On April 22, 20124, Stockland (ASX: SGP, OTC: STKAF) offered AUD4.20 per security for the 80.1 percent of fellow Australian real estate investment trust (A-REIT) and AE Portfolio Conservative Holding Australand Property Group (ASX: ALZ, OTC: AUAOF).

By then Stockland had accumulated 113 million Australand securities at an average price of AUD3.78, establishing a stake of 19.9 percent.

Stockland was interested in Australand’s industrial development pipeline and its investment portfolio. Australand would also have given Stockland the opportunity to reinvigorate its apartments business, and it would have brought expertise in developing medium-density residential projects.

Australand rejected Stockland’s bid but subsequently struck a deal to be acquired by Singapore-based Frasers Centrepoint Ltd (Singapore: FCL).

On Aug. 15 Stockland accepted Frasers Centrepoint’s AUD4.48-per-security-plus-accrued-distributions offer, selling its 19.9 percent stake for what will be a net profit of approximately AUD80 million. 

Stockland took a disciplined approach to its investment in Australand, with a clear strategic intent and view of value. Although it didn’t come out ahead in this particular bidding process, over the long term Stockland will still be able to make progress on management’s strategic objectives due to Australand.

It will reap a solid profit that will fund its growth plan rather than overpay for an asset.

We’re adding Stockland to the AE Portfolio Conservative Holding because of management’s demonstrated restraint, because its residential business will enjoy favorable market conditions well into fiscal 2015 and beyond, because it has a fortress balance sheet and because it pays one of the highest yields among A-REITs.

As for Australand, the final “allowed distribution” under its deal with Frasers Centrepoint of AUD0.0263 per security having been paid and the A-REIT trading at the offer price of AUD4.48 on the Australian Securities Exchange (ASX), it’s time to sell if you haven’t already done so.

Our total return on Australand from its March 16, 2012, addition to the Conservative Holdings through Sept. 11, 2014, is 77.4 percent versus 24.9 percent for the Standard & Poor’s/Australian Securities Exchange 200 Index and 50.1 percent for the S&P 500 Index.

Stockland reported a 12.2 percent increase in fiscal 2014 underlying profit to AUD555 million. Underlying earnings per security (EPS) were up 7.1 percent to AUD0.24, exceeding management guidance.

Statutory profit was up five-fold to AUD527 million, or AUD0.228 per security, from AUD105 million, or AUD0.047 per security, a year ago.

Funds from operations (FFO) were up 21.4 percent to AUD573 million. FFO per security grew by 16.4 percent to AUD0.248.

Net tangible assets per security (NTA) grew by 0.9 percent to AUD3.53 from AUD3.50, while Stockland generated return on equity of 7 percent for the year, up from 6 percent for fiscal 2013.

Stockland paid a total distribution of AUD0.24 for fiscal 2014, for a payout ratio of 96.8 percent, in line with management’s policy.

Stockland completed AUD390 million of acquisitions and investment in core projects during the year.

Management reported year-over-year profit growth for each of its Residential, Retail, Logistics and Business Parks, and Retirement Living portfolios.

Favorable operating conditions drove Residential results, as management brought a number of new developments to market, including new projects at Calleya in Perth, Willowdale in southwest Sydney and Elara in northwest Sydney that have seen strong customer demand.

Operating profit for the unit was 57.2 percent. The Residential team reported 5,219 lot settlements for the year and started fiscal 2015 with a record 3,185 contracts on hand.

Residential also acquired four parcels of land adjoining existing assets, where management has already demonstrated its ability to finish projects at good “speed to market” and leverage previous investment.

Demand in Sydney remains very strong, with relatively low supply impacting affordability in established housing market. The Victoria the market is steady, with good demand balanced by higher competition.

Management’s outlook in Queensland is particularly strong, underpinned by positive economic indicators and a slower start to the housing market recovery. Although Western Australia has moderated from historically high levels, slowing down along with the end of the mining boom, demand remains above the long-term average.

On the commercial front, retail FFO were up 9.9 percent to AUD369 million, reflecting a strong contribution from recently redeveloped properties and the benefits of Stockland’s active re-mixing of tenants within existing assets. Comparable FFO was up 3.9 percent.

Stockland also invested in three major shopping center redevelopment projects to the tune of AUD460 million, with forecast incremental internal rates of return of 12 percent to 14 percent.

One of management’s top priorities during fiscal 2014 was establishing Stockland’s Logistics and Business Parks operation as a “core” business, with focus on optimizing performance of existing assets through active leasing while pursuing growth through acquisition and development.

This effort paid off with year-over-year segment FFO growth of 6.9 percent. Weighted average lease expiry increased significantly to 4.9 years from 3.9 years as of June 30, 2013, and occupancy improved to 96.4 percent.

The portfolio grew by more than AUD270 million, with the acquisition of three new assets and an increased share in Optus Centre.

Office FFO were down 16.5 percent, reflecting asset sales and soft market conditions. Stockland has been slowly shifting away from the segment, and the portfolio now represents 8 percent of assets. Weighted average lease expiry improved marginally to 4.5 years, and occupancy was 90.3 percent.

Retirement Living posted comparable operating profit growth of 13.8 percent to AUD40 million, while management stepped up development efforts at seven retirement villages.

Management expects current and future developments to deliver average incremental internal rates of return of 15 percent to 20 percent.

The AUD160 million redevelopment of Cardinal Freeman Village in the Inner West metropolitan area directly to the west of the Sydney central business district is a key project that will set a new standard for retirement living in this high-demand area.

Management also continues to address costs, its most important initiative focused on integrating its marketing campaigns. Costs have come down on this front, while effectiveness has improved. And that’s what’s commonly referred to as “efficiency.”

Gearing, or debt as a percentage of total tangible assets, as of June 30, 2014, was 25 percent, up from 22.7 percent as of June 30, 2013, but still at the low end of the range for A-REITs.

Indeed, one of Stockland’s strengths is its balance sheet, demonstrated by its A-minus rating and “stable” outlook from Standard & Poor’s.

Gearing remains comfortably within management’s target range of 20 percent to 30 percent, and the A-REIT has diverse and long-dated debt. The weighted average maturity is 5.2 years.

In short, there’s ample support for management’s growth strategy, augmented by the AUD80 million-odd infusion from the sale of its Australand stake.

The Australand bounty will be used to accelerate expansion into medium-density residential and mixed-use development, to further grow its Logistics and Business Parks capabilities as well as for planned system and process enhancements.

Australian businesses and consumers remain cautious. But housing markets have responded well to strong population growth, improving buyer sentiment and low interest rates. That should support a strong market for the balance of fiscal 2015.

And housing construction is likely to provide a boost to economic activity over the next few years.

Management expects to residential land settlements at the upper end of its through-the-cycle target range of 5,000 to 6,000 lots in fiscal 2015.

Meanwhile, Commercial Property–including Retail, Logistics and Business Parks and Office–is tracking to 2 percent to 3 percent comparable net operating income growth. And management forecast “steady improvement” in Retirement Living activity.

Overall Stockland is targeting fiscal 2015 EPS growth of 6 percent to 7.5 percent, with the distribution remaining at AUD0.24 per security.

The outlook for global economic growth has generally improved over the last 12 months but is unlikely to return to long-term trend levels in the near term. That’s a scenario supportive of continuing low rates.

In such an environment, a yield of 5.8 percent such as what Stockland offers, supported by a strong track record of execution and favorable conditions for its key business, is very welcome in the AE Portfolio.

Stockland, a new addition to the Conservative Holdings, is a buy under USD4 on the Australian Securities Exchange (ASX) using the symbol SGP or on the US over-the-counter (OTC) market using the symbol STKAF.

Stockland’s fiscal year runs from Jul. 1 to Jun. 30. The A-REIT reports full financial and operating results twice a year; it typically posts first-half results in mid-February, with full fiscal year numbers out in mid-August.

Management also provides a fiscal first-quarter update in October, a half-year update in February and a fiscal third-quarter update in May.

Interim distributions are usually declared in mid-December, about a week after the half-year investor update, with payment made on Feb. 28.

An estimated final distribution is usually declared in mid-June, shortly following the fiscal third-quarter investor update, with payment made in late August.

Stockland declared an interim distribution in respect of fiscal 2014 first-half results of AUD0.12 on Dec. 18, 2013. This distribution was paid Feb. 28, 2014, to shareholders of record on Dec. 31, 2013. Shares traded ex-distribution as of Dec. 23, 2013.

The A-REIT declared a final distribution for fiscal 2014 of AUD0.12 on June 12, 2014, which was paid Aug. 29 to shareholders of record as of June 30, 2014. Shares traded ex-distribution on June 26, 2014.

Distributions paid by Stockland are “qualified” for US tax purposes. Based on the “fiscal cliff” compromise reached in Washington, DC, in early January 2013 dividends/distributions will be taxed at Bush-era rates of 5 percent to 15 percent for investors’ first USD450,000 a year of income for couples and USD400,000 for single filers. Above that the maximum tax rate is 20 percent.

The Australian government withholds 5 percent to 15 percent, based on the US-Australia tax treaty on double taxation. The two countries have not taken the step of eliminating withholding from dividends/distributions paid in respect of shares held in a US IRA, as have the US and Canada.

Among the 17 analysts who cover Stockland eight rate it a “buy” according to Bloomberg’s standardization of brokerage house recommendation terminology, while six rate it a “hold.” Three brokerages that cover Stockland rate the A-REIT a “sell.”The “best consensus” 12-month target price among the 10 analysts that provide such a number is AUD4.29, with a high of AUD4.50 and a low of AUD3.76.