Scentre Group: Earnings Recovered, Next Step the Balance Sheet as We Transfer to a New Analyst

Like rival shopping mall owner no-moat Vicinity Centres, no-moat-rated Scentre is in good shape to withstand a potential retail slowdown. Portfolio occupancy remains high—at 99.2% at end-April 2024—and leases for its specialty tenants average 6.8 years in length, compared with 3.6 years at Vicinity and 5.3 years at neighborhood shopping center owner Region Group. Scentre’s specialty leases include fixed annual increases, with rent typically contracted to rise annually at 2% above the consumer price index. Australian economic statistics suggest retail conditions are slowing and could get worse as consumers’ disposable income is pressured by inflation and higher interest rates. However, Scentre achieved 3.1% increases on new leases signed in 2023, including 3.6% increases in the second half, while sales for Scentre’s tenants were 2.4% higher in the first quarter of fiscal 2024 compared with the same period last year. We think this bodes reasonably well for future leasing outcomes and rent growth.