February 20, 2018 / 10:55 PM / 3 months ago

UPDATE 3-Australian mall giant Scentre says 2017 profit jumps as refurbishment helps

* Scentre 2018 net profit A$4.23 bln vs A$3.02 bln 2017

* Funds from operations A$1.29 bln vs A$1.24 bln

* Company is revamping malls to expand beyond retail (Updates with fund manager comment)

By Byron Kaye

SYDNEY, Feb 21 (Reuters) - Australian shopping mall giant Scentre Group said annual net profit jumped 41 percent as it squeezed higher rents from tenants, a sign its strategy of revamping assets is creating a buffer against a downturn in brick-and-mortar retail.

The result vindicates moves by the world No. 3 mall owner to expand its tenant mix beyond traditional stores. Like its United States and Britain-focused former parent Westfield Corp , Scentre is adding cinemas, apartments, offices and high-end dining precincts to its malls to bolster rents.

That enabled Scentre, which has 34 Australian malls, to secure a 2.75 percent overall rent hike for the year to Dec. 31, the company said on Wednesday, even as the department stores it once counted as “anchor tenants” cut floor space or exit altogether.

“Our role is to maximise the value of the real estate that we own,” Scentre Chief Executive Peter Allen said on a call with media and analysts, referring to the non-retail parts of the company’s malls.

Scentre shares rose nearly 2 percent by mid session, in a flat overall market.

The hike in net profit came from upward asset revaluations totalling A$3.2 billion ($2.5 billion) as a result of rent rises brought on by mall refurbishment. Excluding asset revaluations, operating profit rose 4.25 percent to A$1.3 billion, it said.

Sales at Scentre’s department store tenants fell 4.6 percent in the year but sales of its speciality stores - widely seen as the biggest non-internet rival to department stores - grew 1.5 percent, Scentre said.

“They are having to spend money to get the foot traffic in and it’s working to some extent,” said Winston Sammut, managing director of Folkestone Maxim Asset Management, which specialises in property companies.

“A lot of investors and analysts will be watching the next set of numbers, the March and June quarters, when we’re in a more normal retail environment,” he added, noting the retail sector typically benefited from Christmas shopping in the December quarter.

Scentre offered no net profit forecast but said it expected an increase in operating profit, which it calls funds from operations, of about 4 percent in calendar 2018 - slightly slower than in 2017.

CEO Allen did not expect any immediate impact on Scentre after Westfield agreed in December to a $25 billion buyout from Europe’s top property group Unibail-Rodamco SE, even though the European firm would take ownership of the Westfield trademark Scentre uses.

“When the deal goes through, we’ll have discussions with Unibail-Rodamco to make sure we both manage the brand with respect to the high-quality properties that we currently own and operate,” Allen said.

Westfield reports 2017 results on Thursday. ($1 = 1.2695 Australian dollars) (Reporting by Byron Kaye in Sydney and Sumeet Gaikwad in Bengaluru; Editing by Christopher Cushing and Gopakumar Warrier)

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