scentre group - macquarie · overall portfolio comp noi growth is expected to come in at the top...

Please refer to page 12 for important disclosures and analyst certification, or on our website

www.macquarie.com/research/disclosures.

AUSTRALIA

SCG AU Underperform

Price (at 07:23, 25 Aug 2015 GMT) A$3.74

Valuation A$ 3.55-3.84 - Sum of Parts

12-month target A$ 3.70

12-month TSR % +4.5

Volatility Index Low

GICS sector Real Estate

Market cap A$m 19,912

30-day avg turnover A$m 49.1

Number shares on issue m 5,324

Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E

Revenue m 1,363.7 1,902.2 1,830.6 1,881.7 EBIT m 1,321.3 1,837.2 1,739.7 1,788.8 Reported profit m 1,714.9 2,030.8 1,914.4 1,979.9 Adjusted profit m 853.9 1,167.5 1,167.7 1,214.4 Gross cashflow m 895.5 1,231.3 1,232.2 1,280.0 CFPS ¢ 21.3 23.2 23.2 24.1

CFPS growth % 7.5 8.6 0.1 3.9 PGCFPS x 17.5 16.1 16.1 15.5 PGCFPS rel x 1.12 1.06 1.13 1.16 EPS adj ¢ 20.4 22.0 22.0 22.9 EPS adj growth % 6.2 7.9 0.0 4.0 PER adj x 18.4 17.0 17.0 16.4 PER rel x 1.10 1.05 1.12 1.15

Total DPS ¢ 48.9 20.9 20.9 21.4 Total DPS growth % 146.5 -57.3 0.1 2.2 Total div yield % 13.1 5.6 5.6 5.7 Franking % 14 0 0 0 ROA % 10.0 8.0 7.7 7.6 ROE % 6.4 6.9 6.3 6.2

EV/EBITDA x 22.9 16.5 17.4 17.0 Net debt/equity % 71.6 58.3 53.1 53.7 P/BV x 1.2 1.1 1.0 1.0

SCG AU vs ASX 200 Prop, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2015

(all figures in AUD unless noted)

25 August 2015 Macquarie Securities (Australia) Limited

Scentre Group The top line vs the bottom line Event

SCG’s 1H15 result reveals continued sales and operational momentum into

the second quarter of the year and whilst NAV support is starting to emerge,

the cash return to investors (ie dividends) will be subdued on our forecasts

with an elevated maintenance capex spend, the distribution remains well

above free cash flow and SCG will reduce its payout ratio over time. We

accordingly retain our Underperform recommendation.

Impact

Sales momentum... It is retailer profit that dictates how much rent they can

pay but top line sales growth provides an indication of the profit trajectory.

Whilst we believe the lower A$ will adversely impact the margins of some

retailers, the continued improvement in sales across the SCG portfolio is

encouraging with comparable specialty sales growth of +5.1% in Australia and

+4.8% in NZ both up on the +4.0% and the +2.8% reported to March 2015.

Whilst overall releasing spreads haven’t got any better relative to the first

quarter of the year, comparable NOI growth of 2.7% in Australia is better than

our expectation as additional income is generated from the smart screen

initiative.

... and now some NAV support. A de-rating of the share price and the roll

forward of our valuation sees SCG now trade within our NAV range of

$3.55ps-$3.84ps.

But earnings profile has headwinds... Whilst debt cost savings mean SCG

can still achieve previous FY15 FFO guidance, dilutive asset sales will

adversely impact growth in FY16 and whilst there are some mitigating factors

(assumed further reduction in unhedged interest costs adopting the forecasts

provided by our economics team and a step up in development management

income), FFO growth in FY16 will be very subdued. Our current forecast is for

FFO of 22.6cps, in line with FY15.

... and distribution growth even lower. Our estimate of free cashflow in

1H15 of 9.8cps is well short of both FFO (11.4cps) and the declared

distribution (10.5cps). Capex spend is currently elevated due to the group’s

“ambience upgrade” program (pretty much a fancy word for maintenance

capex in our view) and a cash flow shortfall persists on our forecasts even

factoring a tapering in this spend. We accordingly believe that the distribution

payout ratio should continue to be reduced with management previously

talking of getting to an FFO payout ratio of ~90% in a few years (vs 92.9% in

FY15).

Earnings and target price revision

FFO: FY15E +1.0%, FY16E -3.1%, FY17E -0.8%. TP from $3.58 to $3.70.

Price catalyst

12-month price target: A$3.70 based on a NAV methodology.

Catalyst: NZ asset sales over next 6 months

Action and recommendation

Underperform recommendation retained. Aside from the fundamental factors

noted above, we also continue to see a reasonable likelihood of an ultimate

sell down of SCG from the Lowy family (~4.1% holding).

http://www.macquarie.com/research/disclosures

Macquarie Wealth Management Scentre Group

25 August 2015 2

Fig 1 SCG getting some top line momentum, but losing it before getting to the bottom line

The good The not-so-good The interesting

SCG 1H15 result was above our expectations. Statutory NPAT of $1,083m. FFO of 11.4cps is ahead of our 11.1cps forecast. Excluding the add back of amortisation, adjusted EPS of 11.0cps is also marginally ahead of our 10.8cps forecast. The beat as driven by lower than expected debt costs and corporate costs.

Leasing spreads showed a marked improvement relative to FY14 but broadly in line with 1Q and remain negative. Overall re-leasing spreads were -1.5% (-1.4% in March, -4.1% in December 2014) with renewals -1.0% (March: +1.2%; December: -0.8%) and new deals improving to -2.0% (March: -4.3%; December 2014: -7.5%). Whilst encouraging, we believe the income growth profile from retail shopping centres remains subdued for the next few years and continue to forecast negative re-leasing spreads for SCG.

Run rate of corporate costs steps down. Corporate costs in 1H15 of $44m is well down on the $49m reported in 2H14 attributed to the incurrence of some one-off costs in 2H14. The run rate is expected to be ~$90m per annum.

Several retailers are voluntarily upgrading their stores. In commenting on tenant behaviour, SCG noted that some retailers are voluntarily upgrading their stores - 600 in FY14 and expected to be a similar number in FY15.

Improvement in comp NOI growth. SCG reported comp NOI growth of 2.4% in 1H15, an uplift on the +2.2% reported in FY14 with Australia at 2.7% on the back of lower lost rent and additional revenue from the group’s smart screen initiative. Overall portfolio comp NOI growth is expected to come in at the top end of the 2.0-2.5% range in FY15.

Occupancy costs declined 40bps to 18.0% from 18.4% in December 2014. We note that the basket has changed given all stats are pro forma for the asset sales.

Australian comparable specialty MAT growth was 5.1%, up from 4.0% at March and 3.6% at December. Meanwhile, NZ specialty comparable MAT growth was 4.8%, up from 2.8% in March and 2.3% in December.

Fashion category was strong again. We highlight again that fashion was elevated at 3.7%. This compares to GPT’s apparel category which was up 1.2%. We note that the fashion category explicitly includes mini-majors (in addition to specialties), which would inflate the figure given the inclusion of relatively higher turnover international retailers.

Projects under construction were ~$2.0bn as at 30 June 2015 (SCG: $828m) which is up from $1.3bn (SCG: $400m) six months earlier in December. This was driven by the inclusion of four projects in the half with Warringah Mall ($310m), and a number of developments announced during 1Q15 – Hurstville, Kotara and Casey.

18-24 months to reach “stabilised yield”. SCG continue to target yields of 7.0-7.5% on development capex; however we note that staged openings typically mean that it is 18-24 months before this yield is achieved, with a yield in the 6’s a common start point.

NZ assets still for sale and marked down in value. SCG commented that they are still in a process to sell the four remaining 100% owned assets in NZ with SCG not prepared to transact at the prices received. Furthermore, in the last six months, the valuations of 3 of these 4 assets declined by 5% each.

Average size of developments added in the half came down. WDC Aust/NZ have historically undertaken large developments and WDC’s focus offshore meant they probably could have done more in Australia but SCG will now focus more on some of the smaller opportunities in the portfolio. Current developments are clear examples of this with Chatswood only $120m, and Hurstville being necessitated by Myer leaving the centre. Consistent with our previous research we believe market expectations for development value and returns will be reduced over time.

Reduced disclosure this period. We note the reduced disclosure for SCG at the operating level with specialty rent growth, specialty expiry profile and the four assets that were sold today removed from the last reported period. Presumably the four non-core assets sold would have been a drag on the metrics.

FY16 lease expiries up a little. Whilst not disclosed at the half year, management noted that CY16 lease expiries have increased from 17% at the start of the year to 18% at June reflecting short term deals related to developments.

Distribution above free cash flow. We estimate free cash flow of 9.8cps in 1H15 accordingly falls well short of both FFO (11.4cps) and the declared distribution (10.5cps) in 1H15. A shortfall persists on our forecasts even after a reduction in the payout ratio to 90%.

Dressing up maintenance spend. Capex spend is currently elevated due to the group’s “ambience upgrade” program. Whilst an improved centre appearance is likely to drive future benefits in terms of customer spend, we pretty much view this as a fancy word for maintenance capex. This spend is expected to be ~$35m in FY15 and relates to things such as changing caret flooring to marble, improved lighting, revitalising columns throughout the centres, etc

Protecting their turf. The development at Casey is an interesting one in that it is not the traditional Westfield type of centre. In fact it will not even be branded Westfield; SCG have acquired this land and will undertake a neighbourhood shopping centre type development as a means of protecting the performance of nearby Fountain Gate. We expect that SCG will ultimately sell this asset after ensuring that it does not compete head to head with Fountain Gate.

Maturity of the PLN’s may be a source of acquisition. We continue to sense that SCG are keen to acquire assets. The PLN’s are subject to a review in December 2016 and whilst the outcome here will depend on what the note holders (ADIA and PGGM) wish to do, ie they may seek to extend the term of the notes, there may also be the potential for SCG to acquire the interests in the underlying assets (Parramatta, Hornsby, Burwood, Southland, Tea Tree Plaza and Belconnen).

Half of the valuation uplift driven by lower cap rates in Australia. We estimate that the movement in the Australian portfolio valuations was driven ~55% by cap rate compression and ~45% by income, development and/or maintenance capex.

Focus remains on digital. SCG commented to a growing share of earnings from its 1,200 digital screen network. Notably, there has been a greater focus on digital innovation across the portfolio (including a number of developments). We are encouraged by this activity which we first wrote about earlier this year (Listed Property Sector – Let’s get digital).

Source: SCG, Macquarie Research, August 2015


25 August 2015 3

FY15 FFO guidance maintained despite dilutive asset sales but still more to come

SCG has entered into sales agreements for Figtree, Strathpine and Warrawong with affiliates of

Blackstone Real Estate Asia, and with Challenger for North Rocks. Gross proceeds will be $783m,

representing a 3.4% premium to the 30 June 2015 book values, with settlement expected to occur

in the third quarter.

Whilst these sales will initially be earnings dilutive, SCG has maintained FY15 FFO guidance of

22.5cps. This is consistent with our 22.4cps forecast going into the result which assumed the sale

of ~A$700m of NZ assets in the third quarter and the continued pursuit of these asset sales may

put downward pressure on FY15 FFO depending on timing. The annualised impact of these sales

will adversely impact growth in FY16.

The full year dilutive impacts from the asset sales can be seen in the tables below. In relation to

timing:

We assume settlement of the Australian sales in 3Q15, so has a 3 month impact in FY15 with

the remaining 9 month impact falling into FY16.

We have pushed our assumed NZ sales from 3Q15 to 1Q16, so has a 9 month impact in

FY16 with the remaining 3 month impact falling into FY17. It is clear that SCG are struggling

to receive a bid at a price they are happy to transact here with the four assets written down

2.1% in aggregate, with Chartwell, Glenfield and West City all down 5.0%, partially offset by

Queensgate which saw a +2.3% revaluation.

Fig 2 Aust sales ~2.3% FFO dilutive Fig 3 NZ sales ~1.6% FFO dilutive

Book value A$m 757.0

Lost NPI A$m -56.0

Interest saving A$m 27.8

Net change to earnings A$m -28.3

FY15 FFO A$m 1,203

Dilution (full year pro forma) -2.3%

Book value NZ$m 744.2

Lost NPI NZ$m -59.0

Interest saving (4.5% rate) NZ$m 26.0

Tax saving NZ$m 10.9

Net change to earnings NZ$m -22.1

Net change to earnings A$m -19.5

FY15 FFO A$m 1,203

Dilution (full year pro forma) -1.6%

Source: Macquarie Research, August 2015 Source: Macquarie Research, August 2015

These sales accordingly adversely impact growth in FY16 and whilst there are some mitigating

factors (assumed further reduction in unhedged interest costs adopting the forecasts provided by

our economics team and a step up in development management income), FFO growth in FY16

will be very subdued. Our current forecast is for FFO of 22.6cps, in line with FY15.

All else constant, settlement of all these sales will reduce gearing by ~250bps. Given gearing is

34.8% at balance date, this implies pro forma gearing of ~32.5%, right in the middle of the group’s

target 30-35% range and providing some capacity to fund the group’s development pipeline.

Interestingly we also continue to sense that SCG are actually keen to acquire assets and

redeployment into Australia shopping centre acquisitions could partially offset the above dilution

more immediately. Indeed the PLN’s (~$1.4bn) are subject to a review event in December 2016

and this may see SCG acquire interests in some or all of the assets which form part of the PLN

structure.

Cash flow being impacted by “ambience upgrade” program

As expected, the FY15 targeted distribution of 20.9cps has been reaffirmed and we continue to

highlight our expectation that distribution growth will remain below FFO growth for the foreseeable

future.

Whilst SCG is seeking to reduce the distribution: FFO payout ratio over time to ~90%, we highlight

that the current distribution is not free cashflow covered on our estimates. Granted a large part of

our estimate is based on our assumption of maintenance capex and incentives.

SCG have provided more colour in this regard than ever before, noting that they typically spend:

$800K-$1m per centre per annum of maintenance capex (100% share),


25 August 2015 4

Rent free incentives are around 5 months on new deals (relative to a typical specialty lease of

60 months),

An ambience upgrade program is also underway - will be lumpy but expected to be $35m in

FY15. The ambience upgrade could be argued as being development spend but given the

returns are so long dated we are classifying it as maintenance in nature (relates to thing such

as replacing carpet flooring with marble, new lighting, etc).

This implies maintenance capex spend of ~$130m in FY15 vs our previous through the cycle

assumption of ~$125m.

Fig 4 Ambience upgrade program adds $35m to capex spend in FY15

A$m

Maintenance capex 31

Tenant incentives 63

Ambience upgrades 35

Total 129

Source: Macquarie Research, SCG, August 2015

Our estimate of free cash flow (9.8cps) accordingly falls well short of both FFO (11.4cps) and the

declared distribution (10.5cps) in 1H15. A shortfall persists on our forecasts even after a reduction

in the payout ratio to 90%.

Fig 5 Free cash flow short of distribution

30-Jun-15 31-Dec-15 FY15E FY16E FY17E

EBITDA A$m 941 907 1,848 1,775 1,824 Net interest paid A$m (313) (270) (583) (512) (519) Tax paid A$m (50) (35) (85) (57) (57) Change in net working capital & other A$m 5 (14) (9) (29) (30)

Operating cash flow A$m 583 588 1,171 1,176 1,218 Maintenance capex A$m (65) (66) (131) (135) (124)

Free cash flow A$m 518 522 1,040 1,042 1,094 EFPOWA # 5,312 5,312 5,312 5,312 5,312 FCF per security Acps 9.8 9.8 19.6 19.6 20.6 DPS Acps 10.5 10.5 20.9 20.9 21.4 FFO Acps 11.4 11.3 22.6 22.6 23.5 FCF:DPS % 93.3% 94.0% 93.7% 93.7% 96.3% DPS:FFO % 91.9% 92.7% 92.3% 92.4% 90.9% FCF:FFO % 85.8% 87.1% 86.5% 86.6% 87.6%

Source: Macquarie Research, SCG, August 2015

1H15 result ahead of our expectations

SCG reported 1H15 statutory NPAT of $1,083m. FFO of 11.4cps was ahead of our 11.1cps

forecast. Excluding the add back of amortisation, adjusted EPS of 11.0cps is also marginally

ahead of our 10.8cps forecast. The beat was driven by lower than expected interest and corporate

costs. The components of the 1H15 result for SCG are presented in the table below.

Fig 6 1H15 result ahead of our expectations

Item

2H14 1H15

NPI $m 917 929 Management income $m 22 23 Project income $m 30 33

Gross income $m 969 985 Overheads $m (49) (44)

EBIT $m 920 941 Net interest $m (252) (254) Currency derivatives $m (1) -

PBT $m 667 687 Tax $m (40) (35) Minority interest $m (49) (48)

FFO $m 578 604 Less: Amount retained $m (36) (53) Distribution $m 542 551 FFOps cps 10.88 11.38 DPS cps 10.20 10.45



25 August 2015 5

Operating metrics still relatively soft but slowly beginning to trend positively

Looking at the overall portfolio performance, sales growth has improved, which resulted in a

modest drop in the occupancy cost ratio. Comparable NOI growth of 2.4% was at the upper end of

prior SCG guidance (2.0-2.5%). Furthermore, SCG commented that the Australian portfolio has

undergone the strategic review and is now considered 100% core post the asset sales which have

been contracted.

We note the reduced disclosure for SCG at the operating level with specialty rent growth, specialty

expiry profile and the four assets that were sold today removed from the last reported period.

Presumably the four non-core assets sold would have been a drag on the metrics.

Occupancy was maintained at >99.5% across the portfolio (consistent with the March

quarterly and prior periods). Average specialty store rent growth was said to be +2.4% in Australia

(2.4% in FY14, 1.7% in 1H14 for the overall Aust/NZ portfolio).

Occupancy costs declined 40bps to 18.0% from 18.4% in December 2014. We note that the

basket has changed given all stats are pro forma for the asset sales. Australian comparable

specialty MAT growth was 5.1%, up from 4.0% at March and 3.6% at December. Meanwhile, NZ

specialty comparable MAT growth was 4.8%, up from 2.8% in March and 2.3% in December.

Fig 7 Sales growth higher...spec costs lower

Specialty retail sales/sqm Comparable 12-month specialty MAT

growth Specialty rent growth Specialty occupancy cost ratio

1H14 FY14 1H15 1H15 vs

1H14 1H14 FY14 1H15 1H15 vs

1H14 1H14 FY14 1H15 1H15 vs

1H14 1H14 FY14 1H15 1H15 vs

1H14

Australia A$10,017 A$10,200 A$10,556 5.4% 2.7% 3.6% 5.1% 240bps 1.7%

2.4% 2.4% 70bps 19.0% 18.4% 18.0% (100bps)

NZ NZ$8,552 NZ$8,765 NZ$10,374 21.3% 0.4% 2.3% 4.8% 440bps 1.0%

Notes: 1. Specialty rent growth disclosure by region was reinstated from FY14. 2. Specialty rent growth in 1H15 represents face specialty store rent growth y/y. Source: SCG, Macquarie Research, August 2015

Leasing spreads showed a marked improvement relative to FY14 but broadly in line with 1Q

and remain negative. Overall re-leasing spreads were -1.5% (-1.4% in March, -4.1% in

December 2014) with renewals -1.0% (March: +1.2%; December: -0.8%) and new deals improving

to -2.0% (March: -4.3%; December 2014: -7.5%). Whilst encouraging, we believe the income

growth profile from retail shopping centres remains subdued for the next few years and continue to

forecast negative re-leasing spreads for SCG.

Fig 8 Re-leasing spreads improve in the half for SCG...slightly positive for the sector

Notes: 1. We have removed WDC from the above chart as it is now included in SCG. 2. Overall re-leasing spreads only. Source: Company data, Macquarie Research, August 2015

Expiry profile not provided...CY16 higher due to short-term development deals. The CY16

specialty expiries increased to ~18% from ~17%. The development deals relate mainly to

Warringah and Knox.

Comparable NPI growth of 2.4% is 20bps higher than FY14 of 2.2% (1H14: 2.3%; FY13: 1.7%),

with SCG expected to deliver growth at the top end of the 2-2.5% target range in CY15.

1.5%

(3.1%)

3.2%

4.8%

(1.5%)(2.2%)

0.5%

(7.5%)

(5.5%)

(3.5%)

(1.5%)

0.5%

2.5%

4.5%

6.5%

8.5%

CQR GPT SGP MGR SCG FDC Average

Jun-13 Dec-13 Jun-14 Dec-14 Jun-15


25 August 2015 6

Australian portfolio MAT was $20.1bn to 30 June 2015, down ~1.5% from $20.4bn in

December 2014 due to the impact of asset sales with the statistics prepared on a pro forma

basis for the contracted asset sale. Comparable total portfolio MAT was up 2.9%. Department

stores showed some growth (+1.5%), discount department stores were essentially flat (+0.2%)

and supermarkets showed a modest increase to 2.2%.

Fig 9 Specialty sales growth trends higher Fig 10 Comp NOI growth continues

Source: SCG, Macquarie Research, August 2015 Source: SCG, Macquarie Research, August 2015

Technology and appliances category included...fashion strong again. Consistent with the

Group’s March quarterly update and other REITs under coverage, SCG reported a technology

and appliances category which was up strongly (+8.6%). Separately, we highlight again that

fashion was elevated at 3.7%. This compares to GPT’s apparel category which was up 1.2%.

We note that the fashion category explicitly includes mini-majors (in addition to specialties),

which would inflate the figure given the inclusion of relatively higher turnover international

retailers.

Mini-majors in Australia comparable MAT sales growth was up 3.2%. This compares to

0.8% in March and -0.8% at December. We understand that most international retailers are

included in this category (H&M, Zara, Uniqlo, etc). Furthermore, SCG commented that they

have seeing encouraging levels of demand from domestic mini-majors.

Fig 11 SCG’s fashion figures include mini-majors

Source: Company data, Macquarie Research, August 2015

Ordinarily we would compare the changes in growth rates across retail categories; however SCG

have restated their disclosures by including mini majors across the categories that previously

consisted only of the specialty retailers. The current figures on this new basis are provided below.

5.1%

4.8%

(2.0%)

(1.0%)

-%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

FY

10

1Q

11

1H

11

3Q

11

FY

11

1Q

12

1H

12

3Q

12

FY

12

1Q

13

1H

13

3Q

13

FY

13

1H

14

3Q

14

FY

14

1Q

15

1H

15

%, y/y

Australia New Zealand

-%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

FY

10

1Q

11

1H

11

3Q

11

FY

11

1Q

12

1H

12

3Q

12

FY

12

1Q

13

1H

13

3Q

13

FY

13

1H

14

3Q

14

FY

14

1Q

15

1H

15

Specialty occ cost Specialty rent growth

Comparable NOI growth

(1.4%)

(0.2%) (0.2%)

0.9%

3.2%2.7%

3.6% 3.6%4.0%

5.1%

1.4%

2.4%3.0%

2.7%

3.7%

(2.0%)

(1.0%)

-

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Jun-14 Sep-14 Dec-14 Mar-15 Jun-15

%, MAT

Mini-majors Specialties Fashion


25 August 2015 7

Fig 12 Mini majors now sprinkled across retail categories

12-months 6-months

Majors:

- Department stores 2.1% 1.5%

- Discount department stores 0.9% 0.2%

- Supermarkets 1.5% 2.2%

Cinemas 19.7% 8.1%

Mini-majors 7.6% 3.2%

Specialties - total 6.1% 5.1%

Categories

-

Fashion 5.4% 3.7%

Food catering 3.9% 2.7%

Food retail 1.6% 0.4%

Footwear 7.0% 5.6%

General retail (2.2%) (0.4%)

Homewares 4.9% 0.9%

Jewellery 8.6% 8.9%

Leisure 6.0% 6.6%

Retail services 0.9% 2.5%


NSW and Victoria report strong sales growth. By region, comp spec sales growth (12-month

basis) benefitted from a strong performance in NSW at +6.6% (December: +4.6%) and VIC

improving to +7.9% (December: +5.2%). Queensland and the ACT were sluggish while WA was

negative. This is consistent with our sector outlook report, Listed property sector - Come fly with

me, where our analysis of a number of key economic variables that typically underpin the property

sector showed a divergence in the performance of the states (NSW/VIC positive with the resource

heavy states, WA/QLD, relatively negative).

New Zealand portfolio MAT of NZ $2.4bn was up ~4% from March 2015 (NZ$2.3bn). Comparable

sales were +3.9%, an improvement from +1.3% in December. In November 2014 SCG entered

into a JV with GIC for five centres in NZ. This was approved and settled in 1Q15. SCG

commented that they are still in a process to sell the four remaining 100% owned assets in NZ and

will likely change the strategy from a portfolio sale to individual asset sales.

Development update – Miranda and Chatswood spend increased, four developments added

Projects under construction were ~$2.0bn as at 30 June 2015 (SCG: $828m) which is up from

$1.3bn (SCG: $400m) 6 months earlier in December. This was driven by the inclusion of four

projects in the half with Warringah Mall ($310m), and a number of developments announced

during 1Q15 – Hurstville, Kotara and Casey.

Fig 13 Changes in SCG’s current developments highlighted below

Total Spend ($m)

SCG share ($m)

Anticipated completion

Development Dec-14 Mar-15 Jun-15 Dec-14 Mar-15 Jun-15 Dec-14 Mar-15 Jun-15

Warringah Mall n/a n/a 310 n/a n/a 155 n/a n/a 2016 Casey Central n/a 155 155 n/a 155 155 n/a 2016 2016 Chatswood 110 110 120 110 110 120 2015 2015-16 2015-16 Hurstville n/a 105 105 n/a 53 53 n/a 2015 2015 Kotara n/a 55 55 n/a 55 55 n/a 2015 2015 Miranda 475 475 500 238 238 250 2014-15 2014-15 2014-15 North Lakes 80 80 80 40 40 40 2015-16 2015-16 2015 Pacific Fair 670 670 670 n/a n/a n/a n/a n/a n/a

Notes: 1. Changes in the last 3 months in the development pipeline are highlighted in grey. Source: SCG, Macquarie Research, August 2015

Four new projects began construction in the 6-month period, 3 in 1Q15 and 1 in 2Q15. These

were all previously in SCG’s pipeline.

Warringah Mall: This $310m development (SCG: $155m) includes the refurbishment of Myer,

a number of mini-major tenancies and ~70 new retailers. The centre’s GLA will increase by

~7.2% to 134,000 sqm. Interestingly, the Myer tenancy will shrink from 21,822 sqm to 15,000

sqm.

Hurstville: This $105m spend (SCG: $53m) was flagged in February following Myer’s

departure in late January. The Myer tenancy will be split into five new tenancies including a

Woolworths (supermarket); Big W (DDS); JB HiFi Home; Cotton On Mega Store; and a Rebel

Sport. This was flagged at the 1Q15 update.


25 August 2015 8

Kotara: This $55m project (100% SCG) will create a new cinema and food dining space on

the rooftop. This was flagged at the 1Q15 update.

Casey: This $155m development will include a refurbished Coles supermarket (to full line),

new Woolworths supermarket, new format Target DDS, an Aldi, mini-majors and 78 new

specs. This development is very much being undertaken to control any impact of SCG’s

nearby Fountain Gate.

The changes to the existing projects under construction were at Miranda, Chatswood and North

Lakes.

Miranda: The development spend increased $25m to $500m (previously $475m) with SCG’s

50% share increasing accordingly. The increase was driven by a decision to update the older

sections of the centre.

Chatswood: The development spend increased $10m to $120m (previously $110m). The

timing was delayed in the 1Q15 update to 2015/16 (originally 2015). The increase was driven

by a decision to update the older sections of the centre.

North Lakes: Timing shortened from 2015-16 to 2015.

SCG has in excess of $3bn of future developments in Australia/NZ. The number of

development opportunities has declined from 16 at December 2014 to 14 in June 2015 mainly due

to 4 of these opportunities entering the construction phase as discussed above. We table the

change in development opportunities below. Tuggerah was removed as discussions with Myer to

anchor the new development had fallen through while Innaloo and Coomera were added.

Chermside was said to begin construction early next year and Carousel is the most advanced

in terms of the opportunities to date.

On the conference call, SCG noted that the target IRR for developments is >12% which compares

to the previous target of 12-15%. Furthermore, SCG commented that the typical stabilisation

period is 18-24 months. In terms of funding, SCG did not rule out the possibility of selling down

stakes of its existing portfolio (the mid tier of assets) into JVs to fund the development pipeline.

Fig 14 The future development pipeline

Dec-14 Mar-15 Jun-15

Project Albany Albany Albany

Carousel Carousel Carousel

Chermside Chermside Chermside

Hurstville

Coomera

Innaloo

Knox Knox Knox

Kotara

Martion Marion Marion

North Lakes

Newmarket Newmarket Newmarket

North Lakes North Lakes North Lakes - Stage 2

Plenty Valley Plenty Valley Plenty Valley

St Lukes St Lukes St Lukes

Tuggerah Tuggerah

Tea Tree Plaza Tea Tree Plaza Tea Tree Plaza

Warringah Warringah Warringah - Stage 2

Whitford City Whitford City Whitford City

Count 16 13 14


NTA increased 7cps (+2.3%) to $3.11ps from $3.04ps

SCG's NTA has increased to $3.11 from $3.04 at December; this was driven by ~1.9%

valuation uplift of the Australian portfolio during the half as the WACR declined 6bps to 5.77%

(from 5.83%). The NZ portfolio WACR increased 15bps to 7.30% from 7.15%.

The biggest revaluation movements in the Australian portfolio were Sydney City (+5.4%), Burwood

(+3.4%) and Bondi Junction (+3.2%). There were only two assets that declined in value –

Warrawong (-0.3%) and Knox (-0.5%).

Interestingly in NZ, three of the four assets that are up for sale declined 5.0% in value.


25 August 2015 9

Fig 15 Only two assets in the Australian portfolio showed negative valuation movements in the half

Fig 16 The NZ portfolio...3 of the 4 assets on market saw negative valuation movements in the half

Notes: 1. Valuation movement during the half only. Source: SCG, Macquarie Research, August 2015

Notes: 1. Valuation movement during the half only. 2. Carrying value has been adjusted for SCG ownership amount. Source: SCG, Macquarie Research, August 2015

The movement in the Australian portfolio valuations was driven ~55% by cap rate compression

and ~45% by income, development or maintenance capex. We illustrate this on the chart below.

We estimate that the Australian portfolio will be ~$26,959m following the sale of Figtree,

Strathpine, Warrawong and North Rocks.

Fig 17 Australian portfolio driven ~55% by cap rate compression

Notes: 1. Australian portfolio only. Source: Macquarie Research, August 2015

0.2%

0.2%

0.0%

(0.3%)

(0.5%)

5.4%

3.4%

3.2%

2.7%

2.5%

(2.0%) 0.0% 2.0% 4.0% 6.0%

Kotara

Liverpool

Woden

Warrawong

Knox

Sydney

Burwood

Bondi Junction

Innaloo

Airport West

4.4%

3.3%

3.0%

0.3%

0.2%

2.3%

(5.0%)

(5.0%)

(5.0%)

(7.0%) (5.0%) (3.0%) (1.0%) 1.0% 3.0% 5.0% 7.0%

Riccarton

Albany

St Lukes

Newmarket

Manukau

Queensgate

Glenfield

WestCity

Chartwell

Currentlyon market

27.2

27.7

27.0

0.280.23

0.76

25.0

25.5

26.0

26.5

27.0

27.5

28.0

Dec-14 Cap rate compression

Income/capex Jun-15 Asset sales Pro-forma

$bn


25 August 2015 10

Fig 18 Scentre financials

FY15F FY16F FY17F FY18F FY19F

Profit & loss

Property NOI A$m 1,780 1,699 1,743 1,815 1,912

Property management fees A$m - - - - -

Management income A$m 123 131 138 136 106

EBIT A$m 1,902 1,831 1,882 1,951 2,017

Corporate expenses A$m (89) (91) (93) (95) (97)

Net interest expense A$m (571) (485) (487) (526) (625)

Total expenses A$m (660) (576) (580) (621) (722)

Operating profit before tax A$m 1,242 1,255 1,301 1,330 1,295

Tax expense A$m (70) (57) (57) (60) (55)

Minority interests

(29) (29) (30) (32) (33)

Operating profit after tax A$m 1,144 1,168 1,214 1,238 1,207

Non-recurring/non-cash items A$m 887 747 766 785 805

Statutory profit after tax A$m 2,031 1,914 1,980 2,023 2,011

Investment fundamentals

Operating EPS A cps 22.0 22.0 22.9 23.3 22.7

Growth % 9.8% 0.0% 4.0% 2.0% (2.6%)

FFO A cps 22.6 22.6 23.5 24.0 23.4

Growth % 7.4% 0.0% 3.9% 1.9% (2.5%)

DPS A cps 20.9 20.9 21.4 21.6 21.0

Growth % 2.5% 0.1% 2.2% 0.9% (2.5%)

FCF per security A cps 19.6 19.6 20.6 21.1 20.8

Growth % (24.5%) 0.2% 5.0% 2.2% (1.4%)

Balance sheet

Property assets A$m 30,330 31,707 33,175 34,630 35,824

Other assets A$m 1,409 1,262 1,278 1,271 1,314

Total assets A$m 31,738 32,969 34,453 35,901 37,139

Borrowings A$m 10,747 10,468 11,068 11,632 11,941

Other liabilities A$m 2,977 2,977 2,977 2,977 2,977

Total liabilities A$m 13,724 13,445 14,045 14,609 14,918

Securityholders' equity A$m 18,014 19,524 20,409 21,292 22,221

NTA per security A$ 3.42 3.71 3.88 4.04 4.22

Growth % 8.6% 8.3% 4.5% 4.3% 4.3%

Gearing % 33.3% 31.5% 31.9% 32.2% 31.9%

Cash flow

Cash flow from operating activities A$m 1,171 1,176 1,218 1,238 1,216

Cash flow from investing activities A$m 1,278 47 (676) (637) (366)

Cash flow from financing activities A$m (2,389) (1,370) (526) (582) (805)

Net increase/(decrease) in cash A$m 60 (147) 16 18 46



25 August 2015 11

Macquarie Quant View

The quant model currently holds a neutral view on Scentre Group. The

strongest style exposure is Price Momentum, indicating this stock has had

strong medium to long term returns which often persist into the future. The

weakest style exposure is Quality, indicating this stock is likely to have a

weaker and less stable underlying earnings stream.

Displays where the

company’s ranked based on

the fundamental consensus

Price Target and

Macquarie’s Quantitative

Alpha model.

Two rankings: Local market

(Australia & NZ) and Global

sector (Real Estate)

406/895 Global rank in

Real Estate

% of BUY recommendations 30% (3/10)

Number of Price Target downgrades 0

Number of Price Target upgrades 1

Macquarie Alpha Model ranking Factors driving the Alpha Model

A list of comparable companies and their Macquarie Alpha model score

(higher is better).

For the comparable firms this chart shows the key underlying styles and their

contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return

The Macquarie Sentiment Indicator is an enhanced earnings revisions

signal that favours analysts who have more timely and higher conviction

revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes

in forward earnings estimates and the resulting change in earnings multiple.

How it looks on the Alpha model

A more granular view of the underlying style scores that drive the alpha (higher is

better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

0.0

0.1

0.3

0.5

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Scentre Group

Westfield Corporation

GPT Group

Federation Centres

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%

Scentre Group


GPT Group

Federation Centres

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

0.5

-0.5

0.4

0.2

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Scentre Group


GPT Group

Federation Centres

-40% -30% -20% -10% 0% 10% 20% 30% 40%

Scentre Group


GPT Group

Federation Centres

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.54-0.04

-0.58-1.37

-0.47 0.25

0.04-0.03-0.09

-0.23 0.04

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/895)

0 50 100

Percentile relative

to market(/414)


25 August 2015 12

Important disclosures:

Recommendation definitions

Macquarie - Australia/New Zealand

Outperform – return >3% in excess of benchmark return Neutral – return within 3% of benchmark return Underperform – return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield

Macquarie – Asia/Europe Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie First South - South Africa Outperform – expected return >+10% Neutral – expected return from -10% to +10% Underperform – expected return <-10%

Macquarie - Canada Outperform – return >5% in excess of benchmark return Neutral – return within 5% of benchmark return

Underperform – return >5% below benchmark return

Macquarie - USA Outperform (Buy) – return >5% in excess of Russell 3000 index return Neutral (Hold) – return within 5% of Russell 3000 index return Underperform (Sell)– return >5% below Russell 3000 index return

Volatility index definition*

This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or

down at least 15–25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only

Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions

All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 30 June 2015

AU/NZ Asia RSA USA CA EUR Outperform 46.23% 58.36% 47.27% 44.20% 60.65% 43.01% (for US coverage by MCUSA, 9.68% of stocks followed are investment banking clients)

Neutral 37.67% 25.65% 29.09% 49.29% 34.19% 40.93% (for US coverage by MCUSA, 5.53% of stocks followed are investment banking clients)

Underperform 16.10% 15.99% 23.64% 6.52% 5.16% 16.06% (for US coverage by MCUSA, 1.38% of stocks followed are investment banking clients)

SCG AU vs ASX 200 Prop, & rec history

(all figures in AUD currency unless noted)

Note: Recommendation timeline – if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period.

Source: FactSet, Macquarie Research, August 2015

12-month target price methodology

SCG AU: A$3.70 based on a NAV methodology

Company-specific disclosures: SCG AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Scentre Group's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

Date Stock Code (BBG code) Recommendation Target Price 24-Feb-2015 SCG AU Underperform A$3.58 08-Jan-2015 SCG AU Underperform A$3.35 18-Sep-2014 SCG AU Underperform A$3.20 26-Aug-2014 SCG AU Underperform A$3.27 25-Jun-2014 SCG AU Underperform A$3.13 05-Nov-2013 SCG AU Outperform A$3.18 30-Aug-2013 SCG AU Outperform A$3.14 28-Feb-2013 SCG AU Outperform A$3.23 25-Jan-2013 SCG AU Outperform A$3.21 15-Aug-2012 SCG AU Neutral A$3.07

Target price risk disclosures: SCG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures.

Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) (“MGL”) and its related entities (the “Macquarie Group”) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations.


25 August 2015 13

General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited (“MENZ”) an NZX Firm. Macquarie Private Wealth’s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) (“MBL”) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary’s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group‘s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures.

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