SCA Property Group buries the pandemic, but earnings now face interest rate headwinds

SCA Property Group buries the pandemic, but earnings now face interest rate headwinds

SCA Property Group's Soda Factory retail centre at West End in Brisbane

Higher property valuations and a surge in retail sales to well above pre-pandemic levels have pushed full-year net earnings for SCA Property Group (ASX: SCP) more than 5 per cent higher to $487.1 million.

In a sign that the impact from COVID is now well behind it, SCA’s growth in funds from operations (FFO), the measure of underlying business activity, was even more robust, surging by 21.2 per cent to $192.7 million in FY22.

However, the shopping centre owner says the gains of the past year could be short-lived with forecasts of lower earnings in the current year due to rising interest rates.

The group is forecasting a negative impact from interest rate increases in the current year, issuing an FFO guidance of 17c per unit for FY23, assuming it makes no acquisitions during the year. This compares with FFO of 17.4c in FY22.

Despite the challenges ahead, SCA Property CEO Anthony Mellowes says the FY22 result demonstrates the resilience of the group’s convenience-based centres over the past year.

“Our tenant sales are now 10 per cent above pre-COVID levels,” says Mellowes.

“Leasing spreads and cash collection rates were impacted by lockdowns in NSW and Victoria during the first half of the year but improved in the second half.”

SCA Property Group, which controls a $4.4 billion portfolio of neighbourhood and sub-regional shopping centres across Australia, reported a big uptick in activity in the last quarter of FY22 with sales lifting 4.5 per cent.

Discount department stores saw the biggest increase in sales over the year, up 11.6 per cent, followed by specialty stores at 10 per cent and supermarkets at 9.7 per cent.

Gross property income rose 19.5 per cent to $347.4 million, led by a 27.3 per cent increase in income from specialty stores.

SCA Property’s $487.1 million bottom line profit for FY22 was boosted by a $354 million increase in the like-for-like fair value of investment properties.

The group’s $4.46 billion investment portfolio was up $460.9 million over the year due to a combined valuation increase of $421 million and acquisitions of $347.5 million, which were offset by divestments of $307.6 million.

Occupancy across the group’s retail portfolio rose to 98.1 per cent from 97.4 a year earlier. SCA has room to improve its specialty store contribution with vacancies of 5 per cent down only marginally from 5.1 per cent at the end of June last year.

SCA Property is making a final distribution of 8c per security, for a full-year payout of 15.2c.

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