SCA Property has acquired a 10-asset portfolio comprised of sub-regional and neighbourhood centres from Vicinity Centres (VCX, Accumulate). The $573m acquisition reflects a 7.1% capitalisation rate, a 7.25% passing yield and a 7.5% yield with $8m of income support.
Pricing favours the purchaser, in our view, for both the neighborhood centres – at a 5% discount to book value – and the sub-regional assets – discounted by 10% – and partly reflects a lack of institutional capital for neighborhood and sub-regional centres and a motivated seller. We estimate the portfolio is being acquired based on an implied total return on capital of 7–8% versus SCA Property’s weighted average cost of capital of 7%.
SCA Property would appear to have been selected as acquirer because of its access to capital, and its ability to move quickly to exchange contracts and settle, with financial close planned for 10 October. Further, we see the market as undersupplied with institutional capital for neighbourhood and sub-regional centres – for example, capital is plentiful in office and industrial, while yields are 100–200bp lower – and pricing appears to reflect this.
Potentially, there will be operating challenges in taking on these assets given the limited income growth initially, although the going-in capitalisation rate is supportive, in our view, and suggests some value is embedded in the transaction.
We see SCA Property as having more stable shopper patterns, superior sales growth and more predictable income growth than the majority of its peers. This is underpinned by SCA Property’s under-rented specialty stores, negligible exposure to department store and discount department store repositioning risk, lower capital expenditure requirements from a newer, better capitalised portfolio, and increasing supermarket turnover rent.
In our view, SCA Property’s operating results are tracking well ahead of other retail portfolios, its earnings are relatively predictable for at least the next two years, and management is delivering on its strategy. We have upgraded our recommendation on SCA Property to Accumulate from Hold and raised our target price to $2.70 from $2.52 as we have increased our earnings estimates over our FY19–23 forecast horizon.