Shopping Local Boosts SCA FY21 Property Results

17 August 2021

A push back to shopping local has helped SCA Property Group show a 13% increase in earnings and a total securityholder return of 20%.

Chief Executive Officer, Anthony Mellowes, said: “Over the last twelve months, our convenience-based centres have benefited from the shift to shopping locally. Our anchor tenants have experienced strong sales growth and turnover rent has increased. Specialty tenant sales recovered quickly following the easing of restrictions and leasing spreads were positive in the second half of the financial year.

“We have continued to grow our portfolio in a disciplined manner, contracting to acquire nine conveniencebased centres during the period, progressing with our development pipeline, and successfully winding up our SURF 1 and SURF 2 funds.

“We have also continued to progress our sustainability program, including setting a Net Zero target for Scope 1 and 2 carbon emissions by 2030 and committing $21.2 million in investment toward that objective over the next twelve months.”

Chief Financial Officer, Mark Fleming, said: “The COVID-19 pandemic has continued to negatively impact our financial results in FY21. During the financial year we provided $10.5 million in rental assistance to over 800 tenants (comprising rent waivers of $6.9 million and rent deferrals of $3.6 million), however rent collection rates returned to pre-pandemic levels by the end of the period.

“Our balance sheet remains in a strong position. As at 30 June 2021 we had cash and undrawn facilities of $290.6 million and our gearing was at 31.3% which is towards the lower end of our target range of 30%-40%.

We will also raised $72.4 million in new equity by underwriting our DRP in August 2021, and this means that we could debt fund approximately $190 million of further acquisitions during FY22 and still keep our gearing below 35%.”

The Group recorded a statutory net profit after tax of $462.9 million, which includes significant movements in non-cash fair value adjustments, including a $354.2 million increase in the fair value of investment properties (being the capitalisation rate tightening by 61bps, valuation NOI increasing by 1.3% and removal of $27.4 million of COVID-19 allowances).

Excluding non-cash and one-off items, Funds From Operations (“FFO”) was $159.0 million, up by 12.9% compared to FY20. The main reasons for this increase were a reduction in the COVID-19 earnings impact (from $20.5 million in FY20 to $7.3 million in FY21) and acquisitions that were completed in FY21. On a per unit basis the FFO per unit increase was lower due to the full year effect of equity raisings completed in late FY20.

Due to the continued uncertainty created by the COVID-19 pandemic, SCA did not provide FY22 guidance at this time, but committed to target a Distribution payout ratio of approximately 100% of AFFO with a target pre-COVID level of 7.5cpu per half (or 15.0cpu per annum) once the impacts of the COVID-19 pandemic have ended.

SCA Property Group are not on our Top Picks List despite our preference for Neighbourhood Centres, as the group holds a large proportion of sub regional centres which are more heavily exposed to retail trading issues.

The REIT commenced the year with a security price of $2.20 against a NAV of $2.22 (-1% discount to NAV) and closed the year at $2.52 with a NAV of $2.52. The REIT provided a 12.4c distribution for FY21, equating to a 5.6% yield, which together with a 14.5% lift in unit price would provide investors with a total return of 20.2%.

Key financial and operational highlights for the period are:

Financial highlights:

Net Profit After Tax of $462.9 million, up by 441.4% compared to the same period last year (“FY20”) primarily due to an increase in the fair value of investment properties
Funds From Operations (“FFO”) of $159.0 million, up by 12.9% compared to FY20
- FFO per unit of 14.76 cents per unit (“cpu”), up by 0.8% compared to FY20
Adjusted Funds From Operations (“AFFO”) of $135.8 million, up by 9.3% compared to FY20
- AFFO per unit of 12.61 cpu, down by (2.6%) compared to FY20
Distributions of 12.4 cpu, down by (0.8)% compared to FY20, a payout ratio of 98.5% of AFFO
Weighted average cost of debt currently 2.4% pa. Gearing of 31.3% as at 30 June 2021, up from 25.6% at 30 June 2020 primarily due to acquisitions completed during the period
Investment property portfolio value of $4,000.0 million, up by $861.8 million since 30 June 2020, due to a like-for-like valuation increase of $409.4 million and acquisitions of $452.4 million
Net tangible assets of $2.52 per unit at 30 June 2021, up by 13.5% from $2.22 at 30 June 2020 primarily due to the like-for-like valuation increase
Management expense ratio (“MER”) of 0.41% at 30 June 2021, up from 0.38% at 30 June 2020 due to increased D&O insurance costs and no KMP STIP in FY20

Operating highlights:

Supermarket moving annual turnover (“MAT”) growth of 3.2% (compared to 5.1% at 30 June 2020) and specialty store MAT growth of 9.7% (compared to (1.1%) at 30 June 2020)
Portfolio occupancy of 97.4% by GLA as at 30 June 2021 (compared to 98.2% at 30 June 2020), with specialty vacancy of 5.1% of GLA (no change from 30 June 2020)
Leasing spreads improved to (0.4%) in FY21, compared to (4.6%) in FY20
Seven acquisitions for $452.4 million (excluding transaction costs) were completed during the period
“SURF 1”and “SURF 2” funds were wound up during the period, crystalising an internal rate of return of 11% and 12% respectively per annum for unitholders

Portfolio update

The directly attributable COVID-19 earnings impact was $7.3 million (compared to a $20.5 million impact in FY20) including $6.9 million of waivers granted during the period and $4.4 million of other direct COVID-19 impacts (such as increased cleaning expenses and rent freezes), offset by a reduction in the ECL allowance running through property expenses of $4.0 million. The ECL allowance has reduced because increased allowances for deferred and unpaid rent during FY21 were offset by greater than expected collections of FY20 unpaid rent

Portfolio occupancy

SCP had a portfolio specialty vacancy rate of 5.1% of GLA as at 30 June 2021 which is at the higher end of their target range of 3-5%. The portfolio occupancy rate declined to 97.4% as at 30 June 2021 (30 June 2020 was 98.2%) partly due to the Target store at The Gateway closing.

Acquisitions, disposals and developments

During the period SCA completed seven acquisitions of convenience-based shopping centres for $452.4 million (excluding transaction costs). Acquisitions included

Warnbro Centre for $92.9m
Market Place Warner $78.4m
Auburn Central for $129.5m
Marketown Shopping Centre for $150.5m

In July 2021 the Group also completed the acquisitions of Raymond Terrace (NSW) for $87.5 million and Drayton Central (QLD) for $34.3 million.

The Groups development pipeline continues to progress, with good progress made at Soda Factory in Brisbane (QLD) due to open before the end of 2021.

Funds management

During the year, SCA wound up the SURF 1 and SURF 2 funds, crystalising an 11% and 12% respectively per annum IRR for investors, and generating performance fees of $0.5 million and $0.7 million respectively. The SURF 3 retail fund continues to operate with three properties valued at $50.2 million

Valuations

The value of investment properties increased to $4,000.0 million during the period (from $3,138.2 million as at 30 June 2020), due to acquisitions of $452.4 million and like-for-like valuation increase of $409.4 million. The like-for-like valuation increase was due to capitalisation rate tightening by 61bps, valuation NOI increasing by 1.3% and removal of $27.4 million of COVID-19 allowances.

The total portfolio weighted average capitalisation rate is now 5.90% (6.51% as at 30 June 2020), with sub- regional centres compressing to 6.35% (from 6.84% as at 30 June 2020) and neighbourhood centres compressing to 5.77% (from 6.39% as at June 2020).

The Group’s net tangible assets (“NTA”) per unit is $2.52, an increase of 30 cpu or 13.5% from $2.22 as at 30 June 2020. This is primarily due to the like-for-like investment property valuation increase.

Capital position

The Group has maintained a prudent approach to managing its balance sheet. Gearing was 31.3% at 30 June 2021 (compared to 25.6% as at 30 June 2020). This is toward the lower end of their target range of 30-40% (with a preference to remain below 35% at this point in the cycle). The increase in gearing was due to the acquisitions completed during the year.

At 30 June 2021, the Group had cash and undrawn facilities of $290.6 million, the weighted average cost of debt is 2.4%, the average maturity of our debt is 5.3 years, the percentage of debt fixed or hedged is 50.8% and the weighted average fixed/hedged maturity is 3.0 years. During the year SCA cancelled $300.0 million of interest rate swaps at a cost of $9.1 million.

The Group have no debt maturities until FY23 with a $200.0 million bank facility in November 2022.

Strategy and outlook

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

Earnings guidance

Due to the continued uncertainty created by the COVID-19 pandemic, SCA did not provide FY22 guidance at this time but committed to target a Distribution payout ratio of approximately 100% of AFFO with a target pre-COVID level of 7.5cpu per half (or 15.0cpu per annum) once the impacts of the COVID-19 pandemic have ended.

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