SCA Property Group (SCP) reported solid and in line FY22 results

Investment Thesis

Lackluster FY23 distribution guidance.
SCP’s share price is trading on par to its NTA.
Sustainable distribution yield.
Strong and experienced management team.
Retail properties continue to be a softening broader market in Australia.
Current low interest rate environment fosters growth and demand in the retail industry.
Improving trends in supermarket sales growth, with strong performance from Woolworths.
Robust development outlook and potential upside from development pipeline and new acquisitions.
Increasing exposure to anchor and non-discretionary customers, providing sustainable and longer-term cashflows and rental income.
SCP’s portfolio occupancy rate is 98.3%; it has in excess of 1,300 tenants. The bulk of gross rent comes from Woolworths and Wesfarmers, and of the remaining portion, there is a heavy weighting towards non-discretionary categories.

Key Risks

Potential further Covid-19 impacts may result in rental earnings and valuation declines.
Likely increases in interest rates or deterioration in credit/capital markets in coming years. This narrows the interest rate-dividend yield differential.
Digital trend of online shopping reduces demand for retail spaces especially with the entrance of Amazon in the Australian market. Hence, this may also affect valuations of assets.
Any deterioration in property fundamentals especially delays with developments, declining asset values, retailer bankruptcies and rising vacancies.
Lower sales growth for WES/Coles and WOW because of Costco and Aldi taking market share.

Key Highlights:

Relative to the pcp and on a constant currency basis: Net Profit After Tax of $487.1m, up +5.2%. Funds from Operations (FFO) of $192.7m, up +21.2%, or FFO per unit of 17.40cpu, up +17.9%. Adjusted Funds from Operations (AFFO) of $169.5m, up +24.8%, or AFFO per unit of 15.30 cpu, up +21.3%.

SCP declared distributions of 15.20 cpu, up +22.6% and represents a payout ratio of 99.8% of AFFO.
Gearing of 28.3% at 30 June 2022, is down from 31.3% at 30 June 2021 mainly due to valuation uplift. Gearing remains below the lower end of target range of 30-40% (with management highlighting they prefer to remain below 35% at this point in the cycle).
SCP’s average cost of debt is 2.5% (versus 2.4% in FY21), with 69.6% of debt fixed or hedged at FY22-end (versus 50.8% at FY21-end). Subsequently, management noted the percentage of debt fixed or hedged was increased to 81%. SCP has no debt maturities until June 2024.
Property portfolio value of $4,460.9m, up $460.9m since FY21-end driven by $421.0m valuation uplift and acquisitions of $347.5m, offset by divestments of $307.6m. SCP’s net tangible assets of $2.81 per unit at FY22-end, is up +11.5% from $2.52 at FY21-end due to the investment property valuation increase.
Property Portfolio Highlights. Relative to the pcp: The value of investment properties increased to $4,460.9m during FY22 (from $4,000.0m at FY21-end), due to acquisitions of $347.5m and valuation increase of $421.0m, offset divestments of $307.6m. Total portfolio weighted average capitalisation rate is now 5.43% (versus 5.90% at FY21-end), with sub-regional centres compressing to 5.87% (from 6.35% at FY21-end), neighbourhood centres compressing to 5.28% (from 5.77% at FY21-end) and freestanding centre compressing to 4.63% (5.50% at FY21-end).
Total comparable store MAT sales are 10.0% higher than pre-Covid.
Portfolio occupancy of 98.1% by GLA was slightly up from 97.4%, with specialty vacancy of 5.0% of GLA (compared to 5.1% at FY21-end), driven by re-leasing of former Gateway Target vacancy (with a new grocer/deli) and acquisitions with higher occupancy levels. SCP saw leasing spreads increase to 2.0% in FY22, versus (0.4%) in FY21, including 3.3% in 2H22. (4) SCP completed seven acquisitions totalling $347.5m (excluding transaction costs) in FY22. In July 2022, SCP acquired five convenience-based shopping centres from Primewest for $180.0m (excluding transaction costs). (5) SCP’s “SURF 3” fund was wound up in FY22, seeing an internal rate of return of 11% per annum for unitholders. SCP launched a new fund with GIC (‘SCA Metro Fund’) in April 2022; 80% GIC owned, and 20% SCP owned, who will also be the Property Manager and Investment Manager. The Fund has an initial target fund size of $750m. SCP divested seven seed assets to the fund for $284.5m, and post reporting date, the Fund acquired a neighbourhood shopping centre at Beecroft in metropolitan Sydney (NSW) for $65.0m, which brings gross asset value to $349.5m.

Company Description

SCA Property Group (SCP) owns a diversified shopping centres portfolio located throughout Australia. The portfolio is currently valued at $4,426.4 million. SCA Property Group predominantly focuses on convenience retailing through its ownership and management of a quality portfolio of neighborhood and sub-regional shopping centres and freestanding retail assets.

(Source: Banyantree)

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