The Scentre Group (ASX: SCG) share price fell 0.7% to $4.26 this morning after the company published its half year results. Here's what you need to know:
- Revenues rose 6.5% to $1,282 million
- Net profit after tax rose 3.6% to $1,463 million
- Funds from operations (FFO) rose 3% to $657 million
- FFO per share of 12.38 cents
- Distribution of 11.08 cents per share announced
- Scentre Group ended the half with around $12.7 billion in net debt
- Net tangible assets of $4.41 per share
- Full-year outlook for 4% growth in FFO and 22.16 cents in distributions
- Outlook for a 4.4% weighted average interest rate
So what?
It was a strong year from Scentre with the company completing several development projects and investing in several more. Operating performance continues to be strong with the company again reporting greater than 99.5% occupancy and 2.5% growth in comparable net operating income (i.e., rent increases).
The comparable net operating income (NOI) figure reflects improvement in existing stores and is usually driven by either higher occupancy or higher rents. Funds from operations (FFO) growth is usually higher because it includes cash generated from new projects.
Sales performance at certain Scentre Group retailers was poor this half:
source: Company presentations
While it is not fair to draw any conclusions from a single snapshot like this, it is interesting to note that most categories of stores did not grow sales as rapidly as rents increased (assuming a 2.5% rental increase). Over time this could lead to pressure on certain categories of retailers as their profitability diminishes. Additionally, Scentre uses some businesses like department stores, or especially cinemas, to anchor its centres and provide a drawcard for consumers. If these businesses struggle, they may close, and this may have an impact on the rest of Scentre's portfolio, albeit perhaps not a serious one.
Now what?
Overall I think Scentre is a great business and in the five or so years I've written about its results I have always thought "this is a well run business". The important thing for investors is knowing what Scentre is and is not. It is a very low growth business that generates a lot of cash and would be suitable for income investors. I would want to get at least a 5% dividend yield on my purchase price, a criteria that is satisfied at today's prices.
Scentre is also a business that borrows heavily, and low interest rates in recent years have a) made it easier for the company to borrow more and b) probably also contributed to increases in its property valuations. So if interest rates move higher, or if there is some market problem that makes it hard for Scentre to refinance its debt for example, the company may have to reduce or cut its dividend. Scentre's property values may also decline and, given that property businesses usually trade close to the value of a company's net tangible assets ($4.41/share, at SCG), the share price may fall.
So while Scentre is a good and well-run business that I think would be suitable for income-seeking investors, it is important to keep these risks in mind. I would not own Scentre if I already had large exposure to banks (i.e., property lenders) or real estate stocks.
