Scentre Group ((SCG)) has made its first revamp of the portfolio for 2019, selling a 50% stake in Westfield Burwood (Sydney) to Perron Group for $575m, a 4% premium to book value. The buyer has existing joint ventures at three other Scentre Group assets, two with Mirvac ((MGR)) and four with Vicinity Centres ((VCX)). It is the sole owner of Cockburn Central, Perth.
UBS considers the sale of Westfield Burwood significant, as it is the first regional asset to change hands since the acquisition of Eastgardens in July 2018. The broker calculates the transaction is -0.7% dilutive to free funds from operations over six months, which may imply a 6% initial yield.
Ord Minnett ranks Westfield Burwood six out of Scentre Group’s 13 fully-owned assets and the 17th most productive shopping centre in the country. Burwood is a strongly performing suburban centre with potential residential development opportunities. The broker points out Scentre Group has not needed to sell a high-quality asset, nor has it offloaded one of its less productive and more growth-challenged assets.
Given the soft sales, challenging leasing conditions and the excess of retail assets on the market, Ord Minnett expects retail capitalisation rates, the ratio of income to the sale price, to soften by around -50 basis points in 2019.
Leverage
UBS agrees Burwood is not a top quartile asset in terms of dollar sales but it is expensive on a rate-per-square metre basis. Nevertheless, the sale does not do much for Scentre Group’s leverage. The broker suspects the market will wait for further evidence of demand from a broader pool of capital, both offshore and local institutional, as Marion, Adelaide and Midland Gate, Perth are also on the market.
The sale was not that unexpected, Ord Minnett asserts, as the company is looking to lower leverage and obtain more flexibility to fund developments, and may be a buyback. The company $700m buyback lapsed in April, having been inactive since June 2018.
Still, the broker suspects Scentre Group will look to execute another partial asset sale before using some of the proceeds to fund a new buyback. UBS agrees the transaction, while reducing gearing by -1%, does not provide capacity to buy back stock. Kotara, Belconnen and Hornsby shopping centres make the most sense as funding sources, but the broker envisages several reasons why they may not be sold in the near term.
Macquarie had previously identified $12bn in assets that the company could divest to reduce leverage. Westfield Burwood was one of these, as it has limited development upside yet is of sufficient quality for capital partners to consider.
While Scentre Group’s gearing remains high relative to other listed peers, Macquarie believes this transaction is the first step in the right direction. Downward pressure as other retail transactions come to market is anticipated. Hence, underlying cash flows are weak because conditions are soft and the balance sheet remains stretched.
Credit Suisse believes the stock’s discount relative to net tangible assets reflects investor concerns around the balance sheet and the ability to fund the future development pipeline. The broker suspects the transaction will not be a one-off and that the company can fetch similar prices for other partial stakes to provide more room on the balance sheet.
FNArena’s database shows one Buy rating (Credit Suisse), two Hold and three Sell. The consensus target is $3.84, signalling -1.4% downside to the last share price. The dividend yield on FY19 and FY20 forecasts is 5.9%.
