Westfield owner Scentre’s mall buying spree not done
Australia’s biggest shopping centre owner, Westfield operator Scentre, is eyeing off more opportunities for funds management in the malls sector after wrapping up two deals in quick succession, worth close to $500 million.
More big moves may be on the cards, with chief executive Elliott Rusanow running his ruler over a $20 billion group of its prized assets, such as Westfield Sydney, which Scentre owns outright. Scentre will consider opening up that ownership to joint-venture partners.
“I don’t think we’re done. I think there are more opportunities because we are in a unique time in terms of the ownership structure of shopping centres in Australia where there are more motivated sellers than historically,” chief Mr Rusanow said.
“The high-yield nature of the Australian market relative to other markets around the world, and the amount of capital that’s sitting on the sidelines has created the opportunity for ourselves to be able to establish opportunities like Tea Tree and West Lakes.”
In April, Scentre paired up with investment house Barrenjoey to create the $310 million Tea Tree Opportunity Trust, which purchased a 50 per cent share in Westfield Tea Tree Plaza. Scentre owns the other 50 per cent of the centre.
Last month, it stepped up its funds management ambitions, taking control of a $167 million half-stake in Westfield West Lakes. In both cases Scentre will house the new mall interests in unlisted funds for private investors.
Mr Rusanow said Scentre Group has an advantage against property syndicators in raising capital to buy shopping centres under this type of arrangement due to the group’s experience in managing malls.
The opportunity to release capital through joint ventures also looms large for Mr Rusanow. Scentre has 12 high-profile assets worth $19 billion to $20 billion that it owns fully, including Westfield Sydney, Westfield Bondi Junction, Westfield Chermside, Westfield Fountain Gate and Westfield Chatswood.
Scentre resilient amid shopping slowdown
The scope to diversify has been bolstered by Scentre’s strong 2024 first-half performance, with its funds from operations rising by 2 per cent to $568 million. Funds from operations is the property sector’s preferred measurement of earnings that factors out valuation swings.
Driving Scentre’s solid earnings is its capacity to lock in rental growth from its tenants, even as consumer spending slows in some areas such as fashion and footwear. Average specialty rent escalations increased by 5.5 per cent during the half-year period.
Sales increased by 2.4 per cent to $13.4 billion for the first six months of 2024, while leasing spreads – the difference in rents between old and new agreements – remained positive at 1.1 per cent, despite contracting on the rates achieved last year.
“We are outperforming the wider retail spend [landscape] and the reason why that would be is because we’re giving people more reasons to come and spend their time with us. When they spend their time with us, they tend to spend more money with us,” Mr Rusanow said.
Scentre’s statutory net profit after tax jumped 170 per cent to $403.9 million, largely due to valuation writedowns being much smaller year-on-year. Scentre recorded $120 million in valuation declines for the first six months of 2024, compared to nearly $400 million during the same period last year.
Distributions for the first half were 8.6¢ per security, which was on guidance.
On the back of that solid performance, Scentre reconfirmed guidance that its funds from operations would be in the range of 21.75 to 22.25 cents per security for 2024, representing 3 per cent to 5.4 per cent growth for the year. It also reconfirmed full-year distributions were on track to be 17.2¢ per security.
The malls giant also announced a tender offer to buy back up to $US550 million ($816 million) of its 2026 subordinated notes. If the tender offer were to be fully taken up, about $US838 billion of that 2026 debt would remain, which is in addition to its 2030 debt.
According to Citi analyst Howard Penny, Scentre’s results were in line with consensus and showed the strongest retail real estate funds from operations growth in the sub-sector.
Jarden analyst Lou Pirenc was also bullish in a client note, saying the first half performance was in line with expectations and the reconfirmation of guidance meant there was “upside risk to our and consensus expectations”.
