U.S. Markets closed

Edited Transcript of SGP.AX earnings conference call or presentation 21-Aug-19 1:30am GMT

Full Year 2019 Stockland Corporation Ltd Earnings Call

Sydney, NSW Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Stockland Corporation Ltd earnings conference call or presentation Wednesday, August 21, 2019 at 1:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Andrew Whitson

Stockland - Group Executive & CEO of Stockland Communities

* Louise Mason

Stockland - Group Executive & CEO of Commercial Property

* Mark Andrew Steinert

Stockland - MD, CEO & Executive Director

* Tiernan Patrick O’Rourke

Stockland - CFO

================================================================================

Conference Call Participants

================================================================================

* David Lloyd

Citigroup Inc, Research Division - Director & Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Ian Randall

Goldman Sachs Group Inc., Research Division - Research Analyst

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

* Stuart McLean

Macquarie Research - Research Analyst

* Winston Sammut

Charter Hall Property Securities Management Limited - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Mark Andrew Steinert, Stockland - MD, CEO & Executive Director [1]

--------------------------------------------------------------------------------

Good morning, everyone, and welcome to Stockland's 2019 Full Year Results. I'd like to begin by acknowledging the traditional custodians of the land on which we meet, the Gadigal people of the Eora Nation, and pay my respects to their elders, past and present.

The format for today is that Tiernan, Louise, Andrew and I will run through the key points of the results, and then we'll open up for questions.

I'm pleased to announce today, results that are in line with our forecast and guidance with 5.1% FFO growth per security. And that despite challenging market conditions, particularly in residential and retail, we saw a strong growth in the communities business, particularly with residential taking over 300 basis points of market share and logistics and workplace portfolio performing strongly. As a result, return on equity improved by 70 basis points to 11.9% and distribution per security increased 4.2% to $0.276.

Conversely, net tangible asset backing per security was down 3.3%, and statutory profit was also down significantly. This reflected devaluations in the retail and retirement living portfolios and also a range of other noncash items.

Our retail town centre strategy, as Louise will talk more about, is all about improving income resilience and in the longer-term growth. This is about ensuring that our rents are sustainable. It's about remixing and rebasing around key consumer trends and divesting noncore assets. The retail center devaluations reflected a combination of factors, including increased capitalization rates, lower forecast rental growth for the next 5 years and a rebasing of rent associated with the remixing and the cost of that. And finally, increases above forecast in statutory outgoings, particularly land tax and rates.

Turning to the strategy. The team will demonstrate the progress that we've made in executing our strategic priorities. In relation to growing asset returns, Louise will discuss the improvement in the quality of the portfolio and the up-weighting in logistics and workplace. In particular, if we look at the retail portfolio, we saw a 2.5% increase in specialty sales per square meter and similarly, a positive growth in income in the core portfolio. We achieved $505 million of noncore divestments in Retail Town Centres, which was ahead of our forecast in timing and quantum, previously we've guided to $400 million, with the remaining $500 million expected to be reviewed carefully, and we'll seek to deal with that in a disciplined way over time, recognizing that we also have to redeploy the capital that's been freed up from the divestment process, which is largely going into the logistics portfolio.

We saw a 4% increase in our logistics and workplace weighting to 23%, mainly through development. And we announced this morning the purchase of the other 50% of Piccadilly for 200 -- sorry, $347 million, which is funded through the divestment of our half of King Street at $340 million, putting us in a position where we can control 100% a significant retail and workplace redevelopment, which is something we're very excited about.

In communities, Andrew will demonstrate that despite experiencing the worst residential conditions in 3 decades, we've been able to grow profit 8% and increase market share 300 basis points nationally to 15%. Importantly, this positions us well to take advantage of the recovery in the housing market, and we are clear that the housing market has bottomed, but we are cautious about the pace of recovery, particularly as it relates to lending availability.

On the retirement living side, we also made good progress in improving the quality of the portfolio with $60 million of divestments in noncore assets and relative outperformance from our new projects.

In relation to capital strength, Andrew will talk about the Aura Capital partnership, and Tiernan will talk about our active and disciplined approach both to capital management and to cost savings.

Of course, customer focus and satisfaction underpins our performance, and it's an area where we've had a relentless focus. In terms of what the team has been doing for our customers, it's pretty clear to us that they're valuing the team's service proposition and the quality of our products. With a prospective residential customer satisfaction rating of 93% in retirement living, customer satisfaction is the highest it's been since 2009, and commercial property satisfaction is sitting at over 80% in all categories.

Team engagement is obviously critical to the execution of our strategy, and with strong employee engagement over 81%, it is helping to drive the operational focus and stakeholder engagement. Innovation also continues to be a key focus area having delivered 1% improvement in operating profit over the period, and we set a similar goal for FY '20. Key drivers of this have been a deeper understanding of our customers and what they value from big data analytics and in particular, removing friction from the customer journey. A good early example is from the Stockland BlueChilli accelerator PropTech process, which was a finalist at Rental Heroes, which use digitized models and artificial intelligence and a bot to basically help our customers whenever they have an issue with their tenancy, which might sound pretty simple, but it's actually pretty complicated when you look at who controls what part of the tenancy, dramatically reducing the number of steps that are taken and the response times. And global leadership in sustainability, which we've held for a number of years, continues to help us not only in innovation but in maintaining and strengthening relationships across the broader community and with stakeholders and has saved $106 million in energy costs since 2006.

Overall, we've maintained an intense focus on executing the strategy to improve the quality of the portfolio, increase the resilience of our income and to manage costs tightly.

I'll now hand over to Tiernan to take you through more detail in terms of the financials. Thank you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you very much, Mark, and a very good morning. 5 slides containing 2 key messages from me this morning as CFO. First of all, we continue to proactively manage our capital position, providing important support for our strategic priorities, and those are the ones that Mark mentioned on Slide 5 earlier. And second, cash flow is supporting our position at this point in the cycle, including funding development expenditure for future land settlements, and I'll deal with some of those issues in the course of these slides.

Moving on to Slide 9, coming back a bit quick. Yes, Slide 9, our capital management metrics, and the key ones were strong at year-end, supporting our investment-grade ratings. Gearing remains materially the same as at December 2018 as increased cash flows from the residential second half settlements due were offset by the buyback of securities during the year at an average 8% discount to NTA. Our cost of debt was as forecast at 4.4%, down from 5.2% last year. With lower market rates and ongoing focus on debt management within the group, we expect the weighted average cost of debt to fall marginally in FY '20.

On Slide 10, at this point in the cycle, we expected and have maintained similar gearing levels to 6 months ago at 26.7%, keeping within our target range of 20% to 30%. This takes account of the progress on the buyback, the effects of portfolio devaluations that Louise will talk about and our active divestment and reinvestment programs across all business units. Within this target range, we have also been able to actively recycle our capital in an accretive manner.

On Slide 11, FFO. Andrew and Louise will take you through the detail in a bit. But from a group perspective, the FFO per security increased by 5.1% to $897 million mainly from an increase of 8% that Mark mentioned in the residential result to $362 million. The commercial property result was up 1.5%., retirement living results were 5.7% better from a strong rebound in development sales, and unallocated overhead sales, 7.3%, mainly from the restructure of the executive committee late in calendar 2018, offset in part by an ongoing and importantly, accretive investment in technology and innovation. As Mark said, we expect overheads to fall further in FY '20 as we continue to streamline the business.

Turning to Slide 12. AFFO growth is similar to FFO growth due to the combined maintenance CapEx and incentive numbers being materially similar to last year. Mark-to-market of our swap portfolio has resulted in a noncash loss of $140 million being expensed to the statutory profit as interest rates continue to fall in the market. In spite of this, our hedge policy continues to provide certainty around interest rate expense for the group and has helped support the lowering of the weighted average cost of debt.

Finally, to cash flows. When we think about cash flows, we manage them for the long term so that we can deliver returns through the cycle. As I've already noted, operating cash flows this period declined principally as a result of increased development expenditure in the residential business to support future settlements for this year and beyond. Payments for land also increased, although 96% of the current year acquisitions, as has been the case in the last few years, were previously purchased on capital-efficient terms. And to put that in context, the average age of these capital-efficient acquisitions this year was 3 years, further narrowing the funding gap between land origination and the ultimate lot settlement.

This efficiency strategy, too, continues to provide timing benefits for interest expense, cash flows and ultimately, gearing. We expect operating cash flows to improve during FY '20 as development expenditure and land acquisitions moderate year-on-year in accordance with the cyclical movements that are prevalent in our business.

Finally, significant covenant headroom has been maintained, especially after we completed the renegotiation of our debt documentation in February this year, including a change to our key financial covenants and its limit from 45% to 50%. As you can see, during this period of intense strategy implementation, we've been able to use our strong established capital position to support the group's long-term strategic initiatives across all businesses.

In closing, I'd also like to mention today that we are an earlier adopter of the International Integrated Reporting Framework and today, lodged our first financial and nonfinancial fully integrated flagship annual report, which includes all of our credentials on sustainability and other matters. That's currently lodged on the website. I think it's going to be a bestseller. So if you want to go on and have a look at that.

Those are my slides. So I'll hand over to Louise. Thank you.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, everyone. I've now been at Stockland for just over a year. While I'm disappointed that we've seen further town center devaluations, this was a year where there's been strong build-out of team capability, a focus on rebasing of rents, remixing and place-making and execution of strategy to improve the quality of the portfolio and grow workplace and logistics, and I'm pleased with the progress, which is reflected in today's results.

Commercial property has met guidance with comparable FFO growth of 2.1%. We've maintained high occupancy across all sectors with a good WALE. Retail FFO is effectively flat. With good leasing and high occupancy, logistics FFO comp growth was good at 3.9% and workplace strong at 10.4%.

At the half, I spoke about a very clear strategy. We've made significant progress in each of the areas: leadership, repositioning and strengthening retail and investing in workplace and logistics. I've built out the capability of the leadership team and the broader business whilst managing operating costs appropriately. The full leadership team is now in place. New roles have been created in significant areas, including place-making, and we're growing our workplace development expertise.

Across the retail portfolio, we conducted detailed asset-by-asset, shop-by-shop reviews. We have a clear definition of core and noncore, and we've made meaningful progress with $505 million of noncore retail transacted over 12 months within 2.1% of the book value.

We've made significant progress in our remixing towards food and services. Through our BlueChilli incubator and with our technology team, we delivered innovations like [S Store], a shopping web platform to make the customer experience easy and enjoyable at Stockland Centers. It's estimated nearly $4 million of online sales were generated in FY '19 across 3 pilot centers with more than 37,000 clicks to buy now and contact the stores for fulfillment.

We're progressing large development pipelines in workplace and logistics. We've created JV opportunities in Melbourne and Sydney to secure more than 290 hectares of logistics over the next 5 years. We've exchanged on the purchase of the other 50% of Piccadilly in the Sydney CBD and on the divestment of 135 King Street. And the workplace and logistics portfolio has grown to 23%, advancing to achieving the 25% to 35% weighting of the portfolio over the next 5 years.

We had a net valuation decline of $199 million, which is made up of a $474 million decline in retail, $202 million uplift in logistics and $73 million uplift in workplace. I spoke about the detailed review of the retail assets the leadership team has undertaken: shop-by-shop analysis overlaid by macroeconomic analysis.

As a consequence, we've reforecast rental numbers and rebased our income. We then initiated revaluations of the majority of the portfolio. Of the $447 million retail devaluation, 35% was driven by cap rate softening, about half driven by the reduction of growth rates and changes to rental income and capital cost reforecasting following the implementation of our strategy to remix tenancies and renew some leases at more sustainable levels. The remainder was driven by increases in land taxes and rates.

While the headline devaluation is disappointing, our FY '20 rebased income is in line with the valuers. Also, in the context of the leaders in the business and the initiatives we have underway, I'm comfortable with our ability to deliver the income.

The uplift in logistics was driven by development delivery and strong leasing, while workplace uplift reflects cap rate compression in the Sydney market.

Occupancy in the retail portfolio remains high at 99.3% and specialty occupancy cost is steady at 15.1%. Incentives are also stable. Of the 700 lease deals we do on average every year, we had blended rent reversions of 2.9% in FY '19. In FY '20, over the 700 deals we'll do, we're forecasting a negative 5% to negative 7%. This is in line with the independent June valuation numbers.

We have fixed annual reviews of 3% to 5% over 99% of specialty leases with the upper end forecast in growth categories. With these fixed reviews and rent reversions over approximately 20% of the portfolio, retail FFO comp growth is forecast to be marginally positive in FY '20.

Comparable specialty sales continued to show growth with FY '19 averaging 2.5% to $9,251 a meter, 6.3% above the Urbis benchmark. We saw good growth in supermarket sales and steady improvement in discount department stores. Mobile phones, retail services and the leisure category were stand-out performers.

Our focus remains on driving good sales growth. These graphs show the area and rental percentage position of remixing from apparel to food and services, nondiscretionary and low discretionary retail categories, which are less exposed to online impact. This remixing is achieving 30% stronger rent per meter for services and food compared to fashion.

Our future quality portfolio of retail assets, reflecting the retail mix in the place-making and the trading patterns, a deep understanding of the markets in which we operate. Markets with good population growth and assets with high main trade area market share.

With the focus on improving the quality of our portfolio, you can see the better performance of the core assets in the portfolio compared to noncore in relation to FFO comp growth and sales. Specialty sales at an average of $9,392 a meter for the core assets is 7.9% above the Urbis benchmark. We'll continue to remix and reposition assets, delivering sustainable income growth.

These are good examples of core retail town centre assets. Green Hills experiencing foot traffic of more than 10 million per annum, a 75% increase on predevelopment traffic. Wetherill Park fresh food trading 27% above benchmark. Merrylands with specialty sales productivity growth at 3.7%, driven by fresh food and food catering, which is 10% above the industry benchmark in productivity terms.

Our workplace portfolio is showing extremely strong rental growth at 18.2% and comparable FFO growth of 10.4%. Portfolio occupancy is now at 94.7% with a 3.7-year WALE. Tenant satisfaction is at 84%. Our focus is firmly on the growth opportunities within the existing portfolio.

Upon settlement of the Piccadilly site, we'll control 100% of this asset and forecast a stage 1 development application will be lodged with the city of Sydney in late FY '20. We have a $1 billion-plus development pipeline over the current portfolio.

We've delivered good results in the logistics portfolio in FY '19 with comparable FFO growth of 3.9%. We've leased more than 25% of the portfolio in gross lettable area terms at 4.9% above market rent. We've improved the WALE from 4.1 to 5.2 years. We've completed more than 78,000 square meters of development. In just over 5 years, we've grown the logistics sector from $1.3 billion to $2.5 billion. We've internalized management, driven customer engagement from 64% to more than 80% and have a $1.1 billion development pipeline.

We've acquired and developed at the right time in the cycle. Whilst a competitive time in the market, we've been able to compete effectively to acquire into joint ventures, such as Melbourne Business Park and future opportunities in Sydney's West, and we have the experience and team capability to deliver the development pipeline and partnerships to take the portfolio to 25% to 35% of the trust.

Developments are continuing to be rolled out down the Eastern Seaboard. At Yennora, we added 2 further buildings and achieved an IRR on completion of 13.9%. The 30,000-square-meter KeyWest in Truganina, in Melbourne is due for completion late this month with strong leasing interest. And at Yatala in Queensland, we completed 2 new buildings fully leased prior to completion on a 10-year WALE.

We're very focused on delivering the $1.1 billion development pipeline. This includes M-Park in Sydney's Macquarie Park, 12 kilometers from the CBD, a large, extremely well-located site with a 5-building rollout over 5 years with the first building to commence later in the second half of FY '20. Melbourne Business Park is a 260-hectare site to be developed over the next 5 years in joint venture with our Mount Atkinson partners. We've launched the DA for stage 1 over 87 hectares, with construction commencement forecast in Q4 '20.

On the one hand, in retail, we've undertaken the rebasing of rents with modest growth forecast over the next 2 to 5 years. On the other hand, we're seeing good results in relation to sales in our reweighting to low and nondiscretionary categories of retail services and food. And we're rolling out place-making and technology initiatives to enhance the customer experience.

In summary, the retail sector was challenged in FY '19, and this will continue in FY '20. We have a $2 billion-plus pipeline in workplace and logistics in the Eastern states, with market conditions expected to remain positive in FY '20.

The commercial property business is forecast to achieve comparable FFO growth of around 1% in '20. Retail is expected to deliver positive comparable growth, albeit marginal. The strong FY '19 base for logistics, driven by high occupancy and minimal downtime on renewals, is likely to result in modest comparable growth in FY '20 in logistics. Workplace is expected to deliver good FFO growth on the back of the reduced vacancy and higher rents achieved for CBD deals. I'll now hand over to Andrew.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Louise, and good morning, everybody. I'd like to start by talking about the results from the residential business. In the context of the challenging market that we've experienced over the last 12 months, there are 2 things that really stood out from this result for me. The first being that the disciplined execution of our strategy has resulted in us delivering 8% profit growth during the worst downturn in the broader housing market for 3 decades. And the second is the quality of the communities that we create have continued to drive good demand for our product. This is really emphasized by the fact that of the 665 active master planned communities around the country, 10 of the top 20 fastest selling are Stockland communities.

Our settlements were in line with our revised guidance of around 5,900 despite the default rate increasing to 7% over the full year. We expect that default rate to moderate over the next 12 months with the improving market conditions.

We're very pleased with the capital partnership we've established at Aura on the Sunshine Coast with capital property groups out of Canberra. This partnership is very strategic for us. It normalizes our exposure to the submarket. It enables us to recycle capital and also establishes a partnership with a high-quality group that we'll be able to extend into other markets and other asset classes.

We've also continued to restock our pipeline with a number of countercyclical acquisitions, including the 2 in Melbourne that we announced on Monday this week. And we're also working on a number of other key opportunities in core metro markets.

On to the year ahead. Importantly, post the federal election in May, we've seen the market improve with leads and conversions up. As you can see from the graphs on the right-hand side of the screen, this is most pronounced in Sydney and Melbourne. And post the initial spike that we saw immediately after the federal election, new leads have moderated, but they still remain materially above what we saw leading into the election.

This market improvement resulted in net sales for Q4 exceeding our expectations, and our July net sales were also reasonable. Whilst our customers are experiencing challenges in getting access to credit and there is elevated stock in some markets that will take time to clear, we have a constructive outlook on the market for the year ahead and expect prices to remain around the current levels and volumes to steadily increase throughout the year.

The recent market improvement has increased contracts on hand due to settle in FY '20 to 3,324. Based on this and the market momentum we're seeing, we expect over 5,000 settlements this year, including around 500 townhomes.

Operating profit margin for FY '20 will remain around 19%, above our through-the-cycle range of 14%. We've grown our market share from 12% to 15% over the past year, which demonstrates we've consistently outperformed the market. This has been driven by a unique combination of competitive advantages that we have in our residential business. The first is our brand. This is built on the quality of the communities we've created for over 60 years. We strive to continually raise the bar by measuring what matters through our annual livability survey and use this data to drive continuous improvement.

Our second competitive advantage is our scale. Our market share is more than 3x that of our nearest competitor, and this gives us increased buying power to deliver our product at lower cost and an ability to invest in technology platforms like Salesforce and AI engines to drive productivity and lead generation and better understanding of what our customers want.

And finally, our 76,000-lot land bank is a competitive advantage that underpins future earnings. We've improved the quality of this land bank significantly over the past 6 years, restocking at the right part of the cycle and in metro locations with a strong skew towards Sydney and Melbourne. And as you can see from the pie chart on the right-hand side of the screen, Sydney and Melbourne exposure now represents over 60% of our book value.

We have a further 8 new communities with first settlements over the next 2 years. This will further activate our land bank and contribute to ROA. And we remain committed to a disciplined reentry into the apartment market and are progressing 2 development approvals for our sites at Rosebery and Parramatta in Sydney.

Now on to the results for the retirement living business. I've been leading this business for 12 months now, and over that period, we've achieved a lot in the face of challenging market conditions, including strengthening our customer value proposition, delivering some successful developments, and improving our sales and marketing productivity. All of this has stabilized sales in the second half and set this business up for growth as the broader housing market improves in the year ahead.

FFO growth this year has been driven by additional profit from the 3 noncore villages that we sold in Victoria and an increase in development settlements that were up 53% for the period. This was offset by the decline in settlements from our established villages in line with the broader housing market.

Last year, we undertook a complete bottom-up price review of all 9,600 dwellings in our portfolio and reduced prices to establish relativity with the broader housing market. This revised pricing was launched in the market in January '19 and drove an improvement in sales relative to the broader housing market. The reduced pricing and future growth and vacancy assumptions also resulted in a reduction in the fair value assessment of our retirement living portfolio.

Over the past 12 months, we remained very focused on maximizing occupancy as the best way to improve the returns from this business. To achieve this, we've strengthened our value proposition, improved our service and care offer and provided our customers with greater certainty through our Peace of Mind contract. We expect the improving residential market to read through to increased settlements this year.

We've also remained very focused on recycling capital from our retirement living business into other high-returning opportunities through disposal of noncore villages and continuing discussions regarding a broader capital partnership.

What differentiates Stocklands from other retirement operators is our ability to drive growth through development. Development is in our DNA, and we are uniquely positioned to leverage our land bank to create modern and desirable new communities for the over-55 market. We've demonstrated at Cardinal Freeman that we can successfully deliver brownfield development of our existing villages at Lourdes and Castle Ridge in Sydney. And next village is -- sorry, at Cardinal Freeman in Sydney. And the next villages to undergo a similar transformation will be Lourdes and Castle Ridge.

We also see vertical retirement as a growing opportunity and progressively planning for our next vertical village in partnership with the Catholic Church in Epping. But I'm particularly excited about the land lease pipeline that we've built over the past year. We've identified 10 sites across our land bank that will yield more than 2,000 dwellings. This is the fastest-growing segment of the over-55s market, and our land bank is uniquely positioned to take advantage of the strong demand for this affordable product.

DAs for our first 2 communities will be lodged in September and construction to commence in 2020.

So in summary, I'm very pleased with the growth that we've delivered in the communities business over the past year despite the challenging market conditions, and our relentless focus on executing our strategic initiatives put us in a good position to take advantage of the improving residential market over the next part of the cycle. I'll now hand back to Mark.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Andrew. You've heard today about the measurable progress that we've made in executing our strategy to build and create livable, affordable and connected communities, to own and manage leading Retail Town Centres and to grow our logistics and workplace weighting. And looking forward, we will continue to lift the overall quality of the portfolio. We'll continue to up-weight logistics and workplace, as Louise described.

Our residential business is well positioned to take advantage of improving market conditions. And in terms of the retirement living business, we expect to be able to grow that through new initiatives like Andrew just talked about with land lease and also through development of traditional product, improving the quality of the portfolio overall.

Looking at our asset allocation targets. We have seen good progress in the reweighting across the portfolio with $1.8 billion of capital transactions over the last 14 months, driving the -- in particular, the up-weighting in logistics and workplace of over 3%. And we are confident that we'll continue to progress the target of up-weighting logistics and workplace.

As it relates to the outlook for FY '20, there is a series of actually very positive factors in place. They include the housing market bottoming and the improved sentiment there broadly, and the increase in inquiry and sales that Andrew talked about. And we do expect by this time next year, a lot of the submarkets that we operate in will be in undersupply given the significant reduction in new build.

Interest rates are historically low. Wages growth is there, but it's moderate. There's solid employment growth and there's a clear flight to quality and affordability from customers. So those factors should combine to create a strong recovery in the housing market. However, as we've talked about, housing finance availability is improving gradually, but it does remain constrained compared to normal conditions. And we think that ultimately, the availability of credit will be the key gating factor as it relates to the speed of recovery. And I think clear evidence of that can be seen in cancellation rates and default rates across the market, as Andrew spoke to.

So bringing that together, we do think residential profits will be down for FY '20 with settlements over 5,000 lots, as Andrew described, compared to 5,878 lots in '19, although there will be the benefit of additional superlot profit from the sale of The Grove and the capital partnership at Aura. For commercial property, as Louise described, we're forecasting around 1% comparable FFO growth with retail slightly positive, reflecting the ongoing remixing and future-proofing of the portfolio. Logistics will grow moderately and workplace, we think, will grow quite strongly. Retirement living will continue to grow at a moderate pace, and we're targeting a further $8 million per annum of savings through simplifying our business and aligning our business structure clearly with the execution of our strategy.

We'll continue to focus in a disciplined way around executing the strategy, and we'll expect that to, obviously, drive long-term, sustainable business success.

I'd now like to open it up for questions. We'll start with everyone in the room and then go to everyone on the line. Thank you.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Mark Andrew Steinert, Stockland - MD, CEO & Executive Director [1]

--------------------------------------------------------------------------------

Yes, we've got one.

--------------------------------------------------------------------------------

Winston Sammut, Charter Hall Property Securities Management Limited - MD [2]

--------------------------------------------------------------------------------

Winston Sammut, Charter Hall Maxim. Just a question in relation to the retirement portfolio. You mentioned there are discussions continuing about capital partnerships. Does that mean that the option of selling the whole business is now off the table? Or what's the strategic view there?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Well, I guess what we've said about that, historically, Winston, is that we've been focused on identifying capital partners. It's obviously something that we've been focusing on for some time, although we have seen an increased level of interest in the sector. And when asked about other options, what we've said is we would take the decisions in the best interest of our securityholders, and that position hasn't changed.

There's no other questions in the room. Perhaps we can go to the lines.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from Stuart McLean with Macquarie Group.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [5]

--------------------------------------------------------------------------------

I just had a couple of questions to begin with on residential. The July net deposit number of 355, if I multiply it by 3, I get over 1,000. It implies a run rate in 1Q '20 that's 25% up on what you did in 4Q '19. Is that a sensible run rate that you can then grow off? Or is that a bit ambitious?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [6]

--------------------------------------------------------------------------------

Stuart, yes, we're thinking that, yes, as this market moves into the recovery phase, that for the next couple of quarters that around the 1,000 net deposits would be a reasonable outcome, obviously, coming off a Q4 that was about 850.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [7]

--------------------------------------------------------------------------------

Okay. And then looking back to [something] on residential, just going back to the comments from Mark at the end in regard to residential earnings being down. Did that include -- were those comments inclusive of Aura and The Grove?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [8]

--------------------------------------------------------------------------------

Yes, it does. So the way to think about Aura and The Grove, if -- we put in the pack that they contribute about $80 million to next year's result. If we were trading those projects normally, that would be around a $25 million contribution. So there's a one-off -- an incremental one-off of about $55 million coming into that year.

--------------------------------------------------------------------------------

Stuart McLean, Macquarie Research - Research Analyst [9]

--------------------------------------------------------------------------------

Okay. And maybe just one on retail as well. So leasing spreads are going to be down 5% to 7% in FY '20. Should we expect that in FY '20 and FY -- sorry, FY '21 and FY '22 as well as new leases continue to come up for expiry?

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [10]

--------------------------------------------------------------------------------

So Stuart, we've done -- as I said, we've done the sort of the detailed shop-by-shop review. At any one time in our portfolio, we have about 15% to 20% of the retail shops come up for renewal in any 1 year.

We're forecasting the negative 5% to negative 7% in FY '20 largely due to a couple of centers that are experiencing development anniversaries and have a bit more of a fashion focus. Whilst generally, we're bringing back the number of fashion stores we have in the portfolio, in a couple of these larger centers, we need to maintain the integrity of the mix, and we need to maintain that fashion. So that's why in FY '20, we're a bit lower. So we're at negative 2.9% in FY '19. In FY '20 -- and bear in mind, this is only over 600 to 700 renewals or new leases, so it's not over the entire portfolio.

What we are forecasting out, and we are in line with the valuers on this, we're forecasting about negative 3% for FY '21 and FY '22. So the larger number is falling in FY '20, as I've said, largely due to the type of mix we have coming up. And also, we'll be in year 3 of our rebasing. So we've done -- will have done now a good portion of the portfolio by the end of FY '20.

Also, new leases will be slightly higher in FY '20. We're forecasting our churn in those 600 to 700 leases of about 45%. Normally, we're on 30% to 35%, and that's because we are doing more remixing and more repositioning across a couple of those larger assets that are coming up this year for renewals. So it's a slightly higher churn, so new deals that are being done at a slightly lower level, and the mix, as I said.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

Your next question comes from Richard Jones with JPMorgan.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [12]

--------------------------------------------------------------------------------

I have a question for you, Louise. In terms of amortization of incentives, they look like they've picked up [in a] straight line, about 15% on the prior year. So I was just wondering if you could give us what the like-for-like NOI growth would be under the traditional earnings definition where you expense the amortization of incentives.

--------------------------------------------------------------------------------

Tiernan Patrick O’Rourke, Stockland - CFO [13]

--------------------------------------------------------------------------------

Richard, I might just take a quick stab at that first. So certainly, last year, we did have higher incentives as we remixed, particularly into food services, which have got a greater fit-out cost but a longer lease. And so this year, you also have seen that the dollar value has increased slightly. It's about $14 million, I think, up on the previous year. Again, part of the reason for that is -- or the majority of the reason for that is leases that require significant more capital but with longer lease terms. So it's why the average lease incentive by month, in terms of month, hasn't changed year-on-year. So more CapEx -- slightly more CapEx, but longer leases.

I think as Louise described, for the next couple of years, it's likely that the incentive number will be a little bit elevated, which means in the next few years, there will be an amortization number which will be higher as those leases amortize over the lease term. However, with a longer lease term, you would expect the amount of amortization to be a little lower than the past because they were shorter leases in the past. So I don't think there's a material change. I don't know -- I'm not sure if you want to add to that, Louise?

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [14]

--------------------------------------------------------------------------------

No. In a number of months, though, we're at about 11.6, 11.7 months in FY '18, FY '19. We're forecasting about 13 months in relation to incentives in FY '20, and that's largely due to, as Tiernan said, the type of remixing we're doing.

Also, the straight dollar amount can be a bit lumpy depending upon when the leasing deal is done and when it's actually paid. So there was some FY '19 payments that actually fell into FY '20. So when you smooth it out over 3 or 4 years, there's not a lot of change occurring over that number.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [15]

--------------------------------------------------------------------------------

Okay. And then similarly in logistics incentives, did they step up as well?

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [16]

--------------------------------------------------------------------------------

Largely, that would be in relation to developments we've undertaken. In terms of actual market percentages, not a great increase. But in relation to the timing of developments and the leasing of those, that would be in relation to the numbers you're seeing there, Stuart (sic) [Richard].

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [17]

--------------------------------------------------------------------------------

Richard.

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [18]

--------------------------------------------------------------------------------

Richard. Sorry, Richard.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [19]

--------------------------------------------------------------------------------

One last question. In terms of the comment about -- on the resi having grown 5,000 lot settlements, how many -- does that include any from Aura and The Grove in that number?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [20]

--------------------------------------------------------------------------------

None from The Grove, but all of Aura. So if that makes sense, Aura at 100%. So in all of our -- we got a number of joint ventures and structured deals across the country. All of our lot settlements are always expressed as whole lots.

--------------------------------------------------------------------------------

Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [21]

--------------------------------------------------------------------------------

Okay. Yes, sure. And is there any further other kind of unusuals in there like the Brisbane Casino Towers that you had this year?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [22]

--------------------------------------------------------------------------------

There'll be other traditional superlots that we will sell down over the period as we normally do, but the 2 significant ones are The Grove and Aura.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Your next question comes from Grant McCasker with UBS Investment Bank.

--------------------------------------------------------------------------------

Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [24]

--------------------------------------------------------------------------------

My first question is just on the sort of the [$80 million and $55 million] net benefit from The Grove and Aura (inaudible). Is that an ongoing part of your business? Should we expect to see it in the number for FY '20?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [25]

--------------------------------------------------------------------------------

So The Grove is split over 3 years, so you will see a contribution from The Grove coming into '21. Yes, the rationale behind doing both the capital partnership and the disposal of The Grove, yes, they're similar or they've got some similar elements. I spoke about recycling capital into higher-returning opportunities. That's both within our commercial property business but also restocking our pipeline, and we're seeing opportunities to do that. Aura specifically was also that submarket exposure together with building the capital partnership with a high-quality group. So it had those other strategic merits as well.

From here, we would see ourselves more acquiring new sites in partnerships with others. One of our competitive advantages is our scale. And to maintain that and continue to build our land bank, we will look at the ticket size of some of the new opportunities both in the inner and middle ring and then in the traditional greenfield corridors. We see ourselves doing more capital partnership on new opportunities in the residential business.

--------------------------------------------------------------------------------

Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [26]

--------------------------------------------------------------------------------

Okay. And then following on from Richard's comment, JVs or [ADAs] or similar agreements, what percentage [have locked] today in FY '20 versus what you saw in FY '19?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [27]

--------------------------------------------------------------------------------

So the only difference is Aura. The rest of them are what was disclosed, and they sit out in the property portfolio, which ones are 100% and which ones are joint ventures. So Grandview is effectively a joint venture, we've got a structured deal at Mt. Atkinson and then a number of projects in Perth as well.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

Your next question comes from David Lloyd with Citi.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [29]

--------------------------------------------------------------------------------

Quick one for Louise. Just on the rebasing comments, Louise, just interested in those given that it looks like the occupancy cost has not moved across the period. So it stands stable at 15.1%, which may indicate that there's really been, in effect, no relative rebasing.

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [30]

--------------------------------------------------------------------------------

Sorry, what was the last comment you made then, David?

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [31]

--------------------------------------------------------------------------------

The occupancy cost has remained stable over the past 12 months. I think the retail portfolio has been maintained at 15.1%. So in a relative sense, it doesn't feel or doesn't look as though there might have been a rebasing in retail rents.

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [32]

--------------------------------------------------------------------------------

Well, over that part of the portfolio, that renewed or new leases, there was a rebasing of about negative 2.9% over that time. I think a part of this answer, too, is over 99% of our leases have set fixed 3% to 5% increase in them. So we sort of balance off the negative rent revisions over 15% to 20% of our portfolio with the fixed increases that occur over 99% of our portfolio, and we're also seeing the improvement in sales as well. So I think all that goes into the mix and the calculation.

--------------------------------------------------------------------------------

Tiernan Patrick O’Rourke, Stockland - CFO [33]

--------------------------------------------------------------------------------

And Louise, I might add that it's also with -- asset sales would also change that relative [composition] as well.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. And the spread of occupancy costs over the type of portfolio we have is from sort of 10% to 18%, and then we've got that average of about 15.1%.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [35]

--------------------------------------------------------------------------------

But just following that logic, if you're getting 3% to 4% rent bumps per annum and sales are growing at, say, 1%, doesn't the gap continue to widen over the next 2 or 3 years so the re-leasing spreads should actually continue to deteriorate? So I'm just -- how should we reconcile that against your forecasting for sort of negative 3% in '21 and '22?

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [36]

--------------------------------------------------------------------------------

I think what we'll be -- what we're saying, though, is on where we're doing the remixing away from apparel to food and services, we're getting rents that are 30% higher than apparel. And we're also gradually moving through more and more of this remixing, so we'll be about 60% through it at the end of FY '20.

I think it needs -- it comes down to an analysis really center by center with the mix that we're putting in to get to that conclusion, but happy to do a little bit more looking into that and have a further check with you about that, David.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [37]

--------------------------------------------------------------------------------

Just also interested in just the process around your retail asset reviews because I believe maybe -- correct me if I'm wrong, over 6 months ago, I think the management team were saying that we've already rebased and we've taken the hit in some of these valuations, but it seems like it's accelerated in the second half. So just curious to know if there's been any change to the review process in the assets over the past 6, 12 months. (inaudible)

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [38]

--------------------------------------------------------------------------------

So what we did at -- sorry, yes, so what we did in February, March, we started a process of setting the budgets for FY '20 and the next 5 years. Leading up to that time, we did an asset-by-asset, shop-by-shop, category-by-category review. And at the same time, I think market conditions continued to be challenged. So when we look at the review we've undertaken shop by shop, the fact that we now align with the independent valuers' rental numbers, I think it's a realization by the market that there was need for further movement, and we've undertaken that. Our reforecasting for the next 5 years is now baked into our LTF, our long-term forecast. And as I said, it's in line with the valuers' numbers.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [39]

--------------------------------------------------------------------------------

Okay. All right. And just maybe the whole place-making, can you just give us some indication what the CapEx requirements are for that?

--------------------------------------------------------------------------------

Mark Andrew Steinert, Stockland - MD, CEO & Executive Director [40]

--------------------------------------------------------------------------------

David, just before Louise answers that, just back to your earlier question. I think it's important just to note that sales growth in specialties per square meter overall on average was 2.5%, not 1%. And the categories that are growing and where the fixed increases have been written, typically in the 3% or 4% range, obviously line up fairly closely with that. Where we've got higher fixed increases typically, which has been in the growth categories, we're seeing higher sales growth as well as higher fixed increases in the rents, which is one of the reasons why when you map all that together, you're not seeing an increase in occupancy costs, which would otherwise be the case.

And to Tiernan's point, the noncore assets that have been sold, a lot of those, being in the smaller category with less discretionary elements, tend to actually have lower occupancy costs. So by definition, as you start to see some of the higher order centers taking a higher proportion, you then actually see a slight increase in the occupancy cost that doesn't actually mean the income is becoming less sustainable.

--------------------------------------------------------------------------------

Louise Mason, Stockland - Group Executive & CEO of Commercial Property [41]

--------------------------------------------------------------------------------

In relation to the place-making question, David, our maintenance CapEx forecast won't move by any great amount. They still sit at about 0.5 of total built-up book value and about 0.5 in relation to leasing incentives.

What we've done -- I think we've taken -- like we've undertaken a shop-by-shop review, we've done a very forensic analysis of where that capital should be spent. And if you look at that sort of $40 million to $50 million that we'll spend on maintenance capital, it's largely split into 3 buckets. Bucket 1 is life cycle. That's just an effect of running an asset. Bucket 2 and bucket 3 really relate to place-making. It's -- one's in relation to aesthetics, and one's in relation to car parking. So it's that focus on improving the customer experience, and that's how that $40 million to $50 million is split up.

We'll also be undertaking place-making initiatives that are accretive, and they will be treated like a development project is treated and will be put forward with those measures in place. So there's not one way of just doing place-making. It's really for us a focus on how we're spending -- best spending that maintenance capital and then also looking at any small project developments and how we measure those.

--------------------------------------------------------------------------------

David Lloyd, Citigroup Inc, Research Division - Director & Analyst [42]

--------------------------------------------------------------------------------

Just if I can just sneak one more in for Andrew, if that's okay. Just on the residential defaults, I think you said 7% maybe for the year, 5% was at the Investor Day. So it sort of implies an acceleration in at least the last quarter. When are you expecting sort of the defaults to sort of -- to bottom out? Is that first quarter this fiscal year, Andrew, or a little bit later?

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [43]

--------------------------------------------------------------------------------

Yes. So we are expecting in the first quarter that we'll see a normalization. We worked through a number of, obviously, settlements in the second half, almost 1,000 above the first half. And in that June period alone, we had over 1,000 settlements that we processed in June. So that's -- the denominator in that calculation is obviously total settlements.

As we move through the first quarter and we get through the backlog of the settlements that we have, the improving market conditions and also the improving credit conditions and the shortening of the time between deposit and settlement, we expect that rate to normalize back towards the long-term average of 3%.

--------------------------------------------------------------------------------

Operator [44]

--------------------------------------------------------------------------------

Your next question comes from Simon Chan with Morgan Stanley.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [45]

--------------------------------------------------------------------------------

Just got a question on Tiernan's slide on Slide 13, the land acquisitions payment. I think on the -- you mentioned in the presser, it's about $500 million per year for the last few years. So that's in line with tradition. But I'm just wondering, can you give us some color on the backlog of land acquisition payments that you have to make in the coming years as a result of the capital-efficient purchases from yesteryears? What's the maximum amount outstanding?

--------------------------------------------------------------------------------

Tiernan Patrick O’Rourke, Stockland - CFO [46]

--------------------------------------------------------------------------------

Yes. Thanks, Simon, and welcome back. Good to have you back. Yes, look, the -- this year, the payments this year were up a couple of hundred million year-on-year mainly off the back of settling some of those previous options. As I mentioned, we settled mostly capital-efficient previous purchases that were bought over the last 3 years -- 3 years ago, on average, I should say. So the -- we paid out most of the large options. There are still some options that are subject to a conditional, which are still in there in the methodology that we adopted and explained last year, where we have to gross up the balance sheet. But they are much smaller, and you'll see a reduction in the development provisions in the balance sheet as a result of that. They're in the order of a few hundred million relative to the increase that we saw a year or 2 ago. So sort of back to the old days of deferred settlements and by putting call options and just put options that we have sort of migrated to. So nothing out of the ordinary, Simon, which is -- but also, it shows, as I mentioned, those payments in FY '20 will fall because it was an unusually high year of development payments or payment -- land payments last year in '19.

--------------------------------------------------------------------------------

Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [47]

--------------------------------------------------------------------------------

Great. And just in relation to the guidance for FY '20, is there any skew to the first half or second half we should be aware of? Because traditionally, resi is either second half buys or first half buys.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes, there is a slight skew to the second half.

--------------------------------------------------------------------------------

Operator [49]

--------------------------------------------------------------------------------

Your next question comes from Ian Randall with Goldman Sachs.

--------------------------------------------------------------------------------

Ian Randall, Goldman Sachs Group Inc., Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Just trying to reconcile some of the residential volume commentary. So you've got 3,324 contracts on hand at June to settle in FY '20. Andrew, I think you mentioned a run rate of about 1,000 net deposits per quarter. So how does that get to only 5,000 settlements? Is there something happening in terms of an elongation of the period between sale and settlement? It just looks pretty light on those numbers.

--------------------------------------------------------------------------------

Andrew Whitson, Stockland - Group Executive & CEO of Stockland Communities [51]

--------------------------------------------------------------------------------

Yes. There's a couple of factors that we think about when we're landing on that number of -- that guidance of about 5,000. There's 3 key factors in there. As you mentioned, obviously, net sales is important, and net sales takes into account a cancellation rate as well. The second factor when we're thinking about it is the -- what we've seen as an extended time frame that it's taking for people to settle. So with some of the challenges in getting access to credit, it's taking -- what we've experienced over the last year is it's taking longer for people from when we notify them of a settlement for them actually to settle. And then the third factor is production around our new projects. So particularly in Victoria, if you think about Mt. Atkinson, Minta Farm, Grandview, Orion, all with -- just started settling or have got first settlements in the next 12 months. Production there is limiting the volume that we can settle in this period. So with those 3 factors is how we land on a guidance of about 5,000. Yes, clearly, if we get a stronger market recovery, we could exceed that as well.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

Thank you. There are no further questions at this time. I'll now hand back.

--------------------------------------------------------------------------------

Mark Andrew Steinert, Stockland - MD, CEO & Executive Director [53]

--------------------------------------------------------------------------------

Great. Thank you. And on that note then, I'd just like to thank everybody for taking time out of the day to spend with us today. Hopefully, we've answered all of your questions.

Just to reiterate, what really differentiates Stockland is our community-creation capabilities. And I would say our customer service proposition in commercial property, we're definitely passionate about that, and we're passionate on executing the strategy and have over $23 billion of development opportunities into the foreseeable future.

So look forward to catching up with many of you over the coming weeks. If there's any other queries, please don't hesitate to reach out, and enjoy the rest of year day. Thank you.