The Shopping Centres Australiasia Property Group Re Ltd (ASX: SCP) share price is on watch this morning after posting a full-year 37% decline in profit despite increasing underlying funds from operations (FFO) by 24%.
What was Shopping Centres' financial highlights?
Shopping Centres Australiasia (SCA) recorded a statutory net profit after tax (NPAT) of $109.6 million, which was down by 37.4% on the same period last year.
Management said this was primarily due to expensing of acquisition transaction costs in FY19 that reduced the fair value of investment properties, compared to an increase in the fair value of investment properties in FY18 due to cap rate compression.
Excluding non-cash and one-off items, Funds From Operations ("FFO") was $141.8 million, up 24.1% on the same period last year.
Key drivers of this increase were acquisitions and developments, and an increase in comparable net operating income ("NOI").
FFO per unit for the period was 16.33 cents, 6.7% above the same period last year, while Adjusted Funds From Operations ("AFFO") was $127.4 million, up by 20.5% on the same period last year.
Maintenance capex of $5.6 million was up by $2.2 million due to the larger size of the SCA portfolio, while leasing costs and fit-out incentives of $8.8 million climbed $3.6 million higher.
The value of investment properties increased to $3,147.0 million during the period (from $2,453.8 million at 30 June 2018), largely due to acquisitions of $677.9 million that were completed during the period (excluding transaction costs that were written off).
SCA's valuations declined by $3.6 million, with net operating income (NOI) growth offset by weighted average capitalisation rates softening by 15 basis points (bps) to 6.48%.
SCA's net tangible assets ("NTA") per unit is $2.27, a decrease of 3 cents per unit (cpu) or 1.3% from $2.30 as at 30 June 2018, primarily due to transaction costs on the acquisitions which are written off.
SCA operations appear to be stable
Excluding the centres acquired in FY19, SCA had a specialty vacancy rate of 4.7% of gross loans and advances (GLA) as at 30 June 2019, compared to 4.8% as at 30 June 2018 and our target range of 3% – 5%.
The REIT reported portfolio occupancy rate was 98.5% which has remained relatively stable since December 2014 at between 98% and 99% for the group.
Including the centres acquired in FY19, SCA had a specialty vacancy rate of 5.3% of GLA as at 30 June 2019 and the portfolio occupancy rate was 98.2%.
Foolish takeaway
Overall, I see the underlying result as solid for SCA, particularly given the A-REIT reported underlying sales growth in supermarkets of 2.7% for the year, while speciality stores and discount department store sales climbed 2.6% and 3.4%, respectively.
The company remains heavily acquisitive, as evidenced by 12 acquisitions in FY19 for $667.9 million, however, I am wary of A-REITs artificially boosting asset values by selling across their portfolios.
The company forecast negative rent renewals from its Vicinity portfolio before returning to growth, and has forecast FY2020 FFO growth of 16.70 cpu, up 2.3% from FY19 and guidance distributions of 15.10 cpu, up 2.7% from this year.
