Scentre Group Earnings: Strong Retail Conditions Help Scentre Group Find Its Mojo
Scentre Group’s SCG first-half 2023 result was in line with our full-year expectations and management guidance. Funds from operations of AUD 10.74 cents per security looks on track for our full-year estimate of AUD 20.99 cps, and distributions of AUD 8.25 cps are halfway to our full-year estimate of AUD 16.5 cps. More importantly for the medium term, we think downside risk should Australia enter a recession has been reduced by new leases signed in the half. On the time value of money our fair value estimate rises 3% to AUD 3.40, and Scentre Group securities screen as almost 20% undervalued.
Scentre’s occupancy improved to 99%, up 0.2%. The average lease length increased to 6.9 years, up from 6.8 years, with strong retail conditions driving tenants to sign new leases. Near full occupancy and strong retail conditions helped drive specialty leasing spreads, a measure of rents on new leases compared with old leases, to positive 2.6%. That’s a substantial improvement from the negative 3.9% leasing spreads in the June 2022 half-year. Scentre achieved an average specialty rent escalation of 8.1%, with contracted specialty rent increases calculated as the Consumer Price Index plus 2%, on average. These long leases with good rental uplifts are critically important at present, as it should help Scentre Group weather any potential weakness in consumer spending.
On that front, management commented that tenant sales growth moderated in June and July but remained positive. Leasing momentum appeared to continue into fiscal 2024, with management stating it has signed well over 300 leases since June 30, 2023, compared with 1,567 leases signed in the June half. By way of comparison, Scentre signed only 596 leases in the 2020 June half-year, and 1,189 in the 2019 June half-year.
Our thesis that a strong retail recovery would help Scentre Group get back into a position of strength and negotiating leases appears to be playing out, mitigating the risks of its heavy debt burden.
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