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Edited Transcript of SGP.AX earnings conference call or presentation 22-Feb-17 10:59am GMT

Thomson Reuters StreetEvents

Interim 2017 Stockland Corporation Ltd Earnings Presentation

Sydney, NSW Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Stockland Corporation Ltd earnings conference call or presentation Wednesday, February 22, 2017 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Steinert

Stockland Corporation Limited - MD & CEO

* Tiernan O'Rourke

Stockland Corporation Limited - CFO

* John Schroder

Stockland Corporation Limited - Group Executive & CEO, Commercial Property

* Andrew Whitson

Stockland Corporation Limited - Group Executive & CEO, Residential

* Stephen Bull

Stockland Corporation Limited - Group Executive & CEO, Retirement Living

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Conference Call Participants

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* Sholto Maconochie

CLSA - Analyst

* Richard Jones

JPMorgan - Analyst

* Paul Checchin

Macquarie Group - Analyst

* Grant McCasker

UBS - Analyst

* Winston Sammut

Folkestone Maxim Asset Management - Analyst

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Presentation

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Mark Steinert, Stockland Corporation Limited - MD & CEO [1]

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Good morning, everyone. As always, it's great to see so many familiar faces. And welcome to Stockland's First Half 2017 Results Presentation. I'd like to start by acknowledging the traditional owners of the land on which we meet, the Gadigal people, and pay my respects to their owners elders, past and present.

Turning to the results, I'm really pleased to be here presenting such a strong set of numbers to you again. And what this is reflecting is our ability to create thriving communities, together with the quality of our assets and the quality of the team, and our ongoing commitment to disciplined implementation and execution of that strategy.

In terms of the results themselves, funds from operation growth, as you would have seen from the release, up a strong 7.8% to AUD369 million, and funds from operation per security up 6.2%. This has underpinned the increase in distribution per security to AUD0.126. During the period, we revalued around 47% of the portfolio and saw significant increases in both the shopping center assets and some of the office buildings, reflecting both a slight decrease in cap rates and also income growth. That translated into a AUD193 million revaluation or a 3.4% increase in net tangible asset backing to AUD4. Bringing that result together overall has seen continued strong return on equity being achieved at 11%.

Our strategic intent has been underpinned by three key pillars. The first of those has been to grow and nurture our customer base and to grow our asset returns sustainably through time. As the slide shows, from a customer point of view, the retail team has continued to achieve equal first as rated by the retail tenant TenSAT. And the Residential business and the Retirement Living business had both seen customer satisfaction scores over 84%. Importantly, that indicates to us that our customers broadly are promoters of that business, and that's critical giving you the lifeblood of that business.

Looking at the commercial portfolio, as it relates to asset returns, we saw a strong 3.7% growth in funds from operation and that was underpinned by a combination of factors: continuing high occupancy in the shopping centers; strong leasing activity in Logistics and Business Park space; the benefits of lending activity in Sydney portfolio in prior periods; positive rent reversions in retail portfolio, which was supported by 2% comparable sales growth in the specialty stores and ongoing strong tenant retention more broadly across the portfolio.

Development continues to be an important part of creating shareholder value. At the moment, there are AUD442 million of construction underway in the shopping center portfolio and that's primarily Green Hills. We have AUD1 billion in planning for the next five to six years. And in Logistics and Business Parks, we have AUD400 million under construction planned in the next five to six years. The returns on that development activity continue to generally be about 7% yields in funds from operation and total returns above 11%. I would call out the recent completion of Wetherill Park as an exemplar; and, if you will, an indication of what lies in the future. John is going to talk to it in some detail. As we boil it down, what you see there is a combination of lifestyle and leisure, services and food, and a great retail offer combining together to offer that experience as well as the shopping element, and that has resonated really well with the customer base. It was previously one of the most successful centers in the country. It's maintained that. It's seen an increase in visitation, an increase in average spend, and an increase in dwell time. And there was only one new major in that development and that was the Coles supermarket.

On the Residential side, continue to see very strong activity across the country. As Andrew will talk about seeing stabilization in Perth is very positive for the first time we've seen that obviously in a number of years. And similarly we're seeing a broadening of both economic activity and a broadening of the strength in the housing market. And that's most evident in the results that we reported for south east Queensland, the Sunshine Coast and the Gold Coast.

Contracts on hand at record levels, up 42% on corresponding period at 5,800. The mix of sales is what influenced the first half operating profit margin. We'll have the traditional skew to the second half and we've guided to 15% to 16% operating profit margins for the full year. And also assuming favorable conditions maintained, we're targeting now 15% plus operating profit margin for the short to medium term. This is the 14% that we previously talked about. The customer reach has continued to broaden off the back of the completed homes strategy, the town homes strategy, where there will be 300 town homes settled this year and they are starting to introduce apartments in selected locations with a focus on Sydney. And bringing that together, we've seen a very strong return on asset achieved at 19.2%.

In terms of the Retirement Living business, a great result there, 42.8% increase in operating profit. Combination of drivers incorporated a 200 basis point improvement in margin and an increase in occupancy levels and also timing with superlot sales in the divestment of the WA villages. As a result of those last [three] points, you will see less of a skew to the second half normal this year in Retirement Living. We continue to be excited about the development program and, importantly, we've seen that 200 basis point improvement in margin translate both from occupancy as well as price increases across the portfolio. And nearly 40% of residents have taken up Retire Your Way as an incremental benefit. The return on asset, as a result, was up 120 basis points to 6.4%, and we're confident of achieving our targeted 7% ROI by FY19.

The other two elements of our strategic pillars relate to operational efficiency and excellence and also maintaining a strong balance sheet. As it relates to operational efficiency, we've had a really significant focus on customer orientated systems. The three things I would call out. The web -- we talked in our last results, web traffic is up over 7%; [60%] of our enquiry is coming online for Residential, 45% for Retirement Living; and with the implementation of the new website as well as sales force, or the sales team in Residential, we've communicated in a more directed way with our 50,000 active enquiries to distribute more than 1 million pieces of marketing material since the launch in the first month of the year. The digitization of the sales center in Cloverton, as I pointed to the future, is a very immersive environment. It gives customers a great insight into what that community will look like into the future. Its amenity, the schools on offer, the town center and its accessibility to public transport; and over time, we'll seek to digitize more broadly a sales experience.

In terms of our people and sustainability, I just got a couple of things. Once again, third year in a row, we're recognized as a Diverse Employer of Choice by WGEA. We're very proud of that. And also, by groups such as DJSI, we've been recognized as the most sustainable real estate company in the world. That's well and truly embedded in what we do. And we've now achieved over the last decade AUD65 million in savings from our sustainability initiatives. Of course, for a decade now, we've maintained A- credit rating with a stable outlook and continue to have a conservative balance sheet.

So bringing that all together, I'd say it is a really strong result. I'm confident in the future. And I'll now hand over to Tiernan to talk to some detail about the finances.

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Tiernan O'Rourke, Stockland Corporation Limited - CFO [2]

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Thank you very much, Mark. Good morning, everyone. Before I turn over this cover page, two interesting ideas arise from this photograph of our Newhaven project in Perth. First of all, not only do we build award-winning inclusive community play spaces like this one, we also are on a journey to use technology to enhance our customer experience, and that's going to be a focus for us over the next couple of years. As you read the financial section, and indeed the whole presentation today, our community-focused strategy is supported once again by a very strong balance sheet that's in really good shape, falling debt costs and consistently high cash flows.

So let me dig into the detail for you. There are three -- from a financial perspective, there are three areas of FFO to focus on. First, FFO growth of 7.8% delivered AUD369 million, with all businesses contributing above the previous corresponding period. This produced EPS growth of 6.2% even with a larger skew to the second half. And I'll let my colleagues dig into the detail of their individual business units.

The second feature here is that unallocated corporate costs have grown AUD2 million to AUD29 million, an increase of 5.8%. Growth in these costs is trending lower for the full year to between 3% and 5% per annum. Business units are all up [2%] and these are predominantly variable costs that are contributing to the volume and profit increases of the businesses. Third, the Commercial Property result includes a small trading profit of AUD5 million from the sale of land as we reshape the Logistics and Business Parks business, and this has been excluded from the comparable metrics so that we don't distort them. I've also noted on this page that, as per the PCA guidelines, we have excluded tax expense from FFO. And I'll remind you that we have significant accumulated tax losses, which means that any tax expense will be a non-cash item for many, many years.

Our statutory profit increased marginally 0.7% to AUD702 million, and this increase clearly driven by achieving our target FFO growth, but it also includes AUD196 million of investment property valuation gains, as Mark has already talked about, and they are due collectively to cap rate compression, the impact of redevelopments and, of course, income growth. Derivative mark-to-market adjustments have added another AUD126 million.

On cash flows, I'm very pleased. Our cash management focus continues to deliver higher operating cash flows. Operating cash flow marginally improved to AUD385 million this period off a high base mainly due to an increase in the residential activity, but also from disciplined capital and development expenditure. Our weighted average cost of debt continues to fall now at 5.6%, down from 5.8% at June 2016, and the forecast for the full year is 5.5% and that will provide us with some welcome tailwinds. And this has been achieved from renewing the debt portfolio at lower rates. We have not paid for termination of any swaps this period. Gearing is still a conservative 23.9%.

Our investment in BGP is starting to crystallize in cash. At December 31, we fair valued the investment in the balance sheet at AUD88 million before tax, after allowing for some residual risks. AUD71 million of this investment value was received from BGP earlier this month by way of an interim dividend. In time, we're hopeful of receiving the remainder of the investment value in cash. With our fixed interest hedge cover over 90%, this graph demonstrates how we continue to provide the business with the visibility of fixed interest cost over a rolling five-year period. And this certainly, of course, is assisting us in making our medium to long term investment decisions.

So, the financial position of the Group allows us to face the future with a very supportive balance sheet with predictable interest costs and continued strong cash flows.

As usual, we will go into the individual business units and I'll start with John Schroder and Commercial Property. So, thank you.

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [3]

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Thank you, Tiernan. Good morning, everybody. This morning I'll share with you some insights into our first half results, share with you some important observations about our headline retail sales results and, as Mark said, I'll walk you through a case study of Wetherill Park, which is a project that we're very proud of.

In the last six months, the Commercial Property group at segment level delivered 7.3% growth albeit, as Tiernan called out, that does have some trading profit in it and on a like-for-like basis and, importantly, the comparable FFO growth for the half grew by 3.7%, which is above our market guidance.

Turning to retail first, our centers remain very productive and with high occupancy levels, and our headline sales results for the last year at 2.7% but you will note that the half was flat in a comparable sense. Our MAT per square meter, the important productivity metric for the specialty shops, was up 2% and we're still well ahead of the Urbis average sub-regional metric. But I'd like to share with you some important observations and in some of our trade areas around Australia, there's been strong supermarket competition over the last one to two years; and what we've been doing in response to that is resetting our leases, getting very long leases in place, and putting new upgrades in place in a lot of our Woolworths and Coles supermarkets and indeed adding ALDI stores to the mix.

We're also observing that Coles and Woolworths are being more disciplined about how many shops they're rolling out. Two of the three discount department store chains have been trading down as they recalibrate their business models, and that will take some time for it to re-base and start cycling of the lows. There is some impact from some of their smaller sub-regional centers in Perth not materially and some of their shopping centers in resource rich parts of Queensland as a re-base such as Gladstone. Whilst these assets remain Number 1 in their trade area and the sales remain above average in a per square meter sense, importantly, they got sustainable rents and sustainable occupancy costs.

The other thing to point out here is that there's been a temporary or, what I say, a frictional loss of JLI over the last, about 9,000 square meters, as we relet shops handed back through administration such as Dick Smith tenancies. And there's, as a result, a frictional loss at retail sales at the headline level. And just to give you some sense of that, in the last six-month period alone, the loss of Dick Smith in the specialty shop category took 1.3% of our growth out and that will take some time to replenish.

As Mark said, our pipeline remains very important to our growth. I'm very pleased with our progress at Green Hills. In the Hunter Valley, we are creating a magic, a major regional shopping center with leading-edge design, great spaces, and leasing is going very well. It's shaping up probably to be one of the best mix of shop services and entertainment we've ever delivered.

Our focus on small projects remains very important as well, and that is a direct response to changing consumer tastes and lifestyles. To put this in the context, in the last six to eight months alone, we have executed nine new agreements for leases, with nine new mini-majors in our Queensland assets alone, including some international retailers, which we'll announce in due course. These three are open, six are under construction. Together with our emphasis on the creation of fast casual dining and other important changes to the mixes, we'll constructively assist growth over the next one to two years. And as Mark already stated, our future redevelopment pipeline over the next five to seven years at cost is about AUD1 billion.

Speaking of which, Wetherill Park, we're very proud of this center, because it really has changed the face of retail leisure and lifestyle out in Western Sydney. A near AUD230 million project at cost and we only added one traditional anchor which was a Coles supermarket. I'll call it a very large lifestyle center, because that's what it is. And our customers told us now in certain terms that they were looking for something different and unique. So the project vision was crafted around mini-majors such as JB Hi-Fi, sporting (inaudible), a fantastic fresh food market, approximately 40 fast casual dining and food catering outlets, plus its quite wonderful indoor-outdoor field, which has created a point of difference for the asset. Medical, health and beauty were the things that our customers told us and that's what we have delivered. And importantly, we materially upgraded the Hoyts theater to the extent that it's one of the best performers in the entire cinema circuit in New South Wales, and we're very proud of that.

As a result, we've got a AUD740 million asset, we delivered 7.3% in place FFO yield on cost, and there's more capacity in the shopping center over time, there are future stages that we're looking at. And our next tranche of developments that are coming in the next two to four years to varying degrees mimic what we've done at Wetherill Park. And I would say, in summary, that that is a direct response of how we're thinking about the changing dynamics of consumer behavior in Australia in digital disruption, and indeed Wetherill Park is a clear indication of how we bought our vision to life.

In the operating side of leasing, the leasing spreads on average remained positive at 2.7%. You will note that we allocated more operating leasing capital in the half and that was to about a third of those operating deals, which were deliberate conversions of uses. So, for example, we took an apparel store and turned it into a restaurant, while we took a redundant Dick Smith tenancy and put a 10-year lease on it to a new line steakhouse to give you some sense of it. These leases are longer in duration. They're typically more than eight years, in some cases 10, not just a standard five-year specialty shop lease. So when you combine that with the work that we've been doing in the anchor tenants and mini-majors, it's resulting in a higher weighted average lease expiry for the retail portfolio, 6.8 years and will probably go over seven years in the next year.

Just a comment on the retail administrations. You've read a lot about that. In our portfolio, whilst it is unfortunate that these administrations have happened, in our portfolio, it affected 65 shops over the last 14-month period since January 1, 2016. That's out of 3,500 tenancies. It impacted about 1.5% of the gross rent roll; of which, 80% of that gross rent has already been replaced. And importantly, in some instances, it's actually triggered a faster review of the mix and remerchandising to better fit the consumer demand in each respective trade area; and in the case of Green Hills and some other assets, it's aided and embedded in our development program.

Now turning to our Logistics and Business Parks portfolio, we've been pursuing a consistent strategy now for about 3.5 years. The portfolio is now AUD2.2 billion. And, as Mark said, we've got an active and future pipeline of AUD492 million. And comparably in the first half, the team delivered a 2.9% FFO growth like-for-like, and a historically high occupancy level of 96.1% off the back of a lot of leasing activity in the half. Some of our assets are well placed for the future in a higher and best use sense. And over time, we'll share that with you as our thinking matures. And I'm very happy with the fact that we did three projects, finished them in the first half on time and fully leased, and revalued favorably.

Turning to our office portfolio, we remain committed, particularly committed to the assets in Sydney CBD and the Sydney metropolitan area, which is the bulk of the portfolio. These assets are fully leased, and there were strong rental growth to come. We're also taking time to figure out development options in some of these assets over time, but I would point out to you that the second half, in an FFO sense, is likely to decline as a result of the let-ups in the remaining Perth assets that today are vacant relative to this time last year when they were leased.

So, in summary, we have delivered above-market guidance income growth in the first half, we're certainly on track to deliver our targets that we've set. I would say that we're up for the challenges in retail, and we remain very committed and focused to our customers and to our retailers and to our tenants who after all pay the rent, and I thank indeed everybody in the Company and Commercial Property for a great effort in the first half.

I'll hand over to Andrew.

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [4]

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Thanks, John. And good morning, everybody. Our Residential business is in great shape. Over the past six months, we've seen strong price growth right along the eastern seaboard. And this means our residential land bank is well positioned for future growth, and that's what's given us the confidence to increase our medium-term operating profit margin forecast to above 15%. We enter the second half of the year with a record number of contracts on hand. This gives us really strong visibility to future earnings over the next 12 months and our new launch projects that we brought to market over the last three years, all got good sales momentum, in particular I'll call at Cloverton and Aura on the Sunshine Coast, Cloverton in Melbourne. They are two largest ever masterplanned communities. And we've achieved more than 600 sales on each of those projects since launch some 18 months ago. So really resonating strongly with the market. We've continued to be very disciplined in our restocking. That's important with where we are in the market at this point.

And I'll just take you back to the original slide that I had up. This is MintaFarm, an acquisition that we announced just before Christmas. 1,700 lots sits in the southeast growth corridor of Melbourne, just outside the Berwick township. As you can see, it's effectively an infill site there and we get -- it's well progressed with planning, we get first settlements from that in FY19, continuing to give us strong coverage for future earnings.

We're also making good progress with our built form initiatives. Within the medium density space, we're now active in all four states. We've launched 12 projects. On track for 300 settlements this financial year. And within the apartment mixed-use area, we've secured a DA for Merrylands Court development and planning is progressing there. And this is continuing to broaden the customer reach of our business.

Our operating profit margin for the period, we are on target to deliver our original forecast of 15% to 16%. For the first half compared to the prior corresponding period, we are marginally down and that is due to the skew to the second half of settlements that we've been talking about, in particular our higher margin in New South Wales projects. And you can see skew reading through to project mix and also overheads. Our project rate is up strongly over the period, and that's due to better-than-forecast performance on a number of projects in Victoria and Queensland that are nearing completion. And our superlot margin is mildly decorative and that's due to the disposal of two of our impaired projects over the last six months, Wallarah in New South Wales and Bahrs Scrub in Queensland, where we recognize a zero operating profit margin on those impaired sales.

Now this is a chart that we've been publishing for a number years to now which represents progress that we're making in reshaping our portfolio. Over the past six months, we have launched a further two new projects, Pallara and Newport, both in Brisbane, and both have been well received and trading strongly. This means that we continue to have more than 90% of our land bank from which we're actively selling. This is up from about 60% three years ago and that's really driven that rebound in our ROI, which for our core portfolio now sits at above 19%. We continue to focus on delivering affordable product and creating highly livable communities. This resonates strongly with the owner-occupied market, which represent around 75% of our buyers and that is where we see the deepest and most sustainable part of the market.

Our outlook for the residential market for the year ahead, within Victoria and New South Wales, we see volumes remaining strong around the current levels. However, price growth, we expect to moderate after exceeding our expectations over the past 12 months. Within Queensland, we continue to see that market gain momentum on the back of increased interstate migration, which is starting to pick up now and also the affordability advantage and the southeast Queensland in particular enjoys that. And within Perth, as Mark mentioned, we're seeing a base in that market. We do expect volumes to stay around the current low levels and any price declines from here would only be minimal.

So, in summary, our Residential business is in great shape. We've got a record number of contracts on hand. We've got good momentum in our new launch projects with more to come. And we're making good progress in broadening the customer reach of that business through our built form initiatives and this is setting us up well for future growth.

I'll leave it there and hand over to Stephen Bull.

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Stephen Bull, Stockland Corporation Limited - Group Executive & CEO, Retirement Living [5]

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Thanks, Andrew, and good morning, or afternoon, everyone. It's a bit midday, I think. Before I start, I just wanted to touch on the image on screen. That's our Cardinal Freeman development here in Sydney that most of you will be aware of. It talks really well, I think, to the changes we've been making in the business over recent years. As you can see, the first two buildings there, which opened mid last year, which were completely pre-sold prior to completion. And the third building, which opens in April this year, only has two apartments left. So you can see how the product is really resonating with our customers in that trade area. You can also see the age care facility, the brand new Opal Age Care facility on the corner there, the H-shaped building, which is a really important part of our offering that we're rolling out across the Company -- across the business where we can.

So onto the results. I'm very pleased with the progress we're making with this business. Really these results reflect the strategies and the work we've been talking to you now about for the last 3.5 years. We continue to grow operating profit, we continue to improve our cash returns from the business, and at the same time, set the business up for the medium term and the long term. You can see from the results that our margins have improved significantly across the period. Margins will move around a bit period-on-period subject to contract mix and product mix and the type of stock we have available, but the growth in those margins of nearly 200 basis points is really underpinned by the operational efficiencies we've introduced into the business over the last three years. Our focus on reducing costs and reducing time it takes us to deliver our renovations in our units and improving the quality of those renovations is really flowing through to our margins now.

A big part of what we're doing is reshaping and improving the quality of the portfolio. Part of that involves the sale of low returning non-core villages, and we've done some of that this year and part of it involves the sale of land superlot sites, so we can deliver more age care facilities across our portfolio. This is a normal part of our business, has been for a number of years and we'll continue to be so into the future as we reshape the portfolio. Because of the timing of those sales this year, you've seen a stronger skewing profit to the first half, but we expect the full year number to be consistent with prior years.

To grow the business, we really need to attract a deeper customer pull. So we've been looking at our product for the last number of years and really looking at what we can do to broaden our customer reach. Historically, we delivered single-storey village-type product. We're now delivering retirement apartments that appeal to a very different cohort. We're seeing the success of that at Cardinal Freeman. We've also started construction prior to Christmas on an apartment project in Oceanside on the Sunshine Coast, where we co-located with a multi-storey age care facility owned and run by Opal. And within the center of a health precinct, which is anchored by the new Sunshine Coast Public Hospital. We think that provides customers with a world-class opportunity to downsize, live in a fantastic community with access to the care needs they want right on their doorstep.

In the next couple of months, we will start construction on our first non-DMF village, so this appeal to the type of customer that wants the benefits of freehold ownership and, coupled with that, the benefits of design and community creation that comes with living in a retirement village, but doesn't want to have to pay exit fees on exit. They're prepared to pay and own the property upfront. We're doing that here at Elara and it's called our Aspire product, which will roll out in other locations across the country. It's more than just a physical product though. We've talked about improving amenity for our customers and aged care being a big part of that. Our relationship with Opal is really important to us and continues to grow. We continue to explore opportunities jointly where we can deliver new developments with aged care, so that our customers can have access to that care when they need it.

But more than just aged care, our customers have been telling us they want access to general medical services. We started construction last year on our first medical center at Highlands in Melbourne. And this is a medical center that we will own and develop attached to the side of our village. We will take a long-term lease with a provider on that who will provide the services not only to our residents but also to the broader community. This does two things for us, it provides great amenity for our residents, but also delivers to us a good strong recurring income stream and returns above our targets. Mark mentioned our Retire Your Way proposition. This continues to resonate with our customers. One part of that is our Benefits Plus program, which gives our residents access to a whole range of services and discounts that they wouldn't otherwise be able to access. So all of these things together are about making our villages a place that is appealing attractive to our customer base. That's how we'll grow the business and that's what we'll continue to do.

So overall, a really good first half, a strong result. We continue to grow profit, we continue to improve our cash returns, and we do this by focusing on operational efficiencies, reshaping the portfolio and broadening our customer reach.

Thanks for your time, and I'll take your questions in Q&A.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [6]

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Thanks, Stephen. Just in closing, this place, I think this photograph is a great way to sum up with the journey we've been on over the last four years. What we're now seeing is that we're in a position where the team is galvanized in a way in which we can really take advantage of the synergies that exist both across our business and in creating the great communities that the team has been talking about. You see at Aura, Cloverton, Elara and Oceanside, they're all good examples and that concept of bringing the future forward is not only underpinned by building world-class playgrounds as the picture depicts, but it's about creating dynamic town centers underpinned by great shopping centers, and we see that in the new project at Harrisdale, and we talked about Wetherill Park, you see it in a multitude of housing solutions from first-time buyer through the retiree and, ultimately adjunct uses as well that we've talked about like medical centers and, more importantly, schools and educational facilities. And we provide more educational land than any other private developer in the country, everything from preschools through to primary schools to high schools, private schools, public schools, and they are integral to the success of our communities together with being close to public transport and employment nodes. And you'd note that just about every one of the new projects is proximate to other existing or new heavy rail and that's resonated deeply with our customers.

Given the strength of this first half, we've had the confidence to tighten our guidance range for the full year and we've increased that from 5% to 7% to 6% to 7% growth for 2017, with the second half skew. The underpinnings for that will be residential settlements above 6,000 lots and operating profit margin, as you've heard, between 15% and 16%. And the Residential business, we think, is really well positioned as Andrew described, particularly as it relates to those key elements that I've just talked about in bringing the future forward. The quality of the new projects and the way they are resonating with the customers and their market shares is really starting to redefine our profit prospects.

Retail funds from operations growth will be between 3% and 4% and, once again, the remixing that John talked about gives us confidence that we'll be able to continue to grow sales sustainably and income into the future. And on Retirement Living, the development program is ramping up and the quality of these projects like Oceanside, like Elara, like Willowdale, et cetera, is really very compelling and building on the success that we've seen at Cardinal Freeman.

We're confident in the sustainability of our distributions and we're forecasting for the full year a 4% increase in DPS, which gives an attractive 5.6% yield and we're focused on continuing to implement our strategy in a disciplined way to provide sustainable growth into the future. And importantly, this focus on building great communities, we think, is a fantastic way to deliver both sustainable profit growth and on a purpose of the better way to live.

So with that, I'd like to open it up for any questions.

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Questions and Answers

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Sholto Maconochie, CLSA - Analyst [1]

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Sholto Maconochie, CLSA. Just on the retail business, [appreciate 25%] in the comp basket, your op cost went up 40 bps sequentially, you've had specialty productivity slowing. It was impacted by Dick Smith. Are you concerned that that portfolio is sort of stagnating and that longer term there are some challenges there? And do you think the fixed 4% to 5% [spread] is sustainable or conversely would you go to a sort of negative spreads like some of your peers to keep those op costs low?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [2]

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There's a lot in there, Sholto. I'll try to answer your question succinctly as possible. The 14.6% to 15.1% that I assume you're referring to, there's number of drivers. As you know, I've been guiding all of you now for four or five years, the metric would go into the 15s, that's as a result of larger sub-regionals being built and major regional shopping centers such as Shellharbour, which have high tolerance to pay. So that that's the primary driver of it.

Now there has been some basket changes as a result of asset sales. Jimboomba is out now and Vincentia because we sold them. So that's part of what's going on there. But I would say, importantly, the change in our approach to the mix and the composition of that approach is also changing in as well. And when you stop and think about it, our reporting services are at [18%], because a lot of these services don't carry inventory, or if they do carry inventory, it's low levels of inventory, so it's a very low cost of goods sold into the business. So, as a result, these businesses can sustainably carry high gross occupancy levels and we're pushing towards retail services both reporting and non-reporting as you know. And in a similar vein, our fast casual dining food catering category is at 16.6% and very sustainable for similar reasons.

Now there's no question that, during the period, there has been some retail categories not all of them, and some centers but not all of them, where sales growth has been below rental growth but it's not homogeneous across the nation. So I'm comfortable with where we're at. And I think a lot of the work that we're doing in resetting some of the assets and adding mini-majors and shifting around the mix will continue to support the growth into the future.

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Sholto Maconochie, CLSA - Analyst [3]

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And just on the retail quickly, the DDS is 10% of rent. So Woolworths has come out today with negative [7%] almost on Big W on the strategic review, how much is Big W of that 10% in DDS?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [4]

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Yes. Actually, Target and BIG W together is AUD34.4 million of AUD690 million gross rent roll, it's actually 5%. So it's not super material. Our Big W has remained productive in our portfolio, albeit this negative comps. And clearly if Woolworths decide over time to make some decisions about some of the Big W stores and they're certainly not saying that to us, but if they were to, we remain confident that we can deal with them appropriately.

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Sholto Maconochie, CLSA - Analyst [5]

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And just one on asset sales, [96 has been hedged in sort of the] top high end there, you didn't break any hedges in the half, so do you look at any asset sales across the portfolio now and, if so, would you break hedges?

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Tiernan O'Rourke, Stockland Corporation Limited - CFO [6]

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Sholto, we've answered that question before and, absolutely, the answer is yes. If we haven't earned a distributable capital gain, then we will look to terminate swaps if the cost of doing so is equal to or less than the interest that we saved, we did that last year, but we didn't do any this year. So, we have higher and better uses of the capital as you've seen in the presentation. We're pretty comfortable where we're at with our falling debt cost and we'll allocate the capital elsewhere meanwhile.

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Sholto Maconochie, CLSA - Analyst [7]

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And don't we look at any assets to sell? Do you, in the portfolio, see any asset sales, non-core in the next four months?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [8]

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Yes. Over the last several years, we have consistently sold a number of assets, not just non-core office, but also non-core retail like we got (inaudible) a few years ago. And in the last half, we got out of Jimboomba and Vincentia and a small metro building in Brisbane at Mount Gravatt. So we're constantly reviewing the portfolio and looking at the total forward returns, risk, our weighted average cost of capital and our gearing levels to determine the right approach.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [9]

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Just while we're waiting for next question, Sholto, I might just pick up on the point about what you're seeing with these different uses. The first thing I would say is that, for the locations they are taking up, the rents are similar than the private tenancies. And if you look at Wetherill Park, as an example, the good -- what you are seeing is an increased visitation, you're seeing an increased dwell time, and you're using an increased spend, and that's because a lot of the uses have a destination element to them, and the cross-shopping is quite powerful. And so, that gives us a lot of confidence, as John described, in terms of the ability to remix the centers and do that in a way that actually creates sustainable income growth into the future. And while we certainly wouldn't want to see the sort of the demise of the discount department stores, as we all know, their rents are obviously relatively low. So, John's point about our ability to reconfigure that space and it's worth noting that of that AUD1 billion of planning of projects, they don't include one discount department store.

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [10]

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Sholto, there's something else I probably should have mentioned as well. An indicator of the health of any investment portfolio is your trade receivables or trade debtors, and I'm not for one minute suggesting that it's been a walk in the park because you got to keep at it. But at December 31, 2016, annually, we build out AUD920 million across the trust and at December 31, 2016, we had 71 basis points outstanding. Now that compares to June 30, 2016 where there was 91 basis points outstanding. So we had less outstanding on more billings.

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Unidentified Participant [11]

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Michelle (inaudible). Just a question from Stephen on Retirement Living. How are the new not-DNF -- what's your non-DNF structure going to look like?

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Stephen Bull, Stockland Corporation Limited - Group Executive & CEO, Retirement Living [12]

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So really, it's strata titled, it will be built like a village. It will have all the design features of a normal village in terms of allowing residents to age in place in their homes. They will have access to a community facility. It will be strata titled and residents will be able to buy their lot as they would in a normal freehold environment.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [13]

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Perhaps, we can go to the phones, if there is no more in the room for now.

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Operator [14]

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Richard Jones, JPMorgan.

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Richard Jones, JPMorgan - Analyst [15]

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Just a couple of resi questions to start off. Of the 5,800 freestyles, can you break out how much of that is in Sydney and typically how much is in Melbourne?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [16]

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Richard, I don't have the exact numbers, but I can get that for you. There is a couple of thousands of them in -- it's around 2,000 in Melbourne and there's around 1,000 in -- just over 1,000 in Sydney, but can I come back to you with the exact numbers, if you don't mind?

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Richard Jones, JPMorgan - Analyst [17]

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Yes, sure. And then just in terms of second half settlements in New South Wales, you only had [250-odd] first half. Can you give us a ballpark how much contribution you might get in second half?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [18]

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It's going to be similar numbers to last year. So yes, the Elara numbers in the first half were very low, so they didn't make a significant contribution there at all. And that was due to some of the infrastructure that we're providing there, we're now over that hump. So those settlements will flow through in the second half.

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Richard Jones, JPMorgan - Analyst [19]

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So, a 1,000 odd. Last year, you signed 750 odd in the second half.

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [20]

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It'll be around that number, yes.

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Richard Jones, JPMorgan - Analyst [21]

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Okay. And just with the town homes, how many, I think, you are [calling 300 that you are] working on, how many will settle in first half and how many will settle second half?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [22]

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So the first half was around 60 and we're looking at 300 for the full year. We got a number of those that are in May and June. So, we're just monitoring that, but it will be around that number.

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Richard Jones, JPMorgan - Analyst [23]

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Okay. And then just a question for John, just in terms of the retail NOI, was there some downtime at Green Hills or Wetherill Park from an NOI perspective that resulted in lost income during the period?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [24]

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Thanks, Rich. You're absolutely correct. We've surgically removed about 40% of the rent producing space at Green Hills, which kicked in towards the end of FY16 and has fully impacted the first half. Equally, the completion of Wetherill Park is less than a year old, it's all but fully leased so you're starting to read through the FFO growth out of that and it will be fully read through in calendar 2017. So the answer to your question is yes.

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Richard Jones, JPMorgan - Analyst [25]

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I'm sorry, just what is the AUD1 million impact at Green Hills that's --

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [26]

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I think -- we'll double-check it for you, but I think it's AUD8.4 million, from memory, in FFO, AUD8.4 million. But we'll check that again.

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Richard Jones, JPMorgan - Analyst [27]

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In the first half or?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [28]

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Full year, the full year of FY17, from memory, I think it's AUD8.4 million, but we'll get back to you on that with some precision.

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Operator [29]

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There are no further questions from the phone at this stage.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [30]

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Okay. That could be a record for questions. All right. Hang on, got one more.

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Operator [31]

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Paul Checchin, Macquarie Group.

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Paul Checchin, Macquarie Group - Analyst [32]

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Just a few questions. The first, can I just get some color on the results from the retirement business, please? When you multiply out what you are reporting as your established unit turnover by the average margin et cetera, including your development profits take off your overheads, you don't quite get to the numbers that you're reporting, you certainly don't get the increase that you've reported in operating profit. Can you please provide some color as to the composition there?

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Stephen Bull, Stockland Corporation Limited - Group Executive & CEO, Retirement Living [33]

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Yes. Thanks for that, Paul. Steven here. So as I mentioned in the presentation, the other contributor to profit is related to superlot land sales and asset sales. So, we've been doing that for a number of years now, as we reshaped the portfolio. Historically, just by happenstance those transactions happen to have fallen in the second half of the year. This year, they've fallen in the first half. So you're seeing an increased profit in the first half this year as a result of those superlot sales.

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Paul Checchin, Macquarie Group - Analyst [34]

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And what is the kind of quantum of profit contribution from those superlot sales?

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Stephen Bull, Stockland Corporation Limited - Group Executive & CEO, Retirement Living [35]

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So we don't -- because it's a small number of transactions, we don't disclose the profit numbers for sensitivity reasons. Over the full year, we expect it to be the same as previous years.

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Paul Checchin, Macquarie Group - Analyst [36]

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And while you've got the mic, just in terms of your comments around the turnover margin, you've seen them go up to 26.9%. You said had it was on the back of efficiencies, operating efficiency. So I just want to make sure it's not because of the embedded price growth you've seen in those units, it's part one the question. And the second part of the question is where do you envisage that margin going over the next five years. Can you get it up to [30%]?

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Stephen Bull, Stockland Corporation Limited - Group Executive & CEO, Retirement Living [37]

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So, in response to your first question, clearly price growth is part of that. So there are number of things that affect margin in the retirement space. Clearly, price growth is one of them. The other one is obviously cost. But the other thing to keep in mind is, because the supply side and retirement changes every year, it really is also a function of the particular units that turnover. So that's why it was caveat, when we were talking about margin by saying that it's subject to what contracts and what units turn, do you have more three bedroom units or more one bedroom units that happened to turn any particularly year, those things affect margin. I don't -- do I think I can get to 30%, I'll be surprised if it gets that high, but it will be in that kind of 24% to 28% number, I would think.

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Paul Checchin, Macquarie Group - Analyst [38]

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And then just a question on the resi business. Now I'm referring to Slide 34 of the additional appendices, which breaks out all of the cost per business. So there's obviously been a substantial increase in your residential overhead costs, which was touched on in the presentation and there is some commentary there on that slide. I'm just keen to understand if you think about that cost base of AUD87 million in the half, how much of it would be fixed? And the key reason why I asked that question is because there's a comment there saying higher staff cost supporting the increasing in number of projects whereas I'd always thought the previous discussions on this topic had suggested that you already had plenty of capacity in the business and you wouldn't need to scale up with the increase in volume.

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [39]

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We are aware, and it's a mix, Paul, obviously where you get increase in volumes on a particular project. So, say, Highlands goes from 400 to 500, you can do that with the existing team and it's scalable. Where we get incremental projects coming into the portfolio and quite often where they're geographically in different locations, we need an additional direct project personnel to run those projects. The mix between fixed and variable, have you got that exact number Tiernan?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [40]

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Paul, Tiernan here, the majority is variable. But of the increase that is, if you look at the increase between AUD72 million and AUD87 million, the majority is variable supporting the projects that are live at the moment, but the remainder is that fixed cost of ramping up the built form and preparing the built form for delivery of product later in the sort of five-year horizon.

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Paul Checchin, Macquarie Group - Analyst [41]

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So if you could [deliver 300] built form products a year, which theoretically I assume that was the run rate even though I know it will go high, but if we assume it's 300, is there any more additions to the cost base to keep delivering at that level from a built form perspective?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [42]

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There's obviously the sales and marketing so that the commission and the marketing costs that come through for each of those, but at that level, we're assuming all things being equal now.

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Paul Checchin, Macquarie Group - Analyst [43]

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But you bought that front-end loaded, the sales and marketing costs happening for this year and that you've got the bulk of the settlements happening in the second half, but presumably the bulk of the sales and marketing costs have already been incurred?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [44]

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Exactly, and out into 2018 as well. Obviously, we're pre-selling a lot of that product and it's got time frames, [delivery] of 12 months and a little bit more in some cases. So, yes, a lot of that's going into 2018 as well.

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Tiernan O'Rourke, Stockland Corporation Limited - CFO [45]

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I think the other way to look at it Paul, Tiernan here again, is from the perspective of overheads as a percentage of revenue, we've been saying to you that that percentage has been coming down as we've been building our revenue base. So to your point about scalability, it has been coming down over the last three years, and our target is to get it to around about 10% of revenue and we're on track for that. So, it means that we have scaled up over the last couple of years and we're getting to the peak of that cycle.

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Operator [46]

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Grant McCasker, UBS Investment Bank.

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Grant McCasker, UBS - Analyst [47]

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Just a query on -- it's in the appendices (inaudible) where you are referencing enquiry levels and leads, I see a marked decline on the previous quarter albeit back to levels like you see in other second quarters, where there various trends worth noting there other than seasonal factors?

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Andrew Whitson, Stockland Corporation Limited - Group Executive & CEO, Residential [48]

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Yes, Grant. There's a couple of things worth noting, as you mentioned. The March quarter traditionally is one of the lower quarters of the year for enquiry and that's purely a factor of the January. January and December tend to become about one month, you lose that Christmas period where people go and do other things apart from buy real estate. So there is that factor flowing through.

What are we seeing more broadly? If I look along the eastern seaboard, our January this year on a like-for-like basis was stronger than our January last year. So when we back out things like new project launches and all of those factors, we had marginally more enquiry this year than we did last year, when we look at a comparable number of projects. Western Australia was at around the same level. So we haven't seen while we were getting some anecdotal feedback from builders and the established market that they're seeing better Januarys than they have two years, we're not seeing it flow through to our numbers yet.

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Grant McCasker, UBS - Analyst [49]

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Okay, great. And just one other question, now I'm not sure if (inaudible) or not, but did you provide quarterly sales numbers for the retail portfolio for this period?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [50]

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Grant, it's John. We did not. We think that the six-month to six-month is more relevant, because there's a lot of seasonality that has to be taken into account.

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Grant McCasker, UBS - Analyst [51]

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So if we look at the December quarter numbers, can you give us a guide on what they were relative to the prior period?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [52]

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Yes. They were flat. Again, bearing in mind the impact of the closure of Dick Smith, which as we've got in the data, took out about 1.3% or 1% on a full MAT basis in the like-for-like basket, also affected the mini-majors as well, because we had several very large older Dick Smith powerhouse tenancies that were materially significant.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [53]

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The other thing to recognize on sales, as you've probably seen, is nearly a quarter of the portfolio is not in the numbers at the moment. And that's just given, obviously, some of the largest, the most successful centers have been going through redevelopment or haven't been two years out of development, so that's just an important sort of context.

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Operator [54]

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Thank you. There are no further questions from the phone at this stage.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [55]

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Thank you. We just got one on the floor.

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Winston Sammut, Folkestone Maxim Asset Management - Analyst [56]

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Winston Sammut, Folkestone Maxim Asset Management. Just if you could explain, John, if things are so rosy in the retail sector, could you explain why incentives went up 40% in terms of months, up from 8.4 to 11.9 and what's the trend going forward in terms of that?

And also when you delivered those numbers about the billings, AUD900 million or whatever it was, did those two numbers include the Dick Smiths and so on? Did you go -- are those billings included or not?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [57]

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Thank you, Winston. There's three questions in your question. I'll answer the third one first. No, the Dick Smith billings would largely be out of that because they started to close the stores in February, I think, last year so that there'd be a little bit in there and some of the other administrations. It does depend on when the administration takes account a bit -- the administrator takes the accountability for the lease, sometimes they do, sometimes they reject it. So it does vary, but it's not material. As I said, it was 1.4% of 1.5% of our gross rent roll and 80% of that rent is already being replaced. And some of those shops actually helped us in a way because, by way of example, the Dick Smith tenancy at Greenhills has been demolished as part of the development. So it did help us in that respect.

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Winston Sammut, Folkestone Maxim Asset Management - Analyst [58]

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I'm just trying to get it at a true delinquency numbers, that's all?

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John Schroder, Stockland Corporation Limited - Group Executive & CEO, Commercial Property [59]

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Well, the way we think about delinquency as well as not just see total outstandings in a basis point sense, it is lower than the prior period, but also our write-offs, what did we actually write off against our provision account, and it was not materially different to the prior period, which is another important thing. Now, you mentioned the word rosy, I'm not for one minute saying it's rosy. We have to work at it. We have to work very hard at the real estate and make sure that we're providing our customers what they want and listening very, very carefully to what our retailers are telling us and keeping on top of that.

With all that said, your first question on the incentives, I think we're the only landlord that discloses that in terms of months and percentage. The important thing there is, it's the specialty shops only. We do not put the mini-majors and the anchor tenants in there. If we did, it would be a much lower number. So we're only deliberately singling out the specialty shops. If we add back mini-majors and supermarket deals and things like that we did in the first half, it's probably well below 10%, which is quite sensible and sustainable.

With respect to the difference, as I called out during the presentation, a chunk of that was used conversions with longer leases in the first half. I think it will moderate in the second half. I can't yet get a feel for where it will moderate, but I would say that by August it will probably, in aggregate and on average, be less than the first half.

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Mark Steinert, Stockland Corporation Limited - MD & CEO [60]

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Okay. If there's no more questions, we'll bring it to a close. And on behalf of the team, I'd just like to thank you all for taking time out of your day to listen to our presentation. I hope we've given you some good insights into the business and also answered all your questions. I'd emphasize what we think makes Stockland and us fundamentally different is a passion for community creation. And in that regard, the elements we've been talking about, we think do deliver a truly differentiated customer and resident outcome and, importantly, and particularly given how topical it is, we see ourselves as very well positioned to play a role in solving the affordability challenge. The housing in Australia, in that regard, just emphasize more than half of all our sales at first-time buyers.

The average house and land package available in a Stockland community is at an 18% discount to the median house price within that trade area. Take something like town homes here in Sydney, we're offering them in the low AUD500,000 range below apartments. It's a great choice for family, compares to [AUD1 million] median price. And to the point about costs, we're ramping up there, we've got more than a couple of thousand in planning, there is a lot of planning initiatives underway, which is enabling us to deliver more of the town homes around the activity centers and, obviously, that brings forward sales costs, but importantly also helps to grow profits sustainably into the future. We'll keep delivering on this strategy in a disciplined way, and we look forward to seeing you on answering anymore questions you've got during one-on-ones over the next weeks and months.

So thanks a lot for being here. We do have lunch for those in the room. So, if you'd care to join us for (inaudible), we'd also appreciate that. Thanks a lot.