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Challenging Times for Vicinity with 71% profit slump


Vicinity Centres announced its annual results for the 12 months to 30 June 2019 revealing the challenge they face in the uncertain waters of retail malls. Vicinity have put an end to the disposal strategy which kicked off 3 years ago, instead deciding to retain the assets and seek to avoid valuations falling further.

The business still delivered FFO of $689.3 million or 18.0 cents per security, up 2.0% on FY18. The FFO was driven by comparable net property income (NPI) growth of 1.5%, development completions and Vicinity’s securities buy-back, but the portfolio is still in pain.

Mr Grant Kelley, CEO and Managing Director, bravely said: “We have delivered a solid financial result in a challenging retail environment, which demonstrates the strength and resilience of our portfolio and the execution of the strategy that we commenced a year ago.”

Mr Kelly said: “The recent softening in investor demand for retail property funds globally, compounded by a crowded divestment market, is impacting retail property pricing in Australia. Consequently, they believe it is in the best interests of securityholders not to proceed with [Keppel] transaction, nor any further material asset divestments, in the current environment as there is more value keeping these assets on balance sheet."

Total portfolio sales grew over the 12 months to June 2019 by 2.7% (excluding Development impacted Centres), however leasing spreads remained negative at -2% as retailers appear to have less confidence in mall traffic and sales. In WA, the leasing spread was -15% with Mandurah Forum feeling the after pains of a major development with many retailers forced to close their stores. The flow on impact on valuations are evident across the portfolio with a net decline of -$227m recorded (compared to a $634m gain last year) as follows;

  • Major Regionals -$229m (-7.3%) with no change in the average cap rates at 5.5%

  • Regionals -$143.6m (-7.7%) with an average 30bps softer cap rate at 6.2%

  • Sub Regionals -$96m (-3.1%) with an average 27bs softer cap rate at 6.40%

  • Neighbourhoods -$21m (-8.5%) with an average 33bs softer cap rate at 6.35%

Improvements in valuations were seen in;

  • Super Regionals (Chadstone) +$98m with no change in cap rates at 3.75%

  • City Centres +$16m with no change in cap rates at 4.75%

  • Outlet Centres +$149.2m with an average 8bps sharper cap rate at 6.45%

The decline in book value is the key contributor to a 71% decline in statutory net profit after tax to $346.1 million for the group. Vicinity will pay a lower distribution per security of 15.9 cents for FY19, compared to 16.3 cents in the prior year. This decrease is largely due to the impact of asset divestments over the past two years and reflects an adjusted FFO (AFFO) payout ratio of 99.8%.

Development

Vicinity made progress on their $3.3 billion (Vicinity’s share: $1.9 billion) development pipeline. In October, they opened DFO Perth, and in July they completed the final major stage of The Glen’s $430 million development. Construction has commenced on more than 500 apartments at The Glen in the largest air-rights deal in Australia, Vicinity’s first residential project to realise value from mixed-use opportunities across our portfolio

A redevelopment of Chatswood Chase Sydney is in advanced planning with development approval granted and construction expected to start in mid 2020. Additionally, Vicinity is advancing plans for several retail and mixed-use developments for Box Hill Central and Bankstown Central with projects in detailed planning for Chadstone, Buranda Village, Victoria Gardens Shopping Centre, Emporium Melbourne and QueensPlaza.

Capital Management

Vicinity's gearing of 27.1% is at the lower end of their 25% to 35% target range. During the year, Vicinity accessed $2.0 billion of new or re-negotiated debt including the issuance of $400 million of Australian medium term notes for a six-year term, with an interest rate of approximately 2.6%. Vicinity now has access to undrawn debt facilities of $1.4 billion.

Guidance

Vicinity’s FFO guidance for FY20 is 17.8 to 18.0 cents per security, reflecting comparable growth of 1.7% to 2.9%.

The retail environment is expected to remain challenging in FY20, although economic stimulus including lower interest rates and income tax cuts may benefit retail spending

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