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Why this retail REIT is currently trading near its all time high

Shopping Centres Australasia Property Group Stapled Securities (ASX: SCP) shareholders should be delighted with how the shopping centre REIT has fared this year, achieving a total shareholder return of 18.4% in FY18, comfortably outperforming the ASX200 A-REIT Accumulation Index by 5.4%.

SCA Property Group, which wholly owns 85 convenience-based shopping centres across Australia, is currently trading near its all-time high price of $2.74 per share; here’s why.

Strong FY18 performance

In its FY18 results, SCA Property Group reported strong financial results, including:

  • FFO (Funds From Operations) of $114 million, up by 5.4% on FY17
  • Distributions of 13.9 cents per unit, up by 6.1% on FY17, reflecting a distribution yield of 5.1% at the current unit price.
  • Net Tangible Assets per unit of $2.30, up 4.5% on FY17
  • Sales growth of 1.9% among anchor tenants (i.e. supermarkets and discount department stores) and specialty sales growth of 3.3%.
  • Average rental increases of 6.1%

In addition to strong financial performance, SCA Property Group also demonstrated prudent capital management in FY18, achieving a gearing ratio of 31.2%, which is at the lower end of its target range.

Acquisition activity

SCA Property Group has purchased 12 assets since the start of July, including 10 properties from Vicinity Centres Re Ltd (ASX: VCX). These acquisitions total $678 million in value and increase the REITs portfolio value by 23% to $3.1 billion. This was partly funded by an institutional placement of $262 million and a successful Unit Purchase Plan, which has raised approximately $110 million.

There are numerous reasons why these asset purchases have been so well received by investors:

  • The acquisitions are earnings accretive; with its expanded asset base, SCA Property Group is expected to generate stronger FFO, with FY19 FFO guidance being raised from 15.6 cents per unit to 16.2 cents per unit.
  • Stronger distributions; as a result of stronger FFO guidance, distribution guidance has also been raised from 14.3 cents per unit to 14.7 cents per unit.
  • Cost efficiencies; these acquisitions give SCA Property Group a more efficient cost base, due to an expanded asset base, resulting in a management expense ratio of less than 40 basis points (0.4%)

Foolish takeaway

SCA Property Group is continuing to show investors that it is a well-managed REIT, backed by a growing portfolio of quality shopping centre assets. While there are some long-term headwinds facing Australian shopping centres, including the growth of online retail, SCA Property Group has a track record of prudent asset management and has established a judicious core strategy.

I believe that the REITs focus on convenience-based, supermarket-anchored assets that are weighted towards non-discretionary retail will prove to be a sound strategy, with this segment being less cyclical to the economic cycle and less prone to the threat of online retail. SCA Property Group is therefore well placed to deliver consistent and resilient distributions to unit-holders.

SCA Property Group has grown its earnings and distributions by 5-6% per annum over the last 5 years while growing the value of its underlying net tangible assets by 40%. The REIT currently offers investors a distribution yield of 5.4%, based FY19 guidance.

If you are looking to gain exposure to Australian convenience-based retail and desire consistent and reliable distributions, SCA Property Group could be the right investment for you.

Motley Fool contributor Gregory Burke has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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