Higher interest rates could dampen earnings: SCA Property Group warns investors

SCA Property Group (ASX: SCP) did little to encourage shareholders at today’s AGM after the shopping centre landlord warned that rising interest rates may dampen earnings over the current financial year.

The internally managed REIT also flagged a potential near term softening of distributions should interest rate pressures persist.

However, the REIT notes strong consumer confidence, courtesy of high employment and household savings levels, are helping to mitigate any softening in the economy.

FY23 guidance

Assuming there are no further acquisitions, the REIT is guiding to FY23 FFO per unit guidance of 17.0 cpu and FY23 AFFO per unit guidance of 15.0 cpu.

The outlook is based on no further acquisitions on balance sheet or in the SCA Metro Fund and a weighted average three-month bank bill swap rate for FY23 of 3%.

“Our centres are well positioned to benefit from inflation over the medium to long-term through turnover rent from anchor tenants and increased affordability of rent for specialty tenants as their sales increase,” the REIT noted.

“However, rising interest rates may dampen growth in distributions in the near term.”

Key priorities

In an attempt to support the ongoing generation of defensive, resilient cash flows and long-term distributions to unitholders - while actively managing interest rate risk in the current volatile market - the REIT aims to keep gearing below 35% over FY23.

While FY22 was a challenging year for the REIT, management reminded investors that after a strong rebound in the second half of FY22, it sees no reason to deviate from its existing strategy of:

• Focusing on both optimising core business – particularly on rent collection and continued deal flow on renewals and reducing vacancy- and growth initiatives.

• Continuing to explore value and earnings accretive acquisition & divestment opportunities.

• Progressing the identified development pipeline.

• Continuing to grow the SCA Metro Fund.

Name change

The REIT’s decision to change names coincides with its expectant entrée onto the S&P/ASX100.

“As we embark on a high growth plan across the next 5 years, we decided to explore a rebrand and name change as part of this evolution,” the REIT noted.

“Tomorrow, Thursday 24th November 2022, we will be changing our name and rebranding – to Region Group.”

Milestones

Within today’s AGM management highlighted key milestones achieved since the REIT’s IPO in December 2012, these include:

• The acquisition of over 60 shopping centres for more than $2.5bn.

• Growing distributions from 11.0 cents per unit in the REIT’s first full financial year, being FY14, to 15.2 cents per unit in FY22.

• Decreasing the management expense ratio from 0.65% in FY14 to 0.38% in FY22.

• Delivering a total unitholder return since the IPO to 30 June 2022 of over 225%, compares to the S&P/ASX 200 A-REIT index return of 116% over the same period.

• In the last five years, SCA has delivered total unitholder returns of 63.5%.

What happened at the full year FY22

During the year the REIT completed 7 centres, one vacant lot and one childcare for $347, and contracted to buy a further 5 centres in FY22 which settled in July.

Other FY22 highlights included:

• Funds from Operations of 17.40 cpu, up from 17.9% on the prior financial year.

• Total Funds from Operations was $192.7m, up 21.2% on the previous year.

• Net profit after tax was $487.1m, up 5.2% on the previous year.

• Gearing as at 30 June 2022 was 28.3%.

• NTA was $2.81, up by 11.5% on the previous year, with a portfolio weighted cap rate of 5.43%.

• Portfolio occupancy was 98.1%.

• valuations increased by $354.0m, or 8.9% (on a like-for-like basis).

What brokers think

The REIT’s share price is down -7% over one year but has been trending higher since late September.

Consensus is Hold.

Based on Morningstar’s value of $2.59 the stock appears fairly valued.

Macquarie retained a Hold rating early November after downgrading its outlook for AREITs to reflect its rising deck for bank bill swap rates.

While Macquarie recognises the REIT’s defensive income profile, the broker says relative valuation and hedging are problematic.

The broker’s target price falls -6% to $2.51 from $2.68.

SCA Property Group share price over 12 months.