‘Last mile’ logistics changes game for regional shopping malls

SCA Property’s Anthony Mellowes: ‘We targeted GIC because they are one of the best sovereign wealth funds in the world.’ Picture: Britta Campion

Small $50m neighbourhood shopping centres dotted all over Australia are on someone else’s shopping list – the big property fund manager.

On Thursday SCA Property announced a $750m joint venture with the Singapore government’s sovereign wealth fund group GIC. That’s a sizeable lick.

For investors the metro centres offer the predictable cashflow of supermarkets, convenience retail and other essential services like GPs and nail bars, perhaps 15 shops in total. But the fresh upside is all about “last mile” logistics.

Metro shopping centres are increasingly being used by tenants not just as retail outlets but mini hubs to fulfil the rush of online orders from customers and for click and collect.

The latest joint venture offers GIC exposure to this upside as it expands its footprint in the Aussie property market.

For Anthony Mellowes, who runs the $3.2bn listed business of SCA, this is a deal he has been chasing for some time. “We targeted GIC because of their interest in the sector and they are one of the best sovereign wealth funds in the world, normally a bit ahead of the game,” he says.

In GIC, Mellowes has a partner of huge scale with a substantially lower cost of capital at a time when capitalisation rates on quality property assets are compressing. The cap rate is the ratio of a property’s income over its price. It compresses when property gets hot.

GIC will have 80 per cent of the joint venture. SCA with 20 per cent will manage the investments. The deal also allows Mellowes to recycle capital into the fastest growing regional centres.

SCA is a real estate investment trust with 99 centres under management. In November the portfolio value was $4.35bn with an occupancy rate of more than 97 per cent.

It was spun out of Woolworths in 2012 to be a landlord of many of the Woollies shopping centres. Today, Woolies (including Endeavour Drinks) provides 26 per cents of rental income, Coles 12 per cent, Big W 5 per cent and Wesfarmers (with Kmart, Bunnings and Officeworks) 3 per cent.

For supermarkets in regions with lower populations, SCP centres are ideally placed for last mile logistics. Coles and Woolworths have built highly efficient distribution centres and trucks which deliver to supermarkets close to local customers.

Mellowes says the customers in store deliver the biggest margin for the supermarkets. Home delivery is lower margin. But the highest growth model at present is “direct to boot”, where the shop picks the product and the customer does the delivering. “They still make a good margin on that. And that is where they would prefer to go because they make a much better margin on that than home deliveries,” he says.

SCP’s own revenues are directly linked to these online sales.

“We get growth from the supermarkets via turnover rent,” says Mellowes. “We have 90-odd supermarkets and for three we get 50 per cent of the online sales. But for the balance, 100 per cent of those sales are included in the definition of turnover.”

Locking in online revenue is nothing new, says the landlord. It is an extension of the old arrangements around phone and fax orders and drive-throughs. The difference is the growth in online which Mellowes believes to be a permanent shift.

In its first quarter trading update in October, Woolworths reported online sales growth of 53.5 per cent over the previous year to $1.9bn. Online now contributes 11.4 per cent of total sales.

Three-quarters of stores in SCA’s centres offer click & collect, including 70 supermarkets. Two supermarkets have drive-through for online pick up, and another 14 drive-throughs are planned next year.

Other specialty tenants are using their stores in SCA centres as logistics hubs for the local area. In its full-year results in August, Domino’s announced it was taking the next step to build out its opportunity markets. “More stores reduces the last mile delivery.”

Historically, Mellowes says there has been little institutional interest in the 1200 neighbourhood centres across Australia. Most owners have been wealthy individuals or families. “There is always liquidity because of HNW (high net worth) and families are selling generally for succession planning issues. And they are still the largest buyers.”

SCA retail centres were put together by Woolworths, which put its balance sheet to good use during GFC when developers where hit by the credit crunch.

Today Mellowes sees more institutional interest than ever before. “It’s an accumulation strategy rather than just buying a 50 per cent share in a large retail centre and placing $200m to $500m in one transaction. Here the average asset size is about $40m to $50m,” he says.

SCA expects a strong spending run into Christmas. In some centres like Ulladulla on the BSW south coast, the performance has been “outstanding” thanks to a sea change and working from home.

Assuming a smooth foreign investment sign-off of GIC by the regulator, Mellowes is armed with a $750m investment vehicle that can home in on centres in Sydney, Brisbane and Melbourne where cap rates have been tightening.

As at June, SCP had a portfolio weighted cap rate of 5.9 per cent. The joint venture will be seeded with $284.5m in assets from its existing portfolio with an average cap rate of 4.84 per cent. Unless markets change, that rate will head lower.

“The great thing about GIC, they have a lower cost of capital and they are happy to get those good high quality assets in the Sydney or Melbourne metropolitan areas which we couldn’t really access,” Mellowes says.

The sheer volume of funds looking for a home could even make SCA a target.

“We are a public listed company. We are for sale every day of the week,” says Mellowes.

Sharpening pencils

Back in the Woolworths camp, CEO Brad Banducci has put his latest spin-off of Endeavour Drinks behind him and is taking on Wesfarmers in a gorilla battle for the wellness space.

Woolworths’ bid for API on Wednesday lifted shares in the pharmacy business by 16.4 per cent. Expect a ramp up of lobbying on both sides around synergies on the one hand and issues with the competition regulator on the other.

However, if true to form in public market M&A, the deciding factor for API shareholders will likely be price. Wesfarmers’ first mover advantage gives it a right to match whatever value a Woolworths final bid presents. In a market where large wellness assets are few and far between, both sides will be sharpening their pencils.