Vicinity Centres (VCX) Earnings Call Transcript & Summary

Go ahead.

Thank you, Vlad, and good morning, ladies and gentlemen. My name is Trevor Gerber, and I am the Chairman of Vicinity Centres. On behalf of my fellow directors, it is my pleasure to welcome you to the 2020 Annual General Meeting of Vicinity Limited and Meeting of the Unitholders of Vicinity Centres Trust, which I will refer to together as the meeting. Firstly, I would like to acknowledge the traditional custodians of the various lands that we meet on today around the country and pay my respects to their elders, past and present. I recognize and respect their cultural heritage, beliefs and relationship with the land, which continue to be important to the traditional custodians living today. It is just past 11 a.m., and as there is a quorum, I declare the meeting open. The Notice of Meeting was released to the ASX and emailed to security holders on the 9th of October, 2020. It is also available on Vicinity's website. In light of restrictions associated with COVID-19 and Vicinity's commitment to health and safety, I regret that your Board and I are not able to meet with you in person today as we are holding this meeting virtually. Today, Vicinity's CEO and Managing Director, Grant Kelley, and I will address security holders. And you will also have the ability to vote and ask questions by the webcast platform we are using today. I will now formally open the poll on all resolutions. There is a virtual meeting online guide available on this web portal if you need further assistance. The guide outlines instructions on how to vote or ask questions during the meeting. If you have not done so already, we encourage you to submit your votes or any questions you may have early in the meeting to ensure these are received. We will address questions received during the discussion on the appropriate items of business. Questions sent during the webcast will be moderated to avoid repetition. And in the interest of time, lengthy questions may be summarized. Thank you to those security holders who have submitted questions prior to the meeting. We will address these during question time, if they're not already addressed during the presentations. Should we experience technical issues, which result in the meeting being adjourned prematurely, we will resume the meeting this afternoon at 3:00 p.m. Eastern time. I would like to formally thank security holders participating in today's virtual meeting and thank those security holders who submitted their votes ahead of the meeting. Before we go on, let me introduce my fellow directors to you. Joining me in Sydney today, the CEO and Managing Director, Grant Kelley. Other nonexecutive directors on your Board joining us for today's webcast include Clive Appleton; Tim Hammon; Peter Kahan, who stands for reelection today; Janette Kendall; Karen Penrose, who also stands for reelection today; and David Thurin. Also joining us today is Rohan Abeyewardene, our Group Company Secretary; Alison Parker and Michael Collins, representing Vicinity's external auditor, Ernst & Young; and Penny Berger, our Head of Investor Relations, who will relay your questions to me today. The attending Officer for today's meeting is Sachin Tokhi from Link Market Services, our security registry. Today, I would like to discuss, number one, Vicinity's performance during FY '20, including our response to COVID 19; number two, Vicinity's strategy, which remains unchanged; and three, our active sustainable business practices. I will then ask Grant to address you. After Grant's address, we will move on to the formal business of the meeting, including questions and discussion. Turning now to some key highlights over the past year. Despite the significant impact of COVID-19, Vicinity continued to deliver on strategy throughout the 2020 financial year. The first half saw us build on the success of portfolio enhancement over prior years, with operational and financial performance continuing to improve. We divested 3 noncore assets at close to their June '19 book values. We added to our leading DFO portfolio, acquiring 50% of Uni Hill Factory outlets in Melbourne, completed development projects at The Glen and Roselands, and we opened Vicinity's first hotel at Chadstone. During the year, we negotiated $3.5 billion of new or extended debt facilities, including launching vicinity's inaugural European Bond Program with a EUR 500 million 10-year issue. But as you know, like many businesses in Australia, we have been materially impacted by COVID-19, and I'm truly proud of Vicinity's proactive response. As the pandemic took hold across Australia, our shopping center teams were quick to adhere to government restrictions and the advice of health authorities with a primary focus on the health, safety and well-being of all Centre stakeholders. We're actively engaged with state and federal governments, and we're actively involved with the Shopping Centre Council of Australia to shape our industry's response to the COVID-19 crisis. With social distancing and mandated stores closures significantly disrupting retail, we have supported many of our retailers in the form of rent waivers and deferrals to help ensure their long-term success. We implemented strict cost controls, reducing or deferring all noncritical operational and capital expenditure. Directors' fees and Executive Committee salaries were reduced by 20% for the 3 months to June 2020. We canceled Vicinity's FY '20 short-term incentive payment. And from April 2020, we temporarily stood down, on a part or full-time basis, many of our team members. We are fortunate that we have been able to reinstate many of those team members as COVID-19 dissipated. Regrettably, however, following structural changes implemented across our organization, we have now had to undertake a number of redundancies. In order to protect our financial position and to lower the risk profile, we made the difficult decision not to pay a final distribution for the 6-month period ended June 2020, and acted decisively to raise $1.2 billion in equity through an institutional placement and security purchase plan. As a result, Vicinity is in a strong position to recover from the COVID-19 pandemic. Vicinity now has a fortified balance sheet with significant liquidity available. Our gearing of 25.5% is at the lower end of our 25% to 35% target range, and we have retained our strong investment-grade credit ratings. Our quality portfolio includes Australia's leading retail destination, Chadstone, the country's best CBD and DFO portfolios and several metropolitan centers well-located on transport hubs with significant retail and mixed-use development potential. And we are future focused. We are advancing our business with the use of technology and rich data and analytics capabilities. We understand that thriving retailers will need physical retail stores to enhance their multi or omnichannel aspirations and we are focused on helping them to achieve their goals in this space. The health and safety of our team members, our retailers and our visitors remain our highest priority, and we have COVID safe plans across all of our assets, where we aim to not only adhere to, but to exceed government standards for safe public spaces. Despite the challenges the COVID-19 pandemic has presented in 2020, Vicinity remains well positioned for future growth when economic conditions have stabilized. Our strategy remains unchanged. We will continue to focus on creating market-leading destinations, including our premium CBD centers, a market-leading portfolio of 7 DFOs and Australia's #1 destination, Chadstone. We will progress in our mixed-use development opportunities, and over the longer term, expand our funds management platform. This strategy is underpinned by Vicinity's high-quality people and our company values, which are: we always collaborate, we embrace difference, and we imagine a better way. Vicinity continues to be recognized as one of the most sustainable retail REITs globally. Our strong asset sustainability programs have helped us to increase our portfolio average NABERS Energy Rating to 4.6 stars, up from 3.9 stars last year. Earlier this year, Vicinity was included in CDP's Global 2019 Climate A-List, which recognizes leading action on climate change. We are one of a small number of companies globally, and 1 of only 4 listed companies in Australia to achieve this ranking. Other significant sustainability achievements this year include a 17% reduction in carbon intensity, with Vicinity well on the road to achieving our near zero carbon emissions target by 2030. Solar panels were installed at 7 more shopping centers with installations now across 17 Vicinity assets. A review of our procurement processes and the development of a plan to reduce ESG risks in our supply chain, with a focus on Modern Slavery. And in financial year 2020, we recycled around half of our waste from centers. Sustainability is a key driver to value creation over the long term and we are determined to remain a sustainability leader amongst our peers globally. Before I hand over to Grant, he will provide with a brief update on the business, I would like to say how proud I am of everyone at Vicinity. 2020 has indeed been a challenging year, and I'm impressed with the efforts undertaken to address the many impacts of the pandemic from the Centre teams who mobilized quickly to maintain a COVID-safe environment for our customers and retailers, right through to our executive team who have actively engaged with industry groups and government. Everyone at Vicinity has made an important contribution. We recognize the critical role our centers play in providing essential services, employment and our retailers' livelihoods. And for these reasons, we have worked hard to keep them open. I would like to offer my condolences to the family of Wai Tang, a valued Vicinity Director passed away during the year. Wai was a beautiful person and well-respected contributor to the Board. I know a number of you on today's webcast would have had the pleasure and privilege of meeting Wai in person over the years at our AGMs, and will be missing her also. I offer my thanks to Peter Hay, who retired as Chairman of Vicinity in November '19. Peter has been instrumental in Vicinity's success, chairing the company since the merger in 2015, and prior to that, was Chair of one of the founding companies, Novion Property Group. Finally, I would like to say how pleased and privileged I am to be working with this exceptional Board and management team. We are determined to capitalize on the ever-evolving retail environment and provide attractive long-term value and sustainable returns to our securityholders. Thank you. I will now hand over to you, Grant.

Thank you, Chairman, and good morning, everyone. And may I just reiterate the Chairman's regrets that we are unable to meet with security holders in person today. I'd like to commence by introducing Vicinity's executive team who have worked tirelessly this year to meet both the challenges of COVID-19 and also lay the groundwork for a rapid return to business once the pandemic subsides. They are Peter Huddle, our Chief Operating Officer; Nick Schiffer, our Chief Financial Officer; Carolyn Reynolds, Vicinity's General Counsel; Carolyn Viney, our Chief Development Officer; David Marcun, our Director of Finance Operations; Ian Padgham, our acting Chief Information Officer; Justin Mills, our Chief Strategy Officer; and Tanya Southey, our Chief People and Culture Officer. Vicinity has been proactive in addressing the challenges of COVID-19, with a strong focus on the health, safety and well-being of our tenants, consumers and most importantly, the communities in which we operate. The onset of COVID-19 earlier this year and evolving federal and state government directives, has required our teams to be agile and respond rapidly to changing requirements, which has included most especially, providing frequent, clear and tailored communications to each of our stakeholder groups to assist them in keeping safe, up-to-date and well informed. Many of our retailers have been challenged during the pandemic, and we have sought to assist them in several ways. Initiatives include negotiating support through short-term lease variations, while at the same time, securing future cash flows for Vicinity; creating a COVID-10 retailer handbook to assist retailers to trade safely; and launching Parcel Concierge, a fully digital and contactless click and collect service, initially in 11 Victorian centers, which we have now expanded to an additional 6 centers over the past week. Maintaining COVID-safe operations across our assets enabled us to remain open throughout the pandemic, allowing retailers to continue to operate their businesses safely, where permitted to do so under government restrictions. And of course, continuing to provide our customers with access to essential goods and services. Vicinity's performance for the 12 months to June 30, 2020 comprised 2 very different halves. Following a first half statutory net profit of $242.8 million, the full year result was a net loss of $1.8 billion. This was primarily due to net property revaluation declines of $1.7 billion, reflecting, in large part, the impact of COVID-19 and, of course, also the evolving retail landscape. FFO per security of $0.137 was down 24.1%, with the second half of the year significantly impacted by a reduction in net property income due to provisions made for the rental waivers, which we expected to provide due to COVID-19 impacted tenants and rent billings, which we did not expect to receive. As the Chairman mentioned, following a distribution per security of $0.077 for the first half, the Board determined that no distribution would be paid for the second half due to the uncertain impacts of COVID-19. Gearing reduced to 25.5% at June 30, 2020, well within our target range of 25% to 35%. This reflects the impact of the June 2020 $1.2 billion equity raise and positions the balance sheet well to meet the challenges of COVID-19. Over the past 3 months, 3 macro trends impacting Australian retail have become clear. First, the Victorian lockdowns have had a significant effect. Until recently, in Melbourne, only essential retailers were permitted to trade under the Stage 4 restrictions, which commenced on 6th of August. For Vicinity, this resulted in 83% of our Victorian stores being closed during that period. Second, CBD locations nationally continue to be impacted by many city employees working from home and, of course, by travel restrictions. And third, outside the Victorian and CBD markets, and where COVID-19 concerns are lower, customer visitation has recovered to levels which approximate, and in some cases, exceed the corresponding period of the prior year. Weekly visitation, excluding Victorian and CBD centers, has consistently averaged between 90% and 100% of the prior year levels since June this year. This demonstrates that once COVID-19 concerns are reduced sufficiently, customers are indeed returning to their preferred shopping centers. Looking forward, and provided locally acquired COVID-19 case numbers remain low, the outlook for center visitation is, we believe, positive. Victoria will, we hope, continue to rebound with the further easing of government restrictions. Domestically, Australian travel restrictions are progressively being lifted and city workers are steadily returning to their CBD offices. However, the ultimate recovery of CBD traffic is likely to be more protracted until international travel returns to closer to the pre-COVID levels. These macro trends are reflected in Vicinity's sales and visitation numbers, as reported in our September 20 quarterly update, which was released last week. Total portfolio MAT to the 30th of September was down 15.2% on the prior year. However, excluding Victorian and CBD centers, portfolio MAT showed only a modest decline of 1.7%. This was supported by sales in the September 20 quarter being up 1.1% compared to a 14.7% fall in the June quarter, both of these, of course, versus the prior year levels. And this, we believe, reflects the impact of the broad first wave of the pandemic in Australia. Cash collected over the September quarter was 56% or 76%, when excluding our Victorian and CBD centers. Assuming no further waves of the pandemic, we expect cash collection rates to continue to improve, particularly following the reopening of our Melbourne retailers. As the Chairman mentioned earlier, as part of our ongoing effort to create greater efficiencies within Vicinity, we recently implemented structural changes across our organization. This has very regrettably resulted in a number of redundancies. And where possible, we have redeployed our impacted team members. We've also proactively reduced outgoings, delivering benefits to both Vicinity and our retailers. We are focused on progressing our development pipeline in a capital-light way. For example, by accelerating development applications and completing our live project at Ellenbrook Central. The Ellenbrook expansion included a new 6,600 square meter Kmart, which has traded strongly since opening in July 2020. As mentioned, during the period, we also lodged 5 Development Applications, or DAs, for Bankstown Central's master plan and received a number of approvals for Chadstone, Sunshine Marketplace and Bayside in Victoria. And I'll now provide further details on each of these. In July 2020, we received Council approval for 5 projects at Chadstone, including a new 9-story commercial office building and more than 1,400 additional car parks, along with upgrades to select retail and dining precincts. These projects are expected to be completed over a 5-year period. Vicinity also received Council approval for mixed-use plans at Sunshine Marketplace in September 2020. Over time, there is the potential to add office space, service departments, an entertainment dining precincts, and a diverse range also of residential accommodation to this 12-hectare site in Melbourne's rapidly growing western suburbs. At Bayside in Victoria, planning approval was received in October 2020 for a new 8-story 15,000 square meter commercial office building with a ground floor retail precinct and basement car park. We've also made significant progress with the planning of our major mixed-use developments. At Victoria Gardens in the Melbourne inner-city suburb of Richmond, the team has progressed planning substantially on a retail expansion and the possible addition of more than 800 apartments. Additionally, in May 2020, Vicinity announced its 10-year vision for a 5.5 hectare site in the heart of Box Hill, which could realize up to 260,000 square meters of mixed-use additions, including a new town center, a 25-level office tower and a 48-level residential tower. Together with our joint owners, Challenger, we also released plans in July 2020 for the 11-hectare Bankstown Central site in Bankstown's CBD. The master plan takes advantage of the major bus interchange, future T3 metro station and also the University of Western Sydney's new campus, and will realize up to 330,000 square meters of mixed-use additions. Both the Box Hill and Bankstown central mixed-use projects will be developed over time on a demand-led basis. Turning now to the Victorian reopenings. And as mentioned earlier, following 12 weeks of Stage 4 restrictions, it was pleasing to have most of our Melbourne retailers reopen from the 28th of October. Victorians were quick to return to shopping centers, displaying considerable pent-up demand. In the final week of lockdown, center visitation was only 39% of the prior year. However, in the week just gone, this has increased to 77% of the prior year. And so we remain confident that visitation numbers across our Victorian centers will continue to rebound just as we have observed in other markets in Australia, where the virus has largely been contained. To further enhance safety measures across our portfolio, we have utilized Vicinity's industry-leading data capabilities and new technologies. This includes implementing a new digital queuing system to manage capacity in retailers' stores and reduce congestion in common areas, utilizing Vicinity's heat mapping technology which monitors capacity and density, enabling center teams to respond in real-time to maintain effective social distancing, and adding real-time traffic data to our center websites to allow customers to better plan their shopping trips ahead of time. Vicinity also has COVID-safe asset plans across our portfolio, which adhere to and in many cases, exceed government requirements. In summary, we recognize that COVID-19 continues to be a risk to our communities and that retail conditions will continue to remain challenging. Our team, nevertheless, is focused on the ongoing recovery and committed to providing our customers with safe and enjoyable retail experiences. Through the extraordinary efforts of all Australians, and most recently, those in Victoria, we now have very low COVID numbers nationally. Center visitation across our portfolio continues to rebound. And we expect this trend to continue as travel restrictions lift, office workers gradually return to CBDs and general economic conditions improve. While there remain numerous short-term lease negotiations to finalize, we expect higher center visitation levels and the resulting sales, particularly across our Victorian assets to increase the rate at which these negotiations are completed. Vicinity is, indeed, well poised for recovery. Our gearing level is low and we have significant available liquidity. There are COVID-safe plans in place at all of our centers. We have leading technology and data analytics capabilities and a high-quality portfolio with a number of longer-term value creating mixed-use development opportunities. While we are not able to provide earnings guidance for FY '21 due to the current uncertain circumstances, Vicinity does intend to pay a distribution for the 6 months to 31 December, 2020. This assumes no material deterioration in existing conditions. In closing, may I say that it is, indeed, a tremendous privilege to lead such a hard-working and dedicated team, which has endured well despite very unusual and challenging circumstances, and which is dedicated to providing a high-quality service to our retail partners, our customers, our community and, most importantly, to you, our security holders. Thank you, and I will now hand you back to the Chairman.

And thank you, Grant, for the comprehensive update and great work from your team during this particularly challenging time. We will shortly move to the formal business of the meeting. Before we do, I would like to address some procedural points considering the format of this meeting being different to previous years. [Operator Instructions] I will now see if we have received any general business questions this morning via our AGM website portal.

Chairman, we have a question from [ Mary Parrett ]. The question is, how are the relationships with companies such as Premier and Mosaic, which refused to pay rent?

Thank you for the question, [ Mary ]. First of all, I think we have to acknowledge that COVID-19 has taken everybody by surprise and caused great difficulty externally in everyone's businesses, personal lives, everything else, completely unprecedented and completely unanticipated. I won't comment on individual retailer negotiations. I think that would be entirely inappropriate. I will, however, try to give you enough information that you can draw conclusions. And that is, we -- our retailers who were used to a certain level of business suddenly have this huge gaping hole open up in front of them. We had legally binding leases with each one of them, which obligated them to pay rent, which was predicated on a certain level of business, which suddenly disappeared or at least dissipated. And then it became back to human nature because had we relied on the legalities, we would have had retailers that couldn't cope with the payments. We would have collected a lot more money perhaps, but very short term, we wouldn't have retailers continuing into the future. So it was incumbent on us and our retailers to sit down together and to work out how to share this gaping hole that has opened up in front of all of us. And that required a certain amount of goodwill and good decent human behavior. So the compromise really was one, which ultimately had to make sense for both parties. And I should add, you've picked out 2 retailers. But our team, ably led by Peter Huddle, has renegotiated thousands of renegotiations. And we're talking around probably 4,000. That is a huge number. And most of those close to vast majority have been negotiated satisfactorily, where both parties think that they've done a reasonable deal and have predicated on a future healthy relationship. There are, however, a few retailers that haven't gone so well, but that's human nature and human behavior. So I think our vast majority of portfolio has reacted well, as has our team behaved with human goodwill.

Chairman, we have a further question from [ Mary Parrett ]. Has Vicinity's dividend policy changed this year?

So the short answer is no, [ Mary ], but I think I might understand why you're asking the question. First of all, if we changed our dividend policy, it would be something that we would make very public. So the fact that you've heard no change means it is unchanged, but fair question to ask me. So coming into COVID-19, obviously, cash became immensely critical and the outlook became very gray and uncertain. And it was incumbent on us to conserve cash at every angle. And regretfully, shareholder distributions is just one of those. So we took a decision in the circumstances to not pay out a 6-month ended June 2020 distribution in order to conserve cash like many other measures, including, of course, our capital raising. We have now today, reinforced and announced during Grant's address, as you may have heard, that we will restart our distribution, starting with the 6 months ended December 2020 payable in February. And we will, of course, at the appropriate time let you know how much that will be. But in terms of the underlying policy, the proportion of payout has not been changed.

Our next question is from [ Emma Bachelor ]. What steps has Vicinity taken to review their cleaning contracts to meet additional COVID cleaning requirements in line with the new COVID-safe plans to ensure that customers are kept safe and that cleaners are paid for the additional hours required to work to meet upgraded COVID-19 hygiene standards?

Thank you for that quite insightful question. I will hand over to Grant to respond to this one.

Thank you, Chair. And thank you very much for the question. We've actively worked, excuse me, with our cleaning contractors during COVID-19 on a range of dimensions. Most importantly, I think, has been to accelerate and deepen the cleaning activities in high-touch areas. So that's particularly included elevators, restrooms and food courts. I might also add as to what -- I think the question is highlighting is, when we do have either a risk or some concern that there may have been some form of COVID activity in a mall, we engage in deep cleaning activities, and that has occurred only a handful of times. But what we tend to do in those situations is close the area for 24 hours and do a thorough deep clean, which has made our centers incredibly safe for the general public. We've also transferred substantial activities from traditional nighttime cleaning to more visible daytime activities. And so our belief is that through these activities collectively, we've met our fundamental obligation to provide a clean and safe environment for our retailers and our customers. Thank you, Chair.

Thanks for that, Grant. Look, I would like to add something. You will have probably seen that we had a case in one of our retailers operating in one of our centers. And we did receive a response after the case had progressed and our response to the efforts. We did receive a response from the department handling the case. And I would like to read it verbatim, if I may. "Your fast and professional handling of this case is an example of industry best practice, which has resulted in this outbreak of COVID-19 being quickly contained with no further transmission." So we're quick on our feet. We see nothing as a higher priority than safety of all of our stakeholders. And I think the response from the state government fills our people with appropriate pride.

We have a further question from [ Emma Bachelor ] in relation to cleaning. Cleaning has been identified as one of the domestic sectors at highest risk of Modern Slavery. A risk acknowledged by Dexus in their Annual Reports. Axi, Cbus and other investors have identified the cleaning accountability framework as an effective compliance mechanism that is best placed to allow property owners to mitigate and remedy their Modern Slavery risk. I understand that Vicinity is a member of the framework and a certified One Shopping Center. Are their plans to certify more sites?

Thank you, Emma. I will, again, hand over to Grant on that one.

Thank you, Chairman. And Emma, thank you for the question. We have indeed publicly stated our support for Modern Slavery legislation, alongside the property sector, the ASX and our NGO peers in an open letter to the Prime Minister in September of 2018. We were actually a cornerstone partner in forming property industry, a combined approach with a register for suppliers. And the supplier platform is used to engage with our supply chain via a common Modern Slavery questionnaire. And this represents, we believe, the best practice approach. I would also add that we are currently addressing Modern Slavery in our procurement process through our public sustainable procurement and human right policies and the sustainability code of practice. So we have addressed this predominantly through the supply chain. And while there is no obligation currently for Vicinity report on retailers, we are actually in the process of certifying the supply chain of our larger retailers and we expect to receive information requests from our bigger retailers. So I think, in summary and answer to your question, [ Emma ], we are highly proactive in addressing the issue of Modern Slavery. It's been addressed predominantly through supply chain practices, but it may shift increasingly to a certification of our retailers as well.

Thank you, Grant.

We have a question from [ Ken Butterfield ]. If conserving cash was so important during COVID, why did the Board continue purchasing Vicinity millions of units on market through the buyback in March 2020?

So that's an entirely reasonable question. Thank you for that. So you might -- it's incredibly deceptive to look at today's environment and to assume that it's been a steady state of affairs. But if you cast your mind back, I first heard about this evil virus back in January this year and assumed it was an external factor affecting China and nobody else. And lo and behold, it quickly spread, and we all became quite conversant with this. And the reason I'm giving you a bit of a history lesson is because we all slowly but surely became entirely aware of how significant the impact of COVID-19 was. So we had a buyback program in place, which has been put in place some time ago. And we continued purchasing up to the point where we believed that it was a much more serious issue than people first expected. And when you, like most of the people looked around, at scientific and other global evidence and said, this is a real big issue. The future is looking cloudy and grayer than ever before, and that's when we actually publicly announced we were ceasing the buyback.

Thank you, Chairman. There are no further questions at this stage for general business.