Shopping for rent escalations

RESULTS ANALYSIS

Need To Know

• Strong result. FFO beat of ~4%. FY23 guidance in-line with consensus expectations
• Balance sheet is starting to look like less of an issue than what the market was fearing
• Overall a strong result. There is clear indication that operating conditions are improving

1H23 Result Overview:

FFO A$556m vs A$535m consensus (~4% beat)

DPS 8.5cps in-line with consensus

Rental escalations increase 8.1% 

Net operating income (NOI) up 10%

DPS guidance 16.5cps and FFOps guidance 20.75cps - 21.25cps.

Investment Implications

A strong result with some clear implications of improving operating conditions. CPI linked rental escalations continue to be a tailwind for Scentre with an 8.1% increase over the period (CPI +2%). Net operating income up 10% pcp, a record half for the group. Total portfolio sales were up 9.1% on 2022 and 13.6% on 2019. Visitations for the group were up ~10%, continuing to positively recover post the pandemic. Occupancy also ticked upwards, improving 0.2% to 99%. 

Balance sheet: Fears of a stretched balance sheet don't appear to be the case. Group NTA remained resilient only decreasing by ~1.4%. Gearing increased marginally to 28% (up 0.7%), hedging was lifted to 89% for 2H23 and the group has plenty of liquidity ($3.9bn) available for debt refinancing. We dont see the balance sheet as an issue at its current position and we expect the market may begin to ease its fears of a overlevered balance sheet. 

FY23 Outlook: Guidance held flat. In-line with consensus expectations. DPS guidance is "at least" 16.5cps and FFOps guidance is 20.75cps - 21.25cps. Management suggest they expect CPI over the next 6 months to remain around the ~5.5% range which implies 7.5%-8% for rent escalation in 2H23. 

Development progress is continuing on behalf of Cbus property to design and construct 101 Castlereagh Street and predevelopment work is continuing to churn away on Westfield Booragoon.

Investment View

A solid result with clear indications of improving operating conditions. We expect debt costs will remain a headwind over 2H23 although we don't believe it significantly threatens the balance sheet. Guidance has been held in-line with consensus expectations.

SCG trades at 12x P/FFO, a ~1.5pt discount to its long term average. On a 3yr forward FFO CAGR SCG provides the strongest growth outlook of all the AREIT's whilst also remaining at a ~24% discount to NTA. Given the strength in the outlook, we see value at current levels. 

We re-affirm our Buy rating. 

Figure 1: SCG leads the AREITS in 3yr FFOps CAGR forecasts whilst also remaining at a significant discount to book value.