Non Discretionary Acquisitions Drive SCA Property Group to better results

3 February 2020

SCA Property Group released their results for the 6 months to 31st Dec with strong earnings growth from recent acquisitions and improved valuations contributing to the outcome. SCA's focus on non-discretionary neighbourhood centres has limited the impact of declining sales and rents, however leasing spreads remain negative and leasing costs and incentives have doubled.

 

The Group recorded a statutory net profit after tax of $90.2 million, which was 129.5% above the same period last year. This was primarily due to a full period contribution from the Vicinity acquisitions, and an increase in the value of investment properties this half compared to a decrease in the same period last year due to expensing of acquisition transaction costs. Excluding non-cash and one-off items, Adjusted Funds From Operations (“AFFO”) was $70.1 million, up by 15.7% on the same period last year.

 

Maintenance capex of $1.9 million was below the same period last year, but leasing costs and fitout incentives of $6.5 million were up by $3.4 million due to our strategy to lease difficult long term vacancies and the repositioning project for the centres acquired from Vicinity.

 

Property valuations

The value of investment properties increased to $3,232.8 million during the period (from $3,147.0 million at 30 June 2019), primarily due to the acquisition of Warner Marketplace for $78.4 million, completion of the Shell Cove Stage 3 development for $4.8 million, and the valuation uplift on like-for-like properties of $22.2 million, offset by the disposal of the Cowes property for $21.5 million (June 2019 book value $19.6 million). The value of the properties acquired from Vicinity increased by $17.8 million to $594.2 million vs the acquisition price of $573.0 million.

 

The total portfolio weighted average capitalisation rate is now 6.46% (6.48% as at 30 June 2019), with sub-regional centres averaging 6.74% and neighbourhood centres averaging 6.36%.

 

Net tangible assets

The Group’s net tangible assets (“NTA”) per unit is $2.29, an increase of 2 cpu or 0.9% from $2.27 as at 30 June 2019. This is primarily due to like-for-like investment property valuation uplifts.

 

Portfolio occupancy

SCP had a portfolio specialty vacancy rate of 4.8% of GLA as at 31 December 2019, compared to 5.3% as at 30 June 2019. The portfolio occupancy rate was 98.3% and has remained relatively stable since December 2014 at between 98% and 99%.

 

Specialty vacancy for the centres acquired during FY19 has reduced to 6.0% as at 31 December 2019 (from 7.3% as at 30 June 2019) and SCA expect it to return to our target range of 3-5% once our repositioning strategy has been fully implemented.

 

During the six month period SCA completed 135 specialty renewals with an average negative rent reversion of -1.7%. SCA also completed 86 new lease deals with an average negative rent reversion of -3.9%. Average incentives on new lease deals have increased to 15.9 months on a new 5-year deal (up from 11.0 months in FY19) due to leasing difficult long term vacancies and a softening in the broader retail market.

 

Sales growth

The comparable store sales MAT growth for the 12 months to 31 December 2019, for stores open more than 24 months was:

• Supermarkets: 2.6% (compared to 2.0% as at 30 June 2019)

• Discount department stores: 3.4% (compared to 2.2% as at 30 June 2019)

• Mini Majors: -1.0% (compared to -3.1% as at 30 June 2019)

• Specialty stores: 2.3% (compared to 1.8% as at 30 June 2019)

 

Chief Executive Officer, Anthony Mellowes, said: “We are pleased to report another solid result for the six months to 31 December 2019. Our anchor tenants continue to perform well, with supermarket and discount department store MAT sales growth continuing to improve over the last six months and turnover rent also increasing. Our specialty tenants are displaying resilience with specialty sales growth improving, sales productivity increasing, specialty vacancy reducing and occupancy cost now at 9.8%. Against a backdrop of a softening in the broader retail market, our strategy has continued to be a bias toward non-discretionary categories, maintaining high retention rates on renewals, and reducing specialty vacancy by focusing on difficult long term vacancies. This strategy will ensure that we have sustainable tenants paying sustainable rents, and ultimately will support our strategy of generating defensive, resilient cash flows to support secure and growing long term distributions to our unitholders. In the last six months, while average leasing spreads were negative and average incentives were higher, we have achieved a sustainable improvement in occupancy and tenancy mix across the portfolio.”

 

Chief Financial Officer, Mark Fleming, said: “We continue to take advantage of investment opportunities that meet our investment criteria and have completed the acquisition of Warner Marketplace in Brisbane for $78.4 million and the Shell Cove Stage 3 development for $4.8 million. We have recycled capital from lower growth assets by selling Cowes for $21.5 million (or 9.7% above June 2019 book value) and we also completed the divestment of all five properties in the SURF 1 retail fund at a 1.3% premium to the June 2019 book value and aim to wind up this fund and return capital to unitholders during calendar year 2020. In relation to the properties acquired from Vicinity in 2018, we are well advanced in our remixing project which we expect to be substantially completed by June 2020. The overall performance of these centres remains in line with our expectations, and the rental guarantee from Vicinity should cover any short term earnings shortfall during FY20.”

 

 

Financial Highlights

  • Statutory net profit after tax of $90.2 million, up by 129.5% compared to the same period last year primarily due to investment property valuation increase (vs decrease in the same period last year due to expensing of transaction costs)
  • Funds From Operations (“FFO”) of $78.5 million, up by 19.1% on the same period last year
  • Funds From Operations per unit (“FFOPU”) of 8.44 cents per unit (“cpu”) (1), up by 4.2% on the same period last year
  • Distribution of 7.50 cpu, up by 3.4% on the same period last year, a payout ratio of 89% (1)
  • FFO adjusted for maintenance capex, incentives and leasing costs (“AFFO”) of $70.1 million, up by 15.7% on the same period last year
  • Weighted average cost of debt currently 3.4%pa.
  • Gearing of 34.2% as at 31 December 2019, up from 32.8% at 30 June 2019
  • Investment property portfolio value of $3,232.8 million, up by $85.8 million since 30 June 2019, largely due to acquisitions, development expenditure and like-for-like valuation uplift
  • Net tangible assets of $2.29 per unit as at 31 December 2019, up by 0.9% from $2.27 as at 30 June 2019 primarily due to the like-for-like valuation uplift
  • Management expense ratio (“MER”) of 0.39% as at 31 December 2019, up from 0.37% as at 30 June 2019 due to increased D&O insurance costs and sale of SURF 1 assets
  • FY20 FFO per unit guidance increased to 16.90 cpu (3.5% above FY19 actual) and
  • FY20 Distribution per unit guidance of 15.10 cpu (2.7% above FY19 actual)

 

Operational highlights:

  • Portfolio occupancy of 98.3% by GLA as at 31 December 2019 (up from 98.2% as at 30 June 2019), with specialty vacancy down to 4.8% of GLA (from 5.3% as at 30 June 2019)
  • Supermarket moving annual turnover (“MAT”) growth of 2.6%pa (up from 2.0%pa as at 30 June 2019) and specialty tenant MAT growth of 2.3%pa (up from 1.8%pa as at 30 June 2019)
  • Average specialty tenant leasing spreads during the period were negative with average renewals at -1.7% and new leases at -3.9%
  • Comparable NOI increase of 1.6% (prior year 2.5%)
  • One acquisition of Warner Marketplace Brisbane QLD completed during the period for $78.4million and one development at Shell Cove NSW completed during the period for $4.8 million
  • Sale of properties in the “SURF 1” retail fund completed in December 2019, with winding up of that fund to be completed during CY 2020

 

Earnings guidance

SCA's guidance for FY20 FFO is 16.90 cpu (3.5% above FY19, an increase from previous guidance of 16.70cpu) and for FY20 Distributions is 15.10 cpu (2.7% above FY19).

 

The FFO guidance does not assume any further acquisitions or divestments during the second half of FY20.