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SCA Property Group

They are young, committed, professional and on the move. One of the youngest entries to the shopping centre development and management arena is SCA Property Group, spun out of Woolworths less than three years ago. If you’d invested in them then, you’d have made 70% on your money. How did they do it? Read on!

In terms of sheer numbers of centres, SCA Property Group  is the largest shopping centre owner/manager in Australia.  The portfolio consists mostly  of neighbourhood and sub-regional centres, with a few freestanding supermarkets spread out across Australia and New Zealand.

SCA (Shopping Centres Australasia) was spun out of Woolworths in late 2012. The latter transferred its ownership of a number of properties to SCA and then issued qualifying Woolworths shareholders with units in the new Group, via an in-specie distribution.

So it was that SCA Property Group was listed; Woolworths was simply a tenant. The new company even had an Independent Chairman (Philip Marcus Clark AM). CEO Anthony Mellowes had previously worked for Woolworths but now the break was clean – SCA Property Group was a totally autonomous entity.

It now consists of two internally managed real estate investment trusts, stapled together to form a listed vehicle which owns and manages a portfolio of quality sub-regional and neighbourhood shopping centres and freestanding retail assets.

Of course, as usual, the critics were out in force. Revenue was coming in at around the 60% mark from  the majors, leaving 40% from the specialties. At the time of listing, the specialty vacancy factor was around 20%. The critics opined that the vacancy factor was far too high and, further, that the portfolio held little interest for national chains, franchisors or even multiple-outlet store operators.

It’s the old ‘glass half full or half empty’ scenario. The critics saw the vacancy factor as a problem, yet SCA saw it as an opportunity and, in their eyes, it was all upside from thereon in!

As it stands, only two and a half years later, specialty vacancies stand at less than 4%! Talk to the SCA people and you see why the vacancy factor has plummeted: they talk retail, they know retail, they know their business and they know what drives the customer. A long talk with SCA is refreshing. There’s no spin, no gilding the lily, and none of the proverbial!

CEO Anthony Mellowes simply tells it like it is. “Look, we may not be seen as ‘sexy’, but we’re not trying to be,” he says. “What we are is a group that’s focused. We know what we are, we know what we do; we do it professionally and we do it well.

“We have a portfolio of ‘convenient’ shopping centres,” he continues. “If you were to describe an ‘average’ centre, it’s a Coles or Woolworths with around 15 specialties. It’s a neighbourhood centre, a Mini Gun, but that doesn’t mean you can’t apply the same principles as those used with the Big Guns.”

Anthony Mellowes

“What we are is a group that’s focused. We know what we are, we know what we do; we do it professionally and we do it well” Anthony Mellowes CEO, SCA Property Group

It’s when they expand the theory that it becomes interesting. According to Mellowes and Sid Sharma, SCA’s General Manager, Operations, growth in specialty rentals is just as important here as it is in the large regionals but, as they point out, traditionally, these smaller centres have lacked the professional expertise to pursue that growth.

“We all know that the challenge for a portfolio of small, neighbourhood centres spread out over a huge geographical area is management,” Sharma states, “and I mean management in its widest sense, incorporating marketing, leasing, operations and so on. Without being critical, what’s happened traditionally is that management has been left to the local real estate agent, who regarded the role as little more than rent collecting, with the added bonus of an exclusive  on a specialty shop leasing when one becomes available.

“So with these smaller centres,” he concludes, “in general there has been little focus on strategies to improve specialty performance, and there’s been even less on market research, retail planning and tenancy mix analysis.” When SCA began focusing on these issues, naturally they began with the customer – the trade area resident – and it was here that some startling information came to light. They found that customers at their centres had more frequent visitations; customer-shopping habits had changed dramatically in a relatively short time. They found that, while the average grocery shop used to be once a week, in their centres, people were shopping two to three times a week. The supermarket had become their ‘pantry’ of sorts; the spend was less, but the frequency was greater.

The leasing strategy became one  of establishing a ‘complementary’  (to the supermarket) tenant mix  to provide a convenient, ‘everyday shopping needs’ centre.  Karla Mitchell, SCA’s Leasing Executive, tells SCN that their  ‘time-poor’ customers want instant gratification – they still want fresh grocery produce but, increasingly, they want diverse food options. “They can grocery shop, get all  the mundane items, then reward themselves with a great takeaway dinner for the family from one of  the specialties,” she says.  Eva Steele, Leasing Executive, added, “We’ve got centres from Mission Beach to Mt Gambier  to Treendale near Bunbury,”  “The geographical spread of our assets in regional Australia means that our customers vary widely in both shopping habits and retail needs. There’s no ‘one size fits all’ with us – we have to be aware of  the differences and make sure our leasing strategies respond.”

1_PortfolioReview+3+PiesThe response has been nothing short of outstanding. With an internally managed leasing team, consisting of two internal and nine external (agent) leasing executives, SCA has completed some 207 leasing deals in the last  12 months. Today, national or regional chains tenant 67% of the specialty shops in the portfolio, and comprise both franchisee and company-operated stores. The sheer growth in the specialty component has been one of SCA’s outstanding achievements since their beginning and, according to the whole team, it’s still got a long way to go.

At the start, some two and a half years ago, the specialty vacancy factor in the portfolio stood at almost 20%. It’s now down to 3.9% (see figure 1), but the drop in vacancies tells only a part of the specialty growth story. Leasing shops is vital for growth but just as important, according to SCA top brass, are tenancy mix, its quality and performance.

In terms of quality tenants, as at  30 June 2013, 54% of the specialty portfolio was tenanted by national chains. A year later, the figure had risen to 64%.

Since listing, specialty MAT in the neighbourhood centres is currently tracking at a massive 8.8%. Occupancy costs for specialty tenants at June 2014 were 10.4%; by September they had dropped to 10% and, at the end of 2014, had broken below the 10% line to 9.9%.

So, you’ve got a decreasing vacancy factor, an increased national chain component, and a significant increase in specialty MAT, all of which result in declining occupancy costs. That points to future growth, not merely from a continuation of present strategies, but from higher rents for new leases as old ones expire. There is significant upside in bringing occupancy costs  closer to current market levels.  It’s a double whammy!

3_Aust_Special_LeaseIf all that’s not enough, the growth picture doesn’t stop there. Since listing, there has been continued growth in sales from supermarkets and other anchors in SCA centres.

The growth is significantly stronger than SCA’s AREIT peers, and stronger than the Coles’ and Woolworths’ averages over the same period. This  is due in part to the relative youth of SCA’s portfolio, in part to the larger than average store sizes, and also to the fact that most of the stores are  in high population-growth corridors.
As supermarket sales growth increases, they move closer to turnover rent points.

2_Speciality_VacancyAs a result, at FY 2015, 14 anchors were paying turnover rent. SCA expects that number to increase and, already,  a further 10 supermarkets are within 10% of reaching their turnover thresholds.

Then, of course, there are the acquisitions. According to Anthony Mellowes, in terms of numbers of centres, SCA is the most acquisitive landlord in Australia! On listing in December 2012, they had 69 centres, valued at $1.406 billion. Today, they own some 82 centres with a value knocking on the door of $2.0 billion. That’s a 19% increase in numbers, and a whacking 40% increase in portfolio value. They’ve done their homework on acquisitions, and the facts and numbers to emerge are both interesting and informative.

4_Current_Sales

5_Rent_TurnoverThere are around 1420 Coles – and Woolworths-anchored centres in Australia (including freestanding stores). Around 20% of them, or 284, are freestanding. A further 20% are in regional or sub-regional centres, but most of them – 60%, or 850 – anchor neighbourhood centres.

6_Portfolio_OccupancyOwnership of neighbourhood centres is very fragmented, with SCA owning the largest number, followed by Charter Hall, then Federation.

In terms of actual numbers, this means that SCA has 70, Charter Hall 60, Federation 30, and other corporate owners together own another 170. In all, that accounts for 310; the other 540 are privately owned.
So growth, in terms of the portfolio, is more than just on the cards. SCA has an opportunity to continue to consolidate the neighbourhood segment, and they’re actively pursuing it. The group has a funding capability, a management capability, it has industry knowledge and myriad contacts to source and execute acquisition opportunities from both the private and corporate sector, and they’re harnessing all that to grow.

You can put all the figures on the table, all the statistics – they’re all meaningful and, of course, vitally important. But what is really impressive at SCA is the shared focus, and a commitment to a fundamental objective. They’ve got a lot of centres out there and, if they apply the highest standards of management, leasing, marketing and operations to the entire portfolio, then they’re bringing much more to the table than has ever been on it before.
It’s a matter of fact that the leases are solid, safe and dependable, and that translates, therefore, to the income stream. In terms of long-term safety, their portfolio WALE (Weighted, Average Lease Expiry) is some 12.9 years. The Anchor WALE is 16.6 years.

With anchors like Woolworths and Coles, the income is secure for a long time into the future. By bringing in management, leasing and marketing skills, the specialties will become just as solid, and a portfolio vacancy rate  of less than 1% within a couple of years could be considered a prudent forecast. With this kind of management approach, specialties will contribute to the success of the majors and vice versa whereas, in the past, it’s simply been one-way traffic – from the majors to the specialties.  All that produces a scenario in which the whole becomes far greater than the sum of the individual parts.

Again, the ‘glass half empty or half full’ comes into play. At listing, the critics pointed to the extent of Woolworths’ influence on the total income stream, maintaining it was static and that growth was therefore strictly limited. That, of course, negates the potential of turnover rent and, in regions of high population growth, coupled with an anchor WALE  of 16.6 years, the picture in five years’ time could be very different indeed.

There’s no clearer example of fundamental shopping centre management best practice, than that given quite casually by Sid Sharma during SCN’s discussions.  “We had a retailer in one of our centres who was doing alright, but nothing special,” he begins. “In the past, there would be no issue; the shop was leased and the retailer was making a living, so no problems.” But then Sharma goes on to explain the difference in SCA’s approach.

Sid Sharma“We all know that the challenge for a portfolio of small, neighbourhood centres spread out over a huge geographical area  is management.” Sid Sharma, General Manager, Operations, SCA Property Group

“We knew, given the chance, he’d vacate, and we’d identified a children’s retailer who wanted in. We changed the tenancy, and the shop went from a turnover of half a million to just over  two million,” he says. “Now, we didn’t get much more rent, but the positive effect on the centre, its traffic, its presentation, its ambience, was phenomenal, and in the future, it’s obvious that the standard of adjacencies will also be raised.

“You find a specialty shop that sells what a supermarket doesn’t – it could be a specialist baker, it could even be a fashion shop, a hairdresser or a specialist food retailer, either fresh or prepared. Whatever it is, it compliments the supermarket.”

And, if it’s the right retailer, the profits are good. Rent is usually lower than the large sub-regionals, yet the potential is not proportional. A typical small sub-regional will achieve around 3.5 million visitations a year, while the average SCA centre has a footfall of about one million, but it has only 15% of the regional’s GLA.

7_Indicative_devel

8_Ownership

9_Buyers_SellersThat says it all! These people know the business – and once again, the figures prove it.

In FY 2015, SCA Property Group outperformed the market, with a total return (distributions plus unit-price appreciation) of over 30% and, since listing only two and a half years ago,  the figure is over 70%. Not a bad investment!

The more you see of the workings of SCA, the more you understand that their whole strategy is one of ‘back to basics’: back to the fundamentals of the shopping centre business.  It’s the perfect training ground for young people who want to enter the shopping centre world. It’s the micro of the huge super-prime regional macro; it’s like peeling the onion down to the core. It’s about finding out what the customer wants, providing it and accepting that as the primary objective.

Sorell Plaza External 2
Sorell, Tasmania

Everyone at SCA is close to the bone, close to the workings of the company, close to the action because, unlike many other organisations, it’s internally managed – there’s no ‘middle man’ taking a fee. Everyone is hands on, and the structure is designed to enable a clear alignment of management interests to those of SCA’s unit holders. When you visit SCA and talk to their people, the overriding impression is that of solidity.

This is a solid company: it has solid assets, solid tenants, solid leases and a solid revenue stream. Its management and its very corporate structure is solid, too. As we said at the beginning of this article, there’s no spin here; it’s a conservative organisation, but that doesn’t mean it’s not innovative, dynamic and full of enthusiasm.

They’ve got a development pipeline, having identified over $100 million in development opportunities. Compared to the Big Gun world, that might not sound like a great deal of money and therefore not much of a challenge. But when you consider that it’s earmarked for the next five years, and will be spent on some 17 already identified centres, spread out over a geographical area stretching from Mackay in Far North Queensland, to Orange NSW,  to Treendale at the southern tip of WA, then the ‘cost’ seems far less  of a criterion than the complexity  of the exercise, and the ‘challenge’  is as good as it gets.

The sheer energy and passion at  SCA is palpable. They are running at  a million miles an hour, but there’s no froth and bubble; it’s solid, controlled, expert and professional. In broad terms – those of large, institutional, commercial investments – it’s a relatively new asset class, evidenced by the fact that around two-thirds of these types of centres are still in private hands. The opportunities are enormous.

WalkervilleIn its short history, SCA has already shown the potential; they’ve demonstrated the quality of their investment, and have already begun  the next phase. SCA has just announced another investment vehicle: the SCA Unlisted Retail Fund (SURF 1). It’s a five-year term fund with a forecasted annualised distribution yield of 8%. The offer to invest opened on July 16th and closes, either when it’s fully subscribed, or on September 9th – whichever comes first. In SCN’s view, if you wait until September 9th, you won’t get any! SCN

 

About the author

Shopping Centre News

Shopping Centre News is the leading publication for the shopping centre industry in Australia and New Zealand.

SCN is one of the most authoritative publications in the world for the shopping centre industry. Each issue contains articles on Design, Legal issues, Marketing, Leasing, Centre Management and Development. It features contributions by industry experts from around the globe. Shopping Centre News is the only publication in the world that features centre statistics on Turnover, Turnover per square meter and Specialty Shop turnover per square meter for every major centre in Australia.

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