About Scentre Group Limited

Scentre Group (Scentre, the Group, ASX: SCG) owns and operates 42 Westfield shopping destinations, encompassing more than 12,000 high quality retail outlets.  Situated on more than 670ha of land, Westfield destinations are strategically located in close proximity to 20 million people across Australia and New Zealand.

Operating profit and Funds from Operations

Scentre Group has reported positive results for the six months to 30 June 2024 with Funds From Operations (FFO) of $568 million, up 2 percent, and Distributions of $446 million, an increase of 4.2 percent. These amounts are equivalent to FFO of 10.95 cents per security and Distributions of 8.6 cents per security. FFO is considered the most useful measure of operating cash flow for Real Estate Investment Trusts. Statutory Profit for the half-year was $404 million and the Group’s portfolio was valued at $34.3 billion.

Customer visits were 1.9 percent or 6 million higher at 320 million when compared to the same period last year and Westfield shopping centre sales increased by 2.4 percent to $13.4 billion in the half-year, and a record $28.6 billion for the 12 months to 30 June 2024. Occupancy is 99.3 percent at 30 June 2024, up slightly from 99 percent 12 months earlier.

The Westfield membership program now exceeds 4.1 million members, an increase of 600,000 compared to 12 months ago.

These figures indicate resilient trading conditions and solid tenant demand that are underpinning Scentre’s earnings and distribution growth.

Value of Property Management Rights

A significant component of Scentre’s Economic Net Asset Value is the value of the Group’s property management rights. The value of property management rights is not included in the balance sheet of the Group. However, in applying the same capitalisation rate used to value each individual shopping centre to the management rights for that shopping centre, the value of Scentre’s property management rights is $3,280 million. This represents 63 cents per security.

Based on Scentre’s 30 June 2024 balance sheet, the Net Tangible Asset Value per security is $3.64. Including the value of property management rights, the Economic Net Asset Value of Scentre is $4.27 per security.  This valuation amount does not ascribe any value to the Westfield Brand, and the Development, Design and Construction platform of the Group.

Scentres securities trade broadly in-line with the last reported Net Tangible Asset Value per security which is $3.64, so on a real state net asset backed basis the securities at around $3.38 do not appear expensive.

The Future

In addition to rent escalations, Scentre also generates development profits as it expands existing shopping malls and undertakes new construction builds. The Group currently has in place a $4 billion future development pipeline, on which it is targeting a 6-7 percent yield on completion, and an average incremental Internal Rate of Return on each development of 12-15 percent. The value of development projects and construction in progress at 30 June 2024 is $758 million.

Key long-term drivers of Scentre’s revenue and valuation are ongoing population growth supporting higher retail sales and the limited availability of quality land in strategic locations suitable for large scale retail development. This situation is conducive to maintaining favourable demand/supply industry conditions for Scentre’s assets over the long-term.

The other key driver of Scentre valuation is interest rates and capitalisation rates, in that lower interest rates drive capitalisation rates lower, and lower capitalisation rates drive asset valuations higher.

Scentre, like all Real Estate Investment Trusts is leveraged to falling bond yields and so should the RBA interest rate easing cycle commence in 2025, Scentre’s valuation should rise.