Should you buy SCA, Woolworths’ property fund?

Reported by Mike King, The Motley Fool.
Wednesday, October 31, 2012
Topics in this article:
Asx,Woolworths

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Woolworths Limited (ASX: WOW) has announced that it is setting up a new property group to hold 69 shopping centres in which Woolworths’ stores are the major tenants

Property group details

The new property trust is known as the Shopping Centres Australia Property Group (or SCA Property Group), and is expected to list on the ASX on 26 November 2012. The company will own a portfolio of 69 shopping centres located throughout Australia and New Zealand, with an independent valuation of around $1.4 billion. 56 properties are already completed and operating, while another 13 are under construction or re-development. Many of the properties come with long term leases to an anchor tenant (being a Woolworths, Masters, Big W or Dan Murphy’s store). The average lease to expiry time is around 20 years, with four options of ten years.

Existing shareholders

Existing shareholders in Woolworths will automatically receive 1 share in the new company for every five Woolworths shares they own, as long as the distribution is approved by shareholders at the AGM on 22 November 2012. As an example, if you own 100 shares in Woolworths, you’ll receive 20 shares in the new property group.

This will see Woolworths record a distribution to shareholders similar to a capital return, and the share price is likely to fall by around the amount of the distribution.

Equity raising

The property group is also holding an equity raising, offering 337 million units with an offer price range between $1.26 and $1.50 per unit. The offer to buy additional shares opens on 15 October 2012 and closes on 20 November 2012. Investors can subscribe for a minimum of $5,000 worth of new shares, or amounts over that in increments of $500. The actual price for each unit won’t be determined until after the Institutional offer closes. This means investors won’t actually know how many units they will get until then.

If you’re interested in downloading the Product Disclosure Statement and applying for units in the new fund, here’s the link.  The offer is also available through brokers, including Commsec, so you may be able to  apply through your broker directly.

Income

The trust is expected to pay a dividend of 5.1 cents for the remainder of 2013  and 10.4 cents in the full 2014 financial year. Based on the offer price of between $1.26 and $1.50, that represents an annualised yield of between 6.9% and 8.3% (with 35% to 40% of the distribution in 2014 to be tax deferred). The first distribution is expected to be paid in August 2013.

Summary

Don’t be fooled by the dividend yield on offer, as it’s likely to fall in three years.

40% of the gross lease income will come from speciality stores – like bakeries, fruit and veg stores, cafes etc. However, speciality stores in the portfolio have a 20% vacancy rate. Woolworths is providing a two-year rental guarantee for the 20% of specialty stores that are currently vacant, so the current yield is based on 100% occupancy.

The PDS even warns “Once the rental guarantee expires, rental income may decrease if SCA is unable to lease speciality tenancies…”

Another issue is that rent on Woolworths leases will only be renegotiated every five years (from the start of each lease), rather than annually based on inflation. That’s 60% of the property group’s income, so really limits the opportunity for SCA to grow its earnings, at least on a ‘per centre’ basis.

Woolworths has previously tried to sell of a group of its centres, but only managed to sell around 8 of them, which shows how unattractive the economics of some of the centres potentially are.

If you’re a Woolworths shareholder, you should be cheering at the sale of these assets, and looking to sell any shares you get allocated during the shareholder offer.

For Woolworths, the sell-off of these assets will free up assets and capital on its balance sheet and increase its return on equity, while allowing the company to focus on its retail stores, rather than being a property manager.

We wouldn’t recommend applying for additional units. The money could be better spent buying Woolies shares, which offer a fully franked dividend yield of over 4%, and carry considerably more potential for growth.

If you only invest in one company this year, make it our “Top Stock for 2012-13”. Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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23/07/2014 05:29Sydney, Australia. 23 July,2014
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