The Scentre Group (ASX: SCG) share price has shot up 6% after reporting its FY20 half year result.
Scentre is the owner and operator of the Westfield shopping centres across Australia and New Zealand.
Scentre HY20 result
Scentre has announced a difficult HY20 result for shareholders.
The bottom line was a statutory loss of $3.6 billion – this is due to a $4 billion reduction in property valuations because of the impacts of COVID-19. But these valuation changes are just accounting updates on paper, the most immediate impact is the effect on Scentre’s earnings.
For the six months to 30 June 2020, Scentre generated operating earnings of $361 million, equating to 6.94 cents per share. It also made funds from operations – meaning its net cash profit – of $362 million, equating to 6.96 cents per share.
Scentre said that it received gross cash inflow of $1.05 billion for the six months and had a net operating cash surplus (after interest, overheads and tax) of $261 million.
COVID-19 impacts
For the six month period, it collected 70% of gross rental billings. For June and July it collected more than 80% of gross rental billings. These collection rates have not been adjusted for the impact of applying the SME code and its impact in reducing the actual amount of cash rent collectible.
Scentre said that it had supported its tenants throughout the period on a case by case basis. It pointed out it has done this without receiving financial assistance from the government. It has agreed arrangements with 2,438 of its 3,600 retail partners including 1,624 SME retail partners.
The shopping centre business said that the structure of the leases with tenants hasn’t changed and remains based on the mutual agreement to pay fixed rent. However, SME tenants, which make up 30% of group rental income, can reduce the amount of cash rent payable with the decline in sales they have seen.
In-store sales for retail partners that traded throughout the six-month period was 8.1% lower compared to the prior corresponding period. Specialty in-store sales were 12.1% lower.
Excluding Victoria, more than 93% of retail stores are open across the portfolio and occupancy was 98.8% at the end of June 2020.
Scentre balance sheet
During FY20 so far the company has raised or extended $5.8 billion of additional funding with $3.4 billion of bank facilities and $2.4 billion of long-term bonds. Scentre said it had $4.4 billion of available liquidity, sufficient to cover all maturities until January 2023.
Interest cover for the reported period was 3.6 times and it had a balance sheet gearing ratio at 30 June 2020 of 38.4%.
Summary
Scentre is clearly challenged in this environment. Some tenants are struggling and there has been a big shift to online shopping. Will the change be permanent?
The demise of shopping centres has been predicted for a long time, but this may have brought forward the shift to ecommerce. Rental income may be challenged by tenants for a while.
For a real estate buy I think businesses like Goodman Group (ASX: GMG), Brickworks Limited (ASX: BKW) or Centuria Industrial Reit (ASX: CIP) could be better buys as ASX dividend shares.