Scentre Group (STGPF) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Scentre Group 2025 Half Year Results Update. [Operator Instructions] Please note that this conference is being recorded today, Tuesday, the 25th of August, 2025, at 9:00 a.m. Australian Eastern Standard Time. I would now like to hand the conference over to Mr. Elliott Rusanow. Please go ahead.

Thank you, and good morning, everyone. Welcome to Scentre Group's Half Year 2025 Results Briefing. . Before we begin, I would like to acknowledge the traditional custodians of the land I am on and pay my respects to their elders past and present. I'm joined today on the call by our Chief Financial Officer, Andrew Clarke; together with Lillian Fadel, Group Director of Customer, Community, and Destination; and John Papagiannis, Group Director of Businesses. Our focus on creating more reasons for people to spend their time at our 42 Westfield destinations in Australia and New Zealand continues to deliver strong performance and continued earnings growth. We made a deliberate strategic decision almost 3 years ago to focus and invest in initiatives to continually reimagine how we operate and repurpose our space to drive more customer visits to our destinations, and thereby increasing opportunities for the businesses that partner with us to interact with our customers. Importantly, we have been implementing this without incurring significant downtime or dilution of earnings during this process, but rather by creating and enhancing active town centers that are more and more relevant to help people choose to spend their time. We have been able to do this, grow visitations, grow business partner sales, increase occupancy and deliver the sector's leading earnings growth year after year, and we expect this to continue. For the first half of 2025, funds from operations were $587 million, up 3.2%, and distributions to our security holders were $0.08815 per security, up 2.5%. Today's results have been made possible by the efforts of our team. I thank them for their focus on continued operational excellence in how they operate our destinations and serve our customers and communities. For the full year 2025, the group reconfirms its target for FFO of $0.2275 per security, representing 4.3% growth for the year. Distribution guidance for the full year has been upgraded to $0.1772 per security, representing 3% growth. We have upgraded our distribution guidance for the second half of 2025 to grow by 3.5% to $0.08905 per security. In the first half, net operating income grew by 3.7% to $1.043 billion. In the first 34 weeks of 2025, we have welcomed 340 million customer visits, 10 million or 3% more than for the same period in 2024. Our business partners achieved record sales of $29.3 billion in the 12 months to 30 June 2025, an increase of $719 million on the same period in 2024. This is approximately $5 billion more sales generated through our destinations in 2019. In the 6 months to 30 June 2025, business partner sales grew to $13.8 billion, up 2.9% on the same period last year. Specialty store sales were 3.9% higher in the same 6-month period, and we are seeing this strong performance continue with the total business partner sales for July 2025, up 5% and specialty sales up 6.1% on the same period last year. Attracting more people to our destinations has continued to drive strong demand from businesses to partner with us. With portfolio occupancy now at 99.7%, its highest level since 2017. During the half, we completed 1,577 leasing deals and welcomed to 591 new merchants to the portfolio. Average specialty rent escalations grew by 4.5% and leasing spreads on new leases signed during the first half were positive 3%. We collected $1.415 billion of gross rent during the half, an increase of $43 million compared to the same period in 2024. Our Westfield membership program now exceeds 4.7 million members, an increase of 600,000 compared to 12 months ago. We continue to invest in unique offers and experiences to strengthen member engagement and visitation, as we know that an engaged member is significantly more likely to visit us more often and spend more with our business partners. Our destinations and 670 hectares of strategic land holdings are key community infrastructure with the potential to deliver additional housing at scale. We continue to progress our significant and long-term growth opportunities by utilizing our prime located urban land to create the town centers of the future. Our landholdings have the potential to supply a substantial number of new dwellings in town centers where people already want to live and work. We are engaging with governments and potential capital partners on how we can realize these long-term significant growth opportunities for the group. Earlier this year, Westfield Burwood and Warringah in Sydney were declared a state significant development with the potential to create approximately 1,500 new dwellings. This joins Westfield Hornsby in Sydney and Westfield Belconnen in Canberra, which have zoning approvals for approximately 2,000 dwellings at each location. We have the portfolio of the highest quality retail property assets in Australia and New Zealand. Investment in repurposing our space to maximize productivity and visitation is key to our long-term growth. We have continued to progress our $4 billion pipeline of future retail development opportunities, targeting a yield of 6% to 7%. During the half, we completed the first stage of the redevelopment at Westfield Bondi in Sydney. Now open to customers, newly reconfigured space on Level 1 features a global first social wellness club concept from Virgin Active and a new rebel rCX concept store. Since opening, customer visitations have increased by 13% compared to the previous period. In June, we successfully opened the first stage of the redevelopment of Westfield Southland in Melbourne, including an extended family dining and entertainment precinct. David Jones and Village Cinemas are due to open their upgraded stores in the first half of 2026. Since opening its Southland, visitation has been strong with a 13.4% increase in traffic. The expansion of Westfield Sydney opened during the period, including the new CHANEL boutique, Moncler and Omega. Thank you, and I'll now hand over to Andrew Clarke.

Thanks, Elliott, and good morning, everyone. Net operating income for the period was $1,043 million. This is an increase of 3.7% over the first half of 2024. . Underlying net operating income, excluding the $4 million prior period release of the expected credit charge grew by 4.1%. This consists of strong growth in property revenue of 3.9%, primarily driven by average specialty rent escalations of 4.5%, an increase in occupancy to 99.7% and an improvement in positive leasing spreads to 3%. Property expenses grew by 3.4%, primarily driven by a full 6-month period of increased levels of security and slightly higher contracted rates for cleaning. Management fee income grew by 3.7% for the period, in line with the growth in property revenue. Overheads were [ $48.7 ], an increase of 3.6%, primarily driven by wage growth. The growth in net interest was 4.3%. This includes a part period benefit of refinancing $1 billion of subordinated notes in March 2025. Following the execution of these transactions, we expect an improvement in the group's 2025 full-year net interest expense of approximately $18 million. This benefit will also flow through to future years. Operating profit grew by 3.5% for the period, underpinned by these strong results. Project income after tax was $1.4 million. This includes approximately $15 million of additional costs for the 121 Castlereagh Street, third-party construction of the office and residential development on behalf of Cbus Property. The additional costs were primarily due to a facade subcontractor going into administration and the subsequent program delays. The project is expected to complete by the first quarter of 2026. Overall, funds from operations for the 6-month period was $587 million, which grew by 3.2% compared to the prior corresponding period. Operating and leasing capital was $74 million for the first half. The full year spend is expected to be approximately $160 million. The group has made significant progress in its capital management funding and interest rate strategy. In March, the group completed the make-whole redemption of all the remaining Non-Call 2026 subordinated notes totaling $1 billion, which had a margin of 4.7%. The group refinanced these notes with a new issue of $650 million of new Non-Call 2031 subordinated notes at a margin of 2% and $350 million of bank drawings. These transactions are in line with our capital management strategy to drive earnings growth by optimizing the group's weighted average cost of debt. During the period, the group also issued $371 million of 10-year senior notes through private placements. In July 2025, the group completed the divestment of a 25% interest in Westfield Chermside for $683 million at a capitalization rate of 5%. The proceeds of this transaction have initially been used to repay bank facilities. This transaction is in line with our strategy to introduce joint venture partners across our portfolio of wholly owned assets. At 30 June 2025, pro forma for the divestment of Westfield Chermside, the group had $3.3 billion of available liquidity. Year-to-date, the group has executed $3.2 billion of interest rate swaps, increasing hedge coverage to 100% as at June 2025 with an average base rate of 2.99% and 99% at December 2025 with an average base rate of 2.96%. The group's hedging strategy has locked in an average base rate in the near term that is significantly below the current floating rate, whilst maintaining the flexibility to take advantage of a reducing interest rate environment over the coming years. Our distribution reinvestment plan continues to be in effect for the August 2025 distribution. The DRP will continue to add to the group's various sources of capital. These capital management initiatives have enabled the group to maintain a weighted average interest rate of 5.7%. Included in this was an average base rate of 3.1% and an average margin of 2.6%. This is a significant improvement of the average margin compared to this time last year of 2.9%. The statutory result was a profit of $782 million, which includes an unrealized property revaluation increase of $177 million. All properties were revalued during the half year, of which approximately 50% of the portfolio were independently valued. Overall, property valuations increased by 1.2% during the 6-month period, primarily driven by growth in net operating income. The weighted average capitalization rate for the portfolio remains at 5.43% at June 2025. Thank you, and I will now pass you back to Elliott for closing remarks.

Thank you, Andrew. In April, the New South Wales Coroner’s commenced the Bondi Junction Inquest. The 5 weeks of hearings that were completed on 30 May were very difficult time for the victims families and many in our community and our team. . I would like to recognize our team members, many of whom have provided significant assistance to the important work of the New South Wales Coroner, and this assistance and support is ongoing. The group has continued to deliver earnings and distribution growth for the first half of 2025. Our strategy to attract more people to our Westfield destinations and to unlock long-term growth opportunities from our strategic land holdings is expected to continue to deliver ongoing growth in earnings and distributions. Subject to no material change in conditions, the group reconfirms its target for FFO of $0.2275 per security for 2025, which would represent 4.3% growth for the year. As I outlined earlier on the call, distribution guidance of 2025 has been upgraded for the full year to grow by 3% to $0.1772 per security. Thank you, and I'll now hand the call back to open it up for questions.

[Operator Instructions] Your first question comes from James Druce with CLSA.

Just a question on guidance first. Your top line is growing at circa 4%, and you picked up a 2% tailwind on that refinance of subordinated debt, you haven't moved FFO guidance. Is that just projects income rolling off? Or how do we think about that?

James, it's Andrew here. Look, in summary, that's right. We've seen very strong growth in the underlying core business in terms of the net operating income. We expect that level of growth to continue in the second half of the year. And our net interest expense as we spoke about, we're definitely seeing reduction in terms of the overall interest expense over the longer term and the benefit of that refinancing coming through this year. And then as I said, we have included an additional $15 million of additional costs relating to the third-party design and construction of 121 Castlereagh Street, which is partially reducing that level of growth, as a one-off for this year.

Just to be clear, so that will be a loss this year-- when you're reporting '25 full year result?

No, we still expect project income overall to be a slight profit, but there's additional cost within that number relating to that project.

And then maybe just one on maintenance CapEx and leasing incentives, I think you're guiding to sort of a flat number for this year. I think in your comments you talked about $170 million. We're not talking a large increase, but it is an increase nonetheless just talk to what that relates to?

Yes. No, just a correction there, James. I've mentioned my speaking it's $160 million, which is pretty much flat compared to prior period.

Your next question comes from Callum Bramah with Macquarie.

One just around how we should think about refinancing of the subordinated notes going forward from here and whether, I guess, with asset sales, the churn side, you've got a greater level of flexibility to replace that with even cheaper bank debt.

Thanks, Callum. Andrew here. That's right. The opportunity to recycle capital out of our wholly owned assets and to bring that capital back on to balance sheet and then to use that capacity over time, potentially to refinance the subordinated notes is definitely an opportunity that we we're thinking through and looking at, and we'll continue to monitor the market in terms of where the subordinated notes are trading in order to see if that's if that is an opportunity that we can unlock. We obviously have to work with the rating agencies around that as well in terms of how we maintain the equity credit that we receive on the balance of any subordinated notes as well. So there's a number of moving parts, but I think you're spot on in terms of long-term strategy as to how do we refinance the subordinated notes and continue to generate a really strong tailwind for the business as we've done over the last few years.

And then just on the development pipeline, can you just talk to us about how we should think about a run rate, if you like, for development both of -- the redevelopment of existing retail. So maybe, I don't know, the dollar value per annum that when we're thinking longer term, medium to longer term? And also just realistically, when those residential opportunities that Hornsby, Belconnen and Warringah would be executable?

Yes. Elliott here. Our run rate for CapEx is circa $400 million to $450 million, which includes leasing and maintenance CapEx and the redevelopment effectively repurposing of existing space in our 42 destinations. The development CapEx, obviously, if you deduct that, would be around $250 million to $300 million as a run rate, and we expect that to continue. I think when we move to the second part of your question, we're in the process at the moment of effectively obtaining optionality in the form of how to understand what is the maximum opportunity for the land holdings, the strategic land holdings that we have. When it comes to actually delivering that, our expectation would be that we would introduce potential capital partners to effectively assist in a great significant way the actual dollar funding of how to execute that. For us, we said that as a very long term -- it's a long-term growth opportunity, not in the long term, but for the long term because we're effectively using land that we have already. So we don't have to buy new land, but effectively meet the thematic demands of both Australia and New Zealand, which are particularly shortage of housing.

And so just to be clear, so does that mean we should think about it more as you learn just fees in relation to doing that residential development and development management as opposed to participate or will you take a co-investment or retain a co-investment, if you like?

I think it's probably the latter because it is on our land. But if you look at historically pre-center group days, the Westfield organization was quite successful in offshore opportunities, particularly in London, where land effectively was the capital contribution. So we would look at it as a group that we're maximizing the potential of the land that we have which in the main is being used for car parking at the moment in order to create additional value for security holders without necessarily expanding in any significant way our balance sheet exposure in order to execute that opportunity.

Our next question comes from Simon Chan with Morgan Stanley.

Can you give me a bit of color on the Westfield Sydney Market Street there, like you said, 3 retailers have opened. How far are we away from earning full freight rent, the full yield on cost at that point?

Yes. So there is more than 3 retailers open. Just to put it into perspective, the amount of space and even capital has been added with the 101 Castlereagh Street, represents around 10% of Westfield, Sydney in its totality. So it is a relatively small addition by the very important addition because it includes a CHANEL boutique, a great CHANEL Boutique probably one of the best fit outs of any CHANEL in the world, which takes a significant proportion of that space. Moncler have also done a fantastic job in their store as well as Omega, which is recently opened. We also have a great cafe there. So if anyone wants to have a good coffee, that's where they go. But we expect that, that will continue to progressively open, particularly as CHANEL opens more of their space and the basement level, which is leased, but will be expected to open towards the back half of this year. So in effect and early next year. So between now and call it the first quarter of 2026 that thing be the additional amount of space that's been added to Westfield Sydney will be fully open operational, trading and even as of today, welcoming customers like yourself to go and shop.

I've already been there, Elliott, just for the record. Just a follow-up to that, though. So what about capitalization of interest, have you guys fully stop capitalizing interest in relation to the $400 million or so of incremental CapEx? Or will that also be phased in over -- between now and the first quarter '26?

Hi Simon, so from a capitalized interest perspective, included in our net interest expense for the half, we have actually reduced the level of capitalized interest. That is predominantly related to other projects that have completed, primarily Mt Gravatt, David Jones. With Sydney, you're right, because it's a staged opening and it's only just opened. The level of capitalized interest will progressively reduce as we get to fully open.

Great. And just one more for me. It's all very good that you've upgraded DPU guidance. I mean it translates to, I think, $4 million or $5 million just by my calcs. Can you just what's the reason behind it? Is it a signal that you guys actually think that the CapEx in cost going forward will be lower, and that's why you're comfortable with having a slightly higher payout ratio? Or what's just driving that?

Well, I think the reality is that we've brought capital back on to balance sheet, where our operating performance of the business itself is strong. We expect it to continue to be strong. And we have the opportunity of returning in the form of a dividend, a higher amount of money to our security holders. So we'll look to continue to be able to do so.

Your next question comes from Ben Brayshaw with Barrenjoey.