Stockland shrugs off housing slowdown to hit top end of guidance

The country’s largest listed residential developer has defied the gloom and will hit the top end of its earnings guidance.

Managing director and Chief executive Tarun Gupta of Stockland, Australia's biggest residential developer. Jane Dempster/The Australian.

The country’s largest listed residential property developer Stockland has defied the gloom in the housing market and will hit the top end of its earnings guidance in the coming results season.

The diversified property company said on Friday it was on track after selling off its retirement division but would start paying tax on its active businesses.

Even if the housing market slows down investors expect that Stockland will keep up earnings as it rolls out fresh warehouse developments in the still busy industrial sector.

Stockland sold its retirement business to EQT Infrastructure for $987m in February after years of struggling to generate acceptable returns for listed investors.

Stockland CEO Tarun Gupta said the group was focused on its “strategic priorities”.

“We have started fiscal 2023 in a strong position with good earnings visibility from residential contracts on hand, a resilient commercial property business, strong balance sheet and an active development pipeline,” he said.

Selling the retirement unit resulted in a large taxable gain for Stockland and the company said the “accelerated” reshaping of the portfolio was expected to return the active Stockland Corporation Limited side of the business to an income tax paying position from this financial year.

Tax payable will be in the range of 5-10 per cent of group Funds From Operations. Stockland flagged it would keep its distribution policy of the higher of 100 per cent of passive trust taxable income or 75-85 per cent of FFO on an annual basis over time.

Morgan Stanley analyst Lauren Berry noted that Stockland upgraded its fiscal 2022 guidance to the top end of its previous range of 35.1c-35.6c per security.

She said the percentage of tax paid could increase in future periods given that this financial year has some benefit from carry-forward tax losses. “We note that this move into a tax payable position has occurred faster than the market‘s expectations,” she said.

“The new tax expense may neutralise FFO per security growth into FY23, given that consensus is at 5.5 per cent. However, we continue to expect positive distribution per security guidance for FY23 based on growth in Stockland’s trust earnings supported by logistics developments,“ Ms Berry said.

Stockland shares added 2.7 per cent, or 10c, to close at $3.85.

Macquarie Research said that a return to paying tax was up to a 10 per cent headwind to FFO and distributions per security. In a worst-case scenario it warned that the latter could fall to 26.2c per security.

“Given the strength of the balance sheet, Stockland could increase in the payout ratio to smooth the DPS,” Macquarie said. But the analysts said they expect the headwind to be larger in fiscal 2024 as all carry-forward tax losses are removed.

Stockland targets 40 per cent of earnings from development, which would imply a 12 per cent tax rate. “In reality, given offsets to taxable earnings it is unlikely to reach these levels, albeit should sit above the 5-10 per cent range provided for FY23,” Macquarie said.

Macquarie said a buyback was a possibility, noting the retirement sale meant the company had the capacity.

“We continue to view Stockland’s capital allocation transition as positive, however the uncertainty surrounding residential conditions remains a possible headwind,” Macquarie said.