Stockland (SGP.AX) Earnings Call Transcript & Summary

Welcome everyone to the Stockland First Half 2023 Results Announcement. There will be a short presentation followed by a Q&A session. [Operator Instructions] I will now pass over to our first speaker, Mr. Tarun Gupta.

Good morning. My name is Tarun Gupta, CEO and Managing Director. Welcome to Stockland's financial results update for the first half of 2023. Before we begin, I would like to start by acknowledging the traditional owners and custodians of the land on which we meet, the garage people of the Euro nation and pay my respects to elders past, present, and emerging. Joining me today is Alison Harrop, our CFO; Louise Mason, CEO of Commercial Property; and Andrew Whitson, CEO of our Communities business. Our first half '23 result reflects the benefits of the execution of our strategy and our continued focus on driving strong operational results. Our residential rental and Empire capital partnerships contributed new high-quality management and development income streams this period. And I exit from the Retirement Living business, which was completed over the period, deleveraged our balance sheet, placing us in a strong capital position. This provides us with flexibility to capitalize on opportunities across our business at this stage of the cycle. Today's result also demonstrates the strength of our diversified platform. The contribution from our Commercial Property segment was up strongly, reflecting new management and development income streams, along with a significant uplift in net operating income from our logistics and town center portfolios. The strength of our commercial property platform and our land leads business has enabled us to deliver FFO growth this period despite our MPC settlement volumes being impacted by extreme wet weather over the half. We expect weather-related production delays to also affect full-year settlement volumes, with approximately 500 settlements deferred into FY '24. We are maintaining our full-year guidance range. This reflects outperformance from our Commercial Property segment, along with margin expansion in our MPC business as a result of a more favorable geographic settlement mix and development cost savings on completed projects. Our diversified platform provides us with multiple levers of high-quality growth and our deliberate clearly defined strategy is focused on generating resilient returns through the cycle. We believe that we are now at the right stage of the cycle to set us up for future growth in our communities business. We have extended our existing relationship with Mitsubishi Estate Asia through an agreement to invest in master-planned communities with a focus on new on-market opportunities. The Stockland communities partnership represents the next step in the implementation of our strategy. The new engagement with Mitsubishi may include a small seed asset from our existing portfolio and will provide origination and production synergies with our existing land lease residential partnership, broaden our market reach while also enhancing our return on invested capital, and creating new sustainable income streams. We have been disciplined in implementing our strategy over the half. We have continued to reshape our portfolio, executing on just under $270 million of non-core town center disposals at a premium to book value, delivering additional high-quality income from our logistics developments and driving further growth in our land lease business. Our MPC sales volumes over the half were below historical averages. However, our scale and the quality of our brand enabled us to outperform the broader market and significantly grow market share in this segment. We are progressing with the delivery of our $41 billion development pipeline. By the end of FY '24, we expect to have completed $1.7 billion of the $1.8 billion of logistics and workplace projects, which are currently underway. We are planning to launch 15 new master planned and land lease communities projects by the end of FY '24, positioning us strongly for the longer-term fundamentals underpinning the residential market. Our strategy is focused on driving sustainable growth. Our commitment to being a leader in ESG is at the core of our strategy and an essential driver of our long-term performance. As one of Australia's largest developers across multiple sectors, we are embedding strong ESG credentials into the product that we create. Our entire logistics development pipeline is now registered as 5-star Green staff. Our MPC business continues to support energy transition with Wildflower and WA, our latest all-electric community. And approximately 80% of our land lease communities homes currently under development have solar as a standard inclusion. We are well progressed with a comprehensive review of our ESG strategy, which includes further enhancements of our efforts in climate resilience, circularity, and social impact. We look forward to sharing further details with you later this year. So, now turning to the first half 23 result. Funds from operations and FFO per security were both up marginally relative to the first half of '22 to $353 million and $0.14, respectively. Our NTF security is stable at $4.31 per security. Independent valuations were up slightly with the cap rate softening offset by income growth. Our commercial property portfolio continues to perform strongly. Comparable FFO growth for the period was 3.2%, with leasing spreads accelerating to 2.5% for the town center portfolio and up almost 20% for our logistics assets. The contribution from our MPC business was impacted by weather-related production delays. However, we finished the period with over 5,800 contracts on hand, providing good visibility to the second half of '23 and into FY '24. Our MPC sales rate for the December quarter were above September quarter levels, and we have seen further improvement in both inquiries and sales in January. However, we do not expect to see a material improvement in residential market conditions until the interest rate environment stabilizes. Our MPC business is benefiting from a flight to quality at this stage of the cycle, and the underlying fundamentals of the sector remain sound with strong labor market conditions, increasing levels of net overseas migration, and a chronic undersupply of housing stock. The contribution from our land lease business was up strongly this period, and we have positioned it to be a key earnings driver for us in future periods. Demand for our land lease product remained resilient over the half, resulting in further price growth on new releases, as Andrew will discuss. I'll now hand over to Alison to take us through the financial results in more detail.

Thanks, Tarun, and good morning, everyone. We have maintained a very strong capital position over the first half of 2023. We ended the period with gearing at 22.1%, down from 23.4% in June 2022 and toward the lower end of our 20% to 30% target range and with available liquidity of 1.4 billion. We expect gearing to remain toward the bottom of our target range for the full year and to maintain liquidity of over $1 billion in the current environment. Our weighted average cost of debt for the first half of '23 was 4.1%, and we expect this to be approximately 4.4% for the full year, consistent with our expectations last August. This is assuming an average BBSW rate of approximately 3.2% over the full year. Our fixed hedge ratio over the first half of '23 on our debt portfolio averaged 59%. And for FY '23, we now expect this to average approximately 60%. We continue to actively manage our interest rate exposure. And since the 31st of December, we have added a further $300 million of forward start hedging, providing greater certainty over interest costs in future periods. Turning now to FFO. Funds from operations for the first half of '23 was up by 0.7% to 353 million. The contribution from our commercial property business was up by 15%. This reflects strong comparable FFO growth for both the TAM centers and logistics portfolios, along with incremental income from logistics development completions over FY '22 and the first half of '23. The result this half also includes development profit and fee income relating to our Park partnership, along with trading profits relating to Melbourne Business Park. Communities FFO was down by 12%, driven by lower NPC settlement volumes. The contribution from our land lease business was up strongly, in part due to cashback profits relating to the transfer of development communities into the residential rental partnership, and we expect such profits to be an ongoing component of our results. Unallocated corporate overheads were up versus the first half of '22. This reflects inflationary impacts across several cost lines, along with investment in the business to support the execution of our strategy and a normalization of discretionary costs post-COVID. We expect corporate overheads for the second half to be broadly in line with the first half, resulting in a lower rate of growth on a full-year basis. Net interest expense was down by 4 million or 10%, and this was driven by the net impact of lower average net borrowings, a higher weighted average cost of debt, and higher capitalized interest, reflecting a higher level of development net funds employed. Our tax position remains as outlined at the full year '22, and we have continued to benefit from some remaining carryforward tax losses for the half. Tax payable for FY '23 is now expected to be at the lower end of the previous guidance range of 5% to 10% of pretax FFO. AFFO per security was up by 5.7%. This was primarily driven by lower tenant incentives, in particular for our town center portfolio. We expect maintenance CapEx and tenant incentives to be higher in the second half than the first half, but to be slightly below FY '22 levels on a full year basis. You will have noticed that we have changed the way in which we present some of our segment detail. We've made these changes to reflect the new and growing earnings streams that we are generating from our partnerships and to provide greater transparency regarding specific income and expense lines and how we manage the business and create value. The changes are detailed on Slide 11 of the presentation, and I'll quickly run through some of the more material items. For both, the commercial property and communities business is we are now separately disclosing management income, given that this is becoming a more material component of our earnings mix as we grow our partnerships. This was previously netted off against overheads for commercial property and included as MPC FFO for communities. We now also separately disclosed development income for commercial property and rental income for communities. You will note that we now show Communities' net overheads as a separate line item, whereas we previously allocated these costs to the MPC or land lease businesses. This means that we will also be changing how we refer to MPC and land lease development margins. We have provided a full reconciliation between the old and new methodologies for NPC in their nexus. And I will call out now that we are guiding to an MPC margin of around 26% for the full year, which equates to a margin of around 19% under our old methodology, and this compares to our previous guidance of around 18%. For land lease, our margin guidance for the full year of 22% to 27% is in line with the 10% to 15% target that we have previously spoken to. Now on to cash flows. Operating cash flow of minus $174 million or plus $192 million before land acquisitions was down significantly versus the first half of '22. This reflects timing differences in development expenditure and revenue across LLC and MPC and the significant skew to the second half for the master plan community settlements. We expect operating cash flow to return to positive by June '23. So as you can see, our first half 23 result reflects the initial financial contributions from our new strategy and a very strong balance sheet position. I'll now hand over to Louise to take us through the commercial property result.

Thanks, Alison, and good morning. The strong commercial property numbers are the result of the work done over the last few years to remix and reposition the Town Center portfolio and divest noncore assets. The development pipeline over our geographically well-placed logistics portfolio, the planning, delivery, and capital partnering of workplace projects like M_Park, and the deep capabilities of the team to deliver. Our strong results reflect the execution of our strategy and the resilience of our diversified portfolio through the cycle. Our growing logistics exposure and the repositioned core portfolio across our Essentials-based town centers have underpinned our strong results. In logistics, we're delivering on the development pipeline with $1.2 billion of development completions on track across FY '23 and '24. We're 92% leased on the FY '23 pipeline. This large logistics development pipeline is delivering high-quality income growth. In workplace, Construction is nearing completion on the first 2 buildings in Stage 1 of M_Park with the final 2 buildings in this stage to begin later this calendar year. We continue to progress design on affinity and authority approvals on Piccadilly, adding value through these stages and maintaining timing optionality. Our high-quality repositioned Town Center portfolio delivered comparable FFO growth of 5% and positive leasing spreads of 2.5%. Our rents are set at sustainable levels with an occupancy cost of 15.2%, down from 15.9% at first half '22. We continue the repositioning and reweighting of our town centers with $266 million of noncore disposals in the first half at a 4% aggregate premium to book value. We've also completed master plans on the logistics, workplace, and retail assets with land bank opportunities for both densifications of logistics and mixed-use. Future town centers associated with the communities business are also proceeding through the planning phase. The $10.8 billion commercial property portfolio delivered 3.2% positive comparable FFO growth. This was underpinned by 5% comp growth in town centers and 4.4% growth in logistics, both driven by positive leasing spreads. We're seeing increased logistics FFO contributions from ongoing development completions under the $6.4 billion pipeline. Rent collection and occupancy is strong in all sectors and new business lines from development and management incomes are making a meaningful contribution to FFO. The portfolio delivered a net valuation uplift of $30 million. 86% of assets by value were independently valued over the first half. In Logistics, cap rates expanded 33 basis points to $4.42. This was offset by strong market rent growth in a well-positioned portfolio with a $48 million uplift. The workplace expanded 12 basis points to 5.41%. This is a portfolio positioned for future workplace and mixed-use developments, and we'll tend to see higher incentives and lower rental growth as the way shortens. And town centers are at 5.9% with a $20 million uplift driven by strong performance and rental growth across the Essentials-based assets. In logistics, we've delivered comparable FFO growth of 4.4%, underpinned by the 19.6% positive leasing spreads. Occupancy remains at historic highs of 99.9% and rent collection was at 100%. The portfolio WALE at 3.4 years allows us to capture further rental growth. The logistics pipeline is enabling growth, and that growth livers high-quality income for the group. The $6.4 billion pipeline will see approximately $1.2 billion in value completions across FY '23 and '24 with $550 million forecast in FY '23. As you can see, we have over $4 billion in master planning, and we'll continue to see these opportunities progress over the coming periods. Over 92% of the logistics pipeline to be delivered in FY '23 is now leased and more than 36% of the FY '24 pipeline. And we're seeing strong rental numbers further supported by reduced incentives on these developments. We're delivering 5% to 6% yield on costs. These development opportunities in very well-located sites underpins the strategic objective of reweighting the portfolio to the logistics sector with the majority of the $6.4 billion pipeline, targeted for delivery over the next 5 years. The workplace portfolio is well-positioned for future development. While we saw comparable FFO a negative 3.4% and re-leasing spreads at a negative 1.1%, this is largely due to rebasing of rents at one asset. However, the workplace portfolio shows strong occupancy at 92.7% and positive spreads on new leases at 2.1%. The WALE of 4.4 years enables our development options. The $5.8 billion development pipeline in the workplace is progressing well with the ongoing delivery of Stage 1 of M_Park and the lodgment of the development proposal for the $1.3 billion Stage 2. At Affinity Place in North Sydney, we're focused on completing detailed design, undertaking leasing discussions with potential tenants, and capital partnering. And Piccadilly is progressing through planning with the City of Sydney. Our capability in managing detailed approval processes is adding value to these assets, whilst we control timing and commencement based on market conditions. We're delivering strong performance in our town centers with total comparable sales growth of 10.6% and specialty sales growth of 11.9% when compared to the corresponding recovery period. At more than $10,000 a meter, our specialty sales are 13.6% above the Urbis average. 75% of sales is in essentials-based categories with our remixing combined with the disposal of non-core assets, resulting in strong sales performance. In Town Centres, we delivered comparable FFO growth of 5% and positive leasing spreads of 2.5%, with 3% rent growth on renewals. We've increased occupancy to 99.4%. Rent collection was 98.8%, and the debt position is below pre-COVID levels. The specialty occupancy cost is well positioned at 15.2%, giving headroom to absorb any slowdown. And incentive levels have decreased to 9.9 months. Our remixing and repositioning of the Town Center portfolio has created resilience. This underpins our performance and gives us a sustainable base moving forward. I'm very pleased with the first half 23 results for commercial property, which highlights our strong operating performance across the assets. We've strategically positioned the sectors to capture growth, and this is managed and delivered by a highly capable team. We're executing the logistics development pipeline, delivering meaningful and growing income to the group. We are on track to deliver $1.2 billion of the development pipeline over FY '23 and '24 with approximately $550 million to be delivered in FY '23. In workplace, we will continue to add value through planning and design of both Affinity and Piccadilly and the delivery of Stage 1 of M_Park whilst aiming to accelerate Stage 2 with commencement forecast in FY '25. We will continue to explore upcycling and leading-edge ESG initiatives with these projects. Our Essentials-based Town Centers portfolio is resilient in an inflationary environment and also provides future mixed-use opportunities to maximize returns. I will now hand to Andrew.

Thanks, Louise, and good morning, everyone. November 21, we committed to 3 key strategic priorities for our communities business. Over the past half, we've continued to execute at pace, including extending our leadership position in master-planned communities with a strong increase in market share in the December quarter. We continue to scale our land lease business with a significant ramp-up in development activity. And as Tarun mentioned earlier, we've extended our existing partnership with Mitsubishi States Asia through the agreement to invest in master-planned communities, supporting the growth of our platform and delivering a high-quality income management stream. This has enabled the communities business to deliver a solid first-half result despite the moderating residential environment and wet weather impacts. Now, on to the results for the Master Planned Communities business. Production during the half has been impacted by extreme wet weather along the eastern seaboard and has resulted in some settlements being pushed out to early FY '24. Our full-year operating profit margin forecast has increased. This is being driven by the deferral of settlements from lower-margin projects in Victoria and Southeast Queensland and the realization of cost savings from projects that have been recently completed. The default rate remains in line with the long-term average, with good visibility to settlements for the next 12 months with almost 6,000 contracts on hand. We've also seen cost escalation moderate with the supply chain improving. As expected, consecutive interest rate increases impacted by sentiment over the first half. However, we've seen recent signs of an increase in inquiry and sales over January and into February, particularly for a more affordable product. So overall, notwithstanding the improving inquiry and sales in January, we expect customers to remain cautious until interest rates stabilize. I'm particularly pleased with the strong market share growth in the December quarter, which has been driven by a competitive advantage that's built on a unique combination of 3 elements: The first, our land bank with strong embedded margins and increasing activation with the launch of a further 8 new projects over the next 18 months. The second, our brand, which is particularly important at this stage of the cycle where there's a flight to quality. And the third, our scale, which enables us to improve sales and marketing efficiency by leveraging data and managing supply chain risks to deliver at a low cost. Now our outlook for the next 12 months. Whilst the stabilization of interest rates is required to drive further improvement in customer confidence and conversion rates, structural drivers remain supportive with a rebound in net overseas migration and constrained land supply. Victoria and New South Wales, we expect affordability constraints will see pricing moderate further from an elevated base. However, the rebound in net overseas migration will support increased sales volumes. With relative affordability and interstate migration supporting Queensland and WALE, we expect these markets to stabilize over the next 12 months. Turning to land lease. When we acquired the Housing business, we set out to scale our land lease business at pace, and that's exactly what we've achieved, delivering strong settlement margin and FFO growth for the half. And we remain on track to deliver our guidance for the full year. We've also grown our capital partnership with Mitsubishi States Asia with the transfer of a further 2 sites into the partnership, generating cash back to profit. Price growth across our communities under development has exceeded 5% over the past 6 months despite the softening established housing market. This demonstrates the resilience of the over-50s market and the strong value proposition of the communities we create. We've reduced the number of new releases across our communities under development during the first half to allow production to catch up following a period of strong demand. Our established portfolio is approaching 2,000 homesites and has retained 100% occupancy and delivered 6.3% rental growth. The team has continued to progress our development pipeline, and we're on track to launch 7 new communities progressively over the next 18 months, more than doubling the number of projects in active development. This will deliver more cash-back profit when these sites are transferred into the partnership and drive significant growth in home site settlements over coming years. So in summary, we've made significant progress in reshaping the business through the execution of our strategic initiatives. And the master-planned communities business and land lease business are continuing to demonstrate resilience. I'll leave it there and hand back to Tarun.

Thanks, Andrew. So in summary, our first half '23 result reflects the execution of our deliberate and clearly defined strategy and the benefits of our diversified model. Our town centers portfolio continues to leverage its focus on essentials categories, generating strong sales growth and positive leasing spreads while maintaining sustainable occupancy costs. Our well-located high-quality logistics portfolio is capturing strong rental growth, and we are generating additional high-quality income as we execute the $6.4 billion logistics development pipeline. Our $5.8 billion workplace development pipeline provides us with a significant opportunity to add value and create new management, development and rental income streams. We will remain disciplined in de-risking these projects regarding pre-commitment, third-party capital requirements and market timing as we progress the pipeline. With our new arrangement with Mitsubishi, we are focused on maximizing the opportunities that this stage of the residential cycle will bring while positioning our MPC business for the recovery phase through increased activation of a land bank. Demand for our land lease product has remained resilient. We expect settlement volumes to grow materially in future periods, driving higher development, rental, and management income contributions from this business. Finally, the strength of our balance sheet provides us with the capacity to fund our near-term development opportunities while also providing capacity to take advantage of redeployment opportunities alongside our capital partners. We will now open the lines for question and answers.

[Operator Instructions] Our first question comes from Tom Bodor from UBS.

I think probably the first one might be for Andrew, but I'd be interested in the price point of your contracts on hand versus what you were settling in first half. Have you seen any notable change? I mean, I think you mentioned mix has changed. Have you noticed any material change in the price of those contracts?

So yes, thanks, Tom. The price of the contracts on hand versus what we said was up 11%. Yes, and that's reflecting the strong price growth that we saw through really the prior 12 months when you look at that overall blend across the states. Is that answering your question?

Yes. Now, that's great. And then I think in the prior result, you mentioned there was an allowance for sort of valuations not coming through that you've got for each settlement. Can you just talk to how that's been utilized and how banks are approaching valuations settlement, please?

Yes, sure. The valuation performance through the first half has been good. We've continued to see valuations supporting settlement contract prices, and we've seen banks performing well. So yes, that's really driven our default rate, which sits around that long-term average of around 3%. And overall default volumes have been pretty stable. So, performing well. We're still carrying for the second half, that $10,000 a lot for all settlements in Q4. So that equates now to over $25 million that we're carrying there. I wouldn't expect to utilize that on every contract. What we would see if valuations come under pressure, that there would be a portion of them that we would look to help bridge that equity gap.

That's great. And then just a final one, if I may. The decision to sort of call out the overhead costing communities. I appreciate this is a focus to invest in this part of the business to grow MHC particularly. But do you expect that there will be continued step-up in cost as the business grows? Or is it -- where do we see overheads evolving in the next couple of years here?

Yes, and probably break up MPC and land lease. MPC for us -- we're looking to continue to scale it up and amortize that overhead over a greater number of lot settlements. But we've got a platform established that is readily scalable there where we can drive more volume through the existing overhead. Land lease, we're in a ramp-up phase. With those 7 new launch projects, we're going to see development settlements ramp up significantly over the coming years. And you'll see growth commensurate with that as we continue to progress that business. But more direct project-related overheads, Tarun.

And Tom, you will note that we're disclosing the management income we get starting to get from our partnerships. So in the communities business as time goes on, both through the communities partnership and land lease, you'll see management income that will provide the operating leverage of the overhead we have. So, our intention is to improve operating leverage in our platform over time.

Our next question is from Caleb Wheatley from Macquarie Group.

My first question is just on guidance going into the second half. So [ resue ] settlements obviously down about 500 lots. It looks like your logistics development completions are also coming down a little bit. I'm conscious of taking a bit more margin out of the residential side of the business. But just keen to understand, particularly that commercial property side, what's the price to the upside there? And what sort of profit we should be expecting out of that part of the business, please?

Yes, Louise here. So, I think performance-wise, we would expect to see a continuation. We start to see some of the income coming in from the logistics pipeline towards the back half. It's only small in FY '23. It's about $4 million, $5 million from that logistics pipeline. And then the balance of that $550 million of completions comes in a full year in FY '24. In terms of trading profits, you saw just under $20 million from Melbourne Business Park, expect about $5 million to $10 million in the second half and around the same number from M_Park that you saw in the first half.

And Louise, the other is obviously, was just going to add the Town Center portfolio. The income is growing. The leasing spreads are growing. So that will also support the second half.

Yes. As you saw in the presentation, we've got great spreads from both retail and logistics. We expect that going forward.

Great.  That's clear. Just wanted to follow up on a comment on your outlook, particularly regarding the balance sheet. So gearing at circa 22% and you're obviously potentially being more opportunistic. Content, you did mention the new resi partnership as well. But how are you thinking about so those opportunities, particularly in the context of further devaluations to come through the balance sheet? How are you feeling about deployment and where mine opportunities lie do you think?

So yes, look, with gearing at the lower end of the target range, I feel we have quite significant capacity to redeploy funds. Clearly, we've talked about partnerships. We have ongoing partnerships and the benefit of that is using additional capital from those partnerships to deploy into the business and to fund the growth. So, it feels like we have significant headroom still within that gearing metric. As you know, we also have a look-through gearing metric. We're still at the very bottom end of that. We're at 22.6% for look through and plenty of headroom there. So it feels like from a balance sheet perspective, we have really good headroom to do all of that new stuff.

And just the communities partnership we've announced today that really will start to take effect more in FY '24, while as we finalize that, and we think that's when the right time will also be to start to ramp up origination in the community space. But over the next 4 months to go, as Alison said, we've got a lot of capacity, and we're probably going to remain towards the bottom end of that range, barring any transactions that we're not anticipating at the moment. Right. And just as a follow-up to that. Is there any particular area whether being communities or commercial property where you're saying signs of distress or really expecting to stay in of distress that you can be a little bit more opportunistic? Or is it still a bit too early to be confining to opportunities?

Caleb, we are seeing in the residential land side, there's no signs of particular distress because that's not evident, although we are starting to see a little bit more product with more realistic expectations, but I think a little bit more time needs to go before bidder spreads have a meeting in equilibrium. On the commercial property side sectors, I think the movement we're seeing in the early part of this year is probably in secondary office windows are becoming a bit more realistic and also in certain parts of the retail market where unlisted funds or products are looking for particular liquidity, and that's where there's some price movement taking place. But no particular signs of distress. But if there was some, we're ready to bounce.

Our next question is from Lauren Berry from Morgan Stanley.

Just one for Andrew to start. Are you able to talk about how your competitors around your resi projects, I guess, changing their pricing or production rates? What are you seeing in the market at the moment?

Yes, Lauren. In general, what we're seeing is prices holding at the moment. Yes, we still got a reasonable backlog on the Eastern Seaboard. Still a reasonable backlog of settlements coming through, so from competitor estate. So we're seeing prices holding pretty generally. What we have been particularly pleased with has been the market share growth that we got within the December quarter. We saw a real bounce in that number up to around 18%. Yes, and that sort of reflects the strength of our black brand, the flight, the quality, but also our ability to bring more affordable product to market, which is where we've seen the biggest response from customers, the latest release at a is a story that I've been sharing. We released 31 lots 2 weeks ago and sold 27 on release. So, where you get the affordable product into the marketplace, we're still seeing a strong response from buyers.

You see more of the shifts going into your medium density from that affordability perspective or as a lot of suppliers are still interested in the land?

The medium density is also getting a good response more from a build certainty perspective. We're taking that uncertainty out of the marketplace. You got a full turnkey product that's sold on a 5% down 95% on completion. So, it's an easy product for a first-home buyer values up well. So that's been well supported through this period as well.

Right. And for Louis, logistics, it looks like you've got about 26% of your portfolio expiring in the next 18 months or so. Can you just talk about how rents are positioned versus market rates at the moment? And if you got any more color on exactly what states are expiring in that bucket?

Yes. Thanks, Lauren. We're fortunate, I think, to have that percentage of the portfolio expiring over the last 12 months -- over the next 12 months, it's a good position to be in. There are a couple of larger expiries in Sydney and some are in Melbourne as well. So again, well-placed middle ring type assets with those end of lease. So we are looking at -- when you look at our spreads at 19.6% and we look at the December valves and then where we sit now in February. We think we're probably about 10% under-rented. So I think we see some good upside potential from that large lease expiry profile over the next 12 months.

Great. And just last one for me. You did mention in your remarks around a pipeline for retail development. Are you able to give us a sense of how big that pipeline might be in those greenfield opportunities?

Yes, there's about $700 million in total over about a 5- to 7-year period, Lauren, the largest one being Aura, and they're all off Andrew's communities business where we supply the infrastructure and the town center amenity for the resi pipeline.

Our next call is Richard Jones from JPMorgan.

One of the questions, if I may. Sorry, a couple of questions is on -- Sir, the new Mitsubishi MPC JV, does that JV have any first rights on any acquisitions? And is the investment mandate for that JV in line with the balance sheet or any differences with the balance sheet?

Yes, Richard, firstly, the second question first, it's very aligned with our own view on the strategy for our MPC business. So the types of lot size lots, and the geographic spread is very aligned with our capital partner and the origination we'd be seeking. The partnership is focused on new origination predominantly, and it will have over a fixed investment period. And our view is the next 3, or 4 years is the time to now cyclically replenish our own pipeline, but also for the partnership over that period, we will have our platform commitment with Mitsubishi to be aligned equally to go after those opportunities. And as I said, the focus will be new origination. I have -- we have flagged a small seed asset just to get things going, but that's quite small. Main focus is new origination. It's not dissimilar in construct to the land lease partnership we set up with them coming 18 months ago.

So if you're buying and joining a state to an existing project. Is that likely to go 100% on the balance sheet? Or...

There are some -- where we're trading already, joining assets, there'd be some carve-outs where it doesn't make sense to confuse things on existing projects with 2 ownership structures. But that will be at the margin. Most of our focus, if you go back between COVID and, say, September '21 in that 18-month period, Andrew and the team are very successful in acquiring almost 20,000 lots. So, we have real forming at the right points in cycle buying new origination at that good returns, and that will be the sort of focus for the partnership. It's about scaling our platform, improving our market position, and generating better returns on invested capital. We're not looking to increase our capital allocation to the communities business are build-to-sale allocations in -- it will remain there or thereabouts. But clearly, our return on invested capital with the extra management fees will generate and the operating platform scalability will be quite beneficial over time for us.

Okay. And maybe to Alison, just in terms of the operating cash flow, just for the full year, do you expect that to be broadly in line with AFFO?

Yes. As I kind of said in my prepared remarks, clearly, we were negative this half, some timing differences between how we're spending development monies and then getting revenues back in. We have a really big skew to the second half, as you know, for settlements. And so we're expecting a lot of cash to come back in second half. And so we will definitely be back in positive territory by the end of the year. And yes, I would imagine we'll be covering FFO at that point... Yes.

Great. And one final question, just to Andrew, just in terms of the communities, just interested, obviously, sales volume has been somewhat depressed for 7 months. Just interested if you're seeing incentives in the market from some of your competitors start to increase to try and drive volume?

Richard, outside of New South Wales, which rebased pretty quickly about mid-last year. We saw a 7% to 10% price reduction generally across the market for vacant land after a period of very strong growth. Prices have largely held. We have been on campaign part of our summer campaign, which is a regular campaign we run, we've been offering a 15,000 rebate across our portfolio, but haven't seen a lot of incentives coming in the marketplace at the moment. What you are starting to see is builders advertising and offering packages, which is a positive sign, particularly on the Eastern Seaboard, you're seeing a lot more homebuilder activity offering fixed-price packages and on campaign, which I think is a reflection of a stabilization in that home builder market and the margins that are now being achieved there being more sustainable.

Our next call is Suraj Nebhani from Citigroup.

A couple of my questions have been answered. Just one for Andrew. Andrew, previously, you have talked about a month to construction amongst production for the residential side. I noted that on Slide 29, you have called out 5,000 under production at 31st December '22. What's the average production time how is that tracking? And I guess, what should we be looking out for with respect to second half settlement?

Yes. Sure. Suraj, the construction time frames that we're still experiencing for an average stage 36 to 40 weeks. We haven't seen that track back towards our longer-term average, which is more like 26 weeks, yes, and that's been predominantly due to the weather, which has disrupted particularly the early earthworks stages that we've been doing and yes, supply gravel, those sort of things with quarries being unable to keep up with demand due to the weather disruption as well. So yes, we're looking out of the future. We would expect those time frames to come back towards that 26 weeks over the next 12 months. As you see pipelines diminish, and that's going to put some downward pressure on pricing as well I think, over that period.

Yes. That makes sense. And I guess, just to track the second-half settlements, how are they going? Like what's the best indicator that you would point to ante? Is it just how is the weather tracking in various states? Is that the gating?

Yes. From here, Suraj, it's 2 things that we look at both, obviously, getting the stages completed and getting titles. So how we've been thinking about that is we've allowed within our programs another 2 weeks contingency. But remember when you get to this stage of construction, a lot of stages become largely weatherproof. You're doing more finishing works, you got payments down. You don't get the large disruptions from a wet weather event that we experienced when you just start construction. So, there are a lot more weather resilient now. And then it comes down to settlement performance. And what we've allowed for in our forecast is around 10% of lots that are forecast to sell in Q4, which is around 2,500 lots to either defer or cancel. So, that is in line with what we saw the peak sort of default rate from the last cycle. So together with the incentives that we spoke about earlier, that gives us confidence in the number that we're looking at. But we'll be tracking, obviously, weather and settlement performance is the 2 indicators.

Perfect. Perfect. And just one follow-up on the Mitsubishi communities partnership, if I may. I know, Tarun, you flagged a seed asset there that you may look to sell down and the partnership being focused on newer opportunities largely. But is there an opportunity to sell down stakes in more of Stockland's communities over time?

Yes, Rich, there is the partnership will have first rights on anything we want to sell and also new originations. So yes, the answer is yes, sir. But we're kicking off the partnership and will be middle of this year and it will all be done with a small seed asset, it's value for half shares like around $50 million. No impact -- material impact on FFO is just to get things going because it is new space for our capital partner, we wanted to give a live project to kick things off. But after that, yes, existing pipeline, but particular focus on new origination.

Our next question is from Ben Brayshaw from Barrenjoey.

I just had a question on net debt. You sold on one of assets and paid out less than AFFO, but net debt is down only circa $400 million. I was wondering if you could just touch on the name-moving parts between the period just to explain the net debt in the context of the capital release?

I don't have those exact numbers to hand, so maybe we can pick it up in the one-on-one. What I would say is we've paid back some fixed-term intends early. That might be part of the reason. But maybe we can pick that up later. I don't have that to hand, Ben, sorry.

Our next question is from Alex Prineas from Morningstar.

Just wondering on the logistics sort of outlook. So, rental growth is obviously quite strong in logistics at the moment. I was wondering on some of those kinds of longer-term expiries out sort of 3 years date and also on your sort of longer-term developments, are you looking to lock tenants in early, say, at the moment, well in advance of some of those expiries and developments coming available to take advantage of that strong rent growth? Or is it -- or are you more expecting that strong rent growth to continue out a few years, so no need to lock tenants in early.

Yes. At this stage, we're certainly seeing that strong rent growth continuing. I'm happy with -- we've got 92% of the FY '23 pipeline locked in and 36% of '24. Probably don't want to push the '24 pipeline leasing too much more at the moment because of the well-located nature of these assets in inner and middle ring-type locations, there's still good rent growth to come through. So, it's a balance for the team on doing that. Our expiries apart from next year's sort of bigger lump, which as I said to Lauren, I think, is a really good thing. Then we're sort of sit around the 16%, 17% mark a year. I think when you look at occupancy at 99.9%, that rent collection at 100%, et cetera. There's no need to be locking those in early. And it's a pretty even flow further out. So I think I'd sum it up by saying we're in a really good position, 19.6% spreads show that. And that under-rented position of about 10% gives us good opportunity over the next 12 to 24 months.

And just on the office or workplace leasing. So you've provided some numbers there for the sort of leasing performance for the first half. What's your outlook for the leasing that you've got to do? Are you expecting improvement or deterioration or around about the same sort of conditions?

I think as I said, we've got a portfolio that's really positioned for development. So, as you get a bit closer to the end of that way, we're going to be probably slightly higher in incentives and probably a little bit lower on rent. But I look at what we've done over that half. And we've got 2.1% positive re-leasing spreads on new leases in the portfolio. So it will really come down to where that space exists. We've done some spec fit-outs throughout the portfolio so that we can backfill small space and hopefully hold those rents.

That concludes our webcast. Thank you for joining us today. You may now log out of the platform. one more remark from Tarun Gupta.

Thanks. Thanks, everyone, for joining in and for your questions. We look forward to talking to you all as we commence our roadshow. So, thanks again, and see you shortly.