This is the second report in a series about Westfield (WFGPY, Financial) and Scentre (ASX:SCG, Financial) — two Australian mall owners with some of the best real estate in the world. The two split last year. Scentre operates mainly in Australia and with some locations in New Zealand.
Scentre paid 22.58 cents Australian (17 cents in U.S. currency) in funds from operations and paid 20.9 cents Australian in dividends in 2015. That would equate to a dividend yield of 4.4% based on today’s stock price of 4.76 Australian dollars. There are 5.31 billion shares, and the company trades at a market cap of 25.28 billion Australian dollars.
Scentre has 40 centers and 43.3 billion Australian dollars under management. The company has 11,670 retailers and 3.6 million square feet; 93% is in Australia and 7% in New Zealand. The average cap rate is 5.54%. Sixteen of the top 25 revenue producing malls in Australia belong to Scentre. Fifty-two percent of malls are in New South Wales and 15% in Victoria; 65% of the Australian population lives within a 30-minute drive of a Scentre mall.
Unlike Westfield, Scentre has less under development. In my conversation with Ryan Dobratz of Third Avenue Value Real Estate, Dobratz said the Lewy family has invested more in Westfield than Scentre. It seems that the model that the company utilizes has more room to grow in the U.S. than in Australia. The model is developing brand-new properties or redeveloping existing properties. Either way, there is a shelf life on Class A malls. They must look nice and up to date. Scentre has 900 million Australian dollars under development.
Scentre’s portfolio was 99.5% leased at the end of 2015. I’m not sure I’ve ever heard of a real estate company with that low a percentage of vacancies. Its two new projects include Coomers in Queensland and an expansion of its New Market location in Auckland, New Zealand.
At the end of 2015, the company had 142.7 million Australian dollars in cash and 205 million Australian dollars in accounts receivables. The liability side showed 1.134 billion Australian dollars in accounts payables, 1.7 billion Australian dollars in short-term loans and 9.4 billion Australian dollars in debt. There are definitely some high levels of debt compared to liquid assets.
The company recently announced that it has put up its mall in Henderson, New Zealand, for sale. The company is asking 175 million New Zealand dollars ($127.6 million in U.S. currency). Last year, Scentre sold three malls for 549 million New Zealand dollars last year. You can see that management wants to concentrate on larger assets in Australia. That’s what it's doing in the U.S. and U.K. — focusing on major cities like London and New York.
Moody’s has given the Australian REIT market a stable outlook. The rating agency sees operating growth of 2.5% over the next 18 months and GDP growth of 2% to 3%. It doesn’t appear that the big pullback in commodities has hit mall sales. CEO Peter Allen stated that the company forecasts 23.25 cents Australian in FFO and 21.3 cents in dividends. That would be a 4.47% dividend yield.
There are different series of trusts that own different entitie,s but I’m not going to get into all of that in this report. The goal is to introduce Scentre to the American value investor. I find the dividend yield on Scentre to be quite appealing. What scares me about mall REITs is capital expenditures — it’s just a matter of time before the company has to plow money back into rehab. Scentre realizes this and stays on top of it probably better than anyone else. For an Australian blue chip that gets no coverage in the U.S., it’s an interesting stock.
Disclosure: We do not own shares.
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