Consumer appetite for luxury goods helps Vicinity Centres boost interim earnings

The popularity of luxury goods and clothing has helped Vicinity Centres (ASX: VCX) deliver a sharp rise in funds from operations in the December half year, indicating successive interest rate increases have failed to stem the appetite of consumers for these products over the past six months.

Vicinity, which operates Australia’s largest shopping centre, Chadstone in Melbourne, posted a 24.1 per cent increase in funds from operations to $357.1 million for the first half which was aided by a rise in centre occupancies and a 20.5 per cent lift in property income.

However, the retail centre group's statutory net profit fell 72.9 per cent to $176.3 million, led by a marginal net property valuation loss of $109.2 million during the period. The bottom line is well down on the previous corresponding period which was buoyed by a $353.7 million lift in post-COVID property valuations.

Chadstone was the star performer for the group during the latest half year after it recorded a $53.2 million valuation uplift to offset falls across the portfolio.

Vicinity says the retail sector was showing continued resilience with consumer demand ‘benefiting from tight employment market and robust income growth and savings rates’.

The company’s portfolio was also boosted by a lift in occupancy to 98.6 per cent at the end of December from 98.3 per cent at the end of June last year as leasing activity picked up during the half-year.

Vicinity wrapped up 833 leasing deals in the latest half, which was190 more deals than a year earlier and 43 per cent more than pre-COVID levels. The apparel and footwear category was the largest contributor to the deal count.

“Our FY23 interim result reflects our disciplined approach to delivering long-term, sustainable growth that is underpinned by quality operational and financial metrics,” says Vicinity CEO Peter Huddle.

“The Australian retail sector continues to enjoy elevated growth, despite near-term uncertainty, while the residual impact of the pandemic on Vicinity is now largely limited to the ongoing recovery of our CBD assets.”

Funds from operations, the preferred measure of profitability for the sector, were boosted by a 20.5 per cent lift in net property income to $459.6 million.

“Elevated retail sales growth of 20 per cent for 1H FY23 compared to 1H FY20 continued to reflect the resilience of the Australian consumer, which was also evidenced by improving visitation, increasing dwell times and spend per visit being sustained at 1.3 times pre-COVID levels,” says Huddle.

“Luxury retail, and apparel and footwear, particularly at our Outlet centres, remain amongst the strongest performing categories and our long-term investment strategy is focused on bolstering our market leadership position in these growing segments.”

Luxury retail sales grew by 55.8 per cent in the latest half or 15.9 per cent on a CAGR (compound annual growth) basis, compared to the first half of FY20.

“Our growth in luxury is the result of our deliberate investment strategy to enhance our luxury landlord credentials,” says Huddle. “Pleasingly, existing luxury brands are demanding more space to extend and elevate their product offerings and we have a pipeline of potential new brands to bring to our premium centres in the short to medium term.”

Vicinity has a solid development pipeline in train which Huddle says will drive further growth for the group.

“However, against a backdrop of elevated construction costs as well as rising costs of capital, we will continue with our disciplined approach to evaluating and deploying capital to ensure we preserve our strong balance sheet and credit ratings,” he says.

Vicinity earlier this month announced it had received council approval to redevelop Buranda Village in Brisbane’s inner south to create a $750 million mixed-use project comprising a retail and dining village, office and other health-related uses, as well as more than 620 apartments.

Chadstone’s new Entertainment and Leisure precinct, known as The Social Quarter, is set to open early next month, while construction of Chadstone’s One Middle Road office tower and fresh food dining precinct is under way.

Vicinity is paying investors an interim distribution of 5.75c per security for the latest half-year performance.