Company Interview / Scentre Group shopping for further growth

Key points:

CEO predicts year-end growth of between 3 to 5.4% by December 2024Scentre Group's (ASX: SCG) visitor-friendly strategy has resulted in increased customer visitsScentre Group (ASX: SCG) plans to further improve occupancy rate and increase rents

Elliott Rusanow, representing Scentre Group (ASX: SCG), expresses satisfaction with their first half-yearly results, where they saw a net profit of $404 million. With unrealised property valuation adding to their profits, Elliott maintains that the company's primary focus is the $568 million posted in funds from operations, representing a 2% rise. He mentions their guidance projection for full-year growth, predicting an increase of 3 to 5.4% by December 2024.

Elliott underscores the success of Scentre Group's (ASX: SCG) strategy to make their spaces more appealing for customers to spend time and money. He indicates that this approach has resulted in an increase in customer visits—around 320 million this year—an almost 2% rise compared to the same period last year. This foot traffic surge has, in his view, led to an increase in sales generated by their business partners, which totalled approximately $28.6 billion by the end of June 2024.

As part of Scentre Group's (ASX: SCG) strategy, Elliott divulges their focus on increasing occupancy rates. He states their occupancy rate stands at an impressive 99.3%, which has consequently led to an increase in rental costs for their business partners, from 16.3% to 16.9%. He reveals that plans are in place to buoy this up further and achieve a balance between customer demand and space availability which will, in turn, prompt a growth in their revenues by increasing rents. He also touched on their future retail development opportunities valued around $4 billion, designed to further enhance their spaces to align with customer preferences.

Full unedited transcript below:

0:11

Let's get some more results. Shopping center giant center Group has posted first half profit of $404 million, which includes an unrealized property valuation decrease of $120 million, tipping a 3.6% increase in distributions for the year. Let's get more on those results. Juliet caught up with center Group chief executive Elliot Rosner.

0:30

So our profit statutory profit does include the, um, unrealized property revaluation, uh, as part of the accounting rules. But the focus for our profit is really what we call funds from operations, which was, uh, $568 million for the first half, which was up 2%. And we're guiding for full year growth, uh, of for funds from operations up between 3 to 5.4% for the full year to December of 2024. So what are you expecting in terms of what will help drive some of that growth for the remainder of the year? Yeah. So our focus is on providing people a reason to come and spend their time at our destinations. And we've seen the benefit of that play out in the first half of this year, uh, where we've welcomed so far this year, until last Sunday, 320 million customer visits, uh, that's an increase of 6 million, or 1.9% more than, uh, the corresponding period last year. And that's

1:30

led to $28.6 billion of, uh, sales that are being generated by our business partners to 30th June, uh, for that 12 month period to 30th June of 2023, 2024. I'm sorry. And that level of productivity, uh, is driving an increasing demand for space, with our occupancy increasing now to 99.3%, uh, leading to higher rents, leading to growth in our net operating income of 3.5% for that six month period, and that's leading to growth for, uh, in earnings in both earnings and distributions for our security holders. So with occupancy near capacity, what's in the pipeline for further I guess growth here? I think that the uh the opportunity for us is to further increase that occupancy. Um, we, uh, we can run at higher occupancy. That what we run that today, uh, as well as push the

2:30

costs of that occupancy. So, uh, this time last year, our occupancy cost. So this is the ratio of rent to sales that our business partners pay us for 16.3%. We've been able to increase that that to 16.9%, uh, at this period. And we see a great opportunity to further increase that, um, the peak of, uh, rent to sales of their occupancy costs cost actually was 19%. Uh, and at that time, we're talking about ten years ago. The productivity that was being achieved by our specialty retailers was $10,000 a square meter, and they're now generating 12,500 dollars a square meter. And that higher level of productivity is being done at a higher margin for our business partners, which means that they have a propensity to pay a higher level of those sales in rent to us. And that's, uh, they're really two factors that will drive, uh, earnings growth for

3:30

us, as well as us focusing on driving more and more customer visitations. And time dwelt, um, at our destinations. Do you expect rents to continue to grow at the level that you saw over last year, particularly given that we could be seeing high interest rates for longer periods? Yeah, we do. And the reason for that is because of our strategy of driving customer visitations. Um, we're driving customer visitations. It's leading to record, um, amounts of productivity that's being generated by our business partners. There's less amount of space that's available to business partners to connect with that customer. And that dynamic of supply and demand or lack of supply. Increasing demand is leading to, uh, the ability to the ability to grow our revenue, uh, through increasing rents.

4:22

Now, I did ask about your pipeline. You've got $4 billion, I believe, in future retail development opportunities. Just tell us about some of these. So our focus is on repurposing existing space, um, from what might be there now, uh, to something that is more, um, more, uh, wanted by our customers. Uh, an example of that is what we're doing at, uh, Bondi, Burwood, Southland, um, similar to what we've done at Mount Gravatt, cravat where we've downsized or seen the exiting of a David Jones at Mount Gravatt, but downsizing and the others that are named and reusing that downsized space for um, for space that is more aligned to where people are spending their time and spending their money on. In the case of Bondi. Uh, the ground level of the David Jones store is actually being repurposed into, uh, a new, fully interactive, uh, new

5:22

line Rebel sports store and a first to market premium Virgin Gym, uh, operation. Uh, at the same time, David Jones is actually, uh, refurbishing and upgrading their existing smaller space at Bondi. So that's just one example which we're seeing repeated across the, um, a number of our centres. And we'll continue, we believe, to see that repurposing of, uh, existing space into a different style of what goes on in that space as we move forward into our, uh, into the future years.

5:55

How is your liquidity looking? Can you cover all your debt maturities? Yeah. So liquidity at the, uh, at the end of June was $3.2 billion. Uh, we have sufficient liquidity to cover all our debt maturities until the end of 2025. Uh, you might have seen that. Today we announced, um, a tender offer to repurchase some outstanding, uh, hybrid notes that have a maturity date of 2026. And as part of that, will be reissuing, uh, new hybrid notes, uh, which will have a longer duration. Um, the amount of the issuance will be determined by, uh, how much we, uh, successful in buying back of the existing 2026 notes. Um, but that's that will further add to our liquidity and our ability to ability. I'm sorry to cover the debt maturity profile. So we're very active in the way that we do manage liquidity. Um, in in particular, uh,

6:55

having sufficient liquidity to cover, uh, not only the maturities but also the implementation of our operating and business strategy. Now, you've also mentioned that you expect distributions to grow for the full year. What sort of payment levels can shareholders expect? Yeah. So we've guided to distributions, uh, for the full year of being 17, at least 17.2 cents per security. Um, and we see that as earnings continue to grow, um, that distribution will also continue to grow. Uh, and so we're very focused on, uh, growing in absolute terms, um, without rebasing and without resetting earnings, uh, both our earnings and our distributions, uh, this year and in the future years to come. And over the long term, because we are a high cash flow generating business. And so we see the opportunity of, uh, further increasing our distributions, uh, into the future years. Now, Elliot, you mentioned

7:55

before Westville Bonda, which, of course, was the scene of a devastating attack back in April. Our thoughts are with your staff member who did lose his life. What is the security like now at in terms of all your operations and all your centers?

8:11

Yeah. The April the 13th saw a very devastating event occur where six people, six innocent people lost their lives and many people were injured. Um, one of those, as you pointed out, was a member of our team for us. And, uh, our deepest condolences remain with the families of the victims of, uh, of those who lost their lives, uh, on that day. Uh, we have been running, um, higher security settings for, um, quite a long period of time, actually. We were running higher security settings with, uh, more guards, um, and very close collaboration with local and, uh, and national police and agencies. Uh, particularly in the wake of October last year and the conflict in the Middle East. And we continue to run with those higher security settings. Uh, there's more visibility of security presence, uh, at our destinations.

9:11

But more importantly, it's that collaboration with the, uh, with the police. And I'd like to take this opportunity of thanking, um, the police, the emergency first responders for. And our bonded team, uh, for how they reacted to that terrible events, uh, on April the 13th and, uh, and how we continue to, uh, act, um, with the victims and the families of the victims. Uh, but we are very focused on providing a safe environment because it's core to our strategy of having people spend more time with us at our destinations.