Westfield mall owner Scentre Group focused on operating earnings & funds from operations in its results release on Tuesday for the June half-year, not including comparisons with the 2019 half-year until it really had to.
This half, Scentre tumbled to an $A3.7 billion loss. All but a couple of valuation lines below are in Australian money. The company used an exchange rate of $A1=$NZ1.0694 this year ($NZ1.0423 last year).
That $A3.7 billion loss is called “the statutory result” because it includes revaluations, which listed property entities tend to pipe up about without too much explanation when they go north, but add a rider to and push downpage if they head south.
These entities prefer to focus on funds from operations on a bad day, because those figures exclude revaluations.
While those revaluations affect the balance sheet in one way or another, they are plainly more than merely a “statutory result” nuisance or exclusion.
They affect property entities’ backing, and therefore the ability to fund growth – an important factor in whether the entities can talk about a bigger or smaller portfolio next year, and also thereby a big influence on share price.
But there was one positive line way down the bottom of the half-yearly financial statement – the return from the New Zealand business. It lifted its property revenue by 17.6%, whereas the Australian malls recorded an 8.2% decline.
Key points in the June 2020 half-year result (2019 half-year in brackets):
Revenue, down 16% to $A1.094 billion ($A1.303 billion)
Property revaluations, down 16,483% to $A4.08 billion reduction ($A24.9 million gain)
Pretax earnings, down 573% to $A3.657 billion loss ($A772.7 million profit)
After-tax earnings, down 591.6% to $A3.657 billion loss ($A744 million profit)
Basic & diluted earnings/security, A69.54c loss (basic A13.95c profit, diluted A13.91c profit)
Funds from operations, down 46% to $A361.9 million ($A670.5 million)
Funds from operations/security, down 44.9% to A6.96c (A12.64c)
Funds from operations/security were worse in 2020 than they look in the line above, because the company reduced its stapled securities by 126.6 million (2.4%) in a buyback just completed in a price range of $A3.95 last September down to $A3.26 in March.
No interim dividend for parent company or for any of its 3 trusts (June 2019 nil for parent company, SGT1 trust A5.7c/unit, SGT2 A5.6c/unit, SGT3 nil)
Total assets, down 7.1% to $A37 billion ($A39.9 billion)
Net assets, down 18.8% to $A19.1 billion ($A23.55 billion)
Net tangible asset backing (NTA), down 17.9% to $A3.66 ($A4.46)
Property revenue, down 3% to $A1.1 billion ($A1.2 billion)
Australia, down 8.2% to $A1.05 billion ($A1.14 billion)
NZ, up 17.6% to $A59.4 million ($A50.5 million)
NZ portfolio, carrying amount $NZ1.55 billion ($NZ1.74 billion)
NZ portfolio weighted average cap rate, 6.14% (5.92%); 2020 rate rose to 6.16% when non-retail assets included
Scentre said a 25-point cap rate rise decreased overall valuation by $A1.63 billion this year ($A1.89 billion last year).
When Westfield Group split in 2014, the Australia-New Zealand part of it went into Scentre Group Ltd. That was outside the Unibail-Rodamco of Europe takeover deal which occurred in 2018. What the Europeans bought was the 35 malls in the US & UK owned by Westfield Corp, worth $A35 billion at the time of the takeover.
What you might think of as a mall is nowadays referred to as a living centre, according to the Scentre website: “Scentre Group owns & operates the pre-eminent living centre portfolio in Australia & New Zealand with retail real estate assets under management valued at greater than $A50 billion and shopping centre ownership interests valued at $A34.1 billion. This comprises 42 Westfield living centres…”
But back to the shop landlord’s results, with some history.
Scentre made $A2.7 billion net profit in 2015 (the 2014 figure, a profit of $A6.6 billion, wasn’t comparable because of restructuring). The 2014 profit attributable to continuing operations after tax, before charges & credits relating to the restructure, was $A1.8 billion. In 2015 it rose 52% to $A2.73 billion.
Scentre now owns all or part of 42 malls, including a 51% interest in its 5 New Zealand centres – Albany, Manukau, Newmarket & St Lukes in Auckland, Riccarton in Christchurch. Singapore’s sovereign wealth fund, GIC, holds the other 49% of that NZ portfolio.
Australian Financial Review columnist Myrian Robin wrote at the end of March: “Continuing exposure to Scentre Group, which owns the Australian Westfield malls, would have cruelled the family’s fortune. Luckily they sold their final 4% stake in a mammoth UBS block trade at $A3.96 a pop last October – not quite at the peak, but pretty damn near it. Scentre Group is now worth a mere $A1.46/share, which means the Lowys’ now-sold $A815 million stake would be worth a mere $A298.85 million today.”
ASX charts show the share price bottomed at $A1.43 on 24 March – down precisely $A2/share in just 3 weeks. From August 2019 through to mid-January, the shares had traded at around $A4, collapsing from $A3.43 on 3 March. The subsequent peak was $A2.73 on 9 June. They closed at $A2.14 on Friday – so, a positive, up 50% since the start of the Covid-19 pandemic in March.
I’ve included a link to a Motley Fool column below because it contains a “could rocket in a post-Covid world” closer. I haven’t written about the implications of Covid-19 on the property sector longer-term because I think most shots at forecasting at the moment will be guesswork.
One important factor will be whether shoppers return to physical premises or stick with online shopping. That issue is fundamental not just to the future of malls at all, but also to their makeup – the kinds of shop, size of premises, right down to the nature of a lease agreement.
My pick is that there will be a big return to going to shops & working in offices, although it may take a few months to get the gregarious nature of urban life back into full swing.
Where are the founders?
Westfield Group co-founder Sir Frank Lowy, who’s 89, has retired to Israel.
Son Steven, chief executive of the family-controlled Westfield Corp on its sale to European mall owner Unibail-Rodamco in 2018, took the retail data business of Westfield into a listed startup, OneMarket Ltd, on 31 May 2018, but it flopped. It was delisted from the ASX on 2 December 2019 after shareholders approved its voluntary liquidation. It was listed at $A1.53/share, and an $A1.08/share interim distribution was paid on 15 June.
Steven’s older brother Peter (now 61), for a time co-chief executive of Westfield, is a longtime US resident and became a standup comedian in 2018.
David Lowy, the oldest of the 3 brothers (now 65) & a musician, retired as a Westfield executive in 2000 and as non-executive deputy chair in 2011. He now chairs the Lowy family office & its investment business.
Motley Fool, 25 August 2020: The Scentre Group share price is up today. Here’s why
Australian Financial Review, 31 March 2020, Rear Window column (paywalled): You’d rather be Frank Lowy than Solly Lew
Sydney Morning Herald, 30 September 2019: Lowy’s OneMarket start-up to be wound up
11 June 2018: Unibail-Rodamco completes Westfield deal
25 May 2018: One last step for UnibailRodamco takeover of Westfield
27 November 2015: Scentre sells 3 malls to locals, one to go
25 February 2015: Scentre to sell the other 4 NZ malls
7 November 2014: GIC buys into 5 NZ Westfield malls
12 April 2017: Frank Lowy & sons talk the ingredients for future retail
24 February 2016: Lowy says first results vindicate Scentre restructure
Attribution: Scentre release & half-yearly report, ASX share chart, Australian Financial Review, Motley Fool, Sydney Morning Herald.