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SCA Growth from Acquisition but...

SCA have had a strong year in the first half of FY2019 following $667M of acquisitions, including 10 centres from Vicinity, which have boosted results across the board. The group completed the capital raising of $383m of equity and $687M in debt to fund the acquisitions which have enable the group to grow Funds from Operations by 17.5% and FFO per unit by 7.7%.

With a portfolio focused on convenience (mostly non discretionary) retail, it is expected that retail sales in the portfolio will continue to grow in line with inflation and the results in the first demonstrate this with Supermarket MAT sales growth of 1.7%, Discount Department Stores at 1.9% and Specialty stores at 3.5%.

SCA point out that the Vicinity Centre have been a drag on performance with negative sales growth and negative renewal spreads however SCA suggest that these are in line with the acquisition expectations and that SCA will show greater value add to these Centres in the coming years.

The increase in the FFO/Unit comes about by the accreative impact on equity that raising 2/3rds of the capital from the debt markets (at a cost of 3.8% pa) provides.

Valuations in the portfolio were mostly unchanged during the period. The valuation results announced in December showed the like-for-like Australian properties valuation increased by $11.4m, or 0.5% with the weighted average capitalisation rate softening by 4bps to 6.37% at December 2018.

Gearing has increased over the period from 31% to 34% as a result of the substantial new debt taken on board to fund the acquisition program.

SCA have also continued the program of spinning off non core assets into wholesale funds and in July 2018 launched SURF3 Fund containing 4 assets s (Moama, Woodford, Swansea, Warrnambool Target) for $57.9m, at a cap rate of 6.92%. SCA had hoped to raise capital fro SURF4 but have announced a delay in the process citing the impacts of the Hayne Royal Commission on the financial planning industry as a key reason for the delay. However market sentiment has changed in the retail sector and as cap rates compression in the sector is at an end, SCA are facing a tough road ahead both in selling assets into the Funds at book value and in not diluting the performance of the trust as a result.

The SCA Board continue to maintain their previous guidance for FY19 with FFO per unit guidance of 16.20 cpu (5.9% above FY18) and DPU guidance of 14.70 cpu (5.8% above FY18).

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