The Scentre Group (ASX:SCG) share price rose 2% to $3.88 after it released its full year results this morning. Revenues declined 2% to $2,470 million and funds from operations (FFO) grew 4% to $1,290 million. Earnings per stapled security were up sharply to 79 cents, although this is predominantly due to property revaluations.
FFO per share (cash the company actually earned) was 24.29 cents, up slightly from 23.3 cents last year. Dividends per stapled security were 21.73 cents, up from 21.3 cents per security last year. Net tangible assets ('book value') grew from $3.67 to $4.24 per share, largely due to property revaluations. Scentre has around $12 billion in net debt.
Occupancy remains high at above 99.5%, and specialty store sales grew 1.5% over the full year. In-store sales at 'Majors' tenants (e.g. supermarkets) fell 0.4% over the full year.
The big story in this report is the property valuations, with Scentre reporting a monster $3.2 billion in upwards property revaluations – more than twice what it reported last year. This was identified as a key audit matter and Scentre said the revaluation was driven by 'continued improvement in capitalisation rates, solid NOI (net operating income) growth, and the value creation from the completion of major developments.'
Capitalisation rates (the net rental yield from the properties, in % terms) across the whole portfolio fell from 5.29% in 2016 to 4.86% this year. Net operating income grew 2.75% but total property valuation increased around 10%. It looks to me as though Scentre's property has grown in value well above the rate of rental income. Properties are independently valued, but even so these valuations look optimistic. Additionally, sales at tenant stores were mediocre which could cap Scentre's ability to pass on any rate rises.
Scentre is a steady earner and has a solid portfolio of properties in diverse locations. However, it carries a lot of debt and with occupancy already at maximum, there is basically no room to improve earnings except via increasing rent and building new shopping centres. As mentioned above, mediocre sales growth at tenants will likely limit Scentre's ability to lift rents and grow earnings. As a result – even though it trades at a discount to its book value – I think Scentre is fully valued and is unlikely to be a star performer from here.
