Release Date: February 14, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Vicinity Centres (ASX:VCX, Financial) delivered a net profit after tax of $223.5 million for the six months ended December 31, 2023.
- Retail sales for the first half remained positive, increasing 1.5%, with specialty store productivity up more than 11% since pre-pandemic.
- The company declared an interim distribution of $0.0585 per security, representing a payout ratio of 83.7% of AFFO.
- Vicinity Centres (ASX:VCX) has a strong balance sheet with conservative gearing at 26.3%, providing resilience against potential market volatility.
- The acquisition of the remaining 49% interest in Chatswood Chase and the ongoing redevelopment projects at Chadstone and Chatswood are expected to drive significant growth.
Negative Points
- Headline FFO was slightly below the prior year at $345.6 million, with a 3.2% decrease compared to the previous period.
- The company recorded a net property valuation loss of $143 million, driven by an 18 basis point softening of cap rates.
- Despite positive leasing spreads, the company has a cautious outlook for the second half of FY24 due to potential moderating retail sales.
- Higher interest expenses increased by 8.4%, primarily due to rising interest rates.
- The retail environment remains uncertain, with factors such as inflation, interest rates, and employment markets impacting future performance.
Q & A Highlights
Q: The first question is just on the corporate cost line. Could you perhaps bridge those costs on a half-on-half basis and maybe just talk about how sustainable those reductions are on an ongoing basis?
A: We have made a significant effort in reducing costs, particularly around insurance and executive changes. Additionally, increased capitalization of development costs has contributed to the reduction. We expect overheads to increase slightly in the second half, maybe by $1 million or $2 million.
Q: Just looking at the positive news from the first half, it does seem to well above your cap rate. Can you help us reconcile that value?
A: There are several factors impacting that differential, including leasehold properties in the DFO portfolio, percentage rent, electricity on-sale, solar income, and higher cap rates on some ancillary uses and office assets. These contribute to the differential in valuation versus implied cap rates.
Q: Can you talk about some of the other moving parts from the first half to the second half?
A: The skew from first half to second half is around $30 million, due to seasonality in ancillary income, property expenses, and loss of rent from Chatswood. We expect underlying comparable NPI growth to be stable year on year.
Q: Are you planning more disposals in the next 12 months?
A: We initially targeted around $400 million worth of disposals and have reported $360 million so far. We still have a couple of other opportunities in the marketplace but do not have a formal divestment program outside of that $400 million.
Q: On some of the larger developments, is it something you're specifically waiting for in terms of improving leasing or construction costs?
A: It's a combination of factors, including final stages of authority approvals and the challenging construction market. We will be patient to ensure we execute these projects at the right time in the market.
Q: Was there any one-offs in the MPI line this period?
A: We had a small amount of write-back, probably around $5 million or $6 million in the first half.
Q: What's your assumed impact from downtime in developments?
A: For the first half, it was about $10 million loss of rent, and closer to $20 million in the second half due to Chatswood. For FY25, we expect loss of rent to edge up to about $35 million, then potentially come down in FY26.
Q: Are you comfortable with the 100% interest in Chatswood Chase?
A: Yes, we are comfortable with the 100% interest in taking that development through to fruition. We also have another two development blocks adjacent to Chatswood.
Q: You have been running a process to introduce capital into some development projects. Are you able to provide an update on those?
A: We are waiting for the outcome of the authority approval process and are likely to pivot some of the commercial mix towards residential. We do not expect to be in the capital raising stage in this fiscal year.
Q: Where do you see required rates of return for institutional capital potentially looking to come into your portfolio?
A: Typically, institutional capital is not coming in at less than 8% unlevered IRR and may require up to 10%. For retail projects, it is closer to 10% unlevered IRR.
Q: How should we be thinking about the trajectory of holdovers going forward?
A: We did a lot of work coming out of the pandemic period to renew holdovers for longer-term leases. We anticipate our leasing transactions will be down on last year, but we are fairly comfortable over the next couple of years.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
