Vicinity's $1 billion turnaround signals retail recovery underway

Shopping centre group Vicinity Centres (ASX: VCX) has recorded a $1 billion turnaround in its fortunes over the December half-year, signalling the long-awaited recovery for the retail sector might be in full swing.

The group posted a net profit of $650.2 million in the first half of FY22, up from a $394.1 million loss in the previous corresponding period.

The result was notably buoyed by an increase in funds from operations (FFO) as well as asset valuations. FFO of $287.7 million was 7.7 per cent up on a year earlier, while non-cash property revaluations were up $353.7 million compared to a previous loss of $512.1 million.

The result has also highlighted a recovery in Vicinity’s CBD markets, with CEO Grant Kelley revealing the outlook for retail in city centres is on the rise.

“Pleasingly, our 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,” says Kelley.

“Retailer demand for flagship stores in our CBD centres remained strong throughout the pandemic, despite the subdued visitation and trading environment.”

While the Vicinity CEO described the latest half year as challenging, he credits the group’s retailer retention strategy for the latest result.

“Despite continued COVID-related disruptions and a greater proportion of our assets being in lockdown this period, our disciplined approach to cash collection and retailer support, together with higher than anticipated tenant retention and resilient ancillary income underpinned our significantly improved result,” Kelley says.

Vicinity maintained occupancy across its portfolio at 98.2 per cent.

“Our highly targeted approach to negotiations has contributed to our reduced number of holdovers, preserved our weighted average lease expiry profile, improved leasing spreads and enhanced retailer mix across our centres,” says Kelley.

Reflecting the recovery in its markets, Vicinity notes that gross rental billing collections averaged 80 per cent over the half year, which was up from the first quarter. Vicinity says it has allocated more than $300 million in support for retailers since the start of the pandemic in February 2020, most of which was in the form of outright rent forgiveness.

Retail sales were particularly strong in November and December last year for Vicinity’s Victorian and NSW centres, with sales up 5.6 per cent on pre-COVID levels and centre visitations at 84 per cent of pre-COVID. This compares with 50.1 per cent in the first three months of this financial year.

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

During the half-year, Vicinity struck 643 leasing deals, up from 542 deals a year earlier. More than 90 per cent of the new deals were negotiated with fixed annual increases of at least 4 per cent.

Vicinity took the opportunity to recycle capital during the period with the acquisition of a 50 per cent interest in Harbour Town Premium Outlets on the Gold Coast for $358 million. The acquisition was supplemented by the sale of its 50 per cent interest in another Gold Coast asset, Runaway Bay shopping centre, for $132 million – which was struck at an 18 per cent premium to book value.

Kelley sees the recovery for Vicinity gaining momentum despite some near-term glitches.

“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 2021,” he says.

“In January 2022, 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.”

Vicinity is forecasting FFO of between 11.8c and 12.6c per security for FY22, with a full-year distribution payout range of between 95 and 100 per cent. The interim distribution for the latest half year is 4.7c per security.