Vicinity Centres today announced its results for the 12 months ended 30 June 2023, with Net Profit After Tax (NPAT) of $271.5 million. Funds From Operations (FFO) increased by 14.5%, largely driven by a 12.1% uplift in Net Property Income (NPI) to $900.2 million; now at pre-COVID levels.
NPI growth was driven by improved cash collections from current and prior years, positive rental growth, percentage rent uplift, continued ancillary income growth, led by carparks and media sales, and higher occupancy. NPI growth was partially offset by higher net interest expense, driven by higher funding for development activity as well as increased interest rates.
Vicinity’s CEO and Managing Director, Peter Huddle said: “FY23 has been a year of resilience and growth at Vicinity. During the year, we deliberately executed at pace while the retail sector was favourable. We delivered a significant level of high-quality leasing outcomes, focused on enhancing the retail mix of each centre and reducing our income at risk, while simultaneously negotiating favourable leasing spreads which support current and future NPI growth.
“Furthermore, we have continued to invest our capital to progress development approvals and execute project activity that will ultimately deliver long term value to our stakeholders, despite near-term, heightened macroeconomic uncertainty.”
Vicinity’s portfolio recorded a 1.6% or $229.1 million decline in total asset valuation for the six months to 30 June 2023.
The valuation result reflects a 16 basis points softening of the portfolio’s weighted average capitalisation rate, partially offset by robust income growth. Longer term income growth has been supported by Vicinity’s strong leasing performance which in turn, reflects the quality of Vicinity’s asset portfolio.
Of particular note, Chadstone’s $28.2 million increase in valuation reflected strong income growth and the completion of The Social Quarter, partially offset by a 12.5 basis point softening capitalisation rate.
Huddle said, “In the final quarter, we were pleased to sell a 50% interest in the shopping centre at Broadmeadows Central, at a 5.2% premium to 31 December 2022 book value. In the immediate term, the
transaction strengthened our balance sheet, and we are now poised to recycle the capital into value accretive opportunities that align with our strategy.”
Broadmeadows Central
Retail sales and portfolio performance
Total retail sales in 2H FY23 were up 8.0% on 2H FY22 with mid-to-high single digit growth rates delivered across mini majors, supermarkets, discount department stores and departments stores, and 10.0% specialty growth.
Across mini majors and specialties, all product categories delivered growth in 2H FY23 with food catering and food retail, together with jewellery delivering the strongest growth rates, at 21.1%, 14.7% and 14.6%, respectively.
Luxury continued to perform strongly in 2H FY23 with growth of 7.3% and Vicinity’s premium centres, comprising Chadstone, Outlets and CBDs also delivered strong growth, up 7.2%, 8.8% and 21.0%, respectively in 2H FY23.
While the retail sector remained resilient in FY23, the rate of sales growth moderated in late 4Q FY23. After strong growth in recent periods, homewares as well as apparel & footwear had flat sales during the quarter as higher living costs impacted consumption.
Across the CBD portfolio, retail sales growth was strong in 2H FY23, underpinned by a 30% uplift in visitation, with the steady return of office workers to CBDs and the continued recovery of international tourism, now at 77% of pre-COVID. Notably, while the number of international tourists is forecast to reach pre-COVID levels in 2025, tourism spend is expected to return to pre-COVID levels in 2024, which bodes well for Vicinity’s CBD portfolio.
The Strand Arcade, Sydney
More broadly, total portfolio visitation increased 11.9% in 2H FY23 relative to 2H FY22 with all centre types observing an improvement.
Critical to Vicinity delivering resilient income growth over time, the Company remained focused on negotiating quality, long-term leasing deals with fixed rate escalators at improving spreads, reducing
holdovers, and increasing occupancy in a favourable retail environment.
Vicinity leased 306 vacant stores in FY23, and occupancy increased to 98.8% from 98.6% reported at 1H FY23 and 98.0% reported at the height of the pandemic (Dec-20).
In FY23, Vicinity completed 1,628 comparable leasing deals, 250 more deals than FY22 and approximately 25% higher than pre-COVID levels (FY19). This delivered $208 million of first year rent relative to $162 million in FY22.
Total deals completed in FY23 was almost 2,250 and this volume surpassed any previous year since the Company’s inception in 2015.
Bankstown Central
Leasing spreads continued to show positive momentum, with a positive leasing spread for FY23 of +0.3% relative to -4.8% reported over FY22 and -0.1% for 1H FY23. Vicinity continued to achieve high single digit spreads for Chadstone and DFOs, driven by ongoing retailer demand for premium assets.
Huddle said, “The volume and characteristics of the leasing deals completed in FY23 clearly demonstrates that large, national retailers are now willing to lock in long term leases in traditional retail. During the year, we transitioned more than 200 shops from short-term to long-term leases and this is evident in our significantly reduced holdover count and income at risk.”
Critical to embedding resilience in Vicinity’s business model, the Company maintained its traditional specialty retail lease structure of five-year leases with fixed annual escalators. In FY23, Vicinity concluded 2,249 leases with average annual escalators of 4.6%.
Development pipeline
In FY23, Vicinity continued to enhance its investment portfolio with the completion of a number of developments during the year, including a Coles supermarket, a Grand Market, and mini majors precinct at Bankstown Central. A Coles supermarket and services mall, and three-storey office podium, leased to Hub Australia, was opened at Box Hill Central, and at Chadstone, Vicinity completed The Social Quarter and the redeveloped Chadstone Place office, now fully occupied by Officeworks’ Head Office.
The Social Quarter at Chadstone on opening day
“I am particularly pleased with the exciting new entertainment, leisure and dining offer at Chadstone, The Social Quarter, which opened in early 2023. This project has expanded the customer base of Chadstone, capturing more of the leisure market, and extended the centre’s customer visitation into the evenings,” said Huddle.
At Chadstone, Vicinity also commenced construction of the 20,000m2 One Middle Road office tower, with more than 55% of pre-committed space. The office tower will be integrated into two levels of retail on the eastern side of Chadstone, with the retail component comprising a new, revitalised fresh food precinct, ‘The Market Pavilion’ and a new alfresco dining precinct. The development is expected to complete in stages from late 2023 until October 2024.
A major upgrade of the fresh food and dining precincts is also underway at Chatswood Chase Sydney. This project will significantly lift the food and dining offer across the lower ground level and positions the centre well for the redevelopment of the upper levels notably with the introduction of a substantial luxury retail offering. Vicinity received development approval for the redevelopment in late FY23.
Once complete, Chase Market will be home to over 40 new restaurants, cafés and fresh food experiences
Investment capital expenditure in FY24 is expected to be approximately $400 million.
From an environmental perspective, Vicinity is on track with its goal to achieve Net Zero for our Scope 1 and Scope 2 emissions for common mall areas across its wholly-owned retail assets by 2030.
