Vicinity Emerge from Lock downs but still facing Challenges

The momentum of recovery and the continued resilience of the retail sector is helping to support Vicinity as they emerge from the pandemic challenges.

In delivering an update to their quarterly results CEO Grant Kelly re-affirmed Vicinity’s guidance despite continuing vacancies, negative leasing spreads and lower visitation numbers.

CEO and Managing Director Mr Grant Kelley commented, “During the March quarter, we continued to build on the operational and financial performance delivered in the first half of FY22. Occupancy remained stable, cash collections improved and retailer confidence rebounded in late February and March.

“The quarterly results were delivered despite challenging trading conditions at times during the quarter, with the spread of Omicron, catastrophic floods in NSW and Queensland and growing geopolitical instability.”

Vicinity completed 186 leasing deals during 3Q FY22. January is seasonally a quieter month for leasing activity, and this was compounded by the rapid spread of Omicron from late December 2021. The concerns of Omicron moderated throughout the quarter and deal momentum rebounded strongly from late February.

Across the 829 leasing deals negotiated in FY22 to date, 74% have fixed annual rental growth of 5% and cumulatively, 95% of new deals have fixed annual rental growth of at least 4% (1H FY22: 72% and 91% respectively). Furthermore, Vicinity delivered an improved leasing spread, now at -5.9% (1H FY22: -6.4%) while preserving the average tenure for new mini majors and specialty leases during the quarter at 4.8 years.

Vicinity collected 89% of gross billings during the quarter representing a significant improvement on the 80% reported for 1H FY22. As communicated in the FY22 interim results announcement, Vicinity remains focused on collecting outstanding rent for current and prior periods, particularly given the strength of retail sales and following the expiry of the SME Codes in NSW and Victoria on 13 and 15 March 2022, respectively.

With the expiry of the SME Codes in NSW and Victoria, Vicinity is expediting short-term COVID lease variation negotiations with SME tenants and collecting outstanding rent.

Mr Kelley commented, “We welcomed the expiry of the SME Codes in NSW and Victoria in March 2022, given that both states had remained open and trading since October 2021. Pleasingly, retail sales have proven resilient to COVID-related disruptions, giving retailers in our centres confidence to pay current and any overdue rent. Of course, we remain committed to supporting retailer partners in locations and categories that continue to be affected by the pandemic.”

Despite the spread of Omicron, portfolio visitation averaged 76% of pre-COVID levels in 3Q FY22 and excluding CBDs, visitation reached 85% of pre-COVID levels. This has increased to 85% for total portfolio and 91% (ex-CBDs) for the month of April as consumers are increasingly confident to return to normal activities.

Visitation across Vicinity’s CBD assets increased steadily, buoyed by the return of day-trippers, domestic tourists and, since 21 February 2022, the reopening of Australia’s international borders to foreign tourists. Furthermore, the removal of mandatory mask wearing in office buildings as well as the lifting of the NSW and Victorian Government’s work from home guidelines in late February 2022, is underpinning a steady return of office workers.

Mr Kelley added: “Consumers continue to shop with purpose and are demonstrating an ongoing willingness and capacity to spend in our centres. Spend per visit during the March 2022 quarter, was 1.34 times higher than 2019 levels (Dec-21 quarter: 1.28 times), with retail sales at an impressive 11.2% above 2019 levels. This compared to 4.1% reported for November and December 2021.

The strong sales result for the quarter was underpinned by a strong performance by mini majors (up 24.3%), while supermarkets and discount department store sales remain elevated, up 13.5% and 11.1% respectively.

Specialty store sales growth of 10.2% was driven by a number of categories, including jewellery (up 28.9%), services (up 19.5%), homewares (up 16.3%) and apparel (up 11.9%). Sales across the luxury category remain strong, while a number of SME retailers, particularly those without an omni channel presence and in CBD locations, continue to lag the portfolio.

Mr Kelley said: “Vicinity emerges from the pandemic in a strong capital position and having accelerated planning on a number of major mixed-use development projects. We are now transitioning from planning to execution on a number of priority retail and mixed-use development projects.”

Following the completion of additional parking and rooftop solar panels at Chadstone in 2021, Vicinity commenced construction of a wintergarden-style leisure and dining precinct during 3Q FY22. Having already secured and/or agreed terms with six of the eight tenants in the precinct, the project is expected to be completed by Christmas this year. Also at Chadstone, redevelopment of the existing Chadstone Place office space is due to commence with Officeworks having been secured in late 2Q FY22 to take all 8,000 sqm of this space.

At Bankstown Central, in preparation for major mixed-use development, Vicinity is undertaking a number of smaller projects to improve the existing retail offer. Works underway include a new Coles and fresh food precinct, a Uniqlo-anchored mini majors precinct and the relocation of the existing major bus interchange. The retail works are expected to be completed in stages through late 2022 to mid-2023.

At Box Hill Central, Vicinity is also preparing for major mixed-use development, with a number of smaller projects underway. Construction of the first stage of the redesign and refurbishment of the centre’s southern retail precinct is being completed, with a number of mini majors and specialty retailers opening in the new double-width mall that will be anchored by a new Coles supermarket, which is due to open in 1Q FY23. In the period, Vicinity also commenced construction of the 4,000 sqm office building which has been pre-leased to Hub Australia, a leading co-working provider.

Mr Kelley said: “The momentum of our recovery and the continued resilience of the retail sector enable us to reaffirm our earnings guidance for FY22.

“While the macroeconomic environment continues to provide favourable tailwinds for our recovery, we are mindful of inflationary pressures and the rising interest rate environment. That said, we remain well positioned, supported by the structure of our leases, and noting also that moderate inflation typically supports sales and margin growth for retailers. Furthermore, approximately 80% of our drawn debt is hedged, and our prudent approach to managing our balance sheet and credit metrics continues.”

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