Scentre Group: Interim result 2015
Recommendation
Along with its interim result, Scentre Group announced the $783m sale of four 'non-core' Australian shopping centres. The sold centres are characterised by disappointing performances from specialty retailers, whose sales averaged $7,376 per square metre in the six months to June, compared to $10,556 in the group's remaining 34 Australian shopping centres. Worse still, Scentre received a lower percentage of specialty retailers' sales as rent in the centres sold.
So it's not hard to see why they were sold and why management will plough the proceeds into redeveloping some of Scentre's remaining properties. $825m in development (of which Scentre's share is $578m) began during 2015 and the group is undertaking 'pre-development activity on future development opportunities in excess of $3bn'.
Should the developments obtain their targeted project yields of 7.0-7.5%, future distributable income should increase moderately. There's also the potential for increases in the current net tangible assets (NTA) per share of $3.16, given the 5.72% capitalisation rate for the group's Australian assets at 30 Jun 15.
The overall capitalisation rate climbs to 5.81% once Scentre's New Zealand shopping centres are included. These assets represent 5% of Scentre's shopping centre assets and arguably have lower growth potential – which perhaps explains why the group sold a 51% interest in five New Zealand centres to Singapore's sovereign wealth fund GIC in March 2015. Management is looking to reduce its interest in its other four centres in NZ.
The strategy of selling 'non-core' assets and reinvesting the proceeds into properties with greater potential is similar to that being undertaken abroad by Westfield Corp. Yet Scentre is likely to grow more slowly in future than its corporate sibling, not only because Westfield Corp has a much larger development pipeline as a percentage of its total assets but also because it has more scope to increase the percentage of specialty retailers' sales that it charges in rent.
Led by its malls in the Sydney CBD and at Bondi Junction, Scentre still owns many of the finest retail properties in the land. Yet with its shares trading at a significant premium to NTA (even after capitalising its management and development income) and paying an unfranked forecast yield of 5.6%, the market is already well aware of this. AVOID.
Disclosure: Staff own shares in Scentre Group but they don't include the author.