Vicinity Lowers Guidance following Lower Income Growth

Vicinity announced their half year results to December 2019 delivering a 1.5% growth in FFO with foot traffic up 0.8% on the pcp and specialty sales up 2.9% from June. Vicinity warned the market that performance for the 2nd half was likely to be impacted by the yet to appear coronavirus, lowering FFO per security guidance revised to 17.2 to 17.4 cents from 17.6 to 17.8 cents 1H.

Mr Grant Kelley, Vicinity Centres’ CEO and Managing Director, said: “Our results today reflect the ongoing benefits from portfolio enhancement, development completions and active tenant remixing, but also subdued economic conditions, compounded by external events.

“Novel coronavirus is having an increasing impact on global travel, trade and consequently near-term economic growth expectations. At Vicinity, we have seen a material decline in foot traffic at some of our key centres since late January 2020, particularly where there is a high proportion of international visitors, which in turn is impacting sales. As a result, we are forecasting modest reductions in percentage rent, ancillary income and hotel bookings.

FY20 highlights

• Statutory net profit after tax of $242.8 million for the six months to 31 December 2019
• Funds from operations (FFO) of $337.0 million or 8.95 cents per security, representing 1.5% comparable growth
• Distribution of 7.70 cents per security, reflecting a payout ratio of 94.9% of adjusted FFO (AFFO)
• High occupancy of 99.5%
• Total portfolio moving annual turnover (MAT)4 growth of 3.2%
• Specialty store (<400 sqm) MAT of $11,403 per sqm, up 2.9% compared to June 2019
• Specialty store and mini majors MAT growth of 3.7%, compared to 3.1% growth to June 2019

• Portfolio quality enhanced

1. Acquisition of a 50% interest in Uni Hill Factory Outlets, VIC, subject to ACCC5 approval
2. Divested three non-core assets for $227.0 million at a 0.4% discount to combined book value
3. Development completions: Hotel Chadstone Melbourne, VIC, Fresh Food projects at Roselands, NSW and final major stage of retail redevelopment at The Glen, VIC

• Strong balance sheet and investment-grade credit ratings maintained

1. Issued €500 million (A$812 million) of 10-year medium term notes
2. Materially extended debt duration by 1.3 years to 5.4 years since June 2019
3. Gearing of 27.3%, within Vicinity’s target range
4. Portfolio net valuation decline of $81 million or 0.5% , with Flagship portfolio gain offset by decline in Western Australian Core portfolio and assets being held for development

• Bought back 14.5 million securities for $36.2 million at a 14.1% discount to December 2019 NTA7
• Included in CDP’s (formerly Carbon Disclosure Project) Climate A-list

Statutory net profit after tax for the six months to 31 December 2019 was $242.8 million. FFO for the period was $337.0 million or 8.95 cents on a per security basis. Adjusting for divestments, comparable FFO per security growth was 1.5%. This was underpinned by comparable net property income growth of 2.5% and the on-market securities buy-back. These items were partly offset by the impact of pre-development centres where upcoming projects prevent optimal leasing outcomes, reduced fee income and lower surrender payments received from tenants. The FY20 interim distribution was 7.70 cents per security, reflecting an AFFO payout ratio of 94.9%, which will be paid to securityholders on 2 March 2020.

PORTFOLIO ENHANCEMENT

Mr Kelley added: ““We divested three non-core assets and agreed the acquisition of a 50% interest in Uni Hill Factory Outlets in Melbourne’s north, subject to ACCC approval, which would become our seventh DFO nationally and sixth DFO on the eastern seaboard.

“Hotel Chadstone Melbourne opened, expanding the luxury experience at Australia’s leading retail, dining and leisure destination at Chadstone. We also completed the final major stage of our retail redevelopment of The Glen and completed Fresh Food projects at Roselands.

“We have made significant progress across our future retail and mixed-use development pipeline, with 12 development applications lodged during 2019 and a further 13 development application lodgements or project approvals expected to be sought in 2020.”

Vicinity’s 59 shopping centres maintained high occupancy of 99.5% at 31 December 2019. Foot traffic across the portfolio for the six months to December 2019 was up 0.8% on the prior corresponding period. Excluding the Sydney CBD centres, which were impacted by the recently completed light rail infrastructure works, foot traffic was up 2.0% across the remainder of the portfolio in the period.

Total portfolio MAT growth of 3.2% includes strong results from Chadstone (+7.8%) and the DFO portfolio (+5.5%). Specialty and mini majors growth of 3.7% is up from 3.1% to June 2019, underpinned by strong growth across leisure (+6.8%), retail services (+5.1%), food catering (+5.0%) and apparel and footwear (+4.3%). Strong deal activity was maintained over the period.

Total leasing spreads for the six months to 31 December 2019 averaged -4.0%, or -2.5% excluding short-term leases.

Short-term deals were materially reduced by 39% to 109, from 178 for the six months to December 2018. Retailer administrations announced account for approximately 1% of income and represent 63 of more than 6,900 stores across the portfolio, with 41 of the stores in administration continuing to trade.

ACCRETIVE DEVELOPMENT

Mr Kelley said: “We reached another milestone in November 2019 opening the 5-star 250-room Hotel Chadstone Melbourne. The addition of accommodation complements Chadstone’s leading luxury retail offer and capitalises on the centre’s domestic and international visitors, along with corporate travellers to the growing Monash economic region.

“Chadstone is continuing to evolve with approximately $700 million of investment planned. Development applications have been submitted for five key projects including a new office tower, expansion of the dining terrace and leisure precinct, upgrades to the fresh food precinct, repurposing space for expansion of selected existing luxury retail stores and additional car parking. These are important projects for Chadstone to deliver new services and experiences for customers and the local community, and to meet demographic shifts in the broader Monash region. Development works will be staged ensuring disruption to the centre is minimised, with the first project expected to commence in 2021.”

Mr Kelley added: “Planning is well advanced for the major redevelopment of Chatswood Chase to deliver premium fashion, lifestyle and dining options for Sydney’s affluent North Shore. With principal town planning consents granted and a construction contract agreed within feasibility parameters, discussions with key retailers continue to advance as we look to secure select lease pre-commitments prior to expected construction commencement in mid-2020.”

‘The Markets’ at Roselands opened in September 2019, transforming the lower ground floor into a new fresh food destination. The revitalised market hall includes a new Aldi and Woolworths, and an upgraded Coles, along with new fresh food and casual dining retailers. The Southern Hemisphere’s first-of-its-kind video gaming and esports entertainment venue will open at Emporium Melbourne, VIC next month. It is expected Fortress Melbourne will follow international trends and become a major attraction for a broad range of customers looking to engage in the growing global phenomenon.

ACTIVE CAPITAL MANAGEMENT

Vicinity’s balance sheet remains well positioned, with strong investment-grade credit ratings of A/stable (S&P Global Ratings) and A2/stable (Moody’s Investor Services). New or renewed debt of $2.5 billion was negotiated during the period, including the inaugural issuance of €500 million (A$812 million) of 10-year medium term notes, improving the diversity of funding sources and materially extending the weighted average debt duration by 1.3 years to 5.4 years.

Vicinity’s 59 direct-owned retail properties were revalued during the period, recording a net valuation decline for the six months of $81 million or 0.5% 13 . The Western Australian Core portfolio recorded a decline of 6.1% or $106 million, driven by subdued retail leasing conditions impacting Regional centres in the state. Declines were also realised at Core assets requiring repositioning, including assets held for development and those undergoing significant remixing. The Flagship portfolio reported a net valuation gain of $208 million or 2.8%, continuing to highlight the quality of these assets. The average portfolio capitalisation rate tightened 4 basis points since June 2019 to 5.26%, reflecting further improvement in portfolio quality. Net tangible assets per security was marginally lower at $2.90 from $2.92 at June 2019.

A SUSTAINABILITY LEADER

Mr Kelley said: “Our sustainability program was strengthened during the period with Vicinity’s commitment to net zero carbon emissions by 203014. This target will be achieved by progressing Australia’s largest shopping centre solar investment program and continuing to innovate and drive energy efficiency across our portfolio.

“Our significant efforts to manage climate risk across our portfolio and prepare for the transition to a lowcarbon economy were key factors in Vicinity’s inclusion in CDP’s Climate A-list.”

Vicinity was also highly recognised in two other sustainability surveys during the period. The Global Real Estate Sustainability Benchmark rated Vicinity number 3 in the Global Listed Retail category and Vicinity was ranked 6th most sustainable real estate company globally in the Dow Jones Sustainability Indices.

OUTLOOK AND REVISED FY20 GUIDANCE

Mr Kelley said: “Vicinity is mindful of the impact that novel coronavirus is having on our retailers and communities. While global uncertainty continues as to the full impact and duration of novel coronavirus, we are undertaking a range of initiatives to mitigate the impact on our portfolio. This includes regularly communicating with our retailers and over coming weeks delivering targeted campaigns to support visitation at our most affected centres. We continue to monitor the implications for Vicinity.”

Vicinity’s FY20 FFO per security guidance has been revised to 17.2 to 17.4 cents from 17.6 to 17.8 cents. The full year distribution payout ratio is expected to be at the upper end of the target range of 95% to 100% of AFFO, and reflects FY20 maintenance capital expenditure and incentives of approximately $80 million to $90 million.