Scentre plans mall makeovers to tackle retail challenges

Westfield owner Scentre says its malls could come to feature more offices, apartments and even educational facilities.

The Westfiled Sydney mall operated by Scentre. Picture: AFP

Scentre Group, the listed owner of the local Westfield empire, has laid out plans for mixed use developments at key centres as it looks to combat the soft retail outlook, the impact of coronavirus on luxury precincts and a series of retail chain collapses.

The company gave relatively soft guidance for this year but its specialty store sales were up strongly.

Scentre said it had come through a summer’s bushfires interruptions well, despite retailers now warning the coronavirus epidemic could hit their operations by crimping tourism.

Scentre chief executive Peter Allen said it was “too early to tell” what the impact of the coronavirus would be, but pointed to healthy January speciality sales and noted the bulk of sales in luxury precincts were to local customers.

Mr Allen also called out about $1.5bn worth of mixed use redevelopment being planned for Westfield malls, which could include offices, apartments and even educational uses.

“We have always looked at maximising the value of the sites that we own,” he said.

The landlord was also in discussions with department stores as they looked to “right-size” with Mr Allen pointing to a series of centres where big stores had handed back space that been filled by more productive retailers.

Scentre reported a lift in funds from operations to $1.34bn, in line with forecast, and bumped up FFO on a per security basis to 25.42c, a 0.7c lift, even as Scentre made major asset sales last year.

The distribution for the 12-month period lifted 2 per cent to 22.6c per security, in line with forecast, and operating earnings were up 1 per cent per security

Mr Allen said that the company was focused on lifting traffic to its centres and believed that it could monetise these visits in future. Annual customer visits to Westfield malls grew to more than 548 million people, a lift of more than 12 million visits.

Occupancy remained at 99.3 per cent as the company introduced 344 new brands and 279 existing brands grew their networks, even as pressure on some retail categories and department stores grew. The overall average leasing spread was -5.5 per cent on a comparable basis.

Macquarie analysts said the result was “in line” with expectations but the 2020 outlook was “softer than expected”. “While asset values are largely holding up for now, we believe returns on the property portfolio and developments remains under pressure which will weigh on earnings/distributions into the medium term,” Macquarie said.

Scentre sold $2.1bn worth of assets including the office towers above Westfield Sydney and a stake in Sydney’s Westfield Burwood. It is pouring the proceeds into funding developments and a share buy-back of up to $800m, of which it completed $304m last year.

Comparable net operating income lifted by 2 per cent, primarily driven by 4 per cent average contracted rent escalations for specialty tenants. Over the year, specialty in-store sales grew by 2.2 per cent, with growth running at 2.8 per cent in the last quarter.

Westfield malls are taking a rising focus on dining, entertainment, health, fitness and beauty services and other lifestyle offerings and the company completed the $NZ790m ($757m) Westfield Newmarket development, while also putting in new precincts in centres in Canberra, Brisbane and Melbourne as it works on more than $3bn of future retail development opportunities.

Mr Allen called out the potential for office developments in the western Sydney hubs of Parramatta and Liverpool as well is in the ACT and in NZ. At Sydney’s Eastgardens the company is looking at commercial, educational, residential options for the site.

Scentre forecast operating earnings for this year to be between 24.75c and 24.80c per security, growth of about 3.1 per cent. FFO for this year is expected to be about 25.3c per security, growth of about 0.7 per cent and a 3 per cent lift in distribution to 23.28c per security.

Moelis analysts noted the company had lower comparable net operating income growth at 2 per cent against 2.3 per cent in the first half but specialty sales had picked up. With the stock trading at a 15 per cent discount to net tangible of assets and a 6.2 per cent yield, they said it looks attractive on a relative basis.

Jefferies analysts said Scentre’s balance sheet remains under pressure as valuations were flat and gearing increased to 33 per cent, partly driven by its acquisition of a half stake in Perth’s Booragoon centre for $570m last December.

“We continue to believe that Scentre should conserve its capital to keep gearing low and improve its credit metrics, rather than buying back stock below net tangible assets that we believe has risk on the downside.” Jefferies analyst Sholto Maconochie said.

JPMorgan analyst Richard Jones said the result showed weaker growth than expected, given the acquisition of Booragoon, the completion of Newmarket development and the buyback, offset by part-year dilution from the sale of the Sydney office buildings and lower expected project income. ”There has been some evidence of softening valuations, and we expect this to continue in 2020 due to lower rent growth expectations and excess assets on the market,” he said.

Scentre shares closed down 1.6 per cent on Tuesday at $3.72.