Please note that this conference is being recorded today, Wednesday, the 26th of February, 2025, at 9:00 A.M. Australian Eastern Daylight Time. I would now like to hand the conference over to Mr. Elliott Rusanow. Please go ahead.
Good morning, everyone, and welcome to Scentre Group's 2024 full-year results briefing. I would like to acknowledge the traditional custodians of the land I am on this morning and pay my respects to their elders past and present. I am joined today on the call by our Chief Financial Officer, Andrew Clarke, together with Lillian Fadel, Group Director of Customer, Community, and Destination, and John Papagiannis, Group Director of Businesses. 2024 was a difficult year following the random and devastating attack at Westfield Bondi on the 13th of April. Six innocent people lost their lives, including one of our security team members, and many others were impacted. We again extend our deepest condolences to the families and loved ones of the victims. I thank our community, customers, and business partners for their ongoing support of our team and of each other throughout this period.
Our 42 Westfield destinations represent the heart of the communities they each serve. Our results have been enabled by the efforts and dedication of our team, who are creating extraordinary places and experiences that connect and enrich the community, and I would like to thank our team for achieving these results. Our focus is to have more people spend more of their time with us because, by doing so, we provide other businesses the opportunity to interact with those people. The more people come, the more often they come, and the longer they stay with us, the more opportunity we are able to provide the businesses that partner with us to interact with our customers. It is because of this that we are able to continue growing the income of our business, which is income for our business, for our security holders.
Our approach is to invest in opportunities that provide people more reasons to spend their time at a Westfield destination and in a way that facilitates the company's ability to grow our income period to period in absolute terms. Our results today for 2024 represent the fourth consecutive year that our Funds From Operations and Distributions Per Security have increased, and we are expecting that this will continue into 2025. Not adjusted, not rebased, but growth in earnings and distributions in simple absolute terms. For the year, our Funds From Operations increased by 3.5% to AUD 1.13 billion. For the second half of 2024, FFO grew by 4.9% compared to the second half of 2023, and we are targeting FFO to grow a further 4.3% in 2025. In 2024, we welcomed 526 million customer visits, an increase of 14 million compared to 2023.
Our 42 Westfield destinations, located in close proximity to 20 million people across Australia and New Zealand, are welcoming on average 10 million visitors each week, and we have continued to see our customer visitations increase in the early part of 2025, where in the eight weeks to last Sunday, we have welcomed 81.4 million visits, an increase of 2.5% on the same period in 2024. We continue to grow our Westfield membership program, which now has 4.5 million members, an increase of nearly 700,000 more members than in 2023. Our membership program is one of the many ways in which we are able to provide more reasons for people to spend more of their time with us because it facilitates a better understanding of our members, their interests, and their behaviors. Another key driver of increased customer visitation has been our continued focus on activating our destinations.
This includes partnerships with leading brands, global leading brands, including Disney and Live Nation, and a program of local and community-based events. This year, we commenced a new strategic partnership with the Australian and New Zealand Olympic and Paralympic teams. The Olympics partnership created the opportunity for customers to watch the competitions overseas with fellow fans locally, with our destinations transformed into local games villages, and we will continue to focus on such initiatives to further drive customer visitations to us. The safety of our customers, business partners, community, and people is our highest priority. Our approach to security works involves working in close partnership with law enforcement authorities, including police and relevant government agencies. We heightened security across all Westfield destinations following the events of 7 October 2023 and further enhanced this following the attack at Westfield Bondi on the 13th of April 2024.
While this has seen operating costs increase during 2024, we will continue to invest in these heightened security initiatives. Our focus on customers and competing for their time facilitates our ability to create and curate the places where businesses, brands, and people want to connect with each other. As a result, our business partners achieved a record level of sales for the year, increasing to AUD 29 billion. This is AUD 544 million more than in 2023 and compared to 2019, our business partner sales have grown 15.8% or AUD 4 billion. Business partner sales have continued to grow at a similar rate in the early part of 2025, and we are seeing continued strong demand from businesses to partner with us in connecting with customers in our destinations. Occupancy increased to 99.6%, specialty rents increased by 5.2%, and new lease spreads were positive 2% for the year.
Average specialty leases have a term of 6.8 years, and over 80% have annual escalations that are inflation-linked. We are focused on increasing this level of occupancy further in 2025, as well as reducing the time it takes from when a store closes to when a new one opens. The productivity of our business partners, facilitated by our focus on driving customer visitations, together with the increasing scarcity of available space for businesses to partner with us, is underpinning our earnings growth. We continue to progress our AUD 4 billion pipeline of future development opportunities to enhance our destinations. During the year, the Group completed works that repurpose space at Westfield Tea Tree in Adelaide and Westfield Mt Gravatt in Brisbane, with visitation up 8.6% and 6.7% respectively since the opening of those two repurposings. We have also commenced projects at Westfield Southland in Melbourne and Westfield Burwood in Sydney.
Works have also begun on the staged development of Westfield Bondi in Sydney, where we will introduce a new Virgin Active lifestyle fitness offer as part of a new health, wellness, and fitness precinct on level 1, alongside a new Rebel rCX concept store. Planning is well advanced for the lifestyle, dining, and entertainment redevelopment that will occur on level 6 at Bondi. The expansion of Westfield Sydney and the construction of the adjoining commercial and residential tower on the corner of Market and Castlereagh Streets in Sydney CBD continues, with the new luxury brands progressively opening in the second quarter of 2025. We are able to undertake these investment works and still grow earnings and distributions at the same time.
The Group's 42 Westfield destinations are located on 670 hectares of land holdings close to where millions of people live and work, as well as existing and planned infrastructure. We see this as a tremendous long-term growth opportunity, additional to the growth we are focused on generating from our operating business today. Our sites have the potential to make a significant contribution to residential housing supply across Australia and New Zealand, and we are focused on how we can create substantial long-term growth by adding density to our large and uniquely located strategic land holdings. During the year, we received rezoning approval at Westfield Hornsby in Sydney and Westfield Belconnen in Canberra that now provides us the opportunity for large-scale residential development at both those sites, and we are focused on securing many similar opportunities across our destinations during 2025 and beyond.
I'll now hand over to Andrew Clarke to present the financials.
Thanks, Elliott, and good morning, everyone. Funds from operations for the 12-month period was AUD 1.13 billion, which grew by 3.5% compared to the prior corresponding period. The full-year distribution is AUD 893 million, representing 3.8% growth on the prior year. Net operating income for the period was AUD 2.03 billion. This is an increase of 4% over 2023. This consists of strong growth in property revenue of 4.6%, primarily driven by average specialty rent escalations of 5.2%, positive leasing spreads of 2%, and an increase in occupancy from 99.2% to 99.6%. The growth in property revenue is partially reduced by an increase in property expenses, primarily due to an increase in award rates for cleaning and security subcontractors and increased levels of security across the portfolio. As a result of delivering strong cash collections, net operating income also includes a AUD 23 million release of the expected credit charge provision.
This compares to $13 million released during 2023. Management fee income increased by $3.3 million or 6.7%, which includes additional fee income from the establishment of the $310 million Tea Tree and $175 million West Lakes Opportunity Trusts. Overheads were $94.6 million for the year, compared to $90.1 million in 2023. This increase includes an investment in additional resources to progress strategic growth opportunities. Taxes increased from $30.9 million to $38.4 million. This increase includes the impact of ancillary income growth, higher management fee income, and higher tax on New Zealand income. The minority interest expense reduced by $10.7 million as a result of the $174 million redemption of the Westfield Hornsby property-linked note. Project income was $10.5 million compared to $14.3 million in 2023. In the previous period for 2023, it included profit recognition for the Westfield Knox redevelopment. Operating and leasing capital was $162 million for the year.
The Group continues its proactive approach to capital management, including funding and interest rate exposure. During 2024, the Group successfully refinanced more than AUD 2 billion of senior notes and subordinated notes, significantly improving the credit margins. In September, the Group completed a tender offer for approximately AUD 900 million of non-call 2026 subordinated notes, which was funded through the issuance of new subordinated notes, reducing the credit margin by approximately 2.4%. In November, the Group accessed the very constructive credit markets and issued AUD 1.25 billion of senior notes, with an average credit margin of approximately 1.3%. The Group's weighted average interest rate for the 12-month period was 5.7%. Included in this was an average base interest rate of 2.9% and an average margin of 2.8%. Excluding the subordinated notes, the weighted average interest rate was 4.7%.
Interest rate hedge coverage at January 2025 was 94%, with an average base rate of 2.99%. The weighted average interest rate for 2025 is expected to be approximately 5.8%. Property valuations grew by 2% compared to December 2023. This included the revaluation of developments at Westfield Sydney and Westfield Mt Gravatt. Excluding the impact of the developments, underlying valuations grew by 0.5%, driven by growth and net operating income, partially offset by an eight basis points softening in capitalization rates across the portfolio. The weighted average capitalization rate for the portfolio was 5.43% in December 2024. Thank you, and I will now pass you back to Elliott for closing remarks.
Thank you, Andrew. Our strong operating performance and focus on operational excellence. It increases customer visits, combined with strong demand for our space by businesses that want to partner with us in scarce available space. Combined with our ability to invest in our portfolio in a deliberate and focused way, it sets the Group up for continued growth in earnings and distributions. Subject to no material change in conditions, the Group's target for Funds From Operations is AUD 22.75 per security for 2025, and that will represent growth of 4.3% for that year. Distributions are expected to grow by 2.5% for 2025 to AUD 17.63 per security. Thank you, and I will now open up the call for questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Richard Jones with JP Morgan.
Thanks. Good morning, Elliott. Just interested in the comments you made around residential development opportunities. I think, you know, historically, Westfield's always talked about retail as the highest and best use. So just interested in whether you can elaborate on that comment versus the focus on increasing density in the sites and then whether you'd be looking at built-to-rent or built-to-sell on the development opportunities you've got so far at Hornsby and Belconnen.
Yeah, thank you, Richard. So you're right. The focus of our business is actually both. Our retail or destinations sit on 670 hectares of land. It's located very close to either planned or existing, mostly existing infrastructure, transport infrastructure. And we are looking at how we can add to our operating business through densification and the rezonings that have occurred at Hornsby and Belconnen. There are good examples of that where we're being given envelope height opportunities that facilitate the potential for multiple thousands of apartments to be put at both sites. And we see that a similar opportunity could occur at most of, if not all, of our destinations across Australia and New Zealand. We're at a very early stage with that. I think it'd be too soon to say if it's for rent or for sale or who builds it or where it's built, etc.
But our focus right now is, given the macro conditions regarding housing supply, on how we obtain as much flexibility and as many approvals as possible that will create long-term growth opportunities for the Group, in addition to the growth opportunities that we are driving from the existing business with increasing scarcity of space and increasing demand from businesses to take that space.
Okay, thank you. And just secondly, you had the capacity to do an additional 10% buyback of the sub-notes late last year, which obviously wasn't done. Just interested in the decision-making on that.
Yeah, hi, Richard. Andrew here. Look, it's, you're right. We do have the capacity and the optionality to do that. It's something that we continue to monitor: the markets, the credit markets, and something that we will consider as part of our many capital management initiatives that we look at and review. And if we believe that the dynamics are right holistically to make that transaction a worthwhile transaction, it's something that we will consider. But we will consider that in addition to many other options that we look at.
Okay. Thanks, Andrew. Thanks, Elliott.
Thank you.
Your next question comes from Lou Pirenc with Jarden.
Morning, Elliott and Andrew. Just following up on the development question previously, kind of if you look at your gearing now in the low 30s with the upcoming development pipeline that you have, where are you willing to take that gearing bearing in mind that you have to hybrid as well?
I think at this point we're able to fund our development spend in the way we're actually managing the development spend. We're able to fund the retail development pipeline that we've previously talked about of around circa $4 billion. But we're doing it in a very purposeful and deliberate manner, which is actually designed to effectively repurpose existing space because it's a very efficient use of capital. It does mean that we do have centers that are impacted during that spend, but the size of our portfolio has facilitated our ability to do so in a way which actually isn't resulting in a decrease in earnings or flat earnings for the Group. In fact, the earnings continue to grow. They've grown for four years, and they're going to grow for a fifth year in a row.
And so I think that the way we're managing our CapEx, which is designed to focus on driving more customer visits, increase demand from businesses, is being done in a way which the Group has capacity for. With regards to the new growth opportunities that I've been talking about, as I said in the previous question, our focus right now is on securing as many opportunities as possible from a planning standpoint. That doesn't cost a huge amount of money in the scheme of the size of our business. But as we get closer to how we execute that, which is not at this point, we will obviously take into consideration a variety of options with regards to how that's funded and delivered. But that's not for now. What's for now is to actually secure as many opportunities from a planning point of view as possible.
Yeah. So we shouldn't expect a step up in CapEx in the next 12-18 months?
Highly unlikely.
All right. And then a quick one, Andrew, on maintenance CapEx and incentives. Can you give, apologies if it's somewhere in the disclosure, but what's that level in 2024, and what do you expect it to be in 2025?
Yeah. Hi, Lou. So the level of expenditure in 2024 was AUD 162 million, and we would expect it to be in a similar level to that in 2025.
Great. Thank you.
Thank you.
Your next question comes from Tom Boustred with UBS.
Good morning. I'd just be interested in the opportunities to potentially buy assets coming out of unlisted fund redemptions. Is this something you're considering, be it sort of yourselves or with capital partners?
Thanks for the question. If you look at last year or 2024, we actually did do that with regards to the sale of well, we facilitated that. I'm sorry, with the sale of Tea Tree and of West Lakes out of an unlisted fund in conjunction with Barrenjoey, the establishment of those two opportunity trusts that were well oversubscribed and have been very successful since launching. To the extent that opportunities do arise, we look at, obviously, those opportunities. At this point in time, I don't think there's anything on the kind of imminent radar. But to the extent that those opportunities arise, as you can see we've done during 2024, we obviously will look. If they make sense, we will determine how best we execute on that. If those opportunities don't look good, then we'll have a look and we'll pass.
Thanks very much. So also kind of, I guess, related, you've in the past talked about bringing in partners on 100% owned assets as well. Is that something that is potentially going to happen in 2025, or is it unlikely at this point in time?
Yeah. Hi, Tom, Andrew here. Look, we're definitely seeing a more constructive backdrop in terms of the direct property market earlier this year. I think if you look at over the last 12 months, there was definitely a meaningful improvement in liquidity and the volume of transactions. It obviously started off last year with a number of smaller assets in terms of ticket size and generally lower quality than the average asset of our portfolio. But in the second half, we did also see some larger asset transactions start to come through: Claremont Quarter, Joondalup, Cockburn, Westpoint, etc. I think you've obviously also seen the RBA rate cut. That does help sentiment in terms of these large institutional investors. And then I think also with the redemption process you spoke about, that really does seem to have mostly run its course to date.
So you might see in 2025 a much smaller level of supply and an increasing level of demand. So that could be an opportunity that we may take advantage of. But I think as we've shown during 2024, we've got many levers that we can pull in order to drive earnings accretion and to execute capital management transactions. So we'll continue to look at all opportunities.
So in a similar vein to my last question, I suppose, is it fair to say nothing's imminent on that front?
Yeah, we're not announcing a transaction today.
Excellent. Thanks.
Your next question comes from Callum Bramah with Macquarie.
Morning, guys. Thanks for taking the question. I'm just looking at the FFO growth projection or guidance for 2025 versus DPU being lower. Just wondered where you're headed from a payout ratio perspective and whether or not that trend will continue into the future to build capacity to fund developments, etc.
Yeah. Hi, Callum. Andrew here. Look, we've just seen it as prudent capital management to have our earnings at this stage grow at a slightly higher level or at a higher level, sorry, I should say, than the growth in distribution. I think what's important though, we are still growing the distribution. We're growing it at a level which is equivalent to where inflation is expected to be for this year. So we're providing our security holders growth from a distribution perspective. But at the same time, because of the strong growth that we've been able to deliver over the last number of years and the growth that we're forecasting to deliver for 2025, we're able to have that luxury of retaining a little bit of extra capital. And that's what we're doing.
That additional retained earnings will help us fund a lot of the growth that we're looking at holistically, and that'll contribute to the investment in many of those growth opportunities.
I just wondered, are you able to just give us a little bit of color about what we should expect in relation to that project income in 2025? And just one around that as well. Just thinking about those couple of developments you identified in Hornsby, etc., which are residential, can you talk to the maturity of the market and whether or not it's actually ready to take that level of apartments in Belconnen or Hornsby?
Maybe I'll answer the second question first and then have Andrew answer the first question second. I think that the reality is that the entire Australian and New Zealand market is at a maturity where it needs more houses. What we are seeing is various ways that which planning is granted being done so in a much more expeditious manner because of the need for housing to be delivered. Hornsby was identified as being part of what they call the TOD process in New South Wales. Its proximity to very heavy transport infrastructure facilitated that.
At Belconnen, the ACT government was running a different but similar process with regards to wanting to create envelope densification opportunities, particularly attractive to our sites because of its proximity to things which people actually like to use when they're close by living, such as what we provide, whether it be supermarkets to eat or whether it's lifestyle choices to be entertained or whether it's close to buy the wares. And so we have a natural right to play because of where our land holdings sit, but also what our land is currently doing. And so whether the timing of when those markets are at the level of maturity is obviously something that we will consider in terms of when we deliver and how we deliver on those opportunities.
But as I said, our focus is obtaining as many approvals as possible at as many destinations as possible at this point. And during that period, we will determine when, how, and what we build at each of the various destinations with regard to the market dynamics that pertain to those local destinations. But our expectation is that most of our locations will have the ability to contribute to the housing supply shortage that is clearly evident and much talked about in both Australia and New Zealand.
Callum, in terms of project income, we would expect that to be a little bit higher in 2025, probably more in that $15-20 million dollar range compared to the $10 million dollars in 2024. Thanks so much.
Thank you.
Your next question comes from Simon Chan with Morgan Stanley.
Oh, good day, guys. Hey, I can't seem to find the specialty occupancy cost number in the pack. Can you guys tell me what it is?
Yeah. I think it is in the deck, but it's 17.2% as at the end of the year. So yeah, I don't know what page number exactly it is, but 17.2 is the number.
Excellent. Thanks. That saves me time. Hey, so how shall I see that in the context of you got an average specialty rent escalation for the year was like over 5%, which is pretty impressive. But then your specialty sales growth was only at 2%. So that gap is getting fairly wide now. Do you see should we be fearful of any downward pressure on rent going forward or at least your ability to keep increasing rent at that level?
I think the opposite is true. You are seeing we've been talking about this for quite some time that where our occupancy cost was at 16%, that we saw a tremendous opportunity to grow that occupancy cost by making space more scarce. And you're seeing that through our increase in occupancy, coupled with an increase in average rents, coupled with higher positive leasing spreads. And as that dynamic of scarce space becomes ever more scarce, we would expect that our share of very high levels of sales productivity that is being generated by the businesses as a function of the amount of customers that we are attracting to our destinations, which it continues to grow, is providing the opportunity for us to increase, I suppose, the price that businesses are prepared to pay to access the customers that we're providing those businesses access to.
Great. So I guess you're suggesting, Elliott, that you can continue to push rent from here. Occupancy costs in percentage terms can continue to increase and the current structure remains sustainable.
If you think about the experience of 2024, I think it's an example of exactly that. We had increasing interest rates. I think interest rates increased 11 times in this cycle. They were obviously recently starting the decreasing part of the cycle. But during that period of higher interest rates, cost of living, we were deliberate and continue to be deliberate in focusing on driving customer visitations, giving people a reason why they should spend their time with us. Our destinations are effectively free to visit. And we have to give people a reason why they should come and visit. We've focused on that through the activations that we do and the partnerships we have.
It's as a function of that, as well as not adding a huge amount of space, but rather repurposing existing space to better usages, that seeing that supply and demand dynamic become more favorable to Scentre Group and its investors. That's manifesting itself through higher rents, increasing rents, higher occupancy at the same time, and growing earnings for our security holders.
That's fair enough, Elliott. Good answer. Hey, so I think in Andrew's comments, he mentioned obviously that property level expenses this year was growing high. It was growing at quite a rapid rate. How should we be thinking for 2025? Is property level expense going to be more in line with revenue going forward or I think still on the up?
Yeah. Hi, Simon. So we would expect property expenses to continue to have a slightly elevated level of growth in 2025 compared to what we would have seen historically. And that's just the annualization of some of the initiatives that we've implemented across the centers, in particular in regards to security. But at the same time, you can probably see based on the earnings guidance that we've provided, we're also expecting property revenue to be very strong growth in 2025.
Great. Andrew, you spoke about how there was about AUD 30 million of provision reversal in 2024. Are you expecting any in 2025 in your guidance? And while I'm there, how big is that provisions bucket that is potentially reversible if there's anything else left in the bucket?
Yeah. Hi, Simon. No, we haven't included provision reversals within our target for 2025. And the amount of expected credit charge that was released in 2024 was AUD 23 million. Look, the reality is we've had very strong cash collections throughout the year, which you can see. We've been able to negotiate better outcomes than what had been envisaged based on the pandemic and the closure that took place during the pandemic. And that's the reason that we've been able to increase that. From a provision perspective, I believe we have circa AUD 70 million of expected credit charge provision relating to the trade debtors in the accounts. But we're not guiding to releasing further provisions.
Terrific. Thanks, Andrew. Thanks, Elliott.
Thank you.
Your next question comes from James Duesbury with CLSA.
Yeah. Good morning. Just following on from a couple of questions on the building blocks for guidance next year. Can you just touch on what you're assuming for CPI and whether leasing spreads you're guiding to be up or down for 2025?
Yes. Andrew can also contribute to. So the inflation, I think we're assuming is what the market's assuming, which is 2.5%. So if you put that into your numbers, it would indicate that we're well, we obviously are targeting for positive leasing spreads to continue. And that's because we have very little space available. In fact, what I haven't said so far on this call is 19 centers in our portfolio had full occupancy at the end of December, and another five centers had less than one vacancy. So 24 of the 42 centers have one or less spaces available for rent. So in that environment, we have a very favorable supply and demand dynamic in favor of Scentre Group. And that's what we see driving future growth, particularly the growth that we're guiding to in 2025.
All right. And then just maybe just to confirm, there's no further buyback of the sub-notes and guidance, I assume?
That's correct.
Okay. And just one bit of detail. What were the specialty sales per square meter for the full year?
They were one.
The property actual.
The dollar value, like 12,800 square meters.
Yeah. It was around AUD 12,500 per sq m for specialty stores.
12,500. Okay. Thank you.
Your next question comes from Ben Brayshaw with Barrenjoey.
Good morning, Elliott. I was wondering if you could just discuss the trading environment in New South Wales and specifically the MAT growth for the last six months being a bit below portfolio average. Is there anything you could call out or put some color around that could explain the underperformance?
Yeah. Look, I think the MAT in New South Wales in particular has been impacted slightly by obviously what occurred at Bondi and the closure of that center for the week. Having said that, it has bounced back very, very quickly. Also, Burwood, where we're doing the repurposing of David Jones. Similar at Bondi, where we're repurposing also David Jones. So there are probably two activities that are impacting the MAT numbers. I think what I would note is that we're not quoting comparable this and comparable that because this is the entire portfolio that continues to grow, and what we're presenting is the whole business impacted as it may by various development activity, but still showing because we're driving growth holistically, so I think that the trading environment in New South Wales is showing also good signs in 2025 in the early parts.
The recent interest rate cut is yet to obviously flow through in any of the numbers, but is obviously a positive to what we do. But our focus on driving customer visitations is what's seeing businesses pay more to actually be at one of our destinations.
Yep. Okay. Thanks for your time.
Thank you.
Thank you.
There are no further questions at this time. I will now hand back to Mr. Rusanow for closing remarks.
Thank you very much for taking the time to listen to our call today. We are around for any questions. We look forward to seeing you soon. Thank you very much. Have a great day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.