SCA Property Group completes re-purchase of Katoomba Marketplace

22 February 2021

In last week’s announcements, SCA Property Group confirmed that they had agreed terms to re-purchase the Katoomba Marketplace from the related unlisted fund SURF2.

SURF2 was established in 2017 by SCA Property as a 5 year unlisted vehicle which was seeded with Katoomba Marketplace and Mittagong Village. At the time, SCA sold Katoomba Marketplace to the fund for $44.7m reflecting a cap rate of 6.5%.

Five years later, SCA have re-purchased the Centre for $55.1m. The purchase price was 17.2% above SURF2 last independent valuation at December 2019 of $47.0 million and the carrying value at June 2020 of $47.0 million, representing a gain of 23.3% above the original purchase price of $44.7 million.

SCA advised that, after repayment of debt, selling costs and other liabilities, investors in the Fund would expect to receive an internal rate of return of around 12% per annum.

Mittagong Village was sold in June 2020 for $9.7m, -6.7% below its purchase price in 2017.

The Katoomba Marketplace contains a Woolworths Supermarket and a Big W Discount Department Store, with a combined NLA of 9,719sqm. The property has a WALE of 14.8years.

The responsible entity for the unlisted fund advised investors in December that it had received multiple offers from multiple agents to purchase Katoomba Marketplace and that SCA’s Offer was considered to be the superior offer after selling costs.

SCA Property Group have not released details on the acquisition, however based on a typical escalation of rent from the 2017 passing yield, the Group appears to have paid a price equivalent to a 6% passing yield.

Whilst Big W have made no further announcements in relation to their Katoomba store, there are ongoing concerns about the long term tenure of the Big W Katoomba, something that would have caused potential buyers some reason to discount the price. SCA Property Group have exposure to 9 Big W stores across their portfolio.

The property was not formally offered to the market.

Our Views

I expect the investors in SURF2 are pleased with this outcome, but would have questioned why the property was not put to the market or why an updated independent valuation was not obtained to support the sale price, given that a related entity was involved.

Given SCA have 9 Big W stores in the portfolio (and that SCA was spun out of Woolworths), we would expect that they would have good access to the Big W real estate team and have a good understanding of their intentions for the store.

SCA own a number of other Woolworths / BIG W Marketplace Centres, the majority of which are held at book values of 6.25% or softer, suggesting that a 6% purchase price for Katoomba looks particularly sharp and not good value for the REIT.

No doubt SCA were hoping not to disappoint investors in SURF2 by selling at anything that would have resulted in a mediocre return for the fund.