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SCA Property Group FY17 Report

August 12, 2017

 

 

 

 

 

 

 

Summary

The SCA Trust released its annual report last week with good results from portfolio re-mixing strategies but with challenges still ahead with long term viability of discretionary retailers which comprise 27% of rental income.

 

The Trust advised that its statutory net profit was up 73% on the prior year, due mainly to acquisitions during the period. The Trusts' FFO per security was up 6.9% from FY16 to 14.7cpu with distributions up 7.4% to 13.1cpu. 

 

NTA was up 14.6% to $2.20 per unit, driven by 66bps improvement in cap rates to an average of 6.47%.

 

The Trust contains 75 Shopping Centre assets (predominantly Neighbourhood Centres) with a total NLA of 525,793 square metres and a total value of $2.3B. Having been aggregated by Woolworths, the Trust has a 34% exposure to Woolworths Supermarkets (by income) and has a weighted average lease expiry of 9.8 years.

 

The Trust is trading at approximately $2.19 per security.

 

 

 

Funds from Operations

The Trust generated FFO of $108M which is an increase of 8.5% on the FY16 FFO. The improvement in FFO was due to changes in the portfolio mix following the sale of NZ assets along with the acquisition of Australian centres with higher specialty retailer  components. Other income from casual leasing, signage and insurance proceeds were also up on previous year. Comparable Net Operating Income for like for like Centres was up 3%.

 

Property expenses were up 6.5% due to the sale of freestanding centres and the acquisitions of enclosed centres which are more expensive to operate.

 

The Trust is also the Fund Manager of two spin off funds, SURF1 and SURF2. The Fund Management Fees form part of the SCP business.

 

Balance Sheet

The Balance Sheet assets showed a positive variation of $289M due predominantly to $476M in valuation gains (CapEx+Fair Value Adjustments) and a new investment from the net proceeds of the NZ asset sales in CQR (+$81M) but offset by reductions in financial instruments ($15M) and the disposal of the NZ assets (-$254M). 

 

The increase in fair value gains was mainly driven by cap rate compression with the average cap rate moving from 7.13% in June 16 to 6.4% in June 17.

 

 

Liabilities increased by $183M to increased debt in support of acquisitions. Overall gearing is slightly down from 34% to 31.8%. The weighted average cost of debt is around 3.8% and the average term is 5 years.

 

 

Portfolio

The Trust acquired 8 assets during the period for $274M and disposed of 4 for $311M and now contains 75 assets (68 neighborhood and 6 sub regional) with a value of $2.36b. 

 

The trust has a vacancy rate across the portfolio of 1.6% with specialty vacancy at 4.8% which is higher than FY16 due to a higher vacancy level in acquisitions. 

 

Rental increases averaged 7.1% across 81 renewed leases providing a total Net Income growth of 3.0%.

 

The trust reported comparable sales growth for Supermarkets of 2.2% and specialty sales up 3.8%. Strong sales growth in non-discretionary retailers were reported with Food/Liquor up 3.7%, pharmacy up 6.2% and services up 9% however discretionary retailers were down with fashion down 1.9%, jewellery down 0.5% and mobile phones down 1.9%.

 

SCA has identified $120M of development opportunities across the portfolio and will continue to seed investments in to further SURF funds.

 

Key Risks

  • Ongoing deterioration in discretionary sales may increase vacancies and or reduce rental income.

  • Softening cap rates and consequential declining values.

  • Potential for further acquisitions in the current cycle to dilute performance.

  • Obtaining valuation gains from development projects

Key Opportunities

  • Achieving growth via strong income generating development pipeline 

  • Growing SURF Fund Management revenues.

 

Outlook

SCP will continue to focus on convenience non-discretionary centres with long leases to quality tenants. SCP will progress some minor development works in the short term to assist growth and will continue to spin off non core assets into separate retail trusts managed by SCP as it did in June 17 with the sale of 2 centres to its SURF2 Fund.

 

SCP provided a guidance for FY18 FFO of 15.1cpa and forecast a distribution of 13.7cpu. (read more)

 

 

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