SCentre’s Distribution Forecasts still Bleak

6 May 2021

SCentre Group provided a brief but very important update to the market on their 1st Quarter results ending March 2021.

The REIT continues to suffer from the impacts of COVID and whilst rent collections have stabilised and sales are starting to recovery, SCentre has retained their distribution forecast of 14ccps, which is good compared to the 7ccps in 2020, but still -36% below the 2019 distribution of 22ccps.

Scentre’s capital requirements are significant as a result of higher incentives and rather than increase debt or raise additional capital (presumably at a discount to NTA), the Group elected last year to reduce distributions and hold onto earnings to cover operating and leasing capital expenditure and fund strategic initiatives.

Portfolio occupancy remained steady at 98.5% leased at the end of March 2021 with 588 lease deals completed in the quarter, including 236 new merchants.

Customer visitation has continued to improve with numbers equal to 93% of 2019 levels. Despite the lower customer numbers, Centre sales are 1.7% higher than in 2019 with Retail Services, Leisure, Technology and Discount Department Store all reporting positive double digit growth.

Sales growth has been strongest in Queensland, South Australia, ACT and New Zealand with New South Wales and Victoria still showing negative growth compared to 2019.

Scentre consciously trimmed back development works in 2020 but were committed to the $55 million entertainment, leisure and dining precinct development at Westfield Mt Druitt which is progressing well and is expected to open at the end of 2021.

Works on behalf of Cbus Property to design and construct the residential and commercial tower in Sydney’s CBD, are progressing well, with completion expected in 2023

Our Views

The fact that customers have not yet returned to pre-2019 levels during the 1st Quarter is a concern as most States were largely COVID free during this period. The retailer categories that have not performed well compared to 2019 are most discretionary retailers and those where online shopping has picked up during COVID. The improvement in Discount Department Stores is a surprise.

SCentres move to retain earnings for use in Capital Expenditure is probably a smart decision as raising additional capital will be dilutive and may not be seen to add any short term value when rents are heading backwards and incentives are higher.

The forecast distribution yield of 5.2%, effectively mirrors the property income yield.

SCentre may be expecting shares in co-owned assets to become available to acquire in which case raising capital to increase exposure to existing assets is probably a smarter move. AMP Capital’s ADPFs interests in a few Westfield Centres are a case in point.

We expect SCentre will increase the distribution toward the end of the reporting period, particularly after the impacts of negative re-valuations have flowed through.

Scentre are not on our Top Picks List

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