The Motley Fool

Why I think Stockland Corporation Ltd is a buy

Shares in Stockland Corporation Ltd (ASX: SGP) have flatlined for the last two years despite delivering good growth. I expect the shares to outperform in 2018.

What I like about Stockland is its exposure to diverse assets. The group has significant interests in retail shopping centres, logistics and business parks, residential developments and aged care homes. The latter provides some immunity from cyclicality, while residential is not at the top end of the market, where the risk of price falls attracts so much media attention.

Having said that, Retail Town Centres remains Stockland’s largest profit contributor. It’s worth noting that in a year in which retail as a whole struggled, Stockland was still able to lift its operating funds by 4.1% to $419 million.

Stockland is particularly adept at recycling its portfolio into higher growth areas. The major $400 million development at Green Hills NSW is already 82% leased, with the next stage opening this month. Across the portfolio, the weighted average lease expiry is 6.6 years.

The next most important profit centre is residential development. Last year it delivered a 16% rise in profit to $270 million. Its return on assets is an excellent 15%. The job market is stable, interest rates are low, and the supply of new builds seems to be constantly limited by planning constraints. Sensibly priced residential developments in the outer suburbs are a far cry from expensive inner city living.

In terms of balance sheet utilisation, Stockland’s overall return on assets has increased from 11% to 11.4%. Gearing is a very modest 22%. The average cost of that debt is only 5.5%. Should the sector hit difficulties, Stockland is best placed to ride it out or take advantage of it.

Other plays in the sector are cheaper, but for reasons. Lend Lease Group (ASX: LLC) has greater geographical diversity but a troublesome Australian construction business. Mirvac Group (ASX: MGR) is more exposed to the inner city apartment market -potentially the most exposed property segment.

Stockland re-iterated guidance with its AGM/Q1 update last month. The group expect a further 5%-6.5% rise in Funds from Operations implying around $850 million. The distribution per security is expected to rise 4% to 26.5 cents. On that basis the shares yield 5.8%.

Foolish takeaway

When it comes to property, it it always pays to buy quality. Even on a 10% premium, Stockland is my preferred stock pick in the sector.

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Motley Fool contributor James Middleweek has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.