Vicinity Centres, co-owner of the Chadstone mall in Melbourne and the Chatswood Chase shopping centre in Sydney, provided a March-quarter update. Total retail sales growth based on moving annual turnover (MAT) moderated 160bp in the quarter to 1.6%, while specialty sales growth fell 320bp to -0.4%, having been heavily influenced by the March result which saw total sales decline 17% and specialties fall 35%. Both supermarkets and discount department stores (DDS), which represent 33% of Vicinity’s total sales, saw growth accelerate in the quarter, however, with MAT growth of 6.0% (up 170bp on the December quarter) and 5.3% (up 130bp) in the year to March. The results benefited from the boom in March – supermarkets rose 22% and DDS rose 8%.
The number of operating stores is increasing, and was at 50% of stores and 65% of area as at 4 May after 530 stores opened in the past week – a 7.5% increase. Lease negotiations are ongoing with retailers in reference to rent relief and rent deferrals, although it is too early to provide any material update on this.
Liquidity is healthy at $1.3bn and the major $1.1bn Chatswood Chase redevelopment has (rightly, in our view) been deferred. Targeted cost reductions include 70% of the team put on reduced hours through to the end of June, short-term incentives cancelled for FY20, and a 20% reduction in director and executive committee salaries for the fourth quarter.
We recently revised our earnings forecasts across the property sector. Relative to 2019, we assume 75–80% of retail rent is booked in 2020, including about 10% of rent deferrals which we assume are recognised in funds from operations but not distributed. We expect FY21 will be the trough year for earnings for Vicinity, with CY21 rent assumed to recover to 87% of 2019’s rent level.
We believe Vicinity’s balance sheet can withstand our assumed 30% impairment in asset values and gearing will be about 37%, which is acceptable based on what we expect to be trough valuations. The stock has been oversold, in our view, and we maintain our Accumulate recommendation with a $1.80 target price.