Scentre Group (SCG) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Scentre Group's 2021 Half Year Results Update. [Operator Instructions] Please note that the conference is recorded today, Tuesday, the 24th of August 2021 at 9 a.m. Australian Eastern Standard Time. I would now like to hand the conference over to your host today, Mr. Peter Allen. Thank you, sir. Please go ahead.

Good morning, everyone. Welcome to Scentre Group's half year results briefing. I'm joined today on the call by our Chief Financial Officer, Elliott Rusanow. We have delivered strong operating performance even with a number of government restrictions in place during the half. In locations less impacted by government lockdowns, we have seen trading conditions better than those experienced in the first half of 2019. Today's results are pleasing because they demonstrate the resilience of our platform and ability to generate cash flow with operating profit up 28%. We've experienced a rapid rebound in visitation as soon as government restrictions are removed. This highlights the value of our strategic locations with the majority of the population living in close proximity to our Westfield Living Centre. We are confident visitation will continue to rebound when restrictions are eased. Customers tell us that they want to be back in our centers because our products, services and experience we curate is an integral part of their lives. A desire to connect and a quick return to physical destinations is a trend we have also observed in international markets. Our business partners have experienced a strong rebound in sales. Annual sales through our platform to June were $23.4 billion. During the first half of 2021, total sales, excluding cinemas and travel operators exceeded the first half of 2019. All Westfield Living Centres have remained open during the period, operating with COVID safe protocols and in line with our latest health and government advice. We are facilitating community access to COVID-19 vaccinations across all of our Westfield centers. We remain open to working with providers to leverage our proximity to the majority of the population for these critical public health initiatives. I'm proud of our team, particularly how we have kept adapting to the conditions and changing regulations, keeping our centers open and safe for the communities we serve. I want to thank them for their contribution to these results. Our purpose has been constant since Scentre Group was established more than 7 years ago, creating extraordinary places, connecting, and enriching communities. Our strategic objective, our plan is that we will create the places more people choose to come more often for longer. We have an ambition to grow by leveraging the strength of our core business and becoming essential to people, communities, and the businesses that interact with them. We want to be the first choice to where people spend their time outside of home and work. We will achieve this ambition by expanding and enhancing our platform, diversifying the businesses we engage with, and continuing to invest in the customer experience we deliver in our destinations. We remain focused on our customer strategy. Notwithstanding the current disruption to our business due to government restrictions across a number of regions, we've continued to make significant progress on customer initiatives that create opportunities to expand and enhance the Westfield platform. After the successful launch of our membership program at Westfield Newmarket in 2019, we launched Westfield Plus in Australia last July. Membership is now more than 1.9 million, having increased by 1.4 million members since June of last year with high levels of member engagement. Last year, we piloted aggregated click and collect to connect our business partners with customers during periods of government restrictions. We learned a lot from this initiative and have channeled these learnings into a new aggregated click and collect platform, which we will launch in the fourth quarter. Westfield Direct will extend the in-center experience and enable our customers to have greater accessibility to our business partners wherever they are across multichannels. Physical stores continue to provide an integral role in driving customer engagement and growth for our business partners. Demand for space across Westfield Living Centres remain strong with a portfolio of 98.5% leased at 30th of June 2021. The group completed 1,515 lease deals during the half, including 619 new merchants. Leasing spreads on these specialty deals were negative 8.7%, and average leasing capital on these deals equates to 8.1% of total rent. Our leading platform, expertise and focus on curating an offering that our customers want has delivered long-term growth. Since 2010, our portfolio has seen rent per square meter across our total area grow by 23% to $822 per square meter at 30th of June. Over the same period, the portfolio's total area has grown by 15% to 3.9 million square meters. We have welcomed 139 new brands to the portfolio. Deal activity has been strong with a number of first-to-market and first-to-portfolio deals. In New Zealand, first-to-market brands for our luxury precinct at Westfield Newmarket include Moncler, Saint Laurent, Balenciaga, Alexander McQueen, Burberry, and Jimmy Choo. First-to-portfolio deal brands include the Miele Experience Centre at Westfield Doncaster and StyleRunner, Rebecca Vallance, and Allkinds at Westfield Miranda. We continue to support SME retailers to mitigate the short-term cash flow impact on their businesses during the pandemic through appropriate rent deferral and support. We have a mutual interest in seeing them get through this tough period and succeed. Given this ongoing support, we are very disappointed we are being mandated by the Victorian and now New South Wales governments to abate rent, transferring value directly from one industry to another and from our security holders to retail to shareholders. This is bad policy. The government should be providing support where warranted. It should be targeted to where the need is greatest, those SMEs with aggregate turnover of less than $5 million. Another major capital provider to these SME businesses, the banks, have not been mandated to forgive interest payments. We continue to look through the cycle and invest in the quality of our portfolio. Last year, we were appointed by Cbus Property to design and construct the residential and commercial tower on the site of the former David Jones menswear store, on the corner of Market and Castlereagh Streets in Sydney. This project continues to progress well with completion expected in 2023. We continue to implement initiatives that support our strategy to operate as a responsible, sustainable business. During the half, we released our 2020 responsible business report and outline the progress we are making on the 4 pillars of our sustainable business framework. The group is committed to achieving net zero Scope 1 and 2 emissions by 2030 across our wholly owned portfolio. We have developed a pathway and transition plan, which will see us achieve at least 50% of this target by 2025. And then annual increments of at least 10% until 2030. Our New Zealand portfolio would be powered by 100% renewable electricity from January 2022. I'll now hand over to Elliott to take you through the financial results.

Thanks, Peter. Operating profit for the 6 months to 30 June was $460 million, or $0.0888 per security. This is an increase of 28% over the first half of 2020. Funds from operations for the 6-month period was $463 million, or $0.0894 per security. In total, the group achieved gross operating cash inflows of $1.384 billion. Our net operating cash surplus after interest, overheads and tax grew by 113% compared to the first half of 2020 and was $488 million for the 6-month period. The group announced a distribution of $363 million or $0.07 per security for the first half of 2021. As a result, the group has retained approximately $100 million for the half. This is in addition to the $403 million retained during 2020. Operating and leasing capital was $48 million during the 6-month period. Included as an expense is an expected credit charge of $45 million relating to the financial impact of the COVID-19 pandemic on rental income during the 6-month period. This compares to $232 million charged that was booked in the first half of 2020. The charge has regard to the level of cash collections and the government restrictions experienced during the half year. Our results for this half did not include any reversal of prior period expected credit charge provisions. Trade debtors, after the expected credit charge provision at 30 June is $121 million, a $72 million reduction from 31 December 2020. Approximately $33 million of this has already been collected in July and August of 2021. As detailed on Slide 8, our cash rental collection levels for the half year were $1.2 billion. This represents an increase of 37%, or $325 million compared to the first half of 2020 and is in line with the second half of 2020. Rental cash inflow for the July month was $167 million. Overheads for the first half were $40.4 million compared to the $41.9 million in the first half of 2020, reflecting overhead savings and efficiencies. During the half, the group repaid $1.2 billion of debt and we currently hold $1.2 billion of cash on short-term deposit. The group continues to maintain elevated levels of available liquidity, a strategy we have implemented since the start of the pandemic in early 2020. Given the current -- the continued uncertainty, we believe it remains prudent to maintain these settings. The group currently has $5.7 billion of available liquidity, sufficient to cover all debt maturities to early 2024. The average net interest cost was approximately 4.8% for the half year. This includes the impact of maintaining this liquidity, the cash held on deposit as well as the financing activity undertaken during 2020. Excluding the line fees on undrawn facilities, the average net interest cost for the 6-month period equates to 4.5%. As at 30 June, the group had hedging of our interest rate exposure of approximately 55%. This compares to the 71% hedge position at the start of the year. We have been deliberate in having our hedge position reduce as contracts mature. In order to take advantage of the continued low interest rate environment, we will review our position over the coming months. We retain our A or equivalent credit ratings from S&P, Fitch, and Moody's. During the period, all 3 rating agencies upgraded Scentre Group's outlook to stable. The statutory result was a profit of $400 million, which includes the unrealized noncash increase in property valuations of $41 million. 53% of the portfolio was valued externally with the same valuation principles applied to the carrying values for the remainder of the portfolio. The average capitalization rate was 4.89% at June 2021, remaining unchanged from December 2020. We have provided on Slide 30, details of the values by property. The book value of our asset portfolio does not include any value attribution for the cash flow we receive as property manager, either for our own share of the assets or for the share owned by third-party partners, which represents approximately $16 billion of assets under management. Our property management fees are based on a fixed percentage of revenue and ranking priority ahead of the owner's share of that asset's income. Additionally, our property management rights remain in perpetuity. On Slide 19, we have detailed the income that we earn as property manager. Although we earned this on our own share as well as our joint venture's partnership, it is deducted as an expense by the independent valuer when they value the asset. That income capitalized at exactly the same cap rate as the particular asset to which it relates equates to an aggregate of $3.27 billion that is not recorded on our balance sheet as an asset. The accounting stated net assets of the group was $3.64 per security at 30 June. It is $4.27 per security when the value of our property management income is included. Both amounts do not include any value for our brand, platform, or other income-generating activities such as development, design and construction. I will now hand back to Peter to conclude.

Thanks, Elliott. The first 6 months have highlighted the fundamental strength and resilience of our business and its ability to rebound when restrictions ease. Whilst we are currently operating through a period of government restrictions in key markets, we are confident in the ability of our business to perform. The group continues to target a distribution of $0.14 per security for the year to 31 December 2021. This is based on the assumption that the current government restrictions substantially ease by the end of October 2021. We are well positioned to come out of this period strongly, supporting our customers and business partners and continue to deliver long-term growth for our security holders. I'll now open the call for questions.

[Operator Instructions] Your first question comes from the line of Simon Chan from Morgan Stanley.

Just a few clarifications for me. Pete, 8.7% negative spreads you mentioned in your prepared remarks. Was that for new merchants? Or was that for overall every leasing deal that you did?

Yes, it's across every leasing deal that we did. And just to give a bit of detail, it's pretty similar across our new merchants as well as renewals. And renewals were about 70%, I suppose, of all deals that were done.

Yes. That's fantastic. A more finance-related question probably for Elliott. You mentioned July cash receipts was about $167 million, yet you also said that approximately $33 million of collection were from trade debtors -- outstanding trade debtors. Is that right? And if that's right, then does that imply that you've actually only collected about $120 million to $130 million of July billings?

No. The fees that I was referring to has been collected in July and August. So it's spread over the 2 months. The $167 million is just the pure cash inflow for the month of July. So part of that will relate to a previous trade debtor. But as you know, we have been consistently reporting the actual cash we have collected rather than a percentage of a theoretical billing because we think that gives the community a better sense of the actual cash that we're collecting as a business, and therefore, our cash flow -- surplus cash flow.

Yes, makes sense. And I appreciate all the NOI stuff is going fine. But can you guys give a comment about how your ancillary income has been impacted in the first half, like car parking, advertising? Like how much of that -- how much have you been hurt in that department?

Yes. Simon, as you can imagine, in terms of the ancillary income, that has certainly been impacted with the impact of the lockdowns at the centers. And as you would have seen in the charts, we have various lockdowns across the different states at different times. So where you see the majority of our portfolio, particularly with regards to New South Wales and Victoria with the lockdowns, we have been more impacted with car parking and with our brand space media. What we are seeing, though, is that the numbers are certainly better than where they were in the first half of 2020, okay? So in terms of the reduction, it's not as large as it was in the first half of 2020. We also hope in terms of that we're coming out of this, as I said, and leading up to the key period of the Westfield week of offers in November and as well as in the Christmas period. And so that's a very important time for us in terms of having our centers open.

Right. Can you quantify that for us, Pete? Like have you been short-changed $5 million or a short change like $50 million on the ancillary stuff, just so that we can put in context?

I think, Simon, just as a rough guess, I think with our car parking as well as our media, you're probably in the order of maybe $15 million, $20 million, something in that order.

Your next question comes from the line of Richard Jones from JPMorgan.

Elliott, maybe just a question for you. Just in terms of -- you called out the expected credit loss allowance of $44.5 million. Just looking at the accounts, just wondering what the amounts written off relating to COVID-19 of $56.8 million is. Is this -- I mean, I think you said it's not a write back of previous provisions and I assume it's not in the NPI. Is that what you're saying?

So there's -- as you know, we provision and then we process. And so what you're seeing there is the actual process occur that gets booked through, but the provision is probably the more pertinent number because it's what we expect to actually process eventually. So if we go back to this time last year, $232 million, $232 was the provision. We expect that, if it hasn't already been fully processed, it will be processed as an expense. Similarly, with the $44.5 million, that most likely has not been processed as yet because it's related -- it's mostly later in the period, and it's a timing issue that will be an actual expense eventually.

And the $56.8 million is the amount of the $232 million that's been processed, is what you're saying?

Effectively. Yes, on top of what we have previously processed in previous periods.

Okay. Peter, maybe a question for you. Just interested, clearly, in states where restrictions have been -- or short burst that there's obviously been a pretty strong rebound we've seen in visitation and sales. Just interested perhaps with reference to Victoria, what the experience is when restrictions have been elongated, obviously, with reference to what that might mean to Sydney coming out of restrictions later in the year, hopefully.

Well, I think that if you see the visitation charts which we've put on Slide 4 across the states for the first half of this year, it's really important to highlight the fact that even with the prolonged lockdown in Victoria, certainly, at the end of last year or during last year, that our visitation basically went up to where it was pre-COVID. And so we are very confident that our visitation will continue to rebound as soon as these restrictions ease. And we've seen that time and time again across whether that's Victoria, the smaller lockdowns that we're seeing, as you say, the shorter ones, in New Zealand, South Australia, West Australia and Queensland. But Victoria, I think, is a great case in terms of the second half of last year where it rebounded very strongly after the restrictions eased in October.

Okay. Good one. And then just finally, just any change on your payout policy. I think sort of last year, you were talking about retaining earnings to cover operating leasing CapEx and also fund growth and reduce debt. Is that still kind of implied in the second half guidance?

Yes, that is. As I said, we're still striving towards achieving a $0.14 distribution for the full year. And it's worth of saying that in terms of the first half of this year, our earnings were certainly substantially above our distribution.

Your next question comes from the line of Sholto Maconochie from Jefferies.

A good presentation, it's nice and sharp and quick. I just had a quick question. The guidance before was at least $0.14. So given the run rate you achieved in the first half, if it wasn't for these lockdowns, would it be fair to say that would have been exceeded?

Yes.

Okay. Good. And then just on the $44.5 million COVID-19 charge, that -- what was waived and what was the expected credit loss. Do you have a split with that?

As we've said in previous times, what we've processed we have booked, I think it's been disclosed over periods of time. But the effective amount that we provide for is what we expect to expense at some point of time in the future, if it has already been processed. So assume it's gone.

Okay. [indiscernible] gone, okay. And then just on the -- I appreciate it's very fluid. How much of your income do you think is covered under the code to conduct in New South Wales and Victoria on an annualized basis? And how much can you get -- off against land tax in New South Wales or Vic?

Yes. So in terms of our overall income, from Victoria and New South Wales, it's probably somewhere around, in total for the SME retailers, it's probably around 15%. So -- and in terms of the benefit that we get from land tax, it's relatively small because the majority of the land tax we have to pass on back to the retailers.

So we get no benefit.

Yes.

Okay. And then just on the -- I know you don't disclose cash. But if you look at your sort of run rate, you're sort of 96% coming in the first half -- first half just on my calc. So this -- if you look at July, that would have been sort of 80%. Is that sort of about right, the sort of that sort of collection rate on a normalized basis?

Well, as I said, I don't think we're looking at it on the percentage standpoint because it is -- obviously, July is lower than the run rate that we've been disclosing. You can see the run rate has been pretty consistent around that $200 million mark, which were for the first 6 months, which was a very consistent run rate in the second 6 months of last year. So if we make now the assumption that $200-odd million is the new run rate, then you can base the $167 million of that $200 million normalized run rate.

Okay. And then just following up on Jones' question on the payout policy. Obviously, you retained the $100 million this half. If you -- obviously, there'll be some arrears you'll collect in next year for these lockdowns. Go to October, there'll be some laggards that -- can you -- would you potentially use that to have a sort of a higher payout in the second half to maintain that $0.14, which is very welcomed in this environment?

As I said, we're targeting $0.14, and we believe that with the restrictions easing by the end of October that we'll be able to pay the $0.14.

Your next question is from Adrian Dark from Citigroup.

I think you made a comment in the worded results announcement as well as in your prepared comments about wanting to be the first choice for where people spend their time outside of home and work. I guess I think of that as being easier if you're doing fairly consistent and sizable development. Could you maybe talk about how you anticipate that will work in the environment where perhaps you might do less retail development going forward? Or what your expectations would be if that is expected to ramp back up, please?