Scentre rides return of shoppers to Westfield malls

New CEO Elliott Rusanow has delivered a bullish first set of results as shoppers flock back to the company’s Westfields.

Westfield owner the Scentre Group has confirmed that big shopping malls have come back strongly as it delivered a jump in full year funds from operations to just over $1bn and flagged that leasing demand for space in its centres was strong.

After a tough period during the coronavirus crisis, Scentre beat earnings guidance on the back of rising sales growth and the company flagged that metrics in its centres were still improving.

Scentre CEO Elliott Rusanow said there was a strong operating performance and an active customer strategy to bring more people to Westfield malls.

The group’s 42 Westfields had 480 million customer visits, a lift of 67 million on the pandemic affected 2021. So far in 2023 it had about 70 million customer visits, an increase of more than 10 million on this time last year.

Mr Rusanow said that sales in Westfield centres were running 11 per cent above 2019 in a sign that customers attracted to the malls were spending.

He acknowledged rising interest rates and cost of living pressures, but pointed to high levels of employment and hefty pandemic savings. “There’s a lot of buffer in that,” Mr Rusanow said.

Westfield has focused on experiential retail where malls serve multiple customer needs, with Mr Rusanow calling out the strength of food, health and beauty, as well as leisure and sports.

Mr Rusanow said the portfolio was also benefiting from inflation as it fed into its fixed annual rent increases. But retailers were outperforming inflation, allowing them to be more productive.

He flagged that occupancy in centres would increase and that earnings would again grow this year, and even where department stores were shrinking the landlord was putting in more productive stores.

“We are confident that the strength of our business and platform, the quality of our team and our customer focused strategy will continue to generate long-term growth for our securityholders,” Mr Rusanow said.

Scentre generated FFO of $1.04bn which translated to 20.06c per security, and showed a 20.6 per cent jump. The distribution of 15.75c per security was up 10.5 per cent, with both figures exceeding guidance.

Scentre expects FFO for this year to be in the range of 20.75 to 21.25c per security, which would show growth of 3.4 to 5.9 per cent growth for the year. Distributions are expected to be at least 16.5c per security for 2023, representing at least 4.8 per cent growth for the year.

“Our focus on driving more customer visits was fundamental to our business partners achieving sales of $26.7bn, a 21 per cent lift compared to 2021, which represents a record level of sales across our Westfield portfolio,” Mr Rusanow said.

Scentre struck 3,409 lease deals in the year, an increase of 912 on 2021. This included 2,232 renewals and 1,177 new merchants, of which 288 are new brands to its centres. Occupancy hit 98.9 per cent and leasing demand remains. Leasing spreads were at -3.6 per cent, an improvement on the -7.6 per cent in 2021.

The $301m full year profit compared to $888m in 2021, with much of the difference down to the treatment of interest rate hedges.

Scentre is investing in its existing centres and said the first stage of its $355m overhaul of Melbourne’s Westfield Knox, including new Woolworths and Aldi supermarkets, was trading well. It has also revamped centres in Sydney’s Mt Druitt, Penrith and Parramatta.

The group’s membership program has also jumped by more than one million people to 3.2 million members.

The net tangible assets per security was $3.57 per share but the stock, like most real estate investment trusts, trades at a discount. Scentre securities added 3.46 per cent to close at $2.99.

Citi analysts said average specialty rent escalations were 6.8 per cent benefiting from CPI plus 2 per cent rent escalations. Scentre has a $4.5bn future development portfolio, targeting yields of 6-7 per cent.

“The result and guidance is ahead of expectations and should be well received by the market. However, the market will continue to focus on see-through gearing and sensitivity to the higher interest rate environment,” Citi said.

Jefferies analyst Sholto Maconochie expects Scentre to hit the top end of guidance despite higher debt costs of 5.6 per cent this year offsetting the strong tailwinds from inflation, as CPI-linked rents grow.