SCA Property Group are hoping for a strong return to its retail centres as restrictions ease in NSW and VIC.
In providing its latest quarter update this week, the Group said that while nationally total sales are higher than previous periods, the results have been patchy with specialities and non supermarket major stores in NSW showing a significant drop in sales.
The drop in sales has seen cash collection rates also decline as the Group implemented the Code of Conduct rules in affected states. Collection rates dropped to 75% in NSW and 83% in Victoria, but are expected to return to normal as restrictions ease. To date SCA have granted $0.4m of SME waivers and $0.5m of deferrals for Q1 FY21 however this was expected to grow.
The Group has been busy acquiring several new assets with the recent settlement of :
- Raymond Terrace (NSW) for $87.5 million (an implied fully let yield of 5.9%); and
- Drayton Central (QLD) for $34.3 million (an implied fully let yield of 5.5%).
In October 2021 we agreed terms to acquire:
- The Moggil Village neighbourhood centre in Brisbane for $54.5 million (at an implied fully let yield of 5.0%); and
- Three assets from the SURF 3 fund for $53.6 million (Moama Woolworths-anchored neighbourhood (NSW), Woodford Woolworths-anchored neighbourhood (QLD) and Warrnambool Target-anchored centre (VIC) at a weighted average implied fully let yield of 6.5%).
These transactions are expected to complete by the end of November 2021.
While cap rates for neighbourhood and convenience-based sub-regional centres have continued to compress since June 2021, SCA continue to assess a number of acquisition opportunities and remain confident of completing more acquisitions during FY22.
Despite not previously providing guidance for FY22, SCA have now forecast that Adjusted Funds From Operations (“AFFO”) per unit, and therefore Distribution per unit (“DPU”), for the first half of FY22 will be at least 7.1 cents per unit and for the second half of FY22 will be at least 7.9 cents per unit (full year FY22 AFFO guidance of at least 15.0 cents per unit).
Tenant Sales
The sales performance of SCP’s tenants has been remarkably robust throughout the COVID- 19 pandemic to date.
Comparable moving annual turnover growth by tenant category (%)
| June 2019 | June 2020 | June 2021 | Sept 2021 | |
| Supermarkets | 2.0% | 5.1% | 3.2% | 1.1% |
| DDS | 2.2% | 7.6% | 9.2% | 1.7% |
| Mini-Majors | (3.1)% | 2.9% | 6.4% | 2.2% |
| Specialties | 1.8% | (1.1)% | 9.7% | 8.1% |
| Total | 1.9% | 4.2% | 4.6% | 2.1% |
However, within lockdown periods tenants have experienced sales volatility. This has played out again in NSW and Victoria during Q1 FY22 which have been impacted by lockdown restrictions. Other States continue to trade well.
Comparable Q1 turnover growth by tenant category (%)
| Rental | % Of Gross Rental Income June 2021 | NSW | VIC | Rest of Australia | Total Portfolio |
| Supermarkets | 38% | 3.8% | (3.1%) | 0.9% | 1.1% |
| DDS | 8% | (32.0%) | (11.0%) | (5.5%) | (14.9%) |
| Mini-Majors | 8% | (16.8%) | 6.3% | 4.7% | 1.3% |
| Specialties | 46% | (16.3%) | 9.2% | 2.1% | (2.0%) |
| Total | (2.1%) | (1.9%) | 0.8% | (0.5%) |
NSW lockdowns commenced in late June 2021 and ended on 11 October 2021. All tenants in NSW are now able to re-open. We expect a strong rebound in sales for NSW specialty tenants in Q2 FY22. NSW represents approximately 31% of our gross rental income.
Victoria lockdowns commenced in July 2021 and are ongoing. It is expected that all tenants will be able to re-open by the end of October 2021. Based on the experience from previous lockdowns, we expect that specialty tenant sales will rebound strongly when the lockdown ends. Victoria represents approximately 17% of our gross rental income.
In the rest of Australia, centres are trading as normal with positive sales growth recorded in Q1 FY22. Supermarket sales growth was positive despite cycling elevated sales levels in Q1 FY21, but Discount Department Store sales growth was negative due to cycling abnormally high levels of sales in Q1 FY21.
Cash Collection Rates
SCP’s cash collection rates have been impacted in NSW and Victoria due to the lockdowns and the reintroduction of the “Code of Conduct” in those States. The Code of Conduct rules are similar to last year in that SCA is required to give rental assistance to small and medium- sized entity tenants (defined as annual turnover of less than $50m) who have experienced sales declines of at least 30% during the lockdown period. The rental assistance must be at least 50% rent waiver and up to 50% rent deferral. To date we have only granted $0.4m of SME waivers and $0.5m of deferrals for Q1 FY21. We expect this number to grow once more tenant applications are received and processed.
Monthly cash collection rates as % of contracted gross rent
While NSW and Victoria cash collection rates are lower than usual, in other States cash collection rates are consistent with business-as-usual levels.
Q1 FY22 cash collection rates as % of contracted gross rent
In NSW, we expect that collection rates will return to normal from November 2021 once applications for relief have been processed and lockdown restrictions have been lifted.
In Victoria collection rates will remain below normal levels until February 2022 due to ongoing restrictions and the terms of the Victorian Code of Conduct which requires rental assistance to be given until 15 January 2022 regardless of the sales performance of tenants after lockdowns have ended.
In other States we are not expecting any protracted lockdowns and we are not expecting the Code of Conduct to be re-introduced.
Capital Management
Since our full year results announcement on 17 August 2021 we have:
- Cancelled the $200.0 million bilateral facility expiring in November 2022; and
- Raised $250.0 million in new 8-year A$ Medium Term Notes with a fixed coupon of 2.45%.
Following the acquisitions of the Brisbane neighbourhood and the SURF 3 assets we expect pro-forma gearing to be approximately 34% (assuming no further cap rate compression since June 2021) and our cash and undrawn debt to be in excess of $140 million. We have no debt expiries until December 2023, our weighted average cost of debt is approximately 2.5%, our weighted average debt expiry is 5.9 years and our fixed/hedged percentage is 65%.
On 29 September 2021 Moody’s issued an updated credit opinion affirming our rating of Baa1 (outlook stable). Our credit rating (and outlook stable) has remained unchanged since we were first rated by Moody’s in 2015.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
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