Skip to Content
Morningstar

Scentre Group Earnings: Strong Retail Conditions Help Scentre Group Find Its Mojo

Illustration of a black two story house outlined in blue and part of a black two story house outlined in yellow in front of a black background depicting the real estate industry

Scentre Group’s SCG first-half 2023 result was in line with our full-year expectations and management guidance. Funds from operations of AUD 10.74 cents per security looks on track for our full-year estimate of AUD 20.99 cps, and distributions of AUD 8.25 cps are halfway to our full-year estimate of AUD 16.5 cps. More importantly for the medium term, we think downside risk should Australia enter a recession has been reduced by new leases signed in the half. On the time value of money our fair value estimate rises 3% to AUD 3.40, and Scentre Group securities screen as almost 20% undervalued.

Scentre’s occupancy improved to 99%, up 0.2%. The average lease length increased to 6.9 years, up from 6.8 years, with strong retail conditions driving tenants to sign new leases. Near full occupancy and strong retail conditions helped drive specialty leasing spreads, a measure of rents on new leases compared with old leases, to positive 2.6%. That’s a substantial improvement from the negative 3.9% leasing spreads in the June 2022 half-year. Scentre achieved an average specialty rent escalation of 8.1%, with contracted specialty rent increases calculated as the Consumer Price Index plus 2%, on average. These long leases with good rental uplifts are critically important at present, as it should help Scentre Group weather any potential weakness in consumer spending.

On that front, management commented that tenant sales growth moderated in June and July but remained positive. Leasing momentum appeared to continue into fiscal 2024, with management stating it has signed well over 300 leases since June 30, 2023, compared with 1,567 leases signed in the June half. By way of comparison, Scentre signed only 596 leases in the 2020 June half-year, and 1,189 in the 2019 June half-year.

Our thesis that a strong retail recovery would help Scentre Group get back into a position of strength and negotiating leases appears to be playing out, mitigating the risks of its heavy debt burden.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

More in Stocks

About the Author

Alexander Prineas

Equity Analyst
More from Author

Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

Sponsor Center