SCentre Values fall -$4.2bn and Earnings -40%

24 February 2021

SCentre have written back the value of its assets by $4.2bn as the impacts from COVID take a toll on the mall giant.

The Group today released its results for the 12 months to 31 December 2020 with Operating Profit of $763.4 million down -40% on the previous corresponding period and Funds From Operations (FFO) for the year was $766.1 million, down -42%.

The results are not surprising given that their Westfield Centre saw close to 100 million less visitors over the 12 months resulting in $3bn less sales flowing through the tenant’s registers.

In reporting like for like sales, SCentre were only able to include sales for 40% of its retailers who had traded during 2019 and 2020. For those tenants, sales fell by -4.8% on average with Victoria tenants falling -16.9%.

SCentres tenant partners wore the pain. COVID-related deals were completed for 3,398 of their 3,600 retail partners, including 2,456 SME retailers. As a result, Scentre’s rental income was down -$181m (-7.3%) with a further Expected Credit Charge (ECC) of -$304m (equal to 13% of 2019 Income) provided for in the accounts.

The Statutory result for the 12-month period, inclusive of unrealised non-cash items, was a loss of -$3,732 million. The result includes a reduction in property valuations of -$4,254 million during the 12- month period. The drop in value is partly due to a +17bps softening of the weighted average cap rate (4.89%) and a circa -10% drop in market rents. NTA per security has reduced to $3.63.

During 2020, the Group achieved gross operating cash inflow of $2,357 million and net operating cashflows (after interest, overheads and tax) grew by 95.7% in the second half of the year resulting in $771 million for the 12-month period. The Group collected $2,059 million in gross rent collections, including $641 million during Q4 2020, equivalent to 100% of gross billings.

Scentre Group CEO Peter Allen said: “2020 was a challenging year and I am proud of how our people adapted to the conditions”

“We trialed a number of initiatives, such as aggregated ‘click + collect’ that facilitated our retail partners connecting with customers during periods of government restrictions.

“We accelerated strategic customer initiatives such as our Westfield Plus membership program, which continues to grow and now has more than 1.2 million members.

“Our capital management actions were focused on strengthening our financial position and preserving value for the long term by not raising equity from our securityholders.

SCentre noted that demand for space across Westfield remains strong with 2,625 lease deals during the year, including 848 new merchants. The portfolio was 98.5% leased at 31 December 2020, down from 99.3% last year. Leasing spreads are now -13.1%

SCentre have resisted calls from some retailers to make wholesale changes to its lease structure to more of a turnover based rent, which would have placed more risk on the property owner than the tenant.

During the year, the Group successfully completed a new dining precinct at Westfield Doncaster (Victoria), introducing 14 new restaurants to the centre. The $50 million project at Westfield Carindale (Queensland) was completed including the introduction of a new Kmart store. Special projects at Westfield Belconnen (ACT) and Westfield Hornsby (NSW) were also completed in the period.

In December 2020, Scentre Group was appointed by Cbus Property to design and construct the residential and commercial tower on the site of the former David Jones menswear store on the corner of Market and Castlereagh streets in Sydney’s CBD.

During 2020, the Group executed $10.1 billion of new and extended funding, including $3.6 billion of bank facilities, $2.4 billion of long-term bonds and $4.1 billion of subordinated notes, further diversifying the Group’s sources of capital, strengthening the Group’s credit metrics and protecting securityholder value. The Group now has available liquidity of $6.9 billion, sufficient to cover all debt maturities to early 2024. Overall gearing has dropped from 33% in 2019 to 27.7% in 2020.

Peter Allen said said, “Whilst uncertainty remains in 2021, subject to no material change in conditions, the Group expects to distribute at least 14.00 cents per security for 2021. The Distribution is expected to continue to grow in future years. The Group plans to retain earnings to cover operating and leasing capital expenditure, fund strategic initiatives and reduce net debt.”

Our Views

As with all major mall operators, the COVID Pandemic has created extremely challenging conditions for SCentre. The Group are suffering significant shortfalls in operating income which is leading to lower market rents and lower valuations.

The forecast distribution for 2021 of 14 cents equates to a 4.9% yield on todays price of $2.84.

We expect valuations to fall further as a result of a further softening of cap rates and further falls in market rents. The REIT is trading at a -21% discount to NTA, reflecting the market expectation of worsening conditions.

We expect the Group will require further capital to manage the revitalisation of Malls that will be necessary post COVID to entice retailers and ultimately shoppers back to their Centres. Scentre have flagged the need to retain earnings for this purpose and as such distributions are expected to remain lower for longer.

SCentre are not on our recommend list.

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