Westfield malls owner Scentre books 49pc fall in half year profit

Westfield mall owner Scentre Group has booked a 49pc drop in half year profit.

Local Westfield owner the Scentre Group has kept its underlying earnings on track but is facing a tough retail environment.

But it believes it is taking market share off smaller rivals.

Announcing its full year earnings, the group reported it was on track to deliver funds-from-operations growth of 3 per cent, although once its recent sales of Westfield Burwood and the towers above and around Westfield Sydney are accounted for, this comes back to 0.7 per cent.

But Scentre investors could also reap the expected positive earnings impact of a buy-back program of up to $800 million. Sales have also kept on track, although tenants are under pressure from sluggish consumer sentiment.

In a busy half, Scentre had steady retail sales but was hit by a further deterioration in re-leasing spreads. It recorded solid net operating income growth of 2.3 per cent.

Scentre shares lost 1c to $3.84 in morning trade.

Scentre chief executive Peter Allen is looking to position the group as the best platform for retailers looking for both a physical and online presence and noted Westfield centres had annual customer visitation running at more than 535 million.

Westfield centres account for more than 7 per cent of all retail sales in Australia and the group has been at the retail forefront in remixing its portfolio to meet demands for leisure-focused customers and to deal with the threat posed by e-commerce.

Mr Allen said retailers are saying they haven’t really seen the government stimulus flow through but sales in Westfield centres had risen by 2 per cent in July, which suggested it was out-performing the market.

The recent NAB Cashless Retail Sales Index, which was up just 0.1 per cent month on month, suggested that ABS retail trade measure will be essentially flat in July.

“This further adds to our concerns that – so far at least – the third quarter has seen little sign of upturn in consumer spending. That is notwithstanding the beginning of tax rebates being received in July,” the NAB report said.

Scentre chief operating officer Greg Miles said previous government stimulus packages had taken “a while” to flow through and instead emphasised the increasing longer term quality of the Westfield malls.

The group has dramatically shifted away from struggling areas like fashion so that experience-based offerings now represented 42 per cent of its portfolio.

“We have been able to achieve this whilst continuing to grow cashflow and distributions for our securityholders and maintain our strong financial position,” Mr Allen said.

In its first half, the company generated funds-from-operations (FFO), a key earnings measure for property companies, of $676.2 million.

On a per security basis, FFO was 12.75c, up 3 per cent. Scentre’s distribution was 11.3c, a 2 per cent lift, and both were in line with forecast. Scentre also reconfirmed its distribution forecast for 2019 of 22.6c per security, an increase of 2 per cent.

Occupancy in the malls remains high at 99.3 per cent and the group reported it had drawn in 118 new brands and 117 existing brands expanded during the year.

Scentre delivered comparative net operating income growth of 2.3 per cent, a 20 basis point dip on last year. Net operating income growth guidance for 2019 was also revised down from a lift of 2.5 per cent to a range of 2 to 2.5 per cent.

Scentre’s re-leasing spreads also dropped by 4.8 per cent, a 30 basis point drop on the first half of 2018. Like-for-like retail sales were up by 1.2 per cent, a 10 basis point lift on the first half of 2018. Specialty sales comparative growth was 1.3 per cent, a 40 basis point rise.

But Mr Allen said that the group was not focused on such short term metrics, which varied between centre, retailer and how the economy was performing. Instead Scentre wanted to get the best retailers in centres, he said.

Mr Allen endorsed moves by department stores to “right size” their spaces in malls, saying that they still added significant value to the complexes but could sometimes trade more efficiently in smaller spaces.

Scentre has successfully back-filled spaces where department stores have left and noted there was also differentiation between Myer and David Jones outlets.

The group has developments underway worth $835m of which its share is $413m. The $NZ790m development of Westfield Newmarket in Auckland is on track with the first stage to open this month with a focus on dining and entertainment and top brands.

During the half, the Group opened the Bradley Street dining precinct at Westfield Woden and started on a $30m rooftop dining, entertainment and leisure precinct at Westfield Doncaster At Westfield Carindale it is bringing in Kmart.

However, JPMorgan noted that Scentre had no material active Australian developments, partly as it completed five projects worth $1.1bn last year. Developers are also taking a more cautious stance towards expansions due to the challenging retail environment.

AMP Capital notably put a planned $750m redevelopment of Booragoon Shopping Centre in Perth on hold and last month put the $1.2bn centre on the block. Scentre has the development and construction role on the project and Mr Miles said Scentre would have a look at the opportunity but noted its development rights existed until 2021.

“Scentre has a high-quality portfolio with strong productivity, its operating statistics remain broadly in line with peers but are under some pressure given the challenging retail environment,” JPMorgan said.

Although few transactions have been struck, the sharp fall in bond yields has helped Scentre’s asset values largely hold in the first half, but JPMorgan warned there would be some valuation pressure over the next 12 months.

Macquarie kept its under-perform rating and said retail conditions will continue to decline.

Scentre, which owns and operates nearly 40 Westfield branded shopping centers, reported a net profit of $740.0 million in the six months to June. That was down from $1.46 billion at the same stage of the previous year.

Funds from operations - a smoothed measure of operating cash flow that excludes depreciation, amortisation and gains on asset sales - rose by 2.9 per ecnt to $676.2 million in the six-month period.