SCA Property Group Earnings Up 21%, Returning to Pre-Covid levels

16 August 2022

SCA Property Group released their results for FY22 taking net profit after tax to $487.1 million and Adjusted Funds from Operations per unit to 15.30 cpu, up 21% on FY21.

Chief Executive Officer, Anthony Mellowes, said: “Over the last twelve months, our convenience-based centres have remained resilient. Our tenant sales are now 10% above pre-COVID levels. Leasing spreads and cash collection rates were impacted by lockdowns in New South Wales and Victoria during the first half of the year, but improved in the second half. We have made solid progress on our sustainability program, including completing our LED rollout, and the installation of solar panels on our WA assets.”

Chief Financial Officer, Mark Fleming, said: “Pleasingly, our earnings per unit is now above the pre-COVID level. This has been the result of solid operational performance in a challenging environment and a strong balance sheet enabling investment in acquisitions, developments and funds management. Our gearing is at the lower end of our target range and post-year end 81% of our debt is fixed or hedged.”

“We have also progressed our funds management strategy during the year, commencing a new joint venture fund with GIC (named the SCA Metro Fund), and successfully winding up our final SURF fund. The SCA Metro Fund positions us to access relatively lower return metropolitan neighbourhoods, in partnership with a high quality and globally recognised partner, while growing asset-light management fee income. The GIC partnership is a strong endorsement of our expertise in the neighbourhood shopping centre segment.”

The value of investment properties increased to $4,460.9 million during the period (from $4,000.0 million at 30 June 2021), due to acquisitions of $347.5 million and a valuation increase of $421.0 million, offset divestments of $307.6 million. The valuation increase included a like-for-like increase of $354.0 million plus transaction costs of $17.3 million, net capital expenditure and straight lining net of amortisation of $13.1 million and development spend of $36.6 million. The like-for-like increase was primarily due to capitalisation rate tightening by 47bps.

The total portfolio weighted average capitalisation rate is now 5.43% (5.90% as at 30 June 2021), with sub- regional centres compressing to 5.87% (from 6.35% as at June 2021), neighbourhood centres compressing to 5.28% (from 5.77% as at June 2021) and freestanding centre compressing to 4.63% (5.50% as at 30 June 2021).

SCA expects earnings to be negatively impacted by increases in floating interest rates in FY23 and has lowered guidance for FY23 FFO per unit to 17.0 cpu (FY22 17.4cpu ) and for FY23 AFFO per unit is 15.0 cpu (FY22 15.3cpu).

Financial highlights:

Net Profit After Tax of $487.1 million, up by 5.2% compared to last year (“FY21”)
Funds From Operations (“FFO”) of $192.7 million, up by 21.2% compared to FY21 FFO per unit of 17.40 cents per unit (“cpu”), up by 17.9% compared to FY21
Adjusted Funds From Operations (“AFFO”) of $169.5 million, up by 24.8% compared to FY21 AFFO per unit of 15.30 cpu, up by 21.3% compared to FY21
Distributions of 15.20 cpu, up by 22.6% compared to FY21, a payout ratio of 99.8% of AFFO
Gearing of 28.3% at 30 June 2022, down from 31.3% at 30 June 2021 primarily due to valuation increases
Average cost of debt for FY22 was 2.5% (FY21: 2.4%), with 69.6% of debt fixed or hedged at 30 June 2022 (30 June 2021: 50.8%). Post year end, the percentage of debt fixed or hedged was increased to 81%
Investment property portfolio value of $4,460.9 million, up by $460.9 million since 30 June 2021, due to a valuation increase of $421.0 million and acquisitions of $347.5 million, offset by divestments of $307.6m
Net tangible assets of $2.81 per unit at 30 June 2022, up by 11.5% from $2.52 at 30 June 2021 primarily due to the investment property valuation increase
Management expense ratio (“MER”) of 0.38% at 30 June 2022, down from 0.41% at 30 June 2021 due to increased assets under management

Operational highlights:

Total comparable store MAT sales are 10.0% higher than pre-COVID
Portfolio occupancy of 98.1% by GLA at 30 June 2022 (compared to 97.4% at 30 June 2021), with specialty vacancy of 5.0% of GLA (compared to 5.1% at 30 June 2021)
Leasing spreads improved to 2.0% in FY22, compared to (0.4%) in FY21, including 3.3% in the second half of the financial year
Seven acquisitions for $347.5 million (excluding transaction costs) were completed during the year
“SURF 3” fund was wound up during the period, crystalising an internal rate of return of 11% per annum for unitholders
New fund with GIC (“SCA Metro Fund”) commenced in April 2022. SCP divested seven seed assets to the fund for $284.5 million. Initial target fund size is $750 million

Earnings

The Group recorded a statutory net profit after tax of $487.1 million, which includes significant movements in non-cash fair value adjustments, including a $354.0 million increase in the like-for-like fair value of investment properties.

Excluding non-cash and one-off items, Funds From Operations (“FFO”) was $192.7 million, up by 21.2% compared to FY21. The main reasons for this increase were acquisitions and comparable net operating income (“NOI”) growth.

Adjusted Funds From Operations (“AFFO”) was $169.5 million, up by 24.8% compared to FY21. Maintenance capex of $12.9 million was higher than the prior period (FY21: $9.7 million) due to the increased size and ageing of the portfolio, while leasing costs and fitout incentives of $10.3 million were slightly lower than the prior period (FY21: $13.5 million) due to a deliberate strategy to allow an increase in holdovers during the year.

Property valuations

Net tangible assets

The Group’s net tangible assets (“NTA”) per unit is $2.81, an increase of 29 cpu or 11.5% from $2.52 at 30 June 2021. This is primarily due to the like-for-like investment property valuation increase.

Capital management

The Group has maintained a prudent approach to managing its balance sheet. Gearing was 28.3% at 30 June 2022 (compared to 31.3% at 30 June 2021). This is below the lower end of the target range of 30-40% (with a preference to remain below 35% at this point in the cycle). The decrease in gearing was primarily due to the valuation increase during the year.

At 30 June 2022, the Group had cash and undrawn facilities of $452.7 million, the average maturity of debt was 5.3 years, the percentage of debt fixed or hedged was 69.6% and the weighted average fixed/hedged maturity was 4.9 years. The Groups’ average cost of debt for FY22 was 2.5% with no debt maturities until June 2024.

In August 2022, the Group amended a $150.0 million interest rate swap expiring in February 2032 at zero cost to a $250.0 million interest rate swap expiring in July 2024. As a result of this, at 15 August 2022, the fixed/hedged percentage increased to 81% and the fixed/hedged maturity has decreased to 3.0 years.

Distributions

SCP aims to deliver secure and growing distributions to its unitholders through the cycle. Distributions declared in respect of FY22 were 15.20 cpu compared to 12.40 cpu in FY21, an increase of 22.6%. The estimated tax deferred component for the FY22 distributions is (3%), which is lower than our expected normalised level of 20-25% due to the capital gains from the sale of $284.5 million properties to the SCA Metro Fund.

The distribution reinvestment plan (“DRP”) remained active for both the January 2022 and August 2022 distributions. The January 2022 distribution raised $17.5 million at $2.88 per unit, representing a take-up rate of 21.9%, while the August 2022 distribution was underwritten to 50% and will raise $44.7 million at $2.80 per unit (natural take-up was 23.8%)

Operational performance

Portfolio occupancy

SCP had a portfolio occupancy rate of 98.1% at 30 June 2022 (30 June 2021 was 97.4%) and the specialty vacancy rate was 5.0% of GLA (30 June 2021 was 5.1%). The increase in portfolio occupancy was driven by re-leasing of the former Gateway Target vacancy (with a new grocer/deli) and acquisitions with higher occupancy levels.

Sales growth

Comparable store sales MAT growth for the 12 months to 30 June 2022 was 1.3%. Discount Department Stores recorded a decline of (6.1%) due to unusually strong growth in the prior period. Sales for all tenant categories are higher than the pre-COVID period, with total portfolio MAT at 30 June 2022 being 10.0% higher than as at 31 December 2019.

Specialty key metrics

Specialty tenants have remained resilient during the period:

Sales productivity is $9,865 per square metre;
Rents remain amongst the lowest in the sector at $793 per square metre; and
Specialty occupancy cost is 8.7%.

SCA’s leasing strategy is focused on:

Taking a considered position on tenants holding over while targeting positive renewal spreads and maintaining a high retention rate on renewals;
Reducing specialty vacancy; and
Continuing to remix toward non-discretionary categories.

Leasing spreads were 2.0% in FY22 (compared to -0.4% in FY21), including 3.3% in the second half of the financial year. The Group completed 252 leasing deals during the year, slightly lower than usual due to our deliberate strategy around holdovers. SCA expect to continue to achieve positive leasing spreads in FY23.

Acquisitions, disposals and developments

During the year, SCA completed seven acquisitions of convenience-based shopping centres and some adjacent sites for $347.5 million (excluding transaction costs). SCA also divested Ballarat (VIC) for $23.1 million and seven centres for $284.5 million to the SCA Metro Fund.

In July 2022, SCA settled the purchase of five convenience-based shopping centres from Primewest for a combined purchase price of $180.0 million (excluding transaction costs).

The Groups’ development pipeline continues to progress, with the Soda Factory in Brisbane (QLD) redevelopment successfully completed in December 2021.

Funds management

In April 2022, SCA established a new fund called the “SCA Metro Fund” in partnership with GIC. The fund is owned 80% by GIC and 20% by SCP. SCP is the Property Manager and Investment Manager for the fund. The fund targets metropolitan neighbourhood assets and has an initial target gross asset value of $750 million. The fund was seeded with seven assets from SCP for $284.5 million. In July 2022, the fund acquired a neighbourhood shopping centre at Beecroft in metropolitan Sydney (NSW) for $65.0 million, bringing gross asset value to $349.5 million.

During the year SCA wound up the SURF 3 fund, crystalising an 11% per annum IRR for investors, and generating performance fee of $0.4 million.

Sustainability

The Group has set itself a range of sustainability targets including to achieve Net Zero for scope 1 and 2 emissions by FY30. During the year we have invested $17.5 million in sustainability initiatives, which are expected to meet our investment hurdles. SCA have now completed 100% of LED lighting across our portfolio, and completed the installation of 6.22 MW of solar panels on our WA centres. The Group have also achieved a 6 star NABERS rating for their head office and improved their GRESB rating score.

Strategy and outlook

SCA’s focus continues to be to serve local communities for their everyday needs, partner with supermarket anchors to provide a convenient supermarket offering (including online fulfilment), actively managing centres to ensure that they have sustainable specialty tenants paying sustainable rents, and execute on sustainability initiatives.

SCA will continue to take a disciplined approach to acquisitions, progress development pipeline, and grow the SCA Metro Fund.

These initiatives will support their core strategy which is to generate defensive, resilient cash flows to support secure and growing long term distributions to unitholders.

Earnings guidance

SCP has a proven track record of delivering growing long-term returns to unitholders. In FY23, SCAs earnings are expected to be negatively impacted by increases in floating interest rates. SCA’s guidance for FY23 FFO per unit is 17.0 cpu and for FY23 AFFO per unit is 15.0 cpu.

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