Over the last five years the management team and I have updated the strategy to focus on our areas of strength, to drive sustainable profit growth. Since that time, we have extended our position as the leading creator of communities across Australia, grown our logistics weighting and increased the resilience of our retail town centre portfolio in this fast-moving environment.
We have successfully repositioned our business by recycling assets to create a strong core business and will continue to do this over the next two years. We have streamlined our executive management team and integrated our retirement and residential businesses to improve operational efficiency and position the business for sustainable growth into the future.
These initiatives will save $8 million in costs from FY20. We are also making clear progress on our journey to becoming a more innovative and customer-centric organisation with customer satisfaction over 81 per cent.
We are well placed for long-term sustainable growth in the future given our leverage to key demand drivers including population growth, urbanisation, infrastructure improvement, ageing population and a growing focus on health and wellbeing. Our strong balance sheet also ensures that we are well positioned to take advantage of opportunities that may arise in this changing environment.
Managing Director and CEO
Our FY18 result has been driven by our focus on executing our key strategic priorities; delivering the best masterplanned communities across Australia, increasing the resilience of our retail town centres, growing our logistics portfolio and enhancing customer experience.
FFO growth for the Group was 6.6 per cent per security, slightly above our guidance range of 5.5 – 6.5 per cent. Net tangible assets (NTA) per security was up 3.5 per cent to $4.18 and our return on equity was 11.2 per cent.
We remain the leading creator of communities in Australia with our Residential and Retirement Living businesses providing customers with whole-of-life housing options in liveable locations with close proximity to transport, schools and employment. In light of these synergies we combined our Residential and Retirement Living businesses into one integrated business, Stockland Communities, to be led by Andrew Whitson.
The Communities business delivered strong profit growth in Residential, up 24.3 per cent from FY17, with solid volumes of net deposits providing high profit visibility for the year ahead.
We recorded Residential settlements of 6,438 lots, with a number of successful project launches in Victoria and Queensland and the success of our existing communities in Sydney and Melbourne, contributing solid sales.
We remain well positioned in the deepest part of the lending market, with over 75 per cent of our product now sold to owner occupiers and continued demand for our range of affordable house and land and townhome product, despite a slowdown in the broader housing market. We anticipate residential profit margins to remain above 17 per cent for the medium term and around 18 per cent in FY19.
Importantly, our focus on the creation of liveable, affordable and connected communities is driving increased market share, up 3.1 per cent, increased velocity of capital and higher profit margins.
Operating profit for our Retirement Living portfolio was down 16.7 per cent on FY17, with sales volumes impacted by adverse sector media coverage and reduced settlements due to the timing of development completions. We expect improvement in Retirement Living market conditions in 1H19 given improving customer sentiment and sales velocity.
Our overall results demonstrate the resilience of the portfolio in a variable trading environment, with the business well-positioned to deliver sustainably into the future, leveraging our customer experience to increase market share.
Commercial Property remains the largest portion of our portfolio. In June, we welcomed our new CEO of Commercial Property, Louise Mason, who has close to 30 years of experience in retail town centres, workplace, and logistics. Results across the asset classes remain solid, with signs of improvement in retail sales despite challenging market conditions. Importantly, specialty sales per square metre were up 4.2 per cent and 81 per cent of our centres have specialty sales above the national benchmark.
We delivered comparable growth in funds from operations of 2.3 per cent across the portfolio, with 1.3 per cent in Retail Town Centres, 6.0 per cent in Logistics and a decrease in Workplace of 2.0 per cent, reflecting ongoing vacancy in our Perth asset.
Retail Town Centre income growth was adversely impacted by increases in government charges, higher electricity costs, and our tenant remixing and upgrading strategy to future proof our centres.
There was an overall net $133 million change in the valuation of our portfolio, with positive valuations on a number of assets offset by negative revaluations at some of our non-metropolitan retail town centres. These negative revaluations were concentrated in central and north Queensland centres where economic conditions are weak and tenant remixing has reset income to more sustainable levels.
Our remixing strategy continues to attract more customers into our retail town centres with foot traffic up 2.5 per cent, helping ensure income resilience into the future. Income from growth categories including food, dining, leisure, cinemas and services now represents 41 per cent of our specialty store income.
During the year, we celebrated the launch of our $421 million redevelopment of Stockland Green Hills; the largest retail redevelopment ever undertaken by Stockland. The centre brings together the best in on trend retail, entertainment, innovation and sustainability and is a prime example of our ability to successfully upgrade and reposition our retail town centres, to deliver outstanding customer outcomes and accretive returns. The redevelopment is expected to achieve an incremental IRR of around 12 per cent in the 10 years post-completion and an incremental, stabilised FFO yield of around seven per cent.
In line with our commitment to reshape our retail assets and re-weight our commercial property portfolio, we continued to execute our retail divestments strategy and are targeting up to an additional $400 million of divestments over the next 12 – 24 months.
We are accelerating our strategy to improve the quality and growth potential of our portfolio. This will be achieved by reducing our Retail Town Centre weighting to focus on leading centres in their trade area and continuing to upgrade and grow our combined Workplace and Logistics portfolio (previously Office, Logistics and Business Parks) to greater than 25 per cent of our total assets.
The growth of this portfolio will primarily be through delivery of our existing development pipeline, on land we already control, as we reinvest proceeds from the sale of non-core assets.
We are in a strong capital management position, maintaining our S&P A- Stable credit rating for the past 17 years and Moody’s A3 rating obtained in August 2017. This reflects the ongoing strength of our balance sheet and cash flows which have enabled us to continue to broaden our funding sources at competitive pricing despite volatile market conditions.
Optimising the allocation of capital within each of our business units remains a key focus with a continued emphasis on capital efficient land acquisitions in our Communities business to reduce our capital needs. Close to 80 per cent of land acquisitions have been purchased on capital efficient terms since FY13.
We have continued to actively manage our debt program, which has seen our weighted average cost of debt fall from 5.5 per cent in FY17, to 5.2 per cent in FY18, and is expected to fall further to around 4.8 per cent in FY19. Gearing remains at the lower end of our 20 – 30 per cent target range, 22.2 per cent at the end of FY18.
Overall, we are in a very good position with operating cash flow and liquidity improving due to disciplined management and leveraging the timing, source and size of debt refinancing.
One of the major issues facing all large corporations is the increased pace of innovation and its ability to disrupt growth. We are embracing this challenge and have appointed a new executive committee position to focus specifically on our technology and innovation capabilities.
In addition to progressing the development of our CORE Systems Program, which will provide digital-ready platforms to increase efficiency and our ability respond to digital opportunities, this role will also focus on enhancing our ability to progress commercial outcomes from innovation projects.
Sustainability also continues to be a key part of our competitive advantage. Throughout the year we have enjoyed a positive response from the community to our $30 million investment in solar systems, delivering in excess of a 10 per cent rate of return.
I am also pleased to confirm our continued support of the United Nations Global Compact, with whom we partner to promote responsible business practices and sustainable development.
Economic conditions remain generally positive and overall fundamentals continue to be largely supportive for our business, with strong population growth, solid employment growth, low inflation and low interest rates.
The land and housing market is clearly moderating, driven by a range of factors including finance availability. Our focus on differentiated masterplanned community creation and housing affordability leaves us well placed in this environment. We have high volumes of residential contracts on hand providing good visibility into the future as markets moderate, in line with our expectations.
We expect to achieve FFO per security growth of 5 – 7 per cent for the full year, and are targeting a distribution per security of 27.6 cents, representing 4 per cent growth on FY18, assuming no material change in market conditions.
We have a clear vision to deliver into the future, and we are well positioned to benefit from the continued population growth and demographic trends being experienced in Australia, as we deliver liveable, affordable and connected residential and retirement living communities, thriving workplace and logistic properties and vibrant retail town centres.
I am proud of the contribution we continue to make to communities across Australia. It is this contribution that will underpin our financial success in the future and the delivery of our purpose to create a better way to live.
Managing Director and CEO