Scentre has options to change gearing: Morgan Stanley

A portion of Westfield Bondi Junction could be packaged up with other assets, Morgan Stanley analysts say. Picture: Gaye Gerard

Shopping centre landlord Scentre Group has many options to reduce its high level debt levels, say analysts at Morgan Stanley, as speculation continues to mount over the prospect of an equity raising.

As The Australian reported last week, industry insiders say that an institutional placement in the order of $1.8bn could be on the cards as the company battles with a relatively high gearing level of 38.4 per cent.

However, the company’s silence on the matter raises the prospect that management could be canvassing other ways to pay down debt.

In a note, Morgan Stanley analysts said Scentre could analyse options such as divesting assets, suspending dividends for two years, or simply doing nothing.

Noting that four of the 13 properties Scentre owns wholly are among some of the most productive shopping centres in the nation, the analysts suggested the company could package up a 25 per cent stake in the malls – which includes those like Westfield in Sydney and Bondi – and take the offering to market.

“Divestment at book value ($2.9bn) would lower gearing to 33 per cent … while a 20 per cent discount would lower gearing to 36 per cent,” the analysts wrote.

An option that could be combined with asset divestment, or carried out alone, could be the further suspension of dividend payments.

Scentre already suspended its distribution in the first half of the 2020 financial year, the analysts said, and assuming a free cash flow of $900m a year post-COVID that is not distributed to investors, gearing could be reduced to 32 per cent by 2022.

A third option could include “riding it out,” with the analysts noting that the company‘s $4.4bn in available liquidity is more than enough to cover the $1bn of maturing bonds in 2021 and the $3.2bn of maturing debt in 2022, some of which is undrawn.

“We believe Scentre Group is far from having any debt problems, and also has material headroom before reaching its financial covenants,” the analysts wrote.

“If conditions in two years do not recover adequately post COVID-19, then Scentre Group may choose to take other actions to soften gearing, rather than make any ‘forever’ decisions now without giving the operating environment time to recover.”