizes these efforts.

We’ve also been able to leverage our sustainability credentials to establish a 12-year debt facility for $75 million with the Clean Energy Finance Corporation, which includes an attractive interest rate discount.

We believe digital innovation and innovation more broadly is critical to our future success. Customer-driven innovation is expected to deliver and drive a 2% increase in funds from operations in FY ’20. Exciting examples include the AI chatbot and call center-enabled live chat for residential sales, which has driven 4,000 inquiries and $16 million in sales since launch in September 2019. ShopAI is another great example where a chatbot-enabled digital shopping guide, featuring small business retailers in our centers drove a 64% increase in gift page views over Christmas.

Of course, our team’s capabilities are critical to the successful execution of our strategy. And in that regard, we’ve established an integrated culture program called Strengthening Stockland.

Looking forward, we’re also undertaking an external remuneration review to ensure remuneration is clearly aligned to delivering our strategic priorities for security holders. Overall, we’ve maintained an intense focus and activity level to create a strong foundation from which to grow profit.

I’ll now hand over to Tiernan to take you through the numbers in more detail.

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Tiernan Patrick O’Rourke, Stockland – CFO [2]

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Thanks so much, Mark, and good morning. There are really the 3 — 2 key things I want to say today. First, compared to last year, lower development expenditure and land purchases have increased cash flows strongly this half. And second, we are on track to achieve our earnings forecast for FY ’20 and the positive momentum from the residential market recovery will support FFO growth into FY ’21 as well.

Our key capital management metrics are very strong. Gearing has fallen to 26.1%, primarily from increased cash flows from the residential market recovery and growth in NTA. Our average cost of debt was 4.4%, the same as last full year. Continued proactive management of the debt portfolio will improve this cost for the full year to around 4%. And for clarity, this is lower than our last forecast, which we had set at 4.3%. With active management of the cost of debt, we have improved its competitiveness since 2013.

I’ve said regularly that we focus on managing our cash flows so we can deliver growth through the cycle. Given increased development expenditure and land payments last year in the Residential business, we have seen operating cash flows improve significantly in this period. Our Devex is back to its long-term averages and land payments, even with accelerated restocking, continued to be undertaken mainly on capital-efficient terms. We expect to maintain this level of improvement in operating cash flow for the full year, especially now that the residential market recovery has emerged strongly. Finally, significant covenant headroom has been maintained on our high investment-grade debt portfolio.

Andrew and Louise will take you shortly through the detail on business unit FFO numbers. But from a group perspective, our FFO per security was down 4.2%, mainly from 4 key areas: First, the decrease in commercial property FFO of 1.7%, predominantly as a result of the impact of noncore asset sales as we re-weight the commercial property portfolio. Second, as Mark has already explained, the Residential result was down 6% due to the skew of settlements to the second half, especially for higher-margin projects in Sydney as was anticipated last year. Third, the Retirement Living result was down about $3 million or 13.8% period-on-period also as a result of the skew of settlements and noncore village divestment profit, both to the second half. And finally, unallocated overheads fell 15.5% due to the savings from the executive team restructure completed in late 2018 now being realized at $8 million per annum.

Finally to statutory profits, maintenance CapEx and incentives are lower period-on-period but will remain around long-term averages as Louise and her team continue to optimize our assets. The net improvement in commercial property valuations, including the effect of active rent rebasing on retail town centers, has led to a significant turnaround in statutory profit this period, too.

We believe that the collective impact of our disciplined financial approach and active capital management will support growth in the business.

So over to you, Louise.

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [3]

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Thanks, Tiernan. Good morning. This is the half for Commercial Property, where we’ve unlocked the value of key assets in our workplace portfolio, continued the successful delivery of logistics projects while actively adapting our retail town centers to changing customer preferences. With the doubling of the logistics portfolio over the last 6 years, we’ve established a land bank supporting an ongoing development pipeline. We’ve also entered into JVs in Melbourne and Sydney’s West. These developments, together with Macquarie Park, give us a $2.1 billion logistics pipeline.

With the acquisition of the other 50% of Sydney’s Piccadilly precinct and adjoining sites to 110 Walker Street in North Sydney, we’re now advancing the growth of the workplace portfolio with a $2.2 billion pipeline. We’re also growing our in-house asset and development management capability to support the total pipeline of $4.3 billion.

Accelerated remixing to more low and nondiscretionary categories, the rollout of place-making projects and last mile convenience initiatives, together with the disposal of noncore assets, is strengthening the Retail portfolio with valuations broadly stable.

Commercial property has had a solid first half, delivering 2% comparable FFO growth. All 3 sectors had strong occupancy with a sustainable WALE. We have a portfolio value of $10.4 billion.

49% of assets by value has been independently valued over the last 6 months with a resultant $199 million net valuation uplift.

Logistics saw a 7.9% uplift driven by the successful leasing of the development assets and cap rate compression. The signing of a further term by Optus at the Macquarie Park campus contributed significantly.

Workplace had a moderate 1% uplift, reflecting the strength of the Sydney assets with the ongoing softness of the WA market with the Durack Centre assets.

Retail experienced a minor decline of 0.5%, with valuations broadly unchanged due to our rental rebasing program and stable cap rates. The slight devaluation was predominantly due to some increased capital allowances. Overall, a result reflective of the implementation of the strategic plan over the last 2 years.

Upfront in relation to workplace and logistics, I’d like to acknowledge the truly outstanding achievement of the Stockland team in delivering strong half results and more than doubling the development pipeline to $4.3 billion.

In Logistics, the pipeline has grown due to the negotiation of large site JVs and the planning of multistage business park opportunities. We now have a logistics portfolio valued at $2.8 billion, representing 19% of our portfolio weighting.

98% of assets located down the eastern seaboard with a $2.1 billion development pipeline in various stages of delivery. The transaction with Fife Capital creates a large land holding of 71 hectares close to the new Western Sydney Airport with a forecast end value of $1.1 billion. In addition, 2 Brisbane assets will be added to the portfolio on an initial yield of 6%. The logistics portfolio delivered FFO comp growth of 3.9%. In the first half, we completed $57 million of developments with speculative developments at Yatala in Queensland and Keywest in Victoria fully leased on completion, delivering IRRs between 8% and 10%, and FFO yield above 6.5%. Average Logistics rental growth of 11.5% has been achieved with the WALE increasing to 5.4 years.

The partnership at Melbourne Business Park with Mt Atkinson Holdings over 260 hectares site has the potential to deliver a $2 billion end value. Following the subdivision planning approval, granted in December 2019, the $190 million Stage 1 launched in the first half of FY ’20 with strong inquiry. Macquarie Park has 2 developments nearing project start of approximately $600 million. The Stage 1 DA for M Park was received in December with a forecast start on site mid this calendar year. The signing of the Optus renewal sees an upgrade across the site as part of the 12-year deal. The renewal resulted in a valuation uplift of more than 20%.

Workplace delivered FFO comp growth of 6.1%. Rental growth was 15.8%. With the purchase of the other 50% of Piccadilly and the North Sydney assets, the portfolio weighting is now 7% with a value of just over $1 billion. The acquisition of sites to allow the maximization of development opportunities under Stockland control and positive at that engagement with local and state authorities has driven the realization of the $2.2 billion pipeline.

Development applications for both projects are expected to be lodged in calendar year ’20. We now manage 90% of the portfolio by value in-house with the ongoing growth of the asset management and development teams to deliver the pipeline. These images show the strategic location of both sites with Walker Street in close proximity to the future Victoria Cross station in North Sydney and Piccadilly in the heart of Midtown Sydney. We’ve been actively stabilizing the retail portfolio and are in year 3 of a 5-year program of rebasing rents and remixing to low and nondiscretionary categories. The retail valuations reflect the strategy.

Occupancy across the 32 assets remained strong at 99.4%. Comparable specialty sales growth was 2.7%, with the portfolio approximately 5% above the Urbis benchmark. Mobile phones and technology generally, services and food catering delivered strong results, with apparel through remixing now stabilizing.

Supermarkets continued to show good growth at 3.1%.

Tenant retention has remained at 63%, with ongoing remixing to higher-growth categories and newer concepts. Occupancy costs also remained stable at 15.1%. Rent reversions just coming at the better end of guidance at negative 5.2%. Incentives are slightly higher at 13.8 months, and we expect this to stabilize to around 11 to 12 months over FY ’21/’22. This higher incentive level reflects our accelerated remixing to food and services.

There has been a number of administrations over the year with Harris Scarfe prior to the end of the first half and JeansWest, Bardot, Curious Planet and Colette in January, February. The Harris Scarfe administration has been factored into the valuation to 31 December. These administrations have impacted 35 tenancies across portfolio of 3,100 tenancies. 70% of 35 sites are now under advanced negotiations. The Harris Scarfe backfill at Green Hills, for example, had had the grade, and we forecast turnover from the new retailers to be double that of Harris Scarfe. We forecast rent reversion for the full year, including those sites impacted by administrations, to be within the negative 5% to negative 7% range.

This slide highlights the strength of our remixing concession to food and services. Food and services are generating 25% higher rent on meter and 30% to 40% higher sales productivity on meter than fashion.

70% of our sales come from low and nondiscretionary categories, including food and services, categories less vulnerable to online growth.

The rollout of restaurants like Bavarian Bier Cafes, now in 3 of our largest centers and under delivery in Rockhampton, are good examples of this shift.

At Birtinya on the Sunshine Coast, NightQuarter will open soon. Bringing live acts and food trucks on a Friday and Saturday evenings, NightQuarter is a great example of placemaking, delivering a point of difference to our retail town centers. We are the first landlord to roll out Amazon Locker across the portfolio, and 22 of our assets have click-and-collect to aid customer convenience. These are great examples of the merging of physical and digital.

The re-weighting of the portfolio will be delivered with the completion of the retail noncore divestments over the next few years and the delivery of the Workplace and Logistics’ $4.3 billion pipeline. The combined Workplace and Logistics portfolio is now 26% of property asset value, up from 19% in FY ’18.

The Logistics pipeline has grown with the realization of joint venture opportunities as well as large business path developments and workplace with well-located development opportunities. We’re responding to the structural change in retail with our strategy delivering sales growth and valuations broadly stable. Comparable FFO growth to commercial property remains in line with guidance at around 1%.

I’ll now hand over to Andrew Whitson.

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [4]

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Thank you, Louise, and good morning, everyone. I’d like to start by talking about the results from the Residential business. The context of market conditions have improved significantly over the past 6 months. We’ve delivered relative outperformance for 2 key reasons. The first being ability of the business to leverage the residential market improvement through accelerating releases as demonstrated by the Q2 sales results. And the second is the strength of the Stockland brand. This has been built on the quality of the communities that we create and has driven a further increase in our market share to 16% over the period. We’ve settled 2,158 lots for the first half, are on track to deliver over 5,200 settlements for the full year on the back of strong sales in Q2. Our default rate was reduced significantly over the past 6 months and was 3.5% in the December quarter, which is within the normal range.

Operating profit for the period also reflects the second half skew to the higher-margin Sydney projects are on track to deliver an operating profit margin for the full year of around 19%.

We remain focused on restocking our pipeline early in the cycle and have acquired 3 sites this period, including 1,500 lots at Donnybrook in Victoria which will be lodged around the middle of the year. Our restocking strategy also includes a disciplined approach to building a meaningful apartment development pipeline.

As mentioned, we’ve leveraged the market recovery and accelerated product releases to drive net sales. The market improvement was at a faster rate than we’d originally expected, and we’ve experienced good demand at all projects along the eastern seaboard. As you can see from the chart on the screen, net sales for Q2 were up over 60% from the low point reached in Q4 FY ’19. And we’re also seeing modest price growth emerging in Sydney and Melbourne and a continuing flight to quality.

Increasing demand over the past 6 months for new land combined with a lack of suitably zoned and serviced land would lead to an undersupply in new housing during the next 12 months. With over 4,200 contracts on hand, we have good visibility to settlement volumes through the balance of the year and into FY ’21. So overall, a strong sales outcome.

I’m particularly pleased with the growth in our market share to 16% this period, which represents more than 4x that of our nearest competitor and demonstrates that we continue to outperform in a rising market. A number of you have heard me speak in the past about the strong competitive advantages of our Residential business based on a unique combination of 3 elements. The first is our brand, which build on the quality of the communities we’ve created for over 60 years. The second is the scale, which enables us to have a deep understanding of what the customer wants and deliver that at a lower cost. And the third is our 76,000 lot land bank, which has average age of around 10 years and with strong embedded margins.

One great example of our competitive advantage is where our scale has enabled us to combine our internal customer data sets with external data sets and use this information to geo target customers and reduce our cost per digital lead by 20%.

Our competitive advantage means our business is uniquely positioned to leverage the strengthening residential market. There are a number of factors which underpin our confidence in our forecast this year and into FY ’21. Those elements include the continuing strong sales rate that we’re experiencing and a normalized default rate, which will drive settlements in FY ’21 to around 5,800, and this includes an increasing number of townhome settlements at a higher average price.

We also see a skew in settlements back towards the higher-margin Sydney and Melbourne projects after a trough year in FY ’20. And there’ll also be a full year of settlements from 4 significant projects launched in Melbourne over the past 18 months.

On to the results for the Retirement Living business. It’s been very pleasing to see that all the hard work that the team have been doing over the past couple of years to improve the business performance is starting to deliver results, with sales from our established villages up 12% over the period.

We’re on track to deliver our FY ’20 guidance of around 850 settlements for the year. And with contracts on-hand up 30%, the business is positioned for further growth in settlements in FY ’21. Over the past 12 months, we remain very focused on maximizing occupancy and improving the returns from this business. To achieve this, we’ve strengthened our value proposition, improved our servicing care offer and provided our customer with greater certainty through our lease — Peace of Mind contract, which now makes up over 80% of all new contracts.

We expect the improving residential market to read through to increased settlements over the coming years. Driving growth of our Retirement Living business through development is a key competitive advantage. And our confidence that the land lease communities pipeline will be a major growth driver over the medium term continues to increase.

We’ve lodged our first 2 development applications for villages in Aura on the Sunshine Coast and North Shore in Townsville and the pipeline of over 2,000 of dwellings.

We continue to remain focused on improving the quality of the portfolio through the sale of noncore villages and are in active discussions with a number of parties over the next tranche of villages.

So in summary, on the back of the strengthening residential market with targeted and delivered a strong sales result for the half and have confidence in our FY ’20 outlook and prospects into FY ’21. I’ll leave it there, and now hand back to Mark.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [5]

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Thank you, Andrew. As you’ve heard today, that measurable progress that we’ve made in executing our strategy to leverage our diversified model, to grow returns and improve portfolio quality. Importantly, the Workplace and Logistics Development pipeline will support our progression to achieve a more balanced portfolio allocation over the next 5 years, with Workplace and Logistics forecast to shift to over 30% of the portfolio and retail town centers to reduce to below 40%. This reflects our views of favorable demand and supply fundamentals in Sydney and Melbourne and the ability to achieve attractive risk-adjusted returns by developing core assets.

One of the standout features of our performance and execution, as you’ve heard, is the increase in the workplace and logistics development pipeline. It has grown from around $590 million of project costs 2 years ago to $4.3 billion today, with Louise reallocating resources and putting a team together to execute and drive these projects.

Looking at the profit evolution between FY ’20 and ’21, a number of positives are now clearly evident. Commercial property earnings are expected to benefit from new developments and underlying sound fundamentals in Workplace and Logistics. Longer term, the Workplace and Logistics development pipeline will not only underpin strong earnings growth, but also capital partnerships and up-weighting to strong markets.

For the Residential business, based upon current sales run rates and new project launches, we expect residential settlements in FY ’21 to move up towards the top of our cycle range at around 5,800 lots. Profit margin should also be maintained above average levels, reflecting our skew back to higher-margin Sydney and Melbourne projects.

Key residential projects moving to normalized full year settlements in FY ’21 will include Minta Farm, Grandview and Mt. Atkinson, all in the strong Victorian market.

New projects to follow include Red Hill, Hope Island and Donnybrook, which together with other new projects will combine to more than 5,500 lots.

In relation to the outlook for the balance of FY ’20, a number of positive factors are helping to drive performance. The housing market is now clearly in a strong recovery, interest rates remain historically low, population growth is above average in most of our markets and solid employment growth is underpinning workplace and logistics demand on the eastern seaboard.

These positives are being offset by a lag impact on profits from increasing residential sales, elevated retail administrations and with consumer sentiment. Overall, we’ve maintained our guidance for a flat funds from operations per security this year with commercial property forecast to achieve around 1% comparable FFO growth, with logistics and workplace growing moderately and comparable retail income stable as we continue to remix and future-proof the portfolio, but administrations dragging growth.

For residential settlements, over 5,200 are forecast with a 19% profit margin and profit recognition from The Grove and Merrylands divestments and the Aura capital partnership.

Retirement Living, as Andrew has described, is forecast to grow moderately. And as mentioned, there will be a strong second half profit skew in communities of around 35% first half, 65% second half.

Distribution per security will also be unchanged from FY ’19 at $0.276, assuming no material deterioration in market conditions.

We will continue to focus in a disciplined way on executing our strategy to underpin future profit growth, and I’d now like to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Lauren Berry from Morgan Stanley.

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Lauren A. Berry, Morgan Stanley, Research Division – Equity Analyst [2]

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Just my first question on your guidance statement. It seems like things are going pretty well in resi and you’ve lowered your cost of debt for the year. Just wondering why you kept your guidance maintained this period instead of an upgrade?

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [3]

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Yes. Thanks, Lauren. Lauren, the main driver there is really these administrations in the retail town center portfolio, and we’ve obviously wanted to allow for those. And of course, there is always going to be a lag read-through from the upturn in residential sales, which really will be most beneficial to the FY ’21 forecast and year.

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Lauren A. Berry, Morgan Stanley, Research Division – Equity Analyst [4]

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Okay. Great. And then on the other 5,800 settlements in FY ’21, are you able to give some color on how much of that uplift is from, I guess, like-for-like sales growth in each project and how much is attributable to projects coming online?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [5]

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Yes, you’ve got a mix of elements in there, Lauren, which you’ve got not only some like-for-like sales growth. You’ve also got some of the new launch projects getting into a full year of production, particularly those new projects we launched in the key corridors in Melbourne over the last 2 years. Now we’ve brought the infrastructure in. We’re getting a full year of settlement there that are unconstrained by production. So it is a mix of those 2 elements.

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Lauren A. Berry, Morgan Stanley, Research Division – Equity Analyst [6]

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I guess do you have a like-for-like number in some of your key projects in Sydney or Melbourne? What the uptick has been over the last 6 to 12 months in terms of net deposits?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [7]

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What we are seeing, particularly in Sydney, has been the strongest recovery. We’re seeing sales rates double over the past 6 months. It would be an indicative level. When we look at new inquiry through January versus prior corresponding period, new inquiries up over 200% across our portfolio, and that’s more pronounced in Sydney.

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Lauren A. Berry, Morgan Stanley, Research Division – Equity Analyst [8]

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Okay. And on the Melbourne Business Park, do you still expect to recognize those as, I guess, (inaudible) profits? And when might those come through to earnings?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [9]

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Some of the first stage, Lauren, we will trade those lots. We’re currently going through the finalization of the subdivision plan, and then we get titled. So that probably won’t occur until late this calendar year, then we undertake further work. So it’s probably — I’m looking across at Tiernan, but I think it would be into late FY ’21/’22 most likely. And our strategy has always been that we sell some of the lots in Stage 1 so that we really launch the park, and then we’ll look later on at the larger lots, potentially holding those.

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Lauren A. Berry, Morgan Stanley, Research Division – Equity Analyst [10]

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Okay. And just final one for me. In the retail portfolio, are you able to give some commentary on any foot traffic trends that you’re seeing in the first couple of months of the year, particularly in regards to bushfires and also virus?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [11]

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Sure. So in relation to bushfires, whilst we had a couple of centers being foster in Nowra. In the range of the bushfires, they were evacuated a couple of times, but then trade continued. So we very much continue supporting the communities in those areas, but haven’t really seen a negative impact. In relation to coronavirus, haven’t seen that either. I think we look across our portfolio, and we don’t have assets in the demographic mix that are perhaps more impacted or in the tourist and high lux end.

I think what we will continue to focus on is supply chain, and we’re staying very close to our retailers to understand from them, whether there is going to be an impact, depending upon how long the issue goes on to any supply and future feedback at the moment is that stocks for the following season is already landed in Australia. So it won’t be impacted, but again, certainly something we’ll continue to watch and probably more so with our smaller retailers.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [12]

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Probably just adding to bushfires. We’re proud to make a $500,000 contribution to the community rebuilding from the Stockland Care Foundation. And as Louise mentioned, a lot of our properties are able to be points of refuge during events and then play a key role in helping to rebuild communities which we’re accelerating. And certainly, we have a heavy focus on bushfire resilience and resilience more broadly as it relates to our entire portfolio, and that will continue to be a key focus for us.

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Operator [13]

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Your next question comes from Stuart McLean from Macquarie.

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Stuart McLean, Macquarie Research – Research Analyst [14]

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First question is just on a comment that I think Tiernan made around earnings growth or FFO growth into FY ’21. I was wondering if we could unpack that a little bit. Are you assuming that the improvement in underlying resi outcomes results in a flat resi operating earnings outcome?

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Tiernan Patrick O’Rourke, Stockland – CFO [15]

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That’s certainly not what I was implying. What I was actually talking more around, Stuart, was more generally that as you know, we have a number of one-offs in FY ’20, and it was to help you bridge the gap across all the business units, not just in residential. So what we’ve done in this result, all of us, I think, is added some additional steps which you can use to bridge into ’21 to not only overcome those one-offs that are in ’20, but bridge into growth in ’21. So I wasn’t implying a flat or growing result in any particular business unit, I was really talking about the group result, and particularly the group result returning to growth in ’21.

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Stuart McLean, Macquarie Research – Research Analyst [16]

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Yes. So I’m just trying to delve into the business units a little bit to understand what’s going on there. So you’re expecting resi operating earnings to grow next year given the strength in the underlying?

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Tiernan Patrick O’Rourke, Stockland – CFO [17]

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I think what we’re saying is it — resi as a — in isolation is around flat next year, yes.

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Stuart McLean, Macquarie Research – Research Analyst [18]

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Okay, perfect. I appreciate that. And second question, just on the retail administrations, it seems that, that’s one of the reason why we consider your guidance for FY ’20, you previously guided to leasing spreads of minus 3% going forward. How does that number stand today, given the impact of administrations that you’re expecting?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [19]

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If I take FY ’20 first, Stuart, as we said in the presentation, taking into account the administrations that we know today, we will end FY ’20 at the negative 7% — close to the negative 7% and what we’re going to have to do over the next couple of months. And bearing in mind, in some of the cases, even those in administration now, they’re actually still trading. So it’s really week by week, we’re reforecasting to see where we might sit in this year and then how that might flow into FY ’21. So we won’t be giving any guidance on that rental spread until the full year for FY ’21.

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Stuart McLean, Macquarie Research – Research Analyst [20]

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Okay. And a final one, also just on retail. The circa $500 million worth of asset sales remaining, just wondering how you’re thinking about those at the moment? Is that something Stockland still wishes — it wants to pursue?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [21]

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Yes, so we still flag another $500 million worth of retail sales, as I think we said at the full year. We’re not proposing to undertake those throughout this year. We will continue to assess the market. We’ll continue to assess when we have the capital requirement to recycle that capital. But as I said in my presentation, we’d see over the next couple of years probably that remaining $500 million. But we continue to manage those assets with the same degree of asset management and drive that we would any other asset.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [22]

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Maybe just to add to that, Stuart, so while we didn’t sell any assets out of the Stockland portfolio in the half, obviously, we settled a couple of hundred million and sold over $500 million in the prior period, we did sell $85 million of assets out of the SREEF1 fund that we manage and we hold units in, and we sold those properties at a 3% average premium to book value. So we’re continuing to see actually pretty strong appetite for high-quality, smaller retail centers, mid-sized retail centers. And obviously, there’s been some large transactions as well. And I think as Louise spoke to the 3.3% sales growth that we’re seeing in the portfolio, that’s up from about 1.4% a year ago. So the actual underlying performance of the portfolio and the remixing impact is reading through to a positive, and the yield differential in high-quality retail relative to other sectors, we believe, is continuing to prove compelling for a lot of different buyer groups.

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Operator [23]

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Your next question comes from Richard Jones from JPMorgan.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division – VP [24]

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Just a question for Tiernan first up. Just in terms of the project profits, I think you’ve called $75 million to $80 million of net project profits for the year. Just wondering if you can give us the first half, second half split of that, Tiernan?

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Tiernan Patrick O’Rourke, Stockland – CFO [25]

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Yes, I can. It’s about — it’s about 60% — 40%-60%, 40% in the first half and 60% in the second half.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division – VP [26]

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Okay. And still at that $75 million, $80 million mark?

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Tiernan Patrick O’Rourke, Stockland – CFO [27]

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Yes.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division – VP [28]

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Okay. And then just in terms of residential sales, not clearly a pickup in New South Wales on net deposits, but all other states were negative on pcp. I just want to get a bit more color, if we could, Andrew, just on, I guess, Melbourne sales look to be reasonably soft? And what do you think is holding that back? And when do you expect a decent recovery to come through in Melbourne?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [29]

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Richard, the volumes in the prior corresponding period in Melbourne was still reasonable leading up to the December — in the December quarter ’18. It really started to fuel the downturn moving into FY ’19. So there was still some reasonable volumes there. What we’re seeing in Melbourne is, it didn’t have the price retracement of Sydney. So prices have been quite stable. We’re seeing rebates being withdrawn from the market there. So that’s driving a net price increase that we’re starting to see. And then the inner northern corridors, when I say inner, the Craigieburn corridor trading very strongly. We’ve got the Western corridor trading strongly in the southeast. Probably some of the outlying areas, we’re still working through some longer-dated contracts around Cloverton and other locations. So when we look at inquiry, yes, they’re up over 200% in Melbourne. We’re seeing that flow through to conversion. So we feel good about what’s happening in Melbourne, and it’s taken a little longer than Sydney to pick up, but we’re seeing momentum really November, December and into January. So we’re seeing that build and expect it to continue to build over the half.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [30]

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Maybe just to add to that, in the Page 79 of the Annexures, you’ll see net deposits for Victoria second quarter ’20 of 481. First quarter is 288. Fourth quarter ’19 was 330. So Victoria is up strongly. Queensland, fourth quarter ’19 was 280. Second quarter 20 of 366.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division – VP [31]

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Just a comment about new inquiry, up 200%. When — is that referencing now versus when?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [32]

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So that’s the January period. So January this year versus January last year?

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Richard Barry Jones, JP Morgan Chase & Co, Research Division – VP [33]

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Okay. And Louise, maybe you could just touch on, obviously, the office development pipeline has ramped up significantly with a couple of big purchases. Can you just give some color as to who’s kind of running those projects and who’s been added to the team?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [34]

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Yes, sure. So just to clarify on those 2. So obviously, it’s made up of Piccadilly and also Walker Street in North Sydney. So we have a head of development or General Manager, Development, Gavin Boswarva, who came to the business 8, 9 months ago with a strong background in all sectors that commercial property covers. In relation to Piccadilly, we brought in a project director, [Ian Bell] who, again, has probably 35 years’ experience in large towers. Ian is growing a team of — by the end of this calendar year, we’ll have another 3 development managers under Ian. They’re currently in — 1 is there, and there’s another 2 in negotiations to move to Stockland. On North Sydney, we brought Caroline Choy in who again was a very large part of the Quay Quarter team for AMP Capital. She’d moved to Vicinity, and we took her from Vicinity. She’s running that project with [Phil Newton] who is a development manager already here with us. So I’m also heavily involved in both of those projects, obviously, having come off the last 5 to 10 years of office developments with AMP Capital. So a team growing, Stuart (sic) [Richard], and we certainly have Exco on Board backing to continue to grow those teams. And we — North Sydney will grow by another couple of DMs over the next 12 months as well. So it’s the old adage, when you have great projects, you can get great talent. And I think the people we’ve been bringing in show that.

In relation to timing on those 2 and DAs, we’d aim, as I said in my presentation, to lodge the Stage 1 DA at Piccadilly this calendar year and North Sydney by the end of this calendar year. So that moved very quickly over the last 6 to 12 months.

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Operator [35]

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Your next question comes from Adrian Dark from Citi.

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Adrian Dark, Citigroup Inc, Research Division – Director and Analyst [36]

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Was interested in the capital allocation, which looks like it may have shifted this half. So the communities business has gone from 20% to 30% to around 30%, and retail has gone from 40% to 45% to less than 40%. Could you talk through what is driving that shift, please?

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [37]

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Yes, happy to. So it’s primarily the $4.3 billion pipeline in Workplace and Logistics. And the completion over that 5-year period or expected completion over that 5-year period of the residual $500 million of noncore retail town center divestments. We are assuming with the Workplace and Logistics pipeline or particularly the large Workplace developments that we will ultimate via fund-throughs capital partner 50% of those projects.

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Adrian Dark, Citigroup Inc, Research Division – Director and Analyst [38]

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Okay. And I think 6 months ago, there are a number of targets associated with capital allocation slide, it seems like a 70-30 recurring to active income split, 7% to 9% return on recurring income assets, that type of thing. I might have missed it, but can I just check, is all of that still on foot? Or has there been some shift, particularly given that that capital allocation to the communities business, I would imagine, would suggest higher active going forward?

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [39]

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It’s — it still is on foot. And if you look at certainly EBIT measures in particular, NPAT recurring income is getting up towards 80%. And obviously, on the asset base still continues in this 5-year forecast to stay recurring income around 70% and as it relates to pretax, pre-interest revenues, we seek for those to be over 60% recurring. And the reason, ultimately, looking at communities, previously, we had factored in some variation around the cycle. But also, we’ve had in the last period and we’ve talked about this before, some very strong over-earning projects that benefited from the last cycle.

When we look at the next 5 years, they will be — some of those will continue, but a number of them will come to the end of their life, and they’ll be replaced by a combination of new acquisitions, the new projects that we’ve talked about, a greater proportion of townhomes, which we think will go over 1,000. You also start to see apartments feature in that. And of course, all of those combined will, we believe, lift profit growth through that period quite consistently outside of any cyclical downturn that will, I guess, inevitably occur in any 5- to 6-year period.

But I guess, as it relates to the question, the average margin, as we’ve talked about in prior periods in that 5-year period will moderate down to more normal historical averages, somewhere around 14% to 15%. Taking a combination of all those factors, versus this year where we’re saying it’ll be around 19%. And next year, where we’re saying it’ll be around 18%.

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Adrian Dark, Citigroup Inc, Research Division – Director and Analyst [40]

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Okay. So can I just clarify on the margin. That was actually my final question. So should we think about 14% as sort of the average over that 5-year period? Or what you’re tending towards as a consistent to recycle margin?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [41]

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Yes, it’s going to be more what we’re tending to. We’ve got this 76,000 lot land bank that’s got strong embedded margins and benefited from CAGRs, growth CAGRs in land prices over the past decade in Sydney and Melbourne that’s sort of 8%, 9%. So yes, that’s got a duration still to run. And as Mark said, we’ll be restocking at more normalized margins of around 15%. So you’re going to get a blending of those 2. Also, when we buy, we tend to assume average growth rates of 3%, 3.5%. If we have a period of stronger growth then you’re also going to see better margins. So that’s why we’re very focused on restocking our pipeline early in the cycle and looking at a number of new acquisitions at the moment.

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Operator [42]

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(Operator Instructions) Your next question is Sholto Maconochie from Jefferies.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [43]

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A lot have been answered, but just on the resi, if we just go through the lot settled. You had 2,158 lots implying a 59% second half skew on the upgraded settlement of 5,200. But in the footnote, it says 534 with JV or PDA with 6 from casino hotels. If you back that out, would there only have been 1,618 settlements, implying a 69% skew. And on that, what was the run rate of settlements from existing projects versus superlots, do you have that split? So what was a one-off versus existing run rate?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [44]

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Well, Sholto, the bulk of those are going to be yet standard lots. Superlots by volume are very low. Obviously, there’s some — you’ve got contributions from the Aura joint venture coming in there, which is this large monitary that’s only counted as one within there. So the bulk of them are standard retail lots.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [45]

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So the other 2,158, 6 were was on either casino towers, and can you give a number on what was a one-off, excluding superlots or one’s that were in the normal course of selling?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [46]

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We’ve got the breakdown of superlots for the period in the Annexure. Tiernan, do you got that?

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Tiernan Patrick O’Rourke, Stockland – CFO [47]

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Yes.

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [48]

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Sholto, we’ll just find that number, the exact number of superlots in the Q.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [49]

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Yes, why on the superlots? Because that revenue went up circa-900%, $176 million versus 18% in the pcp. So if you back that out from revenue, the resi revenue is actually down 6% to $603 million. And that’s all — you’ve already guided to that operating profit up 75% to 80%. So a lot of that profit was already coming from the superlot sales, correct?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [50]

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Well, the big contribution’s, obviously, the settlement of the Aura joint venture, so the half share there, which is contributing to the revenue. And then, as we had — as we’ve guided to, you’ve got the 40-60 split in volumes into the second half, which is obviously contributing to a revenue skew, which is slightly greater as you get the skew back to the higher-priced Sydney and Melbourne lots.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [51]

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Yes. So the lots — can you sort of disclose superlots by number, not just the revenue? So do you have that number at hand or — I can’t see it in the press.

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [52]

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Let me grab it for you. I haven’t got it there. But…

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [53]

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Okay. I’m going to get it after, if you like.

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [54]

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Yes. Of that $176 million, we’ve disclosed in the past, Aura is about $150 million of that. So the total number of superlots is reasonably low. But let me get you the exact number.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [55]

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All right. And then was there any discounting in that to draw the volume? Because obviously, sentiments improved both — in one of your communities in Melbourne in November are now giving 10,000 incentives. Was there a — and the margin’s a bit weaker part of digital mix. Was there any incentives that were helping drive that that you can talk about in the half?

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [56]

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So, yes, as you pointed out, we ran spring campaigns across most markets. We wound back — we went with incentives in Melbourne as in a $10,000 rebate. We’ve seen through back end of November, December, January, we’ve removed those rebates from the marketplace because we’re seeing a strong uptick in both inquiry and volumes. WA, we’ve still been offering incentives there. That’s probably the standout at the moment. But the rest of the markets, there’s a small negotiating allowance, which we give our sales team to close deals below list price. But in general, in the eastern seaboard, we’re withdrawing incentives from the market.

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Sholto Maconochie, Jefferies LLC, Research Division – Equity Analyst [57]

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All right. And then just more for Tiernan on the guide. I think it’s sort of asked that you’ve got increased — I think you’re saying over 5,000 lots, now it’s 5,200, so that’s positive, lower debt costs, circa 30 or 40 bps, just surprised that all that’s offset by the weaker retail and the insolvencies of DAs. And do you forecast any hedge breaks as well in second half ’20 to get that lower debt cost or just natural roll-off of existing debt and as well as the floating rate?

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Tiernan Patrick O’Rourke, Stockland – CFO [58]

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Well, a lot of questions there, Sholto. Let me try and get them all. First of all, we have said on the hedge break costs, you will see in the stat accounts that we spent about $3 million breaking hedges in the first half. So very, very de minimis. We only break hedges when we have distributable capital gains and when the cost of doing it is equal to or below the interest that we save. So possibly, certainly with lower rates for longer, we would certainly look to that. But again, it’s the old issue of we have better opportunities, particularly with restocking to use that cash. Most of the reduction in the [WACD] is because we’ve just been reprofiling as our debt matures the debt at a much lower marginal cost, taking advantage of the market. So I think we’ve sort of, we piece it all together all the sort of debt and different answers with a relatively flat resi business. I think the main issue, as Mark said, is the administrations, we’re just really watching taking the impact of that in the first half. Obviously, the time to get these 70% of active negotiations re-leased that is offsetting some of the upside in the other areas, including interest. And so our forecast is still for the — a flat EPS for the full year.

Just before I forget, just the number on superlots that you were looking for from Andrew, it’s actually 9, 9 superlots, which is around a pretty normal level for us.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [59]

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And Sholto, just to remind, I guess, on the — with our interest savings, a lot of that tends to — that benefit tends to go ultimately into an improved profit margin in the residential business, where we’re capitalizing the cost of goods sold for active projects and then that gets released over the life of the project. So you get the benefit but it comes through over a number of years rather than immediately dropping in the current year.

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Operator [60]

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Your final question comes from Tom Bodor from UBS.

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Tom Bodor, UBS Investment Bank, Research Division – Director [61]

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Just wanted to ask about the Piccadilly development. Just wanted to get a sense as to the sort of size that you’ll be going for with that DA for that asset?

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Louise Mason, Stockland – Group Executive & CEO of Commercial Property [62]

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So we’re in discussions with the city of Sydney at the moment. But if you look at the whole site, we’re really fortunate to have a total land area there of just under 5,000 square meters. So we have the opportunity, Tom, to potentially do 1 large building through the site, which could be 80,000 to 90,000 square meters. So obviously, a lot more detail will come out when we lodge that Stage 1 DA. And as you know, the process, the planning process in Sydney takes some time. So it’s about a 2.5-year process. But certainly, a large office tower with really great proximity to the metro. So it’s a fantastic midtown location we can take advantage of, and then there’ll also be probably 6,000 to 8,000 square meters of retail attached to it as well.

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Tom Bodor, UBS Investment Bank, Research Division – Director [63]

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Okay. And then finally, on the Residential or the Retirement side. I was just wondering if you could talk to the goodwill write-down there. And also just the valuation, what was driving that with the asset vals down a bit?

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Andrew Whitson, Stockland – Group Executive & CEO of Stockland Communities [64]

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Yes, sure. The — yes, on the goodwill side, it really goes with our development pipeline. And as we trade through our development pipeline, without restocking it and recognizing that we’ve got a number of identified sites would move into the land lease development pipeline, we’ve written down that goodwill.

With regards to the fair value adjustment, we’ve targeted a number of high-needs villages where we’ve got a higher vacancy level with some targeted repricing to drive occupancy. So you’re seeing that coming through in the revaluations, which was negative about $23 million, $24 million.

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Operator [65]

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There are no further questions at this time. I’ll now hand back to Mr. Steiner for closing remarks.

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Mark Andrew Steinert, Stockland – MD, CEO & Executive Director [66]

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Thank you, and thanks, everyone, for taking the time to join us today. Hopefully, we’ve been able to answer all of your questions, and we’d like to just highlight that what we think fundamentally differentiates Stockland is our community creation capabilities and their ability to build the core. We’re passionate about the opportunities in front of us, and we think that we’ve got a strong profit growth profile to come, and we look forward to talking to all of you in future upcoming meetings. Thank you, and enjoy your day.



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