Scentre Group: Result 2018
Recommendation
Last year was another busy one for Scentre Group. The trust purchased Westfield Eastgardens for $720m and completed five redevelopments. The redevelopments were part of its ongoing strategy to 'Amazon-proof' its shopping centres - or 'living centre platforms'. Among them were Westfield Coomera and Westfield Carousel, which now boast outdoor space for families, open-air rooftop dining and a refreshed mix of tenants.
Year to Dec | 2018 | 2017 | /- (%) |
---|---|---|---|
Available funds from operations ($m) | 1,227 | 1,183 | 3.7 |
Distribution (cps) | 22.6 | 21.7 | 4.1 |
Gearing (%)* | 33.9 | 32.1 | 5.6 |
NTA per share ($) | 4.46 | 4.24 | 5.2 |
* Gearing defined as net debt/(total tangible assets - cash) |
Scentre hopes sticking to premium locations and adding more entertainment space will continue to attract people to its centres, protecting it from the effects of e-commerce. The best brands want high-end stores in good locations to showcase their wares - so attracting foot traffic is the name of the game.
As to whether it's working or not, the evidence continues to be mixed. On the one hand, rents grew by 2.8% and distributable profit rose 3.9%, helped by lower overheads and some project income. On the other hand, growth in footfall has been disappointing, in-store sales grew by 1.3% and re-leasing spreads (the difference between old and new rent on the same space) were negative for the fourth half in a row, at -3.5%.
These numbers are at least partially affected by ongoing redevelopments and adjustments to the mix of tenants. To prepare for an upcoming redevelopment, Scentre may need to agree to shorter leases at lower rents, or even leave some space unlet. So it's hard to know whether the weak re-leasing spreads are a short-term feature - especially given the number of refurbishments and redevelopments taking place - or whether they're part of the wider problems facing the retail industry. We lowered our growth assumptions and our price guide for Scentre last August to allow more leeway, and we'll continue to watch this number closely.
There's another $3bn of developments in the pipeline, across 12 projects in Australia and NZ, but all in all, 2019 will be relatively subdued. The only major project for the year will be New Zealand-based Westfield Newmarket, which is undergoing a $370m facelift. The redevelopment will see a further 52,000 square metres of lettable space and 230 new stores added. That should mean we have a relatively clean set of numbers to work with.
We're sticking with our estimate of 2-4% long term growth in distributable profit, and this result falls within that range - as does the guidance for a 3% rise in distributable profit for 2019 and a 2% increase in the distribution to 22.6 cents.
The stock now trades around 10% above our buy price, and we're hoping we'll get another buying opportunity. However, with a forward distribution yield of about 5.9% to go with the growth, those that are happy to settle for lower returns may choose not to wait. HOLD.
Note: Our Model Income Portfolio owns shares in Scentre Group.
Note: The Intelligent Investor Equity Income Fund owns shares in Scentre Group.