This article is from the Australian Property Journal archive
SHOPPING centres owner Vicinity Centres has beaten its full-year earnings guidance and nabbed a half stake in Lakeside Joondalup for $420 million – a $230 million discount off the original price tag of $650 million.
Statutory net profit after tax jumped to $547.1 million, from $271.5 million. Funds from operations (FFO) for FY24 came in at 14.6c per security, above its previous guidance of 14.1c to 14.5c, as was adjusted funds from operations (AFFO) at 12.3c, driven by strong leasing outcomes and portfolio performance.
“As expected, elevated costs of living tempered retail sales growth in 2H FY24, however retailer confidence to lock in new leases remained robust, with the team negotiating more than 2,000 leasing deals over the year,” said CEO and managing director, Peter Huddle.
Vicinity leased more than 230 vacant shops in FY24, and ended the year with occupancy at 99.3%, its highest point since before the pandemic. At 99.6%, CBD centre occupancy now also exceeds pre-COVID levels, which it said reflected retailer confidence in the future of CBDs.
Leasing spreads were positive at 1.1% – up from 0.3% year-on-year, although slowing in the second half – and there was a 4.8% average annual escalator on new leases.
Moody’s Ratings’ vice president Saranga Ranasinghe said the REIT maintained high levels of occupancy as well as positive leasing spreads, which highlights the resilience of its high-quality retail assets.
“The REIT benefits from its strong portfolio with favourable lease structures and robust operating metrics, a solid balance sheet and ample liquidity. These strengths, provide a credit buffer against material downside risk from weak consumer sentiment and discretionary spending.
“Its reported gearing remains at the low end of its target range of 25%-35%. Despite high interest costs, we expect the REIT to maintain interest coverage metrics that are in line with our rating expectations,” Ranasinghe said.
Vicinity’s total portfolio comparable net property income (NPI) growth was 4.1%. Comparable NPI growth of 3.0% to 3.5% is expected for FY25. It is writing more long-term deals, pushing the portfolio’s weighted average lease expiry up over FY24 from 3.3 years to 3.6 years.
Huddle said capitalisation rates are showing signs of stabilising and its strategy of locking in long-term leasing deals with fixed annual escalators, increasing occupancy and reducing income at risk, underpinned a modest valuation increase in the second half
FY25 FFO and AFFO per security expected to be within the range of 14.5c to 14.8c and 12.3c to 12.6c, respectively. FY25 distribution payout ratio to be within the target range of 95 to 100% of AFFO.
Major acquisition
Vicinity acquired the 50% interest in Lakeside Joondalup from the Future Fund, and becomes co-owner alongside Lendlease’s Australian Prime Property Fund.
CBRE’s head of retail capital markets Simon Rooney acted on behalf of the Future Fund to sell the stake.
“Lakeside Joondalup has been a strategic acquisition target for some time, with the asset being a premium, fortress-style centre located in one of Perth’s principal activity centres with a large and growing population and achieving almost $800 million in annual retail sales,” Huddle said.
Importantly, Vicinity also secured the property management and retail development “management rights for Lakeside Joondalup, which provides the opportunity to utilise our retail management platform to enhance asset performance, whilst earning additional fee income,” he said.
Although the Lakeside Joondalup transaction is one of the largest in retail sector in 2024 to date, and comes as liquidity returns to the shopping centres market, it is represents a hefty discount to the original expectation of $650 million.
Having said that, the Future Fund hasn’t made a capital loss on the sale after acquiring the centre with APPF Retail in 2010 for $475 million, from the ING Retail Property Fund.
Meanwhile Vicinity executed seven strategic asset sales totalling around $550 million during FY24, at a blended 9% yield, or circa $46 million premium to book values.
“The acquisition of Lakeside Joondalup, the forthcoming redevelopment of Galleria and divestment of four non-strategic assets in Western Australia, has been a deliberate strategy to recycle and redeploy capital to strengthen our asset portfolio in Western Australia,” Huddle said.
A further $250 million of asset sales targeted for FY25.
After more than half a decade of repricing and challenging fundamentals, the retail property sector is looking compelling on a relative value basis, according to Dexus, with yield expansion milder than other core commercial property markets, and “investors are waking up to the positive story”.
The latest MSCI data shows retail volumes were up by 1% YOY for Q2 and 11% for H1 2024 relative to 2023. Transactions were 43% above the average of the past five years and already account for 80% of last year’s transaction total. Notable transactions in the first half include the sale of Westfield Tea Tree Plaza, Stockland Glendale and Cairns Central. And recently Scentre Group and Barrenjoey acquired a 50% stake in Westfield Westlakes for $167.30 million, which is 36% below peak value.
Vicinity is forging ahead with several projects, with the “majority of committed capital” going towards megamall Chadstone in Melbourne’s south-east, which it co-owns with the Gandel family, and Chatswood Chase, which it took full ownership of in November with $620 million development plans.
It said that while Chadstone “has not been immune to the challenged construction sector, we are well progressed on the major retail and mixed-use development”. The opening of the One Middle Road (OMR) office tower and a new fresh food hall, The Market Pavilion, which is 95% leased, and alfresco dining precincts are scheduled for March 2025.
The OMR has already been announced as the home for Adairs’ corporate office, and Vicinity has unveiled Kmart’s headquarters would be moving to the building.
“Our agreement with Kmart was the largest office leasing deal in the Australian metro markets in 2024 and strongly aligns with our strategy of locating the corporate offices of key Australian retailers at the best shopping centre precinct in Australia,” it said.
A major redevelopment of Chatswood Chase began in March with opening slated for late 2025. Circa 80% of income has already been secured.
In June it received development masterplan approval for the mixed-use development at Box Hill Central North, in Melbourne. Vicinity has approval for major retail and mixed-use developments at Victoria Gardens, Box Hill Central North, and Buranda Village.
During the year, Vicinity also completed four smaller redevelopments at Bayside and Emporium Melbourne in Victoria, Castle Plaza in South Australia, and Nepean Village in NSW.
