This morning the operator of the Westfield shopping centres across Australia and New Zealand, Scentre Group Ltd (ASX: SCG), reported a funds from operations profit of $617 million for the six-month period ending June 30 2016. That represents 11.61 cents per security and a dividend distribution of 10.65 cents per security.
The Westfield Group will need no introduction to Australians thanks to its plethora of giant shopping centres in prime locations across major Australian cities. In fact some of these shopping centres are so large they deserve their own postcode, with a recent deal announced to expand the size of its Westfield Sydney shopping centre even further. The expansion involves the acquisition of the adjacent David Jones building which will provide an additional 10,000 square metres of retail space.
The Scentre Group is firmly focused on only owning the most profitable assets in prime locations as the popularity of the assets among consumers and retailers is ultimately what determines the ability to lift rents. Traditionally rents have been lifted by contracted amounts above core inflation, with a forecast for a lift in net property income of 2.5%-3% for the full financial year.
Tenant demand is unsurprisingly strong and the key challenge for investors is valuation as the group trades on a big premium to the value of its net tangible assets as a result of the global yield-hunt in today’s ultra-low cash rate world.
The group expects to deliver a full year distribution of 21.3 cents per security, which places it on a yield of 4.2% with the shares at $5.09 today. Despite the quality of the business the shares look overvalued and vulnerable to a correction if we have witnessed the bottom of the global cash rate cycle.