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Here's how Westfield's owner plans to fight Amazon

Business Insider Australia logo Business Insider Australia 25/08/2017 Caroln Cummins

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Scentre Group, the country's biggest retail landlord, has continued with its strategy to Amazon-proof its Westfield shopping centres by increasing the number of tenants offering lifestyle, entertainment and food options.

In its interim result, the retail industry's bellwether said its tenants in the food retail, food dining, technology & appliances and retail services categories grew sales by 1.5 per cent, which helped offset the continuing declines in department and discount department stores. Tesla and other car outlets are also taking up space within its shopping centres.

More than 100 new retailers have been added across Scentre's 39 Westfield malls, and the popularity of food and home renovations TV shows has seen an increase in demand for these type of retailers.

The Westfield shopping centres owner - along with the rest of the retail industry - is bracing itself for the arrival of global online behemoth Amazon, which earlier this month confirmed it will open its first local fulfilment centre in Dandenong South, Victoria, to spearhead its push into the Australian market.

Presenting its results, the company also revealed plans for its first new development since Westfield Sydney 12 years ago, at Coomera on the Gold Coast.

The $470 million site, of which Scentre's share is $235 million, will be a new-look mall offering Coles and Woolworths supermarkets, an Event Cinemas complex including Gold Class, Kmart and Target discount department stores, and 140 specialty stores including an alfresco leisure and dining precinct.

Growth in what are called "mini major" retailers such as fast fashion groups Zara and H&M will continue to contribute to the forecast full-year fund from operations of about 4.25 per cent.

For the June half, Scentre said funds from operations (FFO) - seen as the most accurate earnings measure for real estate investment trusts - grew 3.5 per cent in the half to $638 million, or 12.01¢ per security. It will pay an interim distribution of 10.86¢ per security on August 31.

Net profit was $1.4 billion, and included $929 million in gains from asset revaluations and the completion of the Westfield Chermside redevelopment.

© Provided by Business Insider Inc Comparable net operating income increased 2.6 per cent for the six months, driven primarily by contractual rent increases. The results were in line with market expectations, and Scentre maintained its forecast range of 2.75 to 3 per cent growth for the full year.

Chief executive Peter Allen said the group will extend its current practice to grow distributions at a lower rate than earnings until it reaches a payout ratio of 85 per cent of FFO.

"The distribution is targeted to grow at 2 per cent per annum until the target payout ratio of 85 per cent is achieved. Once this target is achieved the distribution is expected to grow in line with FFO growth," he said.

The focus on improving its balance sheet "through the disciplined management of capital is essential to delivering long-term sustainable growth in shareholder returns", Mr Allen said.

He added the group would look at building apartments only when the returns of having a residential development outweighed the returns from retail. In areas of high density living, such as near the Warringah Mall in Sydney's northern beaches, there was still demand for more retail with food and entertainment offerings, he said.

Peter Zuk from Shaw & Partners said Scentre's relatively low comparable sales growth and individual category trends were consistent with what was seen from other retail-focused peers such as rival shopping centre Vicinity this reporting season, and highlighted the continued challenges for retailers.

"Despite this, Scentre has keep its centres almost 100 per cent full. Its focus on capital management, that is its lower target payout ratio of 85 per cent over the next few years, makes sense to us as it provides funding for Scentre's $3 billion-plus development pipeline, which based on management's targets, should provide attractive total returns," Mr Zuk said.

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