Vicinity Centres (VCX) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Vicinity Centres FY '20 Annual Results. [Operator Instructions] I would now like to hand the conference over to Mr. Grant Kelley, CEO and Managing Director. Please go ahead.

Good morning, everyone, and thank you for joining us today for Vicinity's FY '20 Full Year Results Briefing. I'm Grant Kelley, CEO and Managing Director of Vicinity. Joining me on today's call are, in speaking order, Nick Schiffer, our Chief Financial Officer; Peter Huddle, our Chief Operating Officer; Carolyn Viney, our Chief Development Officer; and Justin Mills, our Chief Strategy Officer. Turning to Slide 2, and I'll begin today's presentation with an overview of the key results and our achievements for the 12 months to June 2020, followed by an outline of our response to the COVID-19 pandemic and how it is likely to impact our business into FY '21. Nick will follow with an overview of the financials, and the team will then take you through their respective areas of focus. We will then close out with an outline of Vicinity's strategy moving forward and open up the line for any questions. Turning first to the results on Slide 4. And in summary, FY '20 has been a year of 2 remarkably different halves. In the first half, we achieved solid financial and operating performance and continued to strengthen the quality of the portfolio. By contrast, the majority of the second half was significantly impacted by the effects of COVID-19 on our business and our industry. The statutory result for the financial year was a net loss of $1.8 billion primarily due to property valuation declines. We took the decision for the June valuation cycle to value our entire directly owned portfolio of 60 properties independently. Additional allowances were then made for Victorian assets as a result of the increase in COVID-19 cases observed in that state in late June 2020. FFO per security of $0.137 is down 24.1%, with second half of the year significantly impacted by a reduction in net property income due to provisions made for the rental waivers, which we expect to provide to many COVID-19-impacted tenants; and the rental billings, which we do not expect to receive. Despite these uncertain conditions, our centers have remained close to full with portfolio occupancy of 98.6%. The rental support provided to our retailers is, in many cases, crucial to enabling their businesses to survive this period. Portfolio quality continued to be enhanced throughout the year. We acquired a 50% interest in Uni Hill Factory Outlets and divested 3 noncore assets. Developments of The Glen, Roselands and the Hotel Chadstone were completed. And the planning of major projects has also been advanced, with the approval of 5 projects at Chadstone and multiple DAs lodged to prepare for the future major mixed-use transformations at Box Hill Central in Victoria and Bankstown Central in New South Wales. In June, to put Vicinity in the strongest position to respond to the impacts and uncertainty of COVID-19, and also the evolving retail environment, we executed a placement to raise $1.2 billion in equity. Gearing at 30 June was 25.5%, at the lower end of our 25% to 35% target range, and we have retained strong investment-grade credit ratings. Turning now to Slide 5, where we cover our response to the COVID-19 pandemic. And our top priority during the pandemic has been the health, safety and well-being of our team members, consumers, retailers and the broader community, along with the long-term success of Vicinity and our valued retailers. In terms of fortifying our financial position, in addition to the equity raise, we also benefited from $950 million of new and extended short-term bank facilities. We also reduced or deferred noncritical capital and operating expenditures. To assist our team members, we also accessed JobKeeper and implemented a range of initiatives, which focused on our colleagues' mental, physical and financial well-being. We were also able to move quickly to remote or temporarily scale back working arrangements across the business. We played a leading role in advising the Shopping Centre Council of Australia, which collaborated with retail industry groups to create the foundation for the government's SME Code, which was designed to ensure the long-term viability of our small and medium-sized retail tenants. Using the SME Code and negotiating in good faith with like-minded, non-SME tenants, we continue to work through short-term lease variations to support our retailers and secure longer-term cash flows for Vicinity. On a separate note, we think it is important to acknowledge that the property industry generally, and major shopping centers in particular, are one of the few industries to provide rent waivers, not just rent deferrals, despite the legal obligations of tenants under their existing leases. At Vicinity, we have taken the step to ensure the long-term success of not just our business but also that of our retailers. We are also pleased at the rapid pace with which our teams have responded to the pandemic in order to make our centers COVID safe while also keeping them open to allow our customers to access essential goods and services and enabling our retailers to continue their business should they wish to do so, of course, operating within government, COVID-mandated guidelines. Moving to Slide 6, and the chart on the right shows customer visitation across our national portfolio. The key takeaway is that when customers believe there is a low probability of contracting COVID-19, as is the case currently outside of Victoria and New South Wales, there is a quick approximation back to pre-COVID center visitation levels. As such, we are pleased that the stage 4 restrictions in Melbourne appear to be having their desired effect, with COVID infections falling, and we hope this will in turn lead to an easing of restrictions in the near term. Other factors may, of course, delay the return to pre-COVID levels, including domestic and international travel restrictions and office workers not yet returning to CBDs on a full-time basis. The fundamental challenge for our sector will nevertheless remain social distancing measures currently enforced within Australia, which is turn -- in turn, excuse me, has had the effect of suppressing retail demand. We will continue to work with governments across Australia to ensure we play our part in protecting community health. And indeed, our priority remains ensuring that people feel safe in our centers, which is paramount to maintaining the confidence of our customers and our retailers. Looking ahead, Vicinity remains focused on stabilizing center occupancy and completing short-term lease variations while also prudently and carefully managing costs. And following the equity raising, we are also in a strong position to continue the measured execution of our strategy, for example, by advancing preparations at some of our major mixed-use opportunity sites, so we are ready to execute on these when the timing is right. I'll now hand you over to Nick, who will take you through the financial results for the year in greater detail.

Thanks, Grant, and good morning, everyone. I'll start on Slide 8. FY '20 was certainly a year of 2 very different halves. In the first half, we delivered a solid result with comparable FFO growth of 1.5%. We executed on strategy with the acquisition of Uni Hill, divestment of 3 noncore properties and 3 development completions. We were also active with our debt book, issuing our first euro MTNs equivalent to $812 million and extending bank facilities totaling $1.7 billion. The impacts of COVID-19 on our business first became apparent early in the second half. The escalation of the pandemic and associated responses for March have since had a material financial impact on Vicinity. This saw FFO per security for the second half down 47.3% on the 6 months to June 2019 to $0.0471. Due to uncertainty over the extent and duration of the impacts of COVID-19 on our business, we took early and decisive action to enhance liquidity and strengthen the balance sheet. This included completing $950 million of new and extended bank facilities, minimization of CapEx, reductions in operating and corporate costs, cancellation of the final distribution and undertaking the equity raising in June. Turning now to Slide 9. This slide shows the income statement for both halves of FY '20, alongside the full 12-month period and FY '19 results. Following a first half statutory net profit of $242.8 million, the full year result was a net loss of $1.8 billion. This primarily comprises of full year FFO of $520.3 million, offset by net property revaluation declines of $1.7 billion and an impairment of goodwill of $427 million. The FFO result was down 24.5% on FY '19 largely due to a reduction in net property income, which I'll talk to further shortly. To assist in mitigating the impacts of COVID-19 on NPI, we undertook several initiatives. The first of these were corporate overhead cost reductions comprising cancellation of the short-term incentive award, the unfortunate but necessary full or partial stand-down of 70% of our team members and a temporary reduction in director fees and senior management salaries. We were also able to access the federal government's JobKeeper program. Cumulatively, these items benefited overhead costs by circa $31 million. Secondly, we restructured interest rate swaps to bring our floating interest rates in line with market rates. The benefit from this will continue to be realized in the first half of FY '21. On to Slide 10. As shown in the FY '19 to FY '20 NPI waterfall chart, the estimated impact of COVID-19 on rent of $169 million was the main driver of the reduction in NPI over the period. The $169 million includes an estimate for rent waivers of $109 million and an additional expected credit loss provisions of $60 million for the collection risk on the remaining debt in a highly uncertain environment. The pie chart shows the breakdown of second half rental billings, which totaled $580 million. $381 million of those billings were collected by 30 June. $169 million has been deducted for estimated waivers or provisions. And the remaining $30 million of rent, which was unpaid at 30 June, has been included in FY '20 NPI. Total estimated waivers were based on a combination of agreed deals, preliminary discussions with tenants and estimates, taking into account the principles of the SME Code. The $60 million of provisions on the remaining unpaid billings reflects our assessment of the likelihood of collecting outstanding amounts from each tenant and is informed by actual and anticipated impacts of COVID-19 on trading performance, with an additional adjustment for the risks in this uncertain retail trading environment. Cash collection remains our absolute focus. For the 6 months to 30 June 2020, 66% of cash was collected from our tenants. For the June quarter, cash collection was 38% at 30 June. While challenging conditions exist, particularly in Victoria, we have seen signs of improving cash collection. Cash collection for the quarter is now at 49%, and for the month of July, we have collected 47% at 10th of August. Moving to Slide 11 and valuations. The entire Direct Portfolio was independently valued as at 30 June 2020. The valuer significantly increased short- to medium-term cash flow allowances, including vacancy, downtime, leasing capital and CapEx. They also reduced sales growth and market rental growth assumptions. Together with the softening in cap rates and terminal yields, this contributed to a net revaluation movement for the second half of negative 11.4%. The net revaluation movement for Chadstone was negative 7.8%. When combined with our Premium CBD centers and DFOs, our total Flagship portfolio net valuation decreased by 9.1%. This compares to the Core portfolio, which recorded a net revaluation decline of 13.7%. Whilst we recognize that our Premium CBD assets will be impacted by the prolonged office and tourism market recoveries, we are strong believers in the long-term prospects for these assets. Turning to Slide 12 and our gearing position. We entered FY '20 with gearing at 27.1%. Going into the second half of FY '20, our gearing at 31 December 2019 of 27.3% remained at the lower end of our target range of 25% to 35%. As the impact of COVID-19 became apparent, we made the decision in June to undertake an equity raising, including a fully underwritten institutional placement to maintain a conservative capital structure in an uncertain environment. The gearing waterfall highlights how the $1.2 billion placement has positioned our gearing at the bottom of our target range. We also undertook several other initiatives to preserve capital, including the deferral of all noncritical expenditure, which will continue in FY '21. Likewise, we will continue to be cautious with respect to our development pipeline, delaying and reviewing spend as appropriate. We continue to maintain a strong investment-grade credit ratings with an A2 rating, outlook negative, in the case of Moody's; and an A rating, outlook stable, from Standard & Poor's. Turning to Slide 13. We have proactively managed our capital position over the year with the extension or establishment of $3.5 billion of debt facilities. This includes the issue of EUR 500 million, equivalent to AUD 812 million, of 10-year bonds under our inaugural EMTN program. At 30 June 2020, we held $2.1 billion of undrawn bank debt and term deposits, sufficient liquidity for the current environment. Our debt exposures are well diversified and well staggered with only $150 million of debt being AMTNs maturing prior to FY '23. Our weighted average cost of debt reduces 90 basis points over the year to 3.6%, in part driven by the reset of the interest rate swaps I mentioned earlier. And we maintained a weighted average debt duration above 5 years. We believe our balance sheet is well positioned to enable us to navigate through this period of continuing uncertainty. I'll now hand you to Peter to take you through the portfolio performance.

Thanks, Nick, and good morning, everyone. I will start on Slide 15 with a review of our portfolio's performance over the year and how we have responded to COVID-19 pandemic. As Nick stated, this was a year of 2 very different halves. Our portfolio metrics strengthened overall during the first half. As shown in the table, portfolio specialty MAT per square meter increased 2.9% to $11,403 per square meter, and total portfolio of MAT growth to December 2019 was 3.2%. Occupancy was maintained at a strong 99.5% of GLA. In the second half, we saw initial signs of COVID-19 impacting center visitation in late January, and then to a significant degree in March when sales volumes quickly fell with many stores closing. From a performance measurement point of view, this has affected the comparability of sales reporting over the second half. The reported 7% decline in MAT for June '20 includes 0 sales for more than 3,000 stores or approximately 40% of retailers that temporarily ceased trading during the initial peak of COVID-19. During the pandemic, our highest priority has been health and safety. As a company, and together with the industry, we have worked tirelessly to guide, interpret and implement government directives to maintain high levels of hygiene and apply appropriate operating procedures to comply with social distancing within our properties. We created the COVID-19 Retailer Handbook to assist our retailers that remained open or have reopened to undertake measures for themselves, their teams and their customers to operate in a safe manner. Over the period of the pandemic, and more recently during Stage 4 restrictions in Melbourne, we have made sure there is safe, ease of access to key supermarkets, fresh food, pharmacy, medical and other daily needs operators for the communities that they serve. During the period, we continued to enhance our portfolio through the acquisition of 50% interest in Uni Hill Factory Outlet, expanding our leading DFO outlet offer. We have completed developments at The Glen, Roselands and opened our first hotel at Chadstone, together with undertaking an expansion at Ellenbrook. We've also divested our interest in 3 noncore assets and concluded 3 asset refurbishment projects. As announced by Woolworths earlier this week, we have completed a comprehensive portfolio agreement with one of our most significant retail partners. This agreement has mutual benefits for both parties, which include the execution of new supermarket leases, the extension of existing supermarket and Big W leases and the managed exit of 3 Big W stores from our portfolio. Importantly, it also paves the way for mixed-use development activity to be pursued across 5 projects, including the next stages of Chadstone. Turning to Slide 16. During the pandemic, our Flagship portfolio, comprising Chadstone, the Premium CBD centers and our DFOs, have been impacted more in terms of reduced customer visitation and store closures relative to centers within our Core portfolio. This is largely due to the offer in our Flagship assets having a higher weighting to discretional retail and a greater exposure to international, interstate tourists and CBD office workers than centers within our Core portfolio. As can be seen in both the table and the chart, since March, the weekly customer visitation numbers for our Flagship portfolio compared to the prior year are well below that of our Core portfolio. We acknowledge the exact timing of the return of the international tourism is unknown, and the recovery to our CBD centers, in part driven by commercial office workers, remains uncertain. However, these are short-term impacts that we have provisioned for, and we remain confident of the strong, long-term fundamentals of our Flagship portfolio, which was reflected in the resilience of these assets through the recent valuation process highlighted by Nick earlier. Moving to Slide 17. Similar to customer visitations, there has been a clear performance differential in store sales of the 2 halves of the financial year. To provide greater clarity on sales, we have shown month-on-month comparisons for the second half to better understand the impact on COVID-19 by store type. The Core portfolio outperformed the Flagship portfolio during COVID-19, reflecting the higher weighting by consumers to nondiscretionary retail. For example, during the month of April of this year, being the peak of the pandemic, the Core center, which represents close to 58% of total portfolio income, was just 23% below the year sales compared to the Flagship centers, which were down 89%. I should point out the strength of the Flagship assets and that of quality, physical retail generally is demonstrated by the notable improvement in sales once restrictions were even partially lifted. By June, sales had improved to 36% down. This occurred despite reduced trading hours, stores not reopening by choice or restricted by government, a significant reduction in tourist and office worker traffic and the present customer apprehensions regarding visiting larger-format or CBD shopping centers. Conversely, outside of Victoria, total MAT growth for Core centers was negative 0.6% to June compared to 2.2% negative, including Victoria, once again reinforcing that where there is low probability of infection, retail performance has returned to or close to pre-COVID levels. With the current situation in Victoria, there remains considerable uncertainty around trading conditions for the remainder of 2020. However, based on the sales recovery profile, post April, we are planning for similar strong sales returns once this current outbreak is under control. Moving to Slide 18. As presented, the impacts on our center visitation and on our retailer sales in the second half of FY '20 resulting from this pandemic has placed the industry in difficult and unprecedented times. It is essential for us to ensure a strong physical retail network emerges from the current situation, and we are taking this opportunity to forge a stronger working relationship with like-minded retailers into the future. In total, approximately 6,000 leases within our portfolio require some form of short-term variation to accommodate financial assistance during the pandemic. This represents approximately 3x the typical negotiation workload on a yearly basis. Our high-quality management and leasing teams have been and will continue to work tirelessly with their retailer counterparts to progress negotiations to conclusion. For SME retailers, our negotiations have been undertaken in accordance with the commercial code of conduct with the various state-based differentials applied. To date, 55% of SME leases have either been agreed in principle or are unimpacted. If it was not for Stage 3 and Stage 4 restrictions impacting Victoria since last month, the rate deals completed would have been higher. For non-SME retailers, our in-confidence negotiations have been carried out in good faith. To date, 64% of non-SME leases have either been agreed in principle or are unimpacted. The short-term deal structure typically involves the retailer paying a higher of a percentage of rental or a percentage of sales. This allows for a greater recovery of rental in the event that sales return quicker than forecast and provides both parties with a guaranteed minimum floor rental. To provide further certainty for Vicinity, our co-owners and our retailers, a deliberate component of COVID-19 negotiations has been to gain lease extensions through calendar year '21, gain lease renewals and execute commitments on new-to-market leases. For non-SME retailers, as of August, we have agreed 277 lease extensions with an average tenure of 17 months as part of COVID-19 negotiations. This represents circa $45 million in annualized income at a leasing spread of negative 5%. Furthermore, we have secured 30 new deals, representing approximately $6.5 million in income. Overall, with regards to rent relief agreed to date across the entire portfolio, 86% has been in the form of waivers and 14% rent deferrals. This represents approximately 2.3 months in rental assistance. Moving to Slide 19, where we have provided a further breakdown of the status of short-term lease variation negotiations in our portfolio as of August 10. To date, 59% of leases across the portfolio have had a short-term lease variation, either agreed in principle or are unimpacted. This equates to 61% across the Core portfolio and 55% in the Flagship portfolio, representing the relative impacts on both of these portfolios. We have completed more non-SME short-term lease variations primarily due to the fact that the majority of larger portfolio deals versus single store negotiations with SMEs. By state, the areas where customer visitation and sales have improved have experienced high short-term lease variation completions. Victoria has been impacted more recently due to the reinforced lockdowns, while New South Wales is more challenged due to high weighting of our portfolio allocated to the Sydney CBD centers and the prolonged recovery expected to CBD key customer segments. Outside of geographic regions, those retailers that were more heavily impacted by government restrictions, including large format food and beverage, retail services such as personal care and health and leisure operators have a lower relative percentage of short-term lease variation completions. Moving to Slide 20 and the portfolio outlook. We have to remain flexible in the short term as we successfully manage through the COVID-19 pandemic, maintaining the vibrancy in our centers while making sure all necessary safety precautions are in place for our retailers and customers. We are forecast to complete our short-term COVID-related agreements with our retailers in calendar year '20. These are difficult times for all, but it's important for all of us to strengthen and expand our relationships with our retailers, including the further expansion of our data capabilities, which Justin will refer to later. We are prioritizing capital expenditure and reviewing our operating expenditure carefully. At the same time, we're accelerating the planning of value-added mixed-use projects in a phased and capital-efficient way in accordance with significant longer-term master planning for our portfolio that has been undertaken. Carolyn will discuss further. The pandemic has created much uncertainty and has accelerated longer-term structural changes in the industry. However, we are confident that our centers and our hard-working teams have the right strategy to adapt and be very well positioned through this period and set for growth. I will now pass over to Carolyn to provide an update on the development activities.

Thank you, Peter, and good morning, everyone. FY '20 saw the successful delivery of multiple development projects: the final stage of the major redevelopment of The Glen, opened in October 2019, completing the center's transformation, which includes a new outdoor dining precinct and a new fresh food precinct anchored by Coles, Woolworths and a new Aldi store. Construction by Golden Age of the 3 residential towers on top of The Glen has completed to lock-up stage, with internal apartment fit-outs now well underway, and the first purchases expected to move in later this year. This is an exciting step for Vicinity, and what we have learned from integrating these residential buildings with the operations of the shopping center will be used to progress other mixed-use opportunities across our portfolio. In the meantime, we're super impressed with the result at The Glen. The $90 million transformation of the lower ground floor at Roselands was completed in September, creating The Markets, a fresh food precinct also anchored by Coles, a new Woolworths and Aldi stores. Roselands' moving annual turnover increased by 28% over the past year with the creation of this new and expanded fresh food offer. Hotel Chadstone opened in November with 250 rooms. And our $63 million development expansion at Ellenbrook Central is nearing completion, with a new 6,600 square meter Kmart having opened in July. Looking forward, we've made significant progress on the planning of our next major projects with a strong focus on mixed-use development. Master plans were publicly released, and the first development applications, or DAs, lodged for the major town center mixed-use developments at Box Hill and Bankstown. And DA approval was received for 5 projects at Chadstone, and I'll provide more detail in respect of these shortly. Project planning was also substantially progressed for our exciting mixed-use project at Victoria Gardens in Melbourne with more than 800 apartments contemplated as part of that scheme. Having said that, the COVID-19 pandemic has caused us, like everyone, to rethink our projects, which has included our decision to defer and review the size of our Chatswood Chase Sydney major redevelopment. For all projects, we will remain focused on minimizing capital and risk, and Chatswood Chase is but one example of our heightened concentration on this and the challenging environment created by COVID-19. Now to Slide 23. Here we see an artist's impression of the proposed Middle Road commercial office tower at Chadstone. This is one of 5 projects for which a DA has now been obtained. The other projects, which include a new fresh food precinct and an additional 1,400 car spaces. The timing of each project very much depends on demand and any ongoing impacts of COVID-19. Moving now to Slide 24. And what you'll see here is an artist's impression of our proposed new town square at Box Hill, with the office and residential building in the background. In May 2020, Vicinity announced its 10-year vision for this 5.5-hectare site located in the east of Melbourne and which is capable of realizing up to 260,000 square meters of mixed-use area. Box Hill is one of Melbourne's busiest rail and bus transport hubs with health and education facilities nearby. 3 DAs have been lodged with Council, including a 25-level, 42,000-square-meter office building; and a 48-level building, which encompasses 360 apartments as well as 10,000 square meters of office space. Whilst the project will be demand-led, it's important we have the relevant approvals in place and that we're ready to meet that demand at the relevant time. Moving now to Slide 25. Here we show an artist's impression of one of the 2 office towers planned for the 11-hectare Bankstown site in Sydney that we jointly owned with Challenger. The master plan for this major mixed-use development was publicly released in July and looks to take advantage of nearby bus interchange, the future T3 Sydney Metro station and Western Sydney University's new campus. All 3 of these major infrastructure hubs are within 100 meters of the site and symbolize the growth planned for Bankstown. Our master plan includes the potential for up to 330,000 square meters of new area across 16 buildings to be constructed over the next 30 years. Each stage of this major project will, like Box Hill, be demand-led. But importantly, the first 5 development applications have been lodged with Council and include 2 office towers, a new Eat Street or café and restaurant precinct and basement car parking for 320 cars. So in summary, while we see a tremendous amount of development potential across the Vicinity portfolio, the capital outlay in the short term will be very measured. That means fewer projects going into construction in the short term, whilst at the same time ensuring that our planned projects are well positioned to advance once this pandemic eventually subsides. I'll now hand over to Justin.

Thank you, Carolyn, and turning now to Slide 27, retail sector trends. As highlighted by the team, the second half has seen an acceleration of existing trends and the emergence of new challenges and opportunities. We've been adapting to these with COVID only highlighting the importance of being more agile, digital and data-driven. Consumers are still spending. The ABS recorded 17% growth in May. And as retailers and consumers have been able to reopen, trade in our centers has improved quickly. Outside of Victoria and CBDs, most states, and particularly our suburban centers, are largely back to pre-COVID levels of center visitation. And whilst our CBD centers have been impacted by government restrictions, work-from-home and a decline in tourism, we look forward to domestic borders reopening. A Citigroup report estimated that net tourism expenditure domestically could be $9 billion favorable to the economy. Much has been made about -- recently about online sales and its future growth. The transition to increased levels of omnichannel retail is important to our business in the coming years as it will guide things like center design, continued refinement of retail mix and the provision of new digital services such as click-and-collect. COVID has accelerated online sales growth. However, we witnessed firsthand that as physical stores reopened, online sales fell sharply. Physical in-store and omnichannel retailers still account for approximately 90% of all sales. Our strategy and data team recently completed important research with Quantium to understand this transition to omnichannel and the value of physical space. The work clearly demonstrated that the closer a retailer is located to the shopper, the greater the market share across all sales channels. It showed a 50% uplift in market share for a retailer whose physical store is located 10 kilometers from a customer and a 100% uplift when a store is located 3 kilometers from a customer. This is significant as it empirically proved the underlying value of physical space, the value of physical store networks and the value that physical stores play in the growth of a retailer's online business. Moving now to Slide 28. As I've just touched on, we have a strong in-house data science capability. Prior to COVID-19, we're advancing developing a bespoke in-house retailer recommendation tool to optimize things such as retail mix, reduce unwanted churn and provide more accurate sales forecasting. We've also built a retail insights platform to drive retailer engagement and sales performance. We've collaborated with several retail groups on the project who are keen to partner with us and, in some cases, share their data on joint initiatives. During COVID-19, though, we were able to pivot and use some of these IP to produce immediate business value. For example, by leveraging our Wi-Fi network and live customer heat maps, we were able to provide real-time center density analysis to monitor social distancing and manage customer hotspots via automated alerts to our center teams. It also helped inform revised trading hours that met customer demand but also reduced operational costs. We've also regularly pulse checked a sample of our customer database that has approximately 1 million subscribers to assess their changing sentiment towards shopping during COVID. Their feedback has helped guide and produce more targeted customer communications on a state-by-state basis. We believe that our data capability and the ability of our teams to use and apply those insights will be a source of advantage for Vicinity moving forward. On to Slide 29. The impact on center patronage due to COVID has had a material impact on our ancillary income business, down 11.8% for the year. Despite solid growth of 6% in the first half, income declined by almost 31% in the second 6 months. The biggest driver of this was a decline in CML, down 49%; and car parking, down 54%, both of which have now started to commence their recovery as restrictions have eased across most jurisdictions. Victoria had also improved quickly pre-Stage 4. Despite the impact on car park, we've continued providing a foundation for future growth and improved on-site car park management. Carlingford Court paid car parking went live last October. We gained DA approval to paid parking at Bankstown in March, and we brought the management of the QueensPlaza car park in-house in June. Our expanded solar program provided solid growth with income growing by 53% for the second half, and we completed 8 solar capital projects for the year. Our media business, with digital screen networks of 148, continues to grow with 29 screens delivered during the year. This network will grow further in FY '21, including the recent DA approval of 2 large mega screens at DFO South Wharf that we've been pursuing for a number of years. We also delivered a new on-device advertising platform last September that proved popular with clients when combined with digital screen campaigns. Finally, we've recently launched a fully digital click-and-collect service known as Parcel Concierge. This service went live just under 2 weeks ago at Chadstone and is being expanded across another 5 centers in the coming weeks. Retailers have shown strong interest in the product, and we expect a solid sign-up and expansion moving ahead. So despite the volatility of the last 6 months, we're seeing recovery and several new opportunities to drive both income and cost savings. I look forward to updating you on these in the coming months. And I'll now hand you back to Grant.

Thank you, Justin. Turning to Slide 31. And in summary, despite unprecedented conditions due to the COVID-19 pandemic, we remain confident in Vicinity's future. In the near term, as we have seen in our non-Victorian and non-New South Wales assets, when COVID recedes, Australians are returning to shopping centers. And in these markets where normal consumption patterns have returned, our high-quality and well-located assets have quickly reasserted their primacy in their respective catchment areas. There is a dual rationale for this: First, they continue to play an essential role as community hubs, providing both essential and discretionary retail. And secondly, in many cases, they also operate as commerce and transport hubs with the additional benefit of offering considerable mixed-use potential. We have highly experienced management teams across our shopping centers and state offices and market-leading capabilities in asset management and data analytics. We're also very proud to say that Vicinity remains one of the most sustainable retail REITs globally. Moving to Slide 32. And to reiterate, while the pandemic has been challenging for our nation, for our industry and, indeed, for our company, Vicinity is nevertheless very well-placed to respond. Our strong balance sheet and high level of liquidity position us well for the future. In the current environment, we will continue to deliver on our strategy in a prudent and measured way. While the health and safety of our consumers, our retailers and the communities in which we operate will always remain our #1 priority, we nevertheless remain committed to our long-term focus of creating market-leading destinations, realizing our retail-led mixed-use opportunities and leveraging third-party capital. At the present time, we cannot provide earnings and distribution guidance for FY '21 as it would not be reliable in the current circumstances. However, we will continue to monitor trading conditions and provide further updates as appropriate. I'll now open up the lines for any questions. And we would appreciate it if you could limit yourself to a maximum of 2 questions to allow time for others. Thank you very much.

[Operator Instructions] Your first question comes from Stuart McLean from Macquarie.

My first question is just on the leasing front. So I think that it was mentioned that non-SME deals, a percentage of rent or a percentage of sales, whichever one is higher. How long are these agreements in place for? I'm particularly interested in assets like CBD assets where the rental collection -- or sorry, I should say, footfall is likely to be significantly lower than the normal levels for a longer period of time. So just wondering about CBD assets and leasing there.

Sorry, Stuart, I sort of missed part of that question. It's Peter here. Is it SME deals related to CBD assets? Is that -- were the fundamentals of your question?

No, the fundamental question is how you're dealing with CBD assets. And what's the length of that percentage of sales agreement? Is that 6 months, is it 12 months, given that footfall is likely to be subdued?

Yes. So fundamentally, the length of the agreements at the moment are around about 5 months is the duration of the agreements, on average, between SMEs and non-SMEs. On our CBD assets, the length is longer than on our Core portfolio or, for example, on Chadstone. And that's taken into consideration, obviously, the lack of return of commercial office workers and potentially tourism at this point of view. Fundamentally, the majority of assistance that we're providing to our retailer network is assistance that expires at the end of this calendar year with the exception of the CBD assets.

Okay. My second question is on Slide 10, the $30 million of billings that's been recognized in the P&L. Just wondering what that pertains to. Is that COVID-related? Is that normal course of business?

It's Nick here. I'll take that. Look, I think it's probably not the right way to think about it. I think probably the better way to think about it is billings that we feel confident that we'll be able to collect. So it's the residual amount after provisioning and waivers.

Okay. Okay. Understand. And then just on the cash flow statement. Seems operating cash flow is about $50 million short of FFO. I imagine that $30 million makes up the majority of it. Just what would that other $20 million be? Is that lack of distributions from equity accounting investments? Or what's the delta there?

So there's really 2 components. You need to take into account the equity-accounted properties as well that has an impact that's around $14 million, and then the residual gap is principally debtors and payment of the FY '19 STI.

Your next question comes from Grant McCasker from UBS.

Just first question, just on the occupancy, roughly down 100 basis points. Will you be able to talk through where you've seen that occupancy change? And then also, were you able to do any sort of new long-term deals over the final quarter of the year? And talk through sort of the -- are you sort of able to mention any lease terms, a change in lease terms you're seeing?

Grant, I'll tackle all 3. It's Peter. The occupancy is not specific to any centers. It's just reduced occupancy across all centers, really, in the portfolio. There wasn't any sort of centers in particular in -- and we have seen that obviously increase as a result of the pandemic and retailers trying to manage their way through that process. In terms of the -- your second question -- third question on lease structures. Look, at this point in time, we don't see any significant changes to lease structures immediately. What we are seeing is a fair bit of heightened interest, obviously, in terms of anniversary increases, which we obviously have under review. In terms of longer-term leases struck over the last quarter of this year, it's probably fair enough to say that retailers under that much attention in terms of physical retail, that we haven't struck a huge amount of longer-term leases in the back half of this year for nonessential retailers. That said, and as I commented through the presentation, one of our focus is, particularly for non-SME retailers in good faith negotiation, has been to ensure that providing assistance for this year that we secure our cash flows, particularly through calendar year '21. At this point in time, we've agreed 277 of those deals, and we're fairly close to a further 200 of those deals, which goes a long way to securing that cash flow.

Okay. Excellent. And then maybe just turning to the balance sheet. So you've got a very robust balance sheet at this point in time. How do we think about you managing the balance sheet going forward? And I guess what I'm thinking about is historically, you essentially paid out a distribution in line with free cash flow and debt-funded development CapEx or you hope to sell some assets to fund that. Is that how we should think about it going forward? Or are you able to make some sort of broader comments about how you expect to sort of manage the balance sheet on a forward-looking basis?

Grant. I'll pick that. It's Grant Kelley. I'll pick that up initially, and then I'll ask Nick to talk about distributions specifically. But the strategy, as we announced during the equity raise, was very much to retain what I think Vicinity has become known for in recent years, which is low gearing and a very strong liquidity position. The COVID-19 pandemic, I think, has reinforced in some sense, that, that strategy was prescient. And so we remain very committed to that. It provides us enormous resilience navigating what is obviously a highly uncertain environment. On distributions, in particular, Nick, do you want to pick that one up?

Sure. Look, maybe just to make some macro comment, that our policies and our strategy really has not changed. I mean we're obviously focused on being very prudent relating to all sorts of expenditure, operating capital development and ultimately as well distributions as our -- the final distribution for 2020 showed. Our policy relating to distributions, again, has not changed at this point. To reiterate what that is, 95% to 100% of AFFO will tend to be paid out. But clearly, we're in unusual times and particularly so with the lockdown in Victoria affecting nearly half of our assets and earnings. So we'll see how the year evolves, but the Board has not offered guidance around distributions at this point, as Grant indicated.

So just checking. So -- but how do you fund development CapEx going forward? Is it debt funded? Or is it asset sales?

Look, in terms of the approach to development funding, I think we'll need to assess that again as things evolve, as I think both Grant and Peter have touched on and Carolyn as well. Our focus in the near term as it relates to developments has been on the planning aspects and not accelerating significant aspects of the development program in the near term. So we have flexibility. We have flexibility both on the balance sheet side, we also have flexibility in terms of potential asset sales, albeit there are no asset sales targets that we have in mind right now. But the bow wave of significant CapEx is obviously delayed somewhat, so it's not a sort of a pressing opportunity to land on that strategy at this time.

Your next question comes from Richard Jones from JPMorgan.

Just a question for Peter just in relation to Slide 19. You're calling out 59% of leases either agreed in principle on a short-term basis or no variation. Can you break out the split between those 2? And just to -- can you also clarify the comments you made about the short-term variations? What -- I think you said part of it's referenced to turnover and part of it was referenced to something else. I just missed that.

Yes. Sure, no problem. On your first question, just in terms of the 59% that are basically agreed in principle or unimpacted, the easiest way to think about it, 16% of our lease profile is unimpacted, which means they haven't had a material impact in sales and trading reasonably profitably. Essentially, they are the essential retailers. That represents about 25% of the income, of our gross leasing income. In terms of the remainder, then we have 19% that are fully agreed and documented deals, and 24% that are just subject to the documentation being executed. So that gets us to the 59% of agreed deals. In terms of -- for the non-SME retailers that are not subject to the commercial code of conduct, the majority of our deal-making activity of those retailers to provide short-term assistance to make sure that they're healthy on the other side is a mechanism of rental that is on a monthly basis during this period, where they pay the higher of a percentage of the prior base rental or a percentage of sales. And that typically ramps up from April over the period of this year, and there's a mechanism that's set in terms of when that expires. So I hope that makes sense, but that's how the mechanism works.

Sorry, just to clarify. So when you say it ramps up from April, so are you saying the percentage of sales ramps up?

No, the percentage -- typically, a majority of those agreements, the percentage of the gross -- of the base rent payable ramps up. We're subject to Victoria, April being the most impacted month, we'd start on a lower percentage of base rental. And then as sales improve and more confidence comes into the marketplace, there's a predetermined ramp-up of that base rent.

And would a historic occupancy cost be the kind of type of percentage of sales that you'd be expecting there?

Yes. We're typically using the -- we're typically using December 2019 occupancy costs pre-COVID as the trigger to set the -- whether that is -- to set that percentage of sales measure.

Okay. And just one other question, Peter. Just retailers, are you seeing many retailers using the disruption to try and renegotiate their lease structure and, I guess, in particular the base rent that they're paying?

Look, I have to say it's in the vast minority. Majority -- the vast majority of retailers that we're dealing with, and these are daily discussions with them, we are dealing with the existing structure of the lease, and we are not resetting any of the lease parameters of existing leases in place.

Your next question comes from Simon Chan from Morgan Stanley.

My first question, what percentage of your retailers ex Victoria are actually open and trading at the moment? I guess I'm referring to specialty tenants.

I can jump in and answer that one, Simon. 65% of tenants at the moment are open across the portfolio. Obviously, more of the closed retailers are in Melbourne. So that's where we sit at the moment.

Yes. But ex Victoria, would you say you're about 90%, 80%, 95%?

Ex Victoria, it is up around 80%. Most -- it's actually a little bit higher than that. Most states now, with the ease of restrictions, there's only a small number in each state. I think 1,660 tenants are closed. And yes, around about 90% of those are Vic.

Yes. I guess that's -- this gets me to the gist of my question then, Justin. I mean if -- I mean as of Victoria, things are kind of going back to normal. If you are not open for business by now, is there a chance that you never will and meaning your occupancy might be 98.5% today, but effectively, it's probably closer to 90%? Like is my thinking wrong there?

I'll pass over to Peter to give his view, but some of the retailers that haven't opened outside of Victoria are more probably restricted in the numbers that they can get into their stores. So it might not be viable for them to trade at the moment, but that's in the minority. Peter, do you want to touch on any more?

Yes. Simon, probably the difference is we still have a lower percentage open in our CBD assets, particularly in Brisbane and Sydney, as a result of traffic declines. There's some that are not open due to government restrictions still. We -- fundamentally, we are provisioning for higher vacancy, particularly over the next couple of years. We are provisioning for a higher percentage, maybe to preempt the next question on voluntary administrations as well. But the differential between the 2 numbers, which Justin was referring to, are primarily resulting from openings in CBD assets. In terms of anything outside of CBDs, in terms of store openings, traffic returning, we're in excess of 95%.

All right. That's great. My second question, just in relation to your development. I think it's a very good discipline in Carolyn's presentation about you pushing back developments at this point in time. But I was just wondering, how do you guys balance that with assets like Galleria, Bankstown Central? And you mentioned Chatswood Chase. In prior presses, you guys talked about putting leases in a holdover, short-term leases, et cetera, in those big malls, big redevelopments. Like is there a risk that this is a "get out of jail" card for tenants? And a lot of tenants in those malls are on short-term leases, so we could be facing higher vacancy across those key assets.

It's Carolyn, Simon. I mean I think the key is us having certainty ourselves about what's happening in the next 12 to 24 months. As you heard in the presentation, there's a lot of focus going into planning projects so that they are ready to commence in a fully derisked fashion when we get to a point that we want to do that. And in the meantime, as you would expect, and Peter can talk further to it, the teams on the ground doing the leasing and management of those assets are very much concentrated on a BAU leasing and asset management approach to how they're dealing with those retailers.

Yes. Can I get some comments from Peter on this? Yes, because I guess my question more probably relates to your department, in that you're dealing with several big assets with front-loaded lease expiries.

Yes, Simon. I mean obviously, the -- let's talk about Chatswood more specifically. We had obviously geared Chatswood up for a commencement of the development in May of this year, which was approved subject to condition precedents. When you're gearing up a development of that size, you typically are timing out your leases to expire at that particular point in time. So obviously, through the COVID assistance negotiations that we've been doing with a lot of those retailers, we've been extending those leases for a short-term period of time, whilst Carolyn and the broader team are reviewing the phased delivery of Chatswood and when that might be relevant to relook at in the marketplace. Similar sort of situation on Galleria. I mean we can talk in more detail when we catch up. But obviously, focus on major agreements being renewed have occurred there. And similar with Bankstown, although we haven't gone to market in terms of a lot of agreements we're doing in Bankstown. So I understand your question. It is absolutely a valid question, and we do have some exposure as a result of it, which you'll see in holdovers. But that's what we're working through, and we hope to be in a position to commence those developments when the market is appropriate, and we want to make sure that we're holding flexibility in our lease structures to do that.

And probably the only thing I would add, Simon, would be for the vast majority of assets where we have development plans contemplated, it's not the whole asset that's actually going into development. It's a part of the asset that we've ring-fenced to say this is the bit that we are going to work on next, and that's the spot where we're concentrating, both on the leasing expiry, as Peter has described, and also what work we're going to do. But for the balance of very big assets like Bankstown, they're trading and being treated as normal assets except for the bit that we say is the first stage of that redevelopment process.

Your next question comes from James Druce from CLSA.

Yes. Firstly, can you just elaborate perhaps on some of the discussions that you had with the government on the extension of the tenant code of conduct and the prospects for extension, please?

Yes, sure, James. So the strategy there, I think, has been to really discuss with governments, both at the state and federal level, most principally the fact that the retail sector is bearing a very high burden for Australia during this current lockdown. And it's a burden that we willingly undertook for the 6 months of the code, and it's one that, as Nick highlighted, has led to an estimated $109 million in terms of actual rental waivers out of a total of $169 million total rent relief. The discussions with government have focused probably on 2 dimensions, and this is due to, I think, a recognition on all sides that in April, we didn't have the benefit of lessons learned as we went into the pandemic. It was a totally new set of circumstances. And secondarily, it was a decision -- or rather, a series of decisions that were taken exceptionally quickly under enormous pressure. But probably the 2 key takeaways are, first and foremost, we need to ensure that we provide rental relief to those most in need. And one of the things that I think can be contemplated is arguably a reduction in the definition of what a small-medium enterprise truly is. The prior definition was $50 million. I think it's arguable that, that is maybe too broad and that a number lower than that should be contemplated. And secondarily, I think we need to be more targeted by sector. Sectors, in particular, which have done well during the pandemic, need to perhaps be carved out. And those which have perhaps struggled more than was initially thought may require more focused attention. I want to come back to something that Peter expressed, I think, very well earlier, which is our objective in all of this is probably twofold: First, it's obviously to play our part as a good corporate citizen and ensure that our retailers survive this pandemic in good shape. And then on the other side, we've got relationships, which is, as Peter said, are in fact stronger than they perhaps were coming in. But secondarily, we do have to keep an eye on our own position, obviously, on our own cash flows. While our gearing ratios are low and our covenant ratios, as Nick highlighted, are comfortable, we want to ensure that we don't get to a point where -- because we've perhaps been misdirecting rental relief, we put our own company at risk and under pressure. Peter or Nick, if you want to add anything to that -- or Justin, please feel free.

No, I think you covered it really well, Grant. I think the only thing is around time frame. The discussions with government has been very fruitful in terms of we've shown how quickly trade rebounds when restrictions ease. So a 6-month time frame, which is the initial one, as Grant said, was an early call. But anything moving forward, particularly moving into Christmas, it should be much shorter.

Okay. That makes sense. Can we just dig into some of those comments? Just the rationale on why the size is sort of too big or why that should be reduced. And then how would that -- if you were to be more targeted by sector, how would that kind of work? Would you just have a list, whether you're in or out?

Yes, sure. Justin, do you want to pick up those questions from James? Thanks.

Yes. Yes, sure, James. I think some of the categories that Grant was referring to, like cafés, restaurants, travel, so you could have small travel agencies or larger travel agencies. So we pick out the ones that need the help the most. And I think that was the key part of the code, is it's to help those that genuinely need our support the most. We've spent a lot of money, and the Shopping Centre Council had $1.6 billion in terms of rental waivers and deferments that we've provided. It's significant. In order to come out the other end in recovery and invest in developments, et cetera, we need to preserve the cash and help those that need it the most. So those categories that have been the most impacted and shut down by government are probably the ones we're talking about the most.

Okay. And then just my second question around the EUR 500 million you've done. Can you just talk to the pricing of that and compare that to the pricing you would expect to see today?

Yes. Probably...

That's a question -- sorry, Nick, I think you're already on to that. Please go ahead, sorry.

Sorry, GK. Look, the -- probably the more helpful way to describe pricing in the current market is maybe a little bit more holistically, and that is when we look at pricing across a range of maturities or tenants, we've seen an uplift of probably something like 1.5 to 2x pricing that we saw on a pre-COVID basis. So if we looked at a 10-year DCM issuance now, you're probably looking at an all-in fixed cost of around 3.75%, something in that sort of neighborhood. So obviously, base rates have come down significantly, but credit costs and so forth have increased.

Okay. So the message there is, what, it's flat for all-in costs?

Look, it's probably -- yes. From an all-in standpoint, it's probably down 50 points or thereabouts.

Your next question comes from Adrian Dark from Citi.

My first question is probably for Peter. The focus on market-leading destination seems to be unchanged. But I'm interested in your take on whether the assets that fit that bill are changing at all, either in terms of the composition of the portfolio or the mix within centers that might need to shift to continue to fit that bill.

Adrian, to be honest, my personal point of view, which obviously drives a lot of the mix, is no. The coronavirus period has obviously taught us some lessons around social distancing, et cetera. But I think the strength of physical retail will still be on more experiential elements, which will be around large-scale food and beverage, increased health and wellness, large-scale leisure and entertainment offers to diversify shopping centers to become true market destinations. That said, one thing that this period has -- that we are extending some thinking on is really that shop local scenario. And the huge reinforcing of the importance of our neighborhood Core centers around essential shopping, and again, market destinations for them means daily services, whether they're banking, postal, fresh food, supermarket, pharmacy, they remain very critical and have shown through this period of time how valuable they are for local communities. So at this stage, having a diversified portfolio is very helpful for us. And then obviously, the other one, which is part of the University Hill acquisition, is we have a market-leading premium DFO -- premium outlet portfolio. In these periods of time, particularly as -- arguably entering into a -- not arguably, entering into a recessionary environment, the DFOs have and will continue to trade particularly well through those type of environments. So I think across the 3 different classifications of properties in our portfolio, I think where we don't necessarily think there's any changes in composition of mix in any of them beyond what we were doing in strategy in the past. It's just getting through this short-term pandemic period.

And then my second question is around disposals. I think that's something that you've been in discussions with potential counterparties on since the equity raising. And are you able to make any comments on appetite from the market, please?

Sure. Adrian, I'll pick that up. I mean first and foremost, just to touch on the process, we took a strategic decision to raise equity, in large part because our view was that asset valuations were coming down and that assets were unlikely to be well bid. And we, therefore, took a view that we didn't want to be forcing assets into a market. The second aspect of that is post the equity raise, we're obviously no longer a motivated seller. I think as Nick touched on, we will see transaction evidence in all probability in the second half of the year, perhaps some groups that didn't take out the capital management mechanisms or levers in the last several months. So I think it's too early to call. But obviously, from our perspective, the guidance we've given on our -- excuse me, the valuations we've announced on our June 30 balance date were 11.5% down. So that obviously indicates -- I think it's fairly sobering reflection on where retail is currently appraised. But thank you for the question.

There are no further questions at this time. I'll now hand back to Mr. Kelley for closing remarks.

Well, thank you very much, everyone, for joining us today. That concludes our formal presentation. On behalf of the entire Vicinity family, I just wanted to wish you and your families all the very best in health and well-being, which is obviously everyone's #1 priority at the present time. And we look forward to catching up with many of you over the coming weeks, obviously, in virtual contact. But nonetheless, it would be good to see many of you on Zoom and Webex calls in the near future. Thank you once again, and have a great day. Thank you.

That does conclude our conference for today. Thank you for participating. You may now disconnect.