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Scentre Profit Falls 50% and Leasing Spreads -4.8%


Scentre Group released its half year results to 30 June 2019 this week, with Funds From Operations (“FFO”) of $676.2 million however Statutory Profits for the half are down 50% on the pcp as valuations gains and mark to market derivatives reveal significant impacts.

The challenges for SCentre are significant. Consumer spending is poor and online retailing continues to eat into Westfields' traditional customer base.

Total in store sales grew 1.5% for the half and 1.2% for the year. Department Stores performed poorly, with sales down -5.1% for the first half and down -3.8% for the year. There was a similar story for other discretionary products including fashion (up 0.6%), Jewellery (down -3.8%) and footwear (down -0.4%).

SCentre are working hard to turn their aged Centres into vibrant "Living Centres", with businesses more focused on experiences rather than on goods. Today, 42% of the portfolio is experience based which can only be consumed on-site, including dining, entertainment, health, fitness, financial, education and beauty services.

Comparable Net Operating Income grew by 2.3% in the first six months of 2019 primarily driven by contracted annual rent escalations of approx. CPI+2%, however new lease deals are eating away at the income gains with leasing spreads of -4.8% achieved across 1,189 completed lease deals in the half year.

The market continues to be negative on the stock with the share price down -5% on the same week last year.

Financial Performance

Statutory profit was $740 million for the half year. Scentre Group has total assets under management of $54.6 billion. The Group has a strong financial position with FFO to Debt at 11.3% and interest cover at 3.5 times.

During the half, the Group released $2.1 billion of capital from the divestment of the Sydney Office Towers and the joint venturing of Westfield Burwood. The capital realised from these transactions will be deployed into our business – through providing additional financial capacity for future activities and the security buy-back program of up to $800 million.

The Group has “A” grade credit ratings by S&P, Fitch and Moody’s. Occupancy remains high at 99.3% with comparable net operating income increasing 2.3% for the first six months. During the half we introduced 118 new brands and 117 existing brands grew their store network with us. This recognises the central role of highly productive physical stores in acquiring and retaining customers, building brand advocacy and influencing sales both in-store and online.

Developments

Scentre Group has total active developments underway of $835 million (SCG Share: $413 million). The NZ $790 million (SCG Share: NZ $400 million) development of Westfield Newmarket in Auckland is on track for completion in the fourth quarter with the first stage set to open on 29 August. Westfield Newmarket will set a new benchmark in retail, dining and entertainment bringing together the best local and international brands under one roof including a number of first-tomarket and first-to-portfolio retail partners.

During the half, the Group opened the Bradley Street dining precinct at Westfield Woden, bringing six new restaurants to Canberra as part of a $21 million (SCG share: $10.5 million) project. The Group commenced construction on the $30 million (SCG share: $15 million) rooftop dining, entertainment and leisure precinct at Westfield Doncaster, which is due for completion mid-2020.

At Westfield Carindale, we are pleased to announce Kmart will be introduced and will be located on the second level of the existing David Jones store. The fitout of the latest format David Jones store is progressing well and is on track to open in October 2019.

Outlook

The Group reconfirms the Distribution forecast for 2019 of 22.60 cents per security, an increase of 2%.

SCA Trading Chart vs ASX200 AREIT Blue - SCA, Purple ASX200 AREIT Last 12 months

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