This article is from the Australian Property Journal archive
AFTER more than half a decade as the underperformer, there is a palpable air of confidence returning to the retail market as Scentre Group (ASX: SCG) delivered an improved profit result and reinvigorated by its recent $475 million acquisitions of Westfield West Lakes and Westfield Tea Tree Plaza, the REIT is looking at more acquisitions and to activate its expansive 670 hectares land holdings.
Scentre announced Funds From Operations (FFO) of $568 million for the six months to 30 June 2024, an increase of 2.1% from the previous corresponding period, and distributions of $446 million 8.60 cents per security, up 4.2% on the pcp. The statutory profit also improved from $149.4 million to $404 million which includes property valuation decrease of $120 million. As at 30 June 2024, the group’s portfolio was valued at $34.3 billion.
CEO Elliott Rusanow said 42 Westfield centres across Australia and New Zealand recorded 320 million customer visitations so far this year, this is an increase of 1.9% or 6 million more visits when compared to the same period last year.
“This has provided our business partners with the opportunity to increase their sales through our Westfield destinations, increasing by 2.4% to $13.4 billion in the six months to 30 June 2024 and a record $28.6 billion for the 12 months to 30 June 2024.
“Occupancy is 99.3% at 30 June 2024, an increase from 99.0% at 30 June 2023. Average specialty rent escalations increased by 5.5% during the period and new lease spreads were +1.1%. Average specialty occupancy costs are now 16.9%,” he added.
Scentre’s Net Operating Income grew by 3.5% to $1,006 million, underpinned by growth in property revenue of 5.1%, which was partially offset by increased property expenses including an increase in security costs.
The group collected $1,372 million of gross rent during the first half, an increase of $40 million compared to the same period in 2023 and equivalent to 100% of gross rent billings.
At 30 June 2024, the group had available liquidity of $3.2 billion, sufficient to cover all debt maturities until the end of 2025 and increased its interest rate hedging to 89% with an average base rate of 2.44% as at June 2024, and to 89% with an average base rate of 2.93% as at December 2024.
During the period, the group launched into funds management after buying out Dexus’ 50% stake in Westfield Tea Tree Plaza in Adelaide for $308 million, in a joint venture with Barrenjoey.
And late last month the JV returned to Adelaide with the acquisition of a half interest in Westfield West Lakes for $167.30 million.
The acquisitions reflect the improving sentiment within the sector. After more than half a decade of repricing and challenging fundamentals, the retail property sector is looking compelling on a relative value basis, according to Dexus, with yield expansion milder than other core commercial property markets, and “investors are waking up to the positive story”.
Scentre’s result is the second strong result this week after Vicinity Centres posted a bumper full-year profit. Earlier this week Vicinity acquired a 50% interest in Lakeside Joondalup for $420 million. Other notable transactions include Stockland Glendale, Cairns Central, Craigieburn Central, and Rockingham Centre.
Moody’s Ratings vice president and senior analyst Saranga Ranasinghe said Scentre Group’s results for the half year ended June 2024 are credit positive, with the group reporting solid earnings growth and strong operating metrics while maintaining a prudent balance sheet.
“Scentre increased its occupancy levels during the period to 99.3% and achieved positive leasing spreads, highlighting the strength of its portfolio of high-quality retail assets.
“The group also saw mid-single-digit rent escalations supported by favourable lease structures. Despite high interest rates softening consumer demand for discretionary retail, we expect the group’s strong operating metrics and supportive lease structures to support its earnings growth over the next 12-18 months.
“However, we expect the higher-for-longer interest rate environment to pressure the interest coverage ratio, which is currently at the rating threshold with minimal headroom. The group announced a tender offer for up to US$550 million of its outstanding subordinated notes, proposing to fund the repurchase through the issuance of new A$-denominated subordinated notes. We expect the refinancing of a portion of the existing subordinated notes to support the group’s interest coverage, albeit marginally.” Ranasinghe said.
Scentre yesterday announced a tender offer for up to US$550 million and intends to fund the repurchase through the issuance of new A$-denominated subordinated notes, with the size conditional on the take-up of the tender offer.
Rusanow said the group continues to progress its $4 billion pipeline of future retail development opportunities and has commenced the reconfiguration of department store space at Westfield Bondi and Westfield Burwood in Sydney and Westfield Southland in Melbourne.
At the same time Scentre is looking at its massive land portfolio to unlock future development opportunities.
“Our portfolio includes 670 hectares of land holdings. These substantial land holdings, combined with our destinations’ strategic locations, has the potential to provide significant future long term growth opportunities for the group.
“We are now focusing on further understanding and unlocking these and other strategic growth opportunities,” he added.
Overseas Unibail-Rodamco-Westfield has begun activating its shopping centres, gaining approval to develop 400 luxury apartments above the Westfield Old Orchard Mall in Chicago, whilst proposals are underway to add 1,400 apartments to Westfield Garden State Plaza in New Jersey.
Meanwhile Scentre reconfirms its FFO to be in the range of 21.75 to 22.25 cents per security for 2024, representing 3.0% to 5.4% growth for the year. Distributions are expected to be at least 17.20 cents per security for 2024, representing at least 3.6% growth for the year.
