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Awakening the retail bear from hibernation
Its been one year since the pandemic reared its ugly head and swept through markets, triggering one of the biggest stock market falls in history. And just like that, the market moves on. The hardest-hit sectors back then were property trusts, banks, retail and hospitality groups, on concerns of a complete shutdown of the economy.
While the latter three have recovered somewhat, REITs are still well below pre-COVID price levels. And that’s no surprise. The near-total shutdown of Australian major cities, driven by fear, caused the sudden cut-off of cash flows. The Melbourne and Sydney CBDs, usually bustling with people, were turned into ghost towns. Shopping centres and office buildings empty. With no foot-traffic, retailers were forced to shut up shop. The effect is still being felt today but signs of growth are emerging, as are innovative opportunities.
In this article we take a closer look at two Australian REITs and their prospects for recovery.
Shopping Centres – Scentre (ASX:SCG)
Scentre Group is a shopping centre giant with retail destinations operating under the Westfield brand in Australia and New Zealand. It owns and operates 42 Westfield shopping centres. Shopping centres suffered on a global scale, the pandemic forced people to bunker down at home in isolation, all but reducing foot-traffic to nothing. Retail stores were left to fend for themselves and either shifted online or closed premises, causing vacancies and business bankruptcies to retail property groups. Fast-forward to today, and the sector is almost at its pre-COVID level. Shares in SCG hit a Coronavirus low of $1.36 (the pre-Coronavirus high was $4.08) in March and have recently been trading at around the $2.92 level.
SCG’s results for the 12 months to 31 December 2020 came in broadly in-line with expectations. The company noted that every Westfield Living Centre remained open throughout the pandemic. It reported property revenue of $2.27 billion, down 7% from $2.45 billion in FY19. Operating profit fell 40%, to $763 million, after taking into account a $304 million credit charge related to the financial impact of the COVID-19 pandemic, which was expected. Scentre declared a final distribution of 7 cents, down from the final distribution of 11.3 cents in FY19, but expects to distribute at least 14c for 2021.
The inside word
Macquarie has an ‘underperform’ recommendation with a target price of $2.62. The broker isn’t too positive on the company. Impacted by vacancy and negative spreads, the shopping centre’s underlying net property income (NPI) fell by 8%, while FY20 funds from operations of 14.8 cents per share was a 3% miss to consensus estimates. Elevated gearing and rising capital intensity are an impediment to the dividend, says Macquarie. Underperform remains, and the target price is lowered to $2.62 from $2.68.
Office retail – GPT Property Group (ASX:GPT)
GPT Group is a property trust that invests in office (40%), logistics (20%) and retail (40%) assets. The retail segment includes regional and sub-regional shopping centres, while the office segment comprises “prime” central business district office properties including some associated retail space, as well as GPT’s equity investment in GPT Wholesale Office Fund. The logistics segment manages logistics and business park assets. While GPT isn’t a pure-play office retail, it still has a significant exposure to it .
At the company’s results, the group delivered a creditable result despite an extraordinarily difficult operating environment:
- Extended lockdown in Melbourne but recovery underway
- Office and Logistics net billings collection remained high
- Retail net billings collection improved materially in 2H 2020 as shopping centres re-opened
- Portfolio occupancy remains solid
Funds from operations came in at $554.7 million, down 9.6%, and the distribution per security was 22.5 cents, down 15%. The group says it is well-positioned to benefit from the economic recovery. At the time of writing, shares in GPT were trading at $4.43. Pre-COVID, the REIT was trading around the $6.33 mark.
The inside word
Citi has a ‘Buy’ recommendation with a target price of $4.51. Earnings were 3% above the broker’s forecast and a dividend 11% ahead. No guidance was given but this may happen at the April update. GPT has 38% of its portfolio located in Melbourne: COVID devastated retail in the southern capital, with the city going into lockdown for some time. This has caused shopping centre values to fall. The stock is trading below the broker’s valuation.
Summary
With the pandemic largely behind us, at least in Australia, confidence in the nation’s retail sector has returned. The release of January retail data revealed a massive rise in turnover compared with the same month a year ago. The Australian Bureau of Statistics (ABS) recorded a rise of 10.6% in Jan 2021, compared with a 9.6% decrease in the previous month.
Car sales in Australia recorded 83,977.0 units in Feb 2021, representing growth of 5.1%. A large proportion of retail businesses received wage subsidy schemes such as JobKeeper due to mass virus lockdowns preventing foot traffic and physical trading. JobKeeper finishes at the end of March.
While some pundits say sales are likely to soften, we think the retail shopping centre/office space sectors should be able to survive beyond the tapering of JobKeeper payments at the end of March. Primarily this is because of two reasons: Australians not being able to go overseas on holiday would likely increase domestic spending, and international borders are expected to stay this way for the remainder of the year.
The second reason will be the re-opening of Sydney and Melbourne CBD to office workers. Both cities are only a fraction full with many companies taking a go-slow approach to bringing office workers back.
As things return to normal, many see the workforce coming back into the office to connect and collaborate. Some may elect to work two days in the office and the remainder at home. Either way, the return of city workers will bring with it a revitalising energy that will be positive for both the Melbourne and Sydney CBDs.
