A lot has been written and said about retailer performance in 2017. In the United States of America, 2017 was widely referred to as ‘The Retail Apocalypse’. While our Australian market remained relatively resilient, we were not immune from a series of retailers entering into administration and an industry continuing to go through systemic change.
However, what is not widely reported was that, in 2017, the net increase in retail store openings in the United States was more than 4,000 and the net increase in 2018 is estimated to be more than 5,500 stores (IHL Services).
In Australia, all major shopping centre groups have held (or improved) occupancy levels and retail sales growth remained positive (both comparable and aggregate).
As I wrote last year, change in retail is not a new phenomenon and although the pace is quickening, the focus remains, as ever, on ensuring we are not only meeting but exceeding customer expectations. In retail, in particular, the customer is always right and does always come first and last.
Convenience is king
At SCA Property, our expertise and focus is convenient shopping centres weighted towards non-discretionary retail usages. Our Centres are your everyday local and your everyday habit.
Our customers dwell between 20-30 minutes in our centres. 30% of our customers travel less than 5 minutes to visit our centres, 60% of our customers travel less than 15 minutes and over 80% travel less than half an hour. Most of our customers can have everyday shopping done and be home within an hour. Most of our customers shop twice a week or more in our centres and consider themselves proud local shoppers. This is the convenience customers want and is a competitive advantage over alternate shopping options (including online).
The divide between discretionary and non-discretionary sales growth is increasing. Non-discretionary sales remain resilient and growing.
This convenience has underpinned the sales growth of our retailers, who are currently enjoying better than average sales growth. Supermarket moving annual turnover (MAT) increased by 2.7% pa, driven by Woolworths’ improved sales performance. Comparable MAT sales growth for specialty tenants remains a healthy 3.2% pa, with our retailers enjoying occupancy cost of under 10%. Our retailers have now enjoyed over four years of sustained sales growth within the 3% – 8% per annum.
Over the last five years, we have re-weighted our income stream in SCP (our listed vehicle) and launched two unlisted funds. Our focus on tenancy mix has seen our portfolio relatively resilient to tenant closures. Our weighting towards apparel is now at 7% with a focus
on deep discount everyday apparel which continues to have positive sales growth.
This focus above has resulted in leasing spreads of 6.7% on renewals as at December 2017 and between 7% – 10% in prior periods. Comparable Net Operating Income growth remains on track for 2.6% which is strong for a neighbourhood centre group. This is despite the well-documented recent increases in electricity costs. Our occupancy remains steady at 98.4% despite acquiring properties with speciality vacancy over 10%.
Our focus on ensuring a resilient core business affords us opportunities for growth in a disciplined, considered manner.
Disciplined growth and capital management
Demand for retail assets has shown little sign of slowing down with 23 centres worth $963 million transacted in 2017. Cap rates for convenient centres are at historic lows. The investment interest demonstrates the resilience of convenient shopping centres to adapt and adjust to macroeconomic changes.
We completed $38.3 million of acquisitions in the last six months of 2017. The competition to acquire quality neighbourhood shopping centres remains elevated, and yields continue to firm. Nevertheless, we are confident that we can continue to leverage our relationships, management capabilities and knowledge of the sector to source further transactions that meet our strict investment criteria.
There are more than 900 convenient shopping centres in Australia that are anchored by either Coles or Woolworths. The opportunity to consolidate the sector remains. Our track record of over five years of consistent earnings growth demonstrates that disciplined management of neighbourhood centres can result in resilient, secure distributions.
We continue to take advantage of the development opportunities in our portfolio. The developments at Kwinana and Mount Gambier have been completed successfully during the half-year, with significant valuation uplifts achieved at both centres. In the second half of FY18 a key focus will be on completing the new Coles-anchored neighbourhood centre at Bushland Beach, and progressing the new Woolworths-anchored neighbourhood centre at Shell Cove. We continue to identify and progress other development opportunities in our portfolio which we plan to complete progressively over the next five years.
Plans are well advanced on the launch of our third unlisted fund ‘SURF 3’ which will contain some of our remaining non-core assets. We expect this fund to be launched and closed during the second half of FY18.
We also remain focused on appropriate capital management. During the last six-month period to December 2017, we refinanced our bank debt facilities expiring during 2018, extending them out to late 2022. We are pleased to have maintained our weighted average cost of debt at 3.8% and to have increased the weighted average term to maturity of our debt to 5.2 years. As at 31 December 2017 our gearing is 32.5% which is at the lower end of our target gearing range of 30% to 40%, and is consistent with our preference for gearing to remain below 35% at this point in the cycle.
Our people
SCA remains an old-fashioned REIT. Our head office remains lean and agile at under 30 people despite now having over 86 centres under ownership or management. We remain focussed on investing in our property management partners and facilities management partners nationally.
Our customer motto is “love local, shop local” – this not only speaks to our customers but to our approach to management. I am proud to say we have the best network of property managers from Colliers, Comac, Race Property, Knight Frank Townsville, Knight Frank Wagga, Knight Frank TAS and Knight Frank WA along with Knight Frank Facilities Management Australia. This approach of partnering with the best talent in every region, that is usually a local resident and connected to the community, ensures our relationships with our tenants is enduring.
The familiarity of the local, the charm of community and the convenience of the corner shop is how we aim to become every shoppers every daily habit.
Our digital analog approach
It’s well known that the biggest taxi service in the world doesn’t own taxis (Uber) and the biggest accommodation group doesn’t own any physical premises (AirBnB). The digital generation doesn’t associate with one brand and doesn’t want to be attached to one brand.
Instead of services that compete with established so-called ‘disrupters’ – we are working with our retailers to utilise the right disruption technology that improves their business. To facilitate seamless integration, we have introduced several technological solutions on payments which help our retailers stay up to date and competitive in the changing world.
Our customer analytics allows us not only unique insights into customer behaviours but also the opportunity to have a direct conversation with many of our customers. Our digital customer surveys are instantaneous and can reach more than 5,000 people in 24 – 48 hours, allows our retailers to understand customer shopping trends and adapt their product to suit.
Our advertising partner is able to work with FMCGs to better market their product – right outside the point of purchase in the supermarket or specialty store. The power of the ‘now’ and the ability to present customers opportunities for instant gratification remains.
Our digital network, which we rolled out over two years ago, gives us unique insights into shopper movements and customer traffic flows. We now know with certainty peak shopping periods and quieter periods. Customers don’t necessarily shop 9 to 5 and our retailers are adapting to time poor customers by changing their store trading hours.
The aim of our centres is to remain steadfastly convenient, for our retailers to be digitally equipped while focusing on customer service and community engagement. We see this as being ‘digital’ while maintaining some old fashioned analog values that customers relate to.
We’re excited about 2018 – it’s another year of frenetic change and one our team relishes. We hope to continue to deliver our unitholders with sustained, defensive, resilient cashflows all the while remaining fresh and convenient for our customers of today and
those of tomorrow.
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About SCA Property Group
SCA Property Group (SCP) includes two internally managed real estate investment trusts owning a portfolio of 84 quality neighbourhood and sub-regional shopping centres located across Australia. The SCA Property Group invests in shopping centres predominantly anchored by non-discretionary retailers, with long term leases to tenants such as Woolworths Limited and companies in the Wesfarmers Limited group (such as Coles). The SCA Property Group is a stapled entity comprising Shopping Centres Australasia Property Management Trust (ARSN 160 612 626) and Shopping Centres Australasia Property Retail Trust (ARSN 160 612 788).
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