The Stockland Corporation Ltd (ASX: SGP) share price has fallen over 2% in early trade as the real estate investment trust (REIT) announced a 56% decline in net profit after tax (NPAT) and 6.7% decline in funds from operations (FFO).
What caused the profitability decline?
Stockland's FFO fell 6.7% to $407 million (16.8 cents per security) while adjusted FFO was similarly down 6.4% to 14.6 cents per security as management forecast FFO growth per security of ~5%, at the low end of its previous 5-7% guidance.
The REIT recorded a statutory NPAT of $300 million, down 56.2% on pcp as signs of weakness began to appear in the group's Residential Communities and Retail Town Centres segments. Management expects sales and profitability to stabilise in the second half of the year due to the anticipated residential 2H19 sales skew.
Positively for shareholders, management announced a 3.8% increase in its distribution per security to 13.5 cents per share, a payout ratio of 80% of FFO in the half. Stockland has now completed $115 million of its planned $350 million security buyback program so it looks as if security holders have plenty of support for future returns.
The company increased its gearing ratio to 26.4% as it increased borrowings to fund the 2H19 planned settlements and developments. Stockland has had a particularly strong cash flow profile in recent years but this took a bit of a turn into the red this year, with a net cash outflow from operating activities of $136 million in the half.
Weakening asset quality is a concern and there's a bit of risk in Stockland's non-core retail asset divestment strategy in a declining retail market, as I can't see a lot of buyers scrambling to get into regional retail centres.
Foolish takeaway
Today's result was poor for Stockland's profitability and I'm pretty bearish on the A-REIT sector in general. I think despite management initiatives to return capital to security holders, the medium-term outlook is pretty weak for Stockland with its regional retail and residential real estate exposures.
The Stockland share price is currently down 2.25% at $3.68 per share at the time of writing and I wouldn't be surprised to see this slip further before Friday's close.
If you're similarly bearish on the REITs, it might be worth taking a look at these top growth shares that have been tipped as market beaters.
