Stockland profit results reveal why residents driving regulation change on cost recovery is dangerous

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Stockland released its Half Year profit results to the Stock Exchange last week. Always informative, they show that owning and operating retirement villages is a tight budget business. Residents understand tight budgets, having to live within their own diminishing means. We thought it worthwhile to review the Stockland figures to bring perspective to the give and take that is required to ensure both operators and residents canenjoy having village communities to live in.

Stockland is Australia’s largest residential home builder. They know what they are doing. They have 7,800 ILU’s now including the 3,900 they purchased from Aevum.

Perhaps the most interesting snapshot is that in today’s money, Stockland make a $60,000 development profit from the sale of a new ILU and $88,000 on the sale of an existing ILU. Sounds good but of course it takes at least three years to build and sell a new ILU and they have to wait an average of 12 years to get that rollover sale (Stockland average) to receive the $88,000 – and while waiting they cannot make a profit while servicing the resident.

Taking into account the Aevum villages this is what Stockland achieved in cash in the six months July to December 2011:
• $23 million operating profit before interest – this is no change on last year’s profit – i.e. a flat profit
• $23 million is just a 4% return on the $575 million cash they have invested in villages
• With debt, they have villages worth $1.1 billion, so they are making $23 million cash on assets of $1.1 billion
• They predict it will take 5 years to get the 4% up to 8% return on cash
• They had nil price growth in ILU pricing over the six months. This hurts because each 1% growth delivers them $8 million accrued DMF value
• They sold 19 fewer established ILU’s (8%) in the 6 months compared to last year. Average price: $312,000.
• New ILU sales were up from 76 to 100 however, a 32% increase. Average price: $377,000. They made $60,000 development profit on each. But they had to invest $242 million over several years to build them to make that profit.
• Within 2 years they expect to be building and selling 600 new ILU’s a year – with minimal additional overheads. This will require up to another $1.45 billion in funding however.
• Occupancy was 93%, down from 94%. Each 1% improvement in occupancy generates $5 million in cash flow

So it’s a long term, deep pockets numbers game. In all they have land for 3,600 new ILU’s over the next 6-7 years (requiring holding costs – but their cost of debt averages 6.2%). They are looking for an Internal Rate of Return before $40 million a year overheads of 15%. They do not say when they expect this but it is obviously a long way off.

Stockland is still holding on to its 15% shareholding in FKP, specifically mentioning their potential to take out Aveo – with about 12,000 ILU’s. They state they have made $27 million in their FKP investment since 2009.

As significant as all this appears, there are now about 130,000 ILU’s across Australia, so Stockland has 6% of this volume.