Vicinity makes $1bn turnaround as shoppers return to malls

Vicinity says spending is coming back as confidence rises and its centres are benefiting.

31/10/2019 Vicinity centres CEO Grant Kelley at the pool deck of the new Chadstone hotel at Chadstone shopping centre. Picture: David Geraghty, The Australian.

Shopping giant Vicinity Centres has turned around its performance despite the omicron variant hitting, generating a first-half profit of $650.2m, and saying that malls are recovering as customers spend during their visits.

The result was a $1.04bn turnaround from the company’s loss of $394.1m this time last year and it is also seeing more confidence among retailers as the latest wave fades and they look to expand.

Vicinity Centres shares leapt by 11 per cent to $1.86 as it became the big surprise earner of the reporting season and a pointer to more positive results in retail and property.

“Despite significant and often prolonged disruptions, consumer and retailer activity during the year demonstrated underlying resilience. In all states, when Covid-19 restrictions eased, consumers were quick to return to retail malls with confidence and the capacity to spend,” Vicinity Centres chief executive Grant Kelley said.

The retail property chief is keeping a watching brief on interest rates, saying that while bond yields had increased they were still very low relative to long term averages. Inflation is also on the agenda.

“We have significant positive signs for consumption … some of those signs are also often associated with inflationary pressure,” Mr Kelley said. “There is significant stimulus in the system, it may have an inflationary effect, but it is most certainly leading to increased consumption.”

In NSW and Victoria, retail sales rebounded strongly when restrictions eased last October. By November and December retail sales increased by 5.6 per cent on pre-Covid levels, driven by a robust recovery in visits as mall traffic came back to 84 per cent of pre-pandemic levels.

In states less affected by the virus, mall visitation was almost unaffected and retail sales growth has been consistently strong, up by 8.1 per cent in the first half, with Vicinity citing the favourable macroeconomic environment, and restricted international travel which kept significant Australian-based demand onshore.

“We expect the impacts of Covid-19 on our business to continue over the coming months due to the emergence of Omicron in late December. In January, Omicron had a material impact on visitation, particularly at our centres located on the east coast of Australia, however we are seeing an upward trend in the first two weeks of February,” Mr Kelley said.

While Australia continued to be impacted by the Covid-19 pandemic, Vicinity delivered 7.7 per cent growth in Funds From Operations, a measure of earnings, on the first half of last year, driven by rising property income as it also had lower waivers and provisions.

Mr Kelley said the first half had been “challenging” but despite pandemic-related disruptions and a greater proportion of its assets being in lockdown, it took a “disciplined” approach to cash collection and retailer support and kept tenants in its centres.

In a hopeful sign for cities, Mr Kelley said the company’s CBD portfolio recorded a modest uplift in valuations over the period, “corroborating our view that the outlook for CBD retail is improving and these centres will return to their former vibrancy in time”.

Vicinity’s FFO rose from $267.1m to $287.7m and the company paid an interim distribution of 4.7c per share, reflecting a payout ratio of 84 per cent.

The company had a 2.3 per cent uplift in asset valuations and was supported by the strengthening transactions market, particularly for small and mid-size malls, which led to net property valuation gain of $320.1m.

The company kept centre occupancy at 98.2 per cent, supported by resilient leasing activity, and has pushed further into discount outlets, which have performed throughout the crisis. Vicinity is also advancing plans for major mixed developments to add value to its traditional centres.

Vicinity forecast this financial year’s FFO per security is expected to be in the range of 11.8-12.6 cents with Adjusted FFO per security expected to be in the range of 9.5-10.3c and Vicinity is targeting a full-year distribution payout range of 95-100 per cent of AFFO.

The chief executive said the guidance range “demonstrates our growing optimism in general trading conditions” and pointed to the longer term opportunities for malls.