SCentre Low Income Growth but confident on Place Making Ability

Scentre Group released its results for the 12 months to 31 December 2019, with Funds From Operations (“FFO”) of $1.345 billion, in line with forecast up 0.7% on a per security basis but dragged down by higher negative leasing spreads (-5.5%).

SCentre are hoping that new dinning precincts will begin to generate customer growth and deliver more in-Centre customer experiences as the Group face further pressure from changing demographics, on line retailers and poor performing department stores.

Scentre Group CEO Peter Allen said: “We are creating the places more people choose to come, more often, for longer. Our strategic focus on the customer and curation of our offer to continually meet their changing expectations and preferences has delivered these pleasing results. Our 42 Westfield Living Centres are each strategically located in highly urbanised areas with strong population growth and density.

The strength of our portfolio combined with our leading operating platform has seen annual customer visits grow to more than 548 million. This is an increase of more than 12 million visits."

“We have seen strong demand continue from our retail and brand partners with portfolio occupancy at 99.3%. During the year we introduced 344 new brands and 279 existing brands grew their store network with us. We continue to innovate in how we engage with our customer and are using new technology to enhance our direct engagement with the consumer.

SCentre's innovation includes includes;

• the opening of the Bradley Street dining precinct at Westfield Woden in Canberra, bringing six new restaurants as part of a $21 million redevelopment;
• commencement of a $50 million project at Westfield Carindale which has delivered a new format David Jones store and will introduce Kmart to the centre;
• commencement of construction at Westfield Mt Druitt to deliver a $55 million dining and entertainment precinct, adding 12 new rooftop restaurants and entertainment usages for our customers, and
• the $30 million expansion and refurbishment of the level 2 dining precinct at Westfield Doncaster, which will introduce 12 new restaurants.

SCentre's focus on delivering new dinning precincts to satisfy customer demand will unfortunately have little benefit to the existing centre turnover and rents. The introduction of new dinning areas can often come at the expense of existing food offers and while they may increase customer numbers, their peak trading periods occur when the remainder of the retail stores are closed, providing little flow on benefit to specialty tenants. Customers rarely mix clothes and gift shopping trips with dinning trips.

SCentre are trying to move the tenancy mix to provide offerings that can only be consumed on-site. At present 43% of the stores across the platform being experience based with offerings that can only be consumed on-site. This includes dining, entertainment, health, fitness and beauty services and other lifestyle offerings.

For the 12-month period specialty in-store sales grew by 2.2%, with growth in the 4th quarter of 2.8%. Majors in-store sales declined 0.9% for the quarter and grew 0.7% for the year.

Comparable net operating income increased by just 2.0% during the year. The lower growth follows a 4% average contracted rent escalations for specialty tenants but offset by negative leasing spreads across 20% of the specialty rent budget which were down -5.5%. Average Specialty tenant leasing incentives were 7.2%

On a per security basis FFO was 25.42 cents, up 0.7% or 3.2% on a pro forma basis adjusting for the transactions completed during 2019 and distributions for the 12-month period were 22.60 cents per security, up 2.0% and in line with forecast.

During the year, the Group released $2.1 billion of capital from the divestment of the Sydney Office Towers and the joint venturing of Westfield Burwood. The capital released from these transactions is being redeployed into the business – providing additional financial capacity for future activities and the security buy-back program of up to $800 million.

In late 2019, the Group acquired a 50% interest in Westfield Booragoon in Perth for $570 million and became the long-term property and development manager for the centre.

The Group has a strong financial position with interest cover at 3.6 times and FFO/Debt of 10.3%. Balance sheet gearing was 33.0% at 31 December 2019. The Group has “A” grade credit ratings by S&P, Fitch and Moody’s.

SCentre also announced that it will target net zero emissions across the wholly owned portfolio by 2030.

The group expects to deliver a 3% growth in FFO in 2020.