Stockland (SGP.AX) Earnings Call Transcript & Summary

Good morning, everyone. My name is Mark Steinert, CEO and Managing Director. And I welcome you all to our full year results update for FY '20. The format for today is Tiernan, Louise, Andrew and I will present the key elements of the results, and we'll then open it up for questions. 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 our respects to their elders past, present and emerging. I'm pleased to announce our full year result, which reflects the benefit of our diversified portfolio and the significant progress that we've made in executing our strategy. This is despite the very challenging macroeconomic environment due to the pandemic, and before that, the bushfires. Funds from operations were $825 million, down 8% on FY '19. And FFO per security was down 7.2%, with growth in communities, workplace and logistics FFO offset by the impact of the pandemic on our Retail Town Centers. The group recorded a disappointing statutory loss of $14 million reflecting primarily COVID-19-impacted net devaluations in commercial property of $464 million and a net fair value decline of $116 million in retirement living. Net tangible assets also reduced to $3.77 per security, down 6.7%. Distribution per security is as previously announced at $0.241, reflecting a distribution payout ratio of 70%, slightly below our target range, with the retention of earnings helping to strengthen the balance sheet. Our most important priority since the crisis began, has been the safety and well-being of our residents, customers and our team. I want to recognize the enormous commitment from our people. They've worked incredibly hard to look after our customers to ensure we could continue to operate our assets safely and efficiently during this time. At the onset of the pandemic, we immediately implemented best practice safety and hygiene management, and we proactively engaged with industry bodies and government. In addition, we reduced or deferred variable and noncritical expenses, and we increased our available liquidity to around $2 billion. The team worked closely with tenants to safely reopen stores following easing in government restrictions, with 94% of stores now open by rental or 98% if you exclude Victoria. We also worked proactively with our tenants impacted by the pandemic on rent relief to strike the right balance between supporting them and achieving good commercial outcomes for Stockland. A good example is 85% of rental support agreements negotiated with non-SME tenants include lease extensions and/or new leases. For residential, we've had a strong focus on driving settlements and cash flow, and our investment in digitizing our product representation and customer journey has paid off, driving both inquiries and sales. With these measures in place, we believe we're well positioned to navigate the current market disruption and to grow into the future. Turning to Slide 6. As I mentioned, despite the challenging environment, we continued to successfully execute our strategy. We increased our allocation to Workplace and Logistics to 29% of assets, pro forma, up 6% for the year. And we've more than doubled our Workplace and Logistics development pipeline to $5.5 billion, including the commitment to acquire the Johnson & Johnson headquarters, creating a $1.5 billion development opportunity at M_Park and significant tenant precommitments for M_Park, which Louise will discuss. We achieved a strategic reduction in the Retail Town Center weighting to 39% of assets pro forma, down 6% for the year, reflecting noncore divestments and devaluations. The strategic tenant remixing towards nondiscretionary retail and services has clearly driven improved Retail Town Center performance pre and during COVID. This is evidenced by that rapid increase that I mentioned before in visitation as restrictions have relaxed. For the Communities business, settlements have been good with a solid rebound in sales and inquiries, reflecting the quality of our market-leading business, government stimulus and customer preferences for master plan communities. As Andrew will discuss, we remain well positioned to respond to expected strong volumes over the first half, with our leading market share more than 3x our nearest competitor. To position for future growth, we completed $535 million of restocking, including the $415 million Gables acquisition in Sydney's undersupplied Northwest. We also set a strategic goal to broaden our capital base a few years ago and have actively focused on this since. And it's pleasing to have achieved significant progress with 2 logistics joint ventures representing $1.2 billion in end value announced during the period and 2 communities joint ventures at Aura and Katalia. Turning to Slide 8. Underpinning the strong momentum in the execution of our strategic priorities is a close focus on customers and employees. Our design processes, service provision and property operations are all customer led, and it's very satisfying to see customer engagement remaining above 80%. Innovation and digital product representation is also vital to improving customer experience and how we work. In August, we're very pleased to launch our new core end-to-end technology system, which will enhance our operational performance and efficiency. We also accelerated digital initiatives and data analytics. In our residential business, 87% of all inquiries now come from digital channels. And big data analytics and digitization of B2C is helping to future-proof our town centers. So as you can see, there's been material and measurable momentum on every strategic priority. I'll now hand over to Tiernan to discuss our financial performance.

Thank you, Mark, and a very good morning. Given you can't see us today, this is Tiernan O’Rourke here, the Chief Financial Officer. It's certainly been an extraordinary year, as Mark has just outlined. As CFO, it's been a year of active capital management, leading Stockland to a stronger financial position at year-end. This includes higher operating cash flows, improved gearing, lower cost of debt and a prudent approach to tenant credit risk. Let's start with our capital position on Slide 10. In spite of devaluations in investment assets, gearing has reduced to 25.4%, primarily from increased cash flows in the residential business. Importantly, significant covenant headroom has been maintained on our high investment-grade debt portfolio. Our average cost of debt was 4%, the sixth consecutive year it has fallen. And we predict it will fall again in FY '21 to around 3.7%. During the peak of the government restrictions, we retained our high investment-grade ratings with Standard & Poor's and Moody's, demonstrating the quality of our business model. With this sound capital position, the business is well positioned to navigate the future successfully. Moving to cash flows. We've taken a proactive approach to management of our cash position in the current environment. In response to the onset of the pandemic, we cut all nonessential expenditure, including some Devex and CapEx associated with longer-term projects. But Devex in the residential business was back to its long-term average run rate by the end of FY '20. We've also actively restocked our portfolio with about 90% of the land payments for the residential business in FY '20 relating to land previously bought on capital-efficient terms. To conserve cash and support the balance sheet, we reduced the second half distribution to $0.106 per security, representing a payout ratio of 70% of FFO, marginally below our target range of 75% to 85%. We are comfortable with our measured approach taken around raising capital at the start of the pandemic, and particularly the way we boosted liquidity early using debt capital only. At year-end, we retained available liquidity of $2 billion. Importantly, assets held for sale at the 30th of June 2020 will generate a further $469 million in cash proceeds during FY '21. Let's deal with our approach to tenant support. Louise will talk about the progress on lease rental negotiations, but I'll cover off on this slide how we've accounted for the support given to our tenants during the last quarter of FY '20. We billed all tenants in the usual way for each month from April to June 2020. These billings were booked into revenue and receivables. We then set about dealing with the impact of COVID-19. After collections and before rental support under the commercial code of conduct, we had $102 million of lease receivables at year-end. Normal levels at month end have traditionally been around $5 million to $10 million, so a significant change. We provided $29 million of tenant rent abatements comprising agreements which have been finalized with tenants and those that are in active negotiations. The entire cost of these abatements have been expensed in FFO and statutory profit and has also reduced receivables by the same amount. To be clear, we have not capitalized any of these abatements with the full cost in the FY '20 FFO result. Up to late last week, our progress on finalizing tenant agreements indicates the amount set aside for abatements continue to be appropriate. After dealing with known abatements, we applied a prudent provisioning approach against the net receivables balance of $73 million to estimate the potential for further credit loss. As a result, we created an estimated credit loss provision of $38 million. This amount was also fully expensed in FFO and statutory profit in FY '20. After these assessments were made, $35 million of net receivables remained. And up to the end of July, we had collected $20 million or 57% of that balance. We will continue to reserve our rights to collect rents still owing under lease agreements. In conclusion, we believe we are adequately provisioned to meet our obligations under the code and importantly, we have reported an FFO which has been earned in cash. Moving to funds from operations. Now Andrew and Louise will take you through their business unit results. But from a group perspective, our FFO per security was down 7.2% for 4 primary reasons: first, good results from the residential and retirement living businesses; second, as just discussed, the impact of rental abatements and estimated credit loss provisions; third, FFO attributable to noncore asset sales in FY '19, which settled during FY '20; and finally, we reduced total overheads by around $15 million as we cut costs across the group during the year. Finally, to statutory profit. Maintenance CapEx and incentives are lower period-on-period, principally due to the slowdown in activity in the last quarter. Commercial property net devaluations influenced heavily by the pandemic have led to a significant reduction in statutory profit this period. Louise has a more detailed slide on revaluations coming up shortly. So overall from me, our proactive management of capital and liquidity has seen us emerge stronger and ready to do business in the post-COVID environment and to leverage our capital position into further opportunities as they arise. So I'd now like to hand over to Louise for the commercial property results. Louise?

Thanks, Tiernan, and good morning. In FY '20, we've realized the benefits of the effective execution of our strategy, with a significant reweighting of our portfolio exposure, advancement of our large development projects suitable for future capital partnering and strong execution of our logistics pipeline in a highly competitive environment. The impact of COVID-19 sees a negative 10.2% comparable FFO outcome with retail at negative 17% and Workplace and Logistics delivering good results with both at 1.7%. Occupancy remains high across each sector with a good WALE. In line with strategy, the reweighting of the portfolio has continued with Workplace and Logistics now being 29% of the portfolio, and including asset sales post balance date, retail is now down to 39%. We've settled on $220 million of retail asset sales and exchanged a further $418 million of noncore retail. This delivers our strategic goal of close to $1 billion of retail asset sales 2 years ahead of program and the reweighting of the retail portfolio from 45% to 39% over FY '20. Comparable retail sales growth pre-COVID of 3% for the 8 months to February reflects the success of the remixing, which was underway. We've doubled the Workplace and Logistics development pipeline over the last 12 months to $5.5 billion. This includes major logistics developments down the Eastern Seaboard, 2 large office towers in Sydney and the further opportunities at the strongly performing Macquarie Park in Sydney's North with over $2 billion to roll out in capital partnered projects. I'll go into further detail on the COVID impact, but the key statistics are we collected 70% of rent for Q4 and 83% for second half FY '20. The retail portfolio has seen a 10.7% devaluation over the full year. Traffic and sales bounced back quickly post-April, reflecting our subregional exposure and nonmetro spread and/or repositioning to low and nondiscretionary categories. Retail rental collection in Q4 was 61%. The progress of our negotiations is a byproduct of simultaneously respecting the position of our retailers and tenants in unprecedented times, while applying a highly commercial focus to those negotiations with the priorities on rent collection and ongoing resilient occupancy. As the top table shows, retail is well advanced at 52% of negotiations complete with $27 million forecast abatements and $36 million expected credit loss at June 30. Negotiations in logistics are almost complete at 98% with minimal abatements and minimal ECL. Workplace is at 64% complete with the same abatement and ECL levels as workplace (sic) [ logistics ]. Rent collection for the fourth quarter is high in Workplace and Logistics at 92% and 96% and retail compares favorably to our peers at 61%. I'd like to thank the commercial property team for their hard work and resilience through the bushfires and particularly COVID-19 in keeping our assets open and running safely for our retailers, tenants and customers. With 100% of investment properties independently valued as at June 30, 2020, we experienced a net valuation decline across the portfolio of $464 million for the full year, heavily influenced by COVID-19. Pleasingly, in our pre-COVID first half, there was only a small retail devaluation of $31 million or 0.7%. The latest valuations at June 30 saw retail values decline by approximately 10%. This valuation movement was made up of cap rate softening of 18 basis points to 6.1% accounting for 37% of the devaluation, income movement accounting for 29% and largely attributable to the view taken on future majors rent and some further rebasing in specialties and softening of growth rates in the short term due to the pandemic. And increases in capital expenditure, incentives and abatements largely attributable to COVID-19 accounted for 34% of the movement. Workplace saw a small uplift in value due to a firming of the Piccadilly cap rate but partly offset by allowances for potential short-term market softening. Logistics experienced a $237 million uplift for the year. Strong development leasing activity with resultant cap rate compression was largely responsible for the uplift. As you're aware, we've been actively building our exposure to convenience-based low and nondiscretionary retailers for some time, and this put us in a strong relative position before and during COVID-19. This remixing gave us greater resilience during the peak of COVID and underpinned our strong rebound since April, with 94% of stores by rental income now open or 98% excluding Victoria, foot traffic now at 92% versus pre-COVID levels or 95% ex Victoria and WA and Queensland are back to pre-COVID numbers for both foot traffic and store opens. As you can see from the table on the right, overall, for FY '20, total portfolio retail sales was slightly positive, with MAT growth of 0.8% and specialties at negative 6%. Supermarkets saw growth of 8.4% and mini-majors more than 6%. The table bottom left shows the fast rebound of sales with specialties down 60% in April, 25.5% in May and just 7% down in June. July has seen a strong result with total comparable sales of plus 2.4% and specialties, plus 1.4%. As expected, categories such as apparel, jewelry and those impacted by government-mandated closures or restrictions such as gyms, cinemas and cafés were most impacted. Occupancy across the Retail Town Centers remains high at 99%. The specialty occupancy cost has risen moderately to 15.5%. Rent reversions across the new leases and renewals came in within previously given guidance at negative 6%. Holdovers are higher than previous years at 190 as of today. This reflects the continued uncertainty of COVID-19. Retailers on holdover continue to pay rent under binding leases, and we're working through both replacement and renewal outcomes. Churn levels will remain higher than historically, reflecting our acceleration of remixing into more resilient categories. As part of the negotiations occurring with non-SMEs, 85% of rental support agreements have been negotiated to include some form of lease extension and/or new store deals. Retailer satisfaction under the annual survey remains above benchmark at 80%. In the context of the current environment, we're comfortable with our underlying operational performance. Key to both the remixing occurring pre-COVID and the accelerated change required now, Stockland's data capabilities will be key to the positioning of assets going forward to deliver to the customer. We've partnered in FY '20 with one of the big 4 banks to analyze in center and in trade area customer spending behavior and using our in-house data scientists are analyzing demographic, social media and digital data to optimize mix and messaging to our current and future customers. We've partnered with online businesses, including Amazon, to enhance our customer experience. Delivery on demand is now operating at 6 town centers, and 24 of our 30 town centers are now operating click-and-collect facilities in partnership with retailers. We're focusing on curation for the customer with our omnichannel approach. Our focus on data is having a positive impact and we'll further build this out in the future. Workplace delivered FFO comp growth of plus 1.7%. New leases and renewals resulted in 18.6% rental growth. Occupancy remained strong at 93.6%. The shorter WALE reflects the development opportunities at both Piccadilly and Walker Street. Rent collection for Q4 2020 was above 90%. As reported previously, the acquisition of the other 50% of Piccadilly was achieved while divesting the 50% ownership of 135 King Street. And the strategic acquisition of neighboring properties in Walker Street, North Sydney has unlocked a 60,000 square meter tower opportunity. Piccadilly and Walker Street together make up a $2.4 billion development pipeline. Progress on seeking planning approvals over both sites has continued with the Piccadilly planning proposal lodged this month with the city of Sydney and the development application for North Sydney forecast to be lodged later this calendar year. Whilst we have positive momentum with planning authorities, it's important to continue the planning process. As the diagram here shows, there is minimal project spend during this phase, while adding value to the site through approvals. The decision to proceed with either project will be subject to acceptable financial metrics and levels of precommit in late 2022 for North Sydney and 2023 for Piccadilly. The forecast timing of these developments can align with changing workplace design requirements post COVID-19 and the elements of health and well-being and building technology will be key to the successful positioning of these projects. The Logistics and Business Parks portfolio is now just under $3 billion. It's 21% of the portfolio weighting, which we've more than doubled since December 2013, and consists of 28 assets. 98% of the portfolio is located on the Eastern Seaboard and is a mixture of development land opportunities and modern income-producing assets. The development pipeline is now $3.1 billion. In FY '20, we achieved development approval for M_Park in Sydney's North, the refurbishment of the Optus Centre also in Macquarie Park and the re-signing of Optus. A fast-tracked rezoning was achieved on land at Kemps Creek and subdivision planning approval at Melbourne Business Park. The site at Kemps Creek near the Western Sydney Aerotropolis has been consolidated under a JV arrangement with Fife Group to create a 71-hectare landholding and a $1 billion end value development opportunity. We also purchased Carole Park and Richlands sites in Queensland in a fund-through from Fife Group. We've been actively building up our development pipeline and are well positioned for the future. The performance of the logistics assets is testament to the quality and location of the portfolio. Strong comparable FFO growth of 1.7% was achieved, an 83% tenant retention at 12.5% weighted average base rent growth. Portfolio occupancy remains around 96%, and the WALE is stable at 5.2 years. Focusing on the ongoing quality of the portfolio, $114 million of noncore divestments was achieved and the exchange for sale of Balcatta Distribution Centre in Perth has occurred post balance date. Proceeds will be reinvested in the accretive development pipeline. Developments were completed over the year at Yatala in Queensland and KeyWest in Melbourne, both fully leased at completion. These results are evidence of a high-quality portfolio. Around 60% of M_Park is now under heads of agreement, and we are confident with filling the rest with strong tenant demand in Macquarie Park. We recently announced the agreement to acquire the 4-hectare Johnson & Johnson site at Macquarie Park. This site adjoins our M_Park site, and together, creates a $1.5 billion development opportunity. Johnson & Johnson will also enter into a lease for their new head office building at M_Park, which will see them tenant in full a new 10,000 square meter building. A heads of agreement has also been entered into with another multinational over a whole building. The first stage of M_Park will commence construction later this calendar year. You can clearly see the progress we've made on our strategic priorities. COVID-19 will accelerate change in retail, change the way we work and see the continuation of the logistics tailwinds. Our response has been swift and decisive. In retail, we've divested better than latest book value a further $418 million of noncore retail assets, executing on the strategy of disposing of almost $1 billion of assets ahead of forecast time frame to ensure quality and resilience. We've accelerated through greater churn our remixing to low and nondiscretionary categories, utilizing enhanced data skills to curate for our customers. And we'll utilize the forecast DDS consolidation over the next 1 to 3 years to introduce new concepts to our well-located town centers. In workplace, we've achieved in less than 2 years the consolidated ownership of 2 well-located workplace sites and will lodge planning applications over both this calendar year. Planning approvals will add value to the sites and allow for the design of the new normal workplace in sites linked to major transport hubs and amenities. In logistics, we've acquired and joint ventured strategic sites in key locations of Macquarie Park, Western Sydney and middle ring Melbourne. We progressed quickly the planning approvals over these sites to meet strong tenant demand and progress the $3.1 billion logistics pipeline. We've put ourselves in a really strong position. I'll now hand over to Andrew Whitson.

Thanks, Louise. Good morning, everybody. I'd like to start by talking about the results from the residential business. The strength of this result highlights the impact of the consistent execution of our strategy to create highly livable and affordable communities and our agile response to the variable market conditions over the past year. Over the last 12 months, we've delivered 5,319 settlements, which was a strong result in the context of the variable market conditions for 2 key reasons. The first being the strategy to sell affordable homes to owner occupiers, which is again proved to be the deepest and most resilient part of the market. The second has been our ability to accelerate production and releases to respond to increasing demand as demonstrated by Q4 net sales volumes, which were the highest in 2 years. Our default rate for Q4 was 7%. We expect it to remain elevated for some time due to the uncertain outlook. The operating profit for the period was up 2.5% on the prior year, primarily due to strong sales and project disposals, including the capital partnership of Aura in Queensland. We've also selectively restocked on capital-efficient terms during the year in New South Wales and Victoria and further broadened our capital base by establishing a new capital partnership for the development of Katalia in Victoria. Now taking a closer look at our sales performance over the past 5 months since restrictions were introduced in March. And as you can see from the chart on the bottom right, following very low sales in April, we've seen a strong rebound, which has been driven by a combination of factors, including the announcement of federal and state government stimulus, low mortgage rates and supportive credit conditions, customer preferences for lower-density communities and the relative affordability of the product we sell. Outside of Victoria, we expect sales to moderate from the June, July peak over the balance of the first half, but still remain elevated by historic standards. In Victoria, the Stage 4 restrictions will reduce net sales for Q1, but the market will benefit from the recently announced extension of the federal government HomeBuilder grant into the second half. It's also worth noting that civil construction has continued uninterrupted in Victoria under COVID safe plans. With around 4,300 contracts on hand at July 31, we're in a similar position to FY '20. And this year, we'll benefit from margin growth in New South Wales and a full year of settlements from a number of new projects in Victoria. So overall, a strong sales result to start the year, which highlights the ability of the business to respond in an agile manner to changing market conditions and customer preferences. In particular, our investment in digitizing our customer journey has enabled us to not only continue to trade during Stage 3 and 4 restrictions, but also significantly improve the customer experience. This is really important given that COVID-19 has increased customer expectation of their digital experience. And the volume of new inquiry that comes through this digital channel now exceeds 87%. One simple example of this has been the launch of live chat this year, which allows us to be available for our customers 24/7. This channel has generated over 5,000 new leads in the past 6 months and resulted in 151 sales, delivering over $50 million in revenue. It's also worth calling out that our ability to rapidly adjust production to meet changing customer demand has enabled us to increase the release of affordable product to meet the surge in demand generated by the government stimulus. And finally, when we look forward to FY '21, our business is uniquely positioned within the residential sector to drive relative outperformance due to their unique combination of 3 factors. The first being that customer preferences have shifted towards affordable low-density living in communities that provide a high level of amenity. The second is our competitive advantage, which is built on the strength of our brand, our land bank with strong embedded margins and our scale. And the third is the fact that government stimulus and lending is skewed towards a new affordable product that we provide. Now on to the results from the Retirement Living business. I'm really proud of the hard work that our team has done this year to keep our residents safe through both the bushfires and then during COVID-19. The commitment and passion that they show on a daily basis is remarkable. I'm also very pleased to see that our relentless focus on executing our strategy to improve the performance of the business is starting to deliver results, with our sales from our established villages up over 11% for the period. The net fair value of our business has been reduced by $116 million due to the reduction in near-term growth assumptions due to COVID-19, softening of discount rates to reflect the age of some villages and discounting of vacant stock that we own. We've also written off the residual development goodwill to reflect the transition of the development pipeline to land lease communities. Over the past 12 months, we've continued to execute our strategy to maximize occupancy and improve the cash returns of the business. To achieve this, we've strengthened our value proposition and improve the efficiency of our sales and marketing activities. It's encouraging to see this resulting in increased sales. Driving growth of our Retirement Living business through development is a key competitive advantage, and our confidence that land lease community pipeline will be a major growth driver over the medium term continues to increase. We've commenced construction and planning on our first 2 villages at Aura on the Sunshine Coast and Minta in Victoria, respectively, and have a pipeline of over 2,000 dwellings. We continue to remain focused on improving the quality of the portfolio through the sale of noncore villages. So in summaries for the Communities business, despite the market disruption this year, we've delivered a strong result and are well positioned to drive relative outperformance over FY '21. I'll leave it there and now hand back to Mark.

Thank you, Andrew. I spoke earlier about executing our strategy and the importance of customer experience. One of the key things that underpins the achievement of these goals for us is sustainability. We have been consistently recognized for our sustainability leadership over the past decade. And there are many great examples of how this has created long-term value for Stockland's security holders and the communities in which we operate. For example, the initiatives that underpin our market-leading Green Star ratings for master planned communities are critical to our resident 74% livability score, which helps drive referrals. Our commitment to creating climate resilient properties has seen a 65% reduction in emissions intensity, saving $123 million. And our low employee injury rate, leadership in preventing modern slavery and commitment to equality has helped position us as a trusted top 30 brand in Australia. So as you can see, our commitment to sustainability is both tangible and produces strong value for all stakeholders. Turning to Slide 39. One of the more pleasing aspects of the last year has been the measurable progress as discussed in reweighting our capital allocation. We set out to do this 5 years ago, and we'll continue to actively reweight to improve our portfolio quality and produce sustainable returns. Over the year, we settled or have contracted to sell $638 million of noncore retail properties, bringing total divestments to over $1 billion since 2018, in line with our noncore divestment strategy outlined in late 2017. And we acquired or have committed to acquire approximately $1 billion in strategic Workplace and Logistics properties and development sites in FY '20. This reflects our confidence in both the demand/supply fundamentals, particularly for logistics on the Eastern Seaboard and our ability to generate attractive risk-adjusted returns by developing core assets. Importantly, we remain in a strong position to achieve a balanced portfolio over the next 5 years through delivering on our Workplace and Logistics development pipeline. Turning to Slide 40. Our focus for FY '21 is to adapt to the pandemic-influenced environment, to leverage opportunities and continue to execute our strategy. Personally, my #1 goal is to work with the Board and Exco to ensure a seamless transition for the new CEO. Our relentless focus on customer experience will be assisted by our growing, scalable digital capabilities. We'll continue to develop and accelerate our $3.1 billion Logistics and Business Park pipeline in line with customer demand, as Louise described. And make opportunistic residential land acquisitions to leverage Australia's strong, medium to long-term demographics and macro drivers. Our guidance remains withdrawn, given continued uncertainty surrounding the pandemic with key future variables that we're watching closely to gauge risks and opportunity, including rates of new cases, government restrictions, government stimulus and macroeconomic conditions. This result reflects the hard work and commitment of our team. In particular, those on the front line at our town centers, retirement villages and other properties. Given our capital strength, diversified business model and competitive advantages, I'm confident in our relative position going into FY '21. We will continue to focus in a disciplined way on executing our strategy, and thank you for your ongoing support. I'd now like to open up the lines for Q&A.

Our first question is from Stuart McLean from Macquarie.

Just in terms of the asset sales, noncore asset sales. So you achieved the goal of the $1 billion. Just given you're selling assets at around 30 June book values, can Stockland do any more noncore asset sales to get closer to that 1/3 capital allocation?

Stuart, it's Louise here. Yes, I think as you can see, we've certainly done a good deal over FY '20, a good number of deals, and they're slightly ahead of 30 June book value by about 1.1%. We're still aiming for that 1/3 of the portfolio being held in retail. And currently, we're sitting at 39%. So we'll continue to assess assets for sale over time. And at a right time to sell, then we will look to sell those assets. So a continuing focus of ours.

So is the right time over the next 12 months or more of a 12- to 36-month type journey?

It depends on the type of assets, Stuart, and the types of buyers. So you'll see from the assets we've sold recently, they continue to be around that $100 million mark asset and the syndicates continue to be in the market for those types of assets. So it's got to be right asset size. There's got to be the buyer pool for them. So all that has to align.

Okay. And then on residential side of things, just on the margins. Are you able to provide what the underlying margin was kind of ex super profit -- superlot profits? And in the release, it says that margins in '21 will benefit from margin growth in New South Wales. Just wondering how much underlying margin improvement we should see next year.

Yes. Thanks, Stuart. So if you ex out the superlot sales, that brings down our margin to around 17% for the full year, not 70%, 17% for the full year. Yes, the way to think about margins for next year, and we obviously haven't given margin guidance, but there's a few factors that take into account. We've mentioned the margin expansion in New South Wales, and that's really been on the back of price growth that we've seen in the last 12 months, with prices up 7% to 10%. And with those, Elara and Willowdale nearing completion in the next 2 to 3 years, that flows through directly into margin. So that's one factor. You've obviously got more settlements coming out of WA which are lower margin. But the key swing factor to think about is volumes out of Victoria is really ultimately going to dictate where our margins land relative to this year.

And just on that, are you able to give an idea of Victoria resi sales over the month of August to date? Are they as bad as the trough in April and May? Or are they holding up a little bit better than what we saw?

Yes, it's interesting. What we're seeing in Victoria at the moment under second lockdown, the difference to the first lockdown from a new inquiry point of view, we're seeing about 3x the number of new leads than we saw during the first lockdown. So leads are actually holding up at above the pre-COVID level -- sorry, it's about around the pre-COVID level in the second lockdown, which is positive. From a sales point of view, obviously, a lot more subdued because people aren't able to get out and inspect properties. So sales, to give you some rough numbers, in June and July, we were seeing 40 to 50 net sales per week. Now we're seeing 10 to 20 a week. But with the level of new inquiry that we've got, it gives us some confidence that as restrictions are eased, you're going to see a good recovery. The extension in the federal government HomeBuilder grant through to the end of March is also pretty material for that market.

Great. And one last one, just on the cash flows and it's residential related. It looks like there was a significant reduction in infrastructure spend and in future stage cost spend. Are you just able to comment on if that's sustainable, is there some catch-up that needs to be made there? Looks like it's down about 30%.

Yes, Stuart, Tiernan here. Look, as I said in my speech, our run rate for Devex in resi went back to the long-term average run rate by the end of the year. So really, all that happened in mid pandemic is we probably only stopped Devex for 4 or 5 weeks. I mean I reviewed every payment run every week for the whole time of the pandemic. So I could see where we were spending our money. And most of where we were spending our money were on projects that we were doing settlements on in FY '21. And in addition to that, so the long-term run rate is about $900 million a year in terms of Devex, if you look back over history. The stage costs, so -- and it's a timing issue, really, because last year, we had the election, so we had we had built up a lot of stock as we came into FY '19 in 30th of June in readiness for delivery of all the settlements during FY '20. And then we entered '21 with stock on the ground and so -- and with Devex back to long-term averages. So I'd expect that we will be back to long-term averages during FY '21. But most of that increase is going to deliver settlements beyond '21. So we've already got -- we've already spent the money on stage costs for FY '21. The majority of the increase will be stage cost for beyond '21 and also EMW's stage major works, infrastructure works for some of the new projects that we're bringing on stream over the next few years. So I think summarizing, it's sort of back to the normal run rate and expected, and FY '20 didn't really decline significantly relative to the long-term average.

Our next question is from Richard Jones, JPMorgan.

Andrew, just in terms of WA resi sales, there's obviously been like a kind of spike in sales in June and continued strong numbers into July. Could you just give us a bit more color as to what's driving that strength in WA?

Thanks, Richard. The -- yes, really on the back of the federal and state government stimulus. So as a first homebuyer in WA, at the moment, you qualify for -- you have $55,000 of grants plus stamp duty savings. That totals up to about $69,000 of total savings. And yes, that's been a real catalyst for that market to respond. There is some pent-up demand there, very low sales there. For the last couple of years, well -- total market was really sitting at around that [ 400 ] a month and then you've seen that triple in June and July. So a strong response on the back of that -- the announcement of those grants. And yes, I think with the way the state government have dealt with the pandemic, the easing of the lockdowns, yes, there's confidence returning to WA.

Okay. And just in terms of project profit within residential, can you just clarify how much was booked in '20 and how much is kind of held back for '21?

Are you talking from superlot sales, Richard?

Well, predominantly from The Grove and what's the other one you had, Aura?

Yes. So that was...

Merrylands Court, I think, was the other one.

Yes. So that total number was [ 102 ]. And then there's [ 13 ] from a second payment or third payment at The Grove. Third payment from The Grove coming next year.

Okay. And then just a separate question. I think you talked about $480 million of post balance date sales in predominantly retail, one in industrial. Did I pick up you also said about $1 billion of acquisitions, and is that -- Kemps Creek and Macquarie Park in that number?

Yes. I think Mark referred to the $1 billion. And yes, that is the JV with Fife Group at Kemps Creek and the payments on that as well as the agreement to purchase the J&J site at Macquarie Park.

Also, the other half of Piccadilly, Carole Park, Richlands and also the Willawong Fife JV.

Yes. That's for payment the same year.

Our next question is from Sholto Maconochie from Jefferies.

Just [ about in total, a few ] questions, so I'll be quick. Just resi asset sales, what percentage of book value were they below the December and/or '19 number -- the '20 number in June for retail?

Sorry, are we talking value? I thought you started with the resi question. I switched off. I was thinking Andrew was going to answer -- sorry, Sholto.

That's all right, my bad. On retail, what percent of discount to December and June values were they at?

So slight premium to June, about [ 1.2 ].

Yes.

And about [ 10.8 ], I think, discount to 31 Dec.

December, yes.

Okay. And then just on -- for Andrew on resi, the contracts on hand, really, really strong result there. Do you expect Victoria to announce some stimulus packages similar to the other states post the lockdown easing, and that should be a big driver of the growth on that resi lot? Do you have an expectation there?

Yes. The state government down there, Sholto, have indicated that they're looking at broader stimulus measures to help the recovery. So yes, there's indications that similar to WA, there's a potential for additional state government stimulus, whether it comes immediately or whether it comes with the roll-off of the federal grant is probably the piece that's reasonably uncertain. But they've shown to be pretty proactive in this space to understand the multiplier effect of the construction industry, and they understand that it's important to keep construction jobs going.

And then just finally on the retail to wrap it up. Noni B said they're closing 500 stores. One of your peers has 129 that was locked out. Do you have a number of how many stores you are up to the Noni Mosaic brands?

We have 84 of Mosaic brand stores in our portfolio.

Okay. And are they in discussions or closed on them with you or it's too early?

I won't comment on an individual retailer. We've just got ongoing negotiations with Mosaic at the moment.

Next for a question is James Druce from CLSA.

Congratulations, Mark, on a pretty resilient result. How should we be thinking about the distribution in FY '21?

Well, I think given we haven't given guidance, we obviously can't comment specifically, but yes, we'll look to that payout ratio guidance of 75% to 85% of FFO as a starting principle. And I guess, just as important, we look at AFFO to ensure that we have a sustainable level of distribution. And as we've tried to balance with the distribution this time, we recognize that distribution and by definition yield is very important to our investor base. So it's something that we continue to focus on.

Yes. Okay, clear. And you've got 190 holdovers, just what's that percentage as a percentage of stores?

Yes. We've got about 3,000 retailers. So that's about 6%.

Okay. And just on the resi business, can you just talk about the ability to sell and settle in the same financial year? Probably more thinking about WA at the moment, given that's where the strength is, but more broadly across the business as well?

Yes. Thanks, James. There's a couple of things to think about there from a production point of view. When you look at -- and we've been, obviously, pretty focused on the first half when we're looking at the stimulus out there and the way that it's driven demand. Yes, at the moment, we've got around 2,850 completed lots on the ground, of which about 2,000 of those are sold and due to settle in the first half. We've then got under production another 2,300 that we can settle in the first half, recognizing that, generally, what we sell in November and December will settle into the second half. So production-wise, for us, we're in a really good position of -- we've done the hard work to get approvals in the door. And you see through the Devex over the past years, we've done a lot of the heavy infrastructure work. So our ability to respond quickly to that changing demand, we can do that. And there's also been an improvement in the planning environment. We're seeing state governments recognizing that planning is an economic lever and approvals are flying more quickly than they were. So all of those things put us in a good position to meet underlying demand as opposed to this year being production constrained.

Yes. That's clear. And just on the 7% default rate. That's on unconditional contracts, I assume. What was the cancellation rate for conditional contracts?

Yes, that's correct. That default rate was on unconditional. Cancellation rates have sat around -- on average, it's just below 20% for the full year. That varies by location. New South Wales is down below 10% and then the 3 other states are around 20%.

Our final question is from Tom Bodor from UBS.

I just wanted to sort of ask around that cancellation point following on. How are you dealing with buyers that have had a major change in circumstances due to the pandemic? Are you generally showing a degree of discretion in refunding their deposit?

So we -- there's a couple of things we're doing there, Tom. Obviously, prequalification is really important at this stage. So we go through a pretty rigorous prequalification process to understand their capacity to settle, so -- which requires a letter of eligibility from a financial institution to confirm their ability to get credit to settle. So that's really important upfront. We've always run a reasonable approach on hardship, and we've got a hardship review process that we look at with regards to people's circumstances. So we've taken a reasonable approach to that, and we'll continue to.

Okay. And then on the retirement business, you talked about reducing price on -- [ in ] stock. Can you just talk to the price -- level of price reductions? And then a second follow-on from that is now you've written the business down quite considerably, do you believe it's been written down to the point where you will be able to get external capital in?

Yes. So just a couple of things to pick up on that. Our strategy and when you think about that business, it is very much an occupancy-driven business. That is how you improve the cash returns and improve that ROIs to get your occupancy up. So over the past couple of years, we've done a lot of hard work to reposition villages, strengthen our value proposition, and we've adjusted relative pricing. Pleasingly now, we're seeing that resulting in good sales momentum. So if you look at sales for this calendar year, in every month, except the 2 lockdown months in April and May, we exceeded 60 sales in our established portfolio, which is good strong momentum and significantly up on prior year. So that indicates that the work we've done around adjusting pricing and strengthening the value proposition is working. The adjustments that we've made in book value near-term growth rates was really reflecting the COVID impact on the established market. The softening of discount rates on older villages was the additional CapEx -- to reflect any additional CapEx we need from a value proposition there. And then carrying value, it's really adjusting of stock we own. Stock that we won't sell within the first 12 months, we adjust the carrying value as opposed to discounting it further. So that's what's been reflected there. We -- obviously, one of our strategic priorities is still to introduce a capital partner into that business. We're cognizant of the current environment, but we're still progressing on that initiative.

Okay. And then on the Piccadilly and Walker Street developments, I just would like to get a feel for the sort of level of pre-commits you would require before kicking that off from a leasing perspective.

Yes. I think we'd be looking around the 40% to 50% mark.

Okay. Maybe one final question. Can you just talk to what happened to the foot traffic in the Wetherill Park asset post the -- COVID [ came ]? Did you notice a material change relative to the other assets in the portfolio?

Yes, we did. Yes, we did. We saw that foot traffic drop as the Thai Rock cases unfortunately grew. We saw that foot traffic drop around 30%. And then week by week, it's come back. So it's now sitting a bit lower than the New South Wales average. It's sitting at around 10% down, whereas the New South Wales average is sitting at sort of around 5% to 6% down. But we're noticing week on week, it's gradually coming back up. And it was always interesting, and I think a great point made by the Chief Medical Officer when those cases were announced, and that was to say that a deep cleaned asset was probably the safest asset to visit in the country given how well it had been cleaned post that outbreak. So we've continued to ensure our customers -- or assure our customers that we clean, we are really on top of all those issues. But it did have an impact for a few weeks.

We have no further questions. I'm now going to hand over to Mel to go to Menti.

Thanks, everybody. We're going to switch to several questions that have come through on the Menti app. I have been reliably informed that not everyone has good reception working from home, so this has been a request. The first question comes from Adrian Dark at Citi. Could you please discuss recent events in Victoria and their impact on Stockland's residential business? What are your expectations for this market going forward?

Yes. Sure. Thanks, Adrian. Yes, I think I mentioned in response to a prior question that we're still seeing good inquiry that's around the levels pre-COVID that while sales have been more subdued, our expectations would be, as restrictions are eased, we would see a rebound, similar to the rebound that we saw coming out of the first lockdown. Obviously, extension of HomeBuilder will benefit that market into the second half, and then the willingness of the government -- of the state government to also support the construction industry is the other thing to think about there.

Importantly, we've been able to maintain construction on master plan communities within the government constraints as well for civil works.

A second question from Adrian Dark, this one is for you, Louise. Could you please discuss any changes you may be making to retail leases since COVID's impact became evident? For example, changes in how rent is determined, grown over time and lease length.

Thanks, Adrian. We don't have an intention at this stage to change the structure of our leases in relation to how we charge rent. What we are looking at is to ensure that we could include online sales when those goods are distributed from the retailers at our assets. So that's really the change you'll see continuing to grow in our leases, that omnichannel approach to retail.

One for Tiernan. Of the $38 million of provisioning, you've collected a further $20 million at July, so the provision would reduce to $18 million. And would this be written back in first half '21, all else equal? Or is there more provisioning expected?

Who was that from?

That's from an unknown.

An unknown. Okay. So look, that's not quite right. So if you look at Slide 12 in the pack, at the end of 30th of June, we had $102 million of receivables owing. To deal with the negotiations that were ongoing at that date, we set aside an amount of $29 million for abatements and $38 million for estimated credit loss. After those 2 amounts, we were still owed $35 million by tenants who did not come under the code or did not come under a negotiated outcome under any other case-by-case approach. And that $35 million is what the $20 million that we collected related to. So we are now owed -- still owed, at that point in time, $15 million of the $35 million after collecting that $20 million. The -- it's really too early to say whether there would be any write-back of either the abatement or the ECLs. We think based on the progress we've had so far in terms of around half of the deals being done that those provision amounts, so those amounts set aside are appropriate. And we'll just continue to assess that in time. Of course, if the negotiated outcomes are better, then certainly, we will have to work out what to do with those provisions at some future point.

Thank you, Tiernan. And the final question for Louise, what have leasing spreads been trending in the fourth quarter? Any view on how these might look over the next year? And that's from Lauren Berry at Morgan Stanley.

Thanks, Lauren. We delivered in the fourth quarter and for the total year FY '20 within the guidance that we've given. And we said that we would have rent reversions between 5% and 7%, and we've delivered at negative 6%. Prior to sort of March, we were at slightly better than that. So for all deals done to 30 June, new deals and renewals, we delivered negative 6%. And I think it will be -- time will tell as to what FY '21 looks like. We're 50% of the way through negotiations as we said. We're negotiating renewals and new deals there, but it's really going to be on a case-by-case basis, and we'll continue to work through that.

Thanks, Louise. We have no further questions. I will now hand back to Mark for his closing remarks.

Thanks, Mel, and thanks, everyone, for joining us today. As discussed, we're well positioned, we believe, in a difficult environment to leverage our relative competitive advantages. And in that regard, we look forward to talking to all of you more about our business in upcoming meetings. Enjoy your day and stay safe. Thanks.