Trough year for Stockland who are now focused on higher margin residential projects

The Stockland managing director Mark Steinert has described the past year as a "trough" year for Stockland as it reported its results for the year ended 30 June 2013 with its underlying $494.8 million profit, down 27% on the previous corresponding period.

It reflected soft conditions in the new housing market, the impact of asset sales, and the previously reported change in approach to capitalised interest.

"This has been a challenging year and we have responded with a number of important strategic decisions that position our business for stronger future returns," Mr Steinert said.

"Although global economic conditions have improved over the last six months, there is still considerable uncertainty and volatility.

"In Australia business confidence remains low and consumer spending is relatively soft as households continue to deleverage.

"We expect consumer sentiment will remain relatively subdued, however we do anticipate continued moderate economic growth. While the housing market is showing clear signs of improvement, the recovery is likely to be modest and uneven."

Mr Steinert said he expected steady improvement in Stockland’s earnings from FY14 largely from its new retail, residential and retirement living projects beginning to contribute, along with recent industrial letting, rental growth and as benefits of cost reduction initiatives come through.

However, improvement in residential earnings "will likely be constrained as Stockland continues to work through a number of impaired and low margin projects.

"It will also take some time to see the full benefits of the Group’s new strategic priorities, particularly in Industrial and medium density housing development.

"Our decision to hold our distribution at 24 cents per share, despite being outside our target payout ratio, demonstrates our confidence that earnings should continue to improve from FY14," Mr Steinert said.

"We significantly restructured the business to reduce costs and improve core processes and skill sharing.

"We reviewed our residential landbank to create a clear classification of core and workout projects, and also maintained our strong balance sheet and A-/stable credit rating."

As previously flagged, the performance of its residential business was significantly impacted by "market softness" which affected both volume and prices.

Its profit also reflected the shift in sales mix with a lower proportion coming from higher margin projects in Victoria, and the previously reported change in our approach to interest capitalisation.

The residential division group executive Andrew Whitson said Stockland had reduced "finished goods by 50%, ensuring a good mix of affordable products and accelerating the sale of impaired lots to release capital for reinvestment."

While looking to accelerate the work out of impaired projects, Stockland are now  focused on bringing new higher margin projects to market such as East Leppington (Willowdale) in NSW and Banjup in WA.

It has also identified projects in its portfolio where it can increase revenue and broaden its market reach by expanding our medium density offering.

"Importantly we have outlined a clear strategy to optimise securityholder returns within an acceptable level of risk through the cycle," Mr Steinert said.

"This includes setting target asset weighting ranges that reflect our strengths and which will deliver the right balance of income and growth.

"We have a refreshed senior management team in place and are determined to execute our strategy with a disciplined focus that will deliver reliable profit and EPS growth over time."

Its statutory profit was $104.6 million, down 79%, largely due to a previously disclosed $355 million impairment in the value of the residential book.

Its underlying EPS was 22.4 cents, down 24% from FY12.

Stockland’s full year distribution was 24 cents per security.

Stockland announced it will sell its 14.9% stake in its retirement rival, FKP Property, a strategic holding which dates back to 2008.