The Shopping Cntrs Austrls Prprty Gp Re Ltd (ASX: SCP) share price will be on watch this morning after it posted an increase in profits and dividends.
You might not have guessed that COVID-19 had hit retail landlords hard. But SCA Property Group's focus on neighbourhood centres provided it some protection.
The group reported a 14.1% increase in interim net profit to $102.9 million compared with the same period last year.
Watch the cash not profit
But profits aren't really the focus when it comes to property groups. It's more the Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO) that I watch.
On these two metrics, the group posted a weaker result compared to 1HFY20, which was before COVID.
However, management was quick to point out that FFO in the latest half improved by 8.2% to 6.77 cents per unit (cpu) compared with 2HFY20.
The increase would have been starker at 16.1% if not for the significant capital raise it undertook during the height of the pandemic.
SCA lifts dividends on improving AAFO
AAFO also improved in 1HFY21 over the previous six months. This measure, which deducts operating costs including maintenance capex climbed 7.4% to 5.8cpu.
Fund flows are more important to investors because that's where dividends are paid from. On that front, investors would be pleased that SCA Property Group boosted its interim distribution by 14% over 2HFY20 to 5.7cpu.
While that's still a big drop from last year's interim dividend of 7.5cps, management is promising to keep increasing the dividend as long as the economy continues to recover.
Dividend and earnings outlook improving
As long as nothing comes out of left field, investors can count on another dividend upgrade in the second half as management is forecasting a full year AFFO of 12.2cpu. Assuming a 98% payout ratio, this should equate to a final distribution of ~6.25cps. This compares with the 5cps it paid in 2HFY20.
SCA Property Group's earnings are probably more resilient than many other retail landlords, including the Vicinity Centres (ASX: VCX) share price and Scentre Group (ASX: SCG) share price.
While some of the group's specialty retail tenants are facing ongoing pressure from COVID, its key anchor clients are Woolworths Group Ltd (ASX: WOW) and Coles Group Ltd (ASX: COL).
Foolish takeaway
Both the WOW share price and COL share price are trading at or close to record highs as they are "COVID winners". Demand for their groceries and alcohol increased during the pandemic and are expected to remain strong.
As for the big profit jump reported by SCA Property Group, that is less exciting than it sounds, in my view.
This is because it was driven primarily by the higher valuations placed on it property portfolio. The main reason investors buy a property stock is for sustainable dividends and companies can't pay dividends from property valuation increases.
