Vicinity Centres (VCX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Vicinity Centres' FY '23 Annual Results. [Operator Instructions] I would now like to hand the conference over to Mr. Peter Huddle, CEO and Managing Director. Please go ahead.

Good morning, and thank you for joining us for Vicinity Centres' results call for the 12 months ended 30th of June 2023. Joining me on today's call is Adrian Chye, our Chief Financial Officer. Before we begin, I'd like to acknowledge the traditional custodians of the lands on which we meet today and pay my respect to their elders past and present. I extend that respect to Aboriginal and Torres Strait Islander peoples on the call today. I will start today's presentation on Slide 5. Our financial results and portfolio metrics highlight a year of strong execution and strategic progress. We continue to deliver quality retail property management and positive leasing outcomes across our assets. I'll talk to leasing metrics in more detail shortly, but the callouts are: a record number of leasing deals executed; 8 consecutive quarters of improved leasing spreads; 40% reduction in holdovers, now comprising just 4% of income versus 7% of income in FY '22; occupancy increasing to its highest level since the onset of the pandemic at 98.8%; and our portfolio specialty occupancy cost sits at 13.5% versus 15% just prior to the onset of the pandemic, providing future potential for income growth. While being judicious with our capital, we remain in execution phase of our retail and mixed-use development projects, with a number of important developments completed and/or commenced in the year. We extended our third-party capital partnerships with the partial sale of the shopping center at Broadmeadows Central at a 5.2% premium to December '22 book value. And of course, we maintained our strong balance sheet and continued with our purposeful ESG agenda. Adrian will talk to the financials in more detail shortly. But at the headline level, Vicinity delivered a net profit after tax of $271.5 million for the year. Importantly, FFO grew 14.5% to $684.8 million, equating to $0.15 per security and representing a sizable beat on our guidance driven by strong operational performance. While moderating in the fourth quarter, sales growth on a monthly basis remained positive throughout the year, and visitations continued to improve, especially in our CBD assets. The Board declared a final distribution of $0.0625 per security, bringing the total distribution for FY '23 to $0.12 per security, representing a payout ratio of 95% of AFFO. Turning to our investment proposition. Vicinity has a prize portfolio of retail assets, spanning 28 hectares and generating greater than $2.7 billion in MAT retail sales. Chadstone remains unrivaled in the Australian marketplace. This asset gives us tremendous competitive advantage and leverage across our retail asset portfolio. We have the preeminent CBD retail portfolio of any Australian landlord and, having actively invested in these assets during the pandemic, our CBDs were a meaningful contributor to our headline visitation and retail sales growth this year. We are the clear market leader in the growing premium outlet sector, and we have ambitions to extend our leadership position. We have more than 10 assets in key metropolitan locations with attractive retail and mixed-use development opportunities and where we have well-progressed master plan approvals. Further to this, we have a track record of managing through significant industry disruption and volatility while still delivering project returns that are in line with our investment feasibilities. Our strategic partnerships with 17 joint venture partners and more than 2,500 retailers are another source of competitive advantage and opportunity, especially in the context of the breadth and quality of our asset portfolio. And of course, an important contributor to the resilience and long-term growth of our business is our prudently managed balance sheet, showcased by low gearing, high near-term hedging, a well-diversified debt book and strong credit ratings. And to ensure we continue to maintain our competitive advantages and deliver sustained value growth, we've reviewed and refreshed our strategy. When I stepped into the CEO role this year, I knew that, overall, we had the right strategy. That being said, we are now laser-focused on being a high-performing property-led organization. This means, above all else, we are prioritizing the enhancements of our investment portfolio. Our portfolio strategy remains focused on increasing Vicinity's exposure to premium malls and premium outlet centers and at the same time unlocking our mixed-use opportunities. Our portfolio strategy is now enabled by an active investment strategy where we'll continuously curate the portfolio by recycling and allocating capital to fund both accretive retail and mixed-use developments and strategic acquisitions. We'll continue to selectively divest whole or partial interest in assets where we can realize attractive pricing. Asset recycling gives us an opportunity to extend third-party capital partnerships and unlock additional income streams under management services agreements. We'll be delivering property excellence to position Vicinity's retail and mixed-use precincts as destinations of choice for retail partners, shoppers, future residents, suburban office workers and surrounding communities. As our operating metrics announced today highlight, our asset management and leasing capabilities provide a strong platform for continued growth. We will maintain our strong financial stewardship to maximize our operational and strategic flexibility by prudently managing our balance sheet and strong credit metrics, together with our disciplined approach to capital allocation and driving efficiencies. We already have an extensive debt and equity partnerships, and we'll be investing in those partnerships to make them strategic, long term and focused on mutual value creation. And finally, we'll enable good business by further developing our culture where our organizational values and ways of working are enablers of high performance while promoting a thriving and safe work environment for everyone. And naturally, we'll continue to deliver a purposeful ESG program, pragmatically manage risk and compliance, and have a mindset of continuous improvement that is increasingly data and insights led. Not surprisingly, our operational and financial results today demonstrate that we are already executing across these strategic priorities and that these priorities set a framework for sustainable earnings growth through the cycles and for the long term. At Vicinity, we believe that having a sustainable business is critical to delivering long-term value for our stakeholders. From an environmental perspective, we are on track to achieve net zero for our Scope 1 and 2 emissions for common mall areas across our wholly-owned portfolio by 2030. Further to this, our sustainability programs continues to be recognized on a global stage, with Vicinity being ranked Oceania Leader for the second consecutive year and #3 globally on the GRESB benchmark. During the year, we focused on delivering a number of important people- and community-related programs, ranging from our new employee social impact platform, Vicinity Cares, to smaller, center-specific programs that are focused on the needs of our local communities. That all being said, we are continuing on our journey to truly operationalize and embed a purposeful ESG program into our business, and I look forward to sharing more in the coming year. From a portfolio perspective, FY '23 has been a very strong year. Our customers continue to frequent our centers, shopping for themselves and enjoying social connectedness through our food, entertainment and leisure precincts. Remembering that much of the first half of FY '22 was impacted by lockdowns, so we are focused on the second half of FY '23 versus the same period for FY '22. Visitation for the 6 months to June '23 was well above last year with almost 12% more visitations across the portfolio, which in large part was driven by the CBD assets, with international tourism climbing to 77% of pre-COVID levels, office workers steadily returning to CBD locations and cultural and sporting events supporting additional weekend traffic. The conversion of CBD visitation to strong retail sales growth was even more pleasing, and certainly highlights the benefit of the investment we've made in our CBD assets during the pandemic. We manage an extensive, diverse and broad-reaching retail asset portfolio across Australia. Across our portfolio, total visitations exceeded 400 million this year, with shoppers spending more than $18 billion across our network of discretionary and convenience centers. Our total sales increased 8% in the second half of FY '23, with specialty retailers outperforming the total portfolio, delivering 10% comparative growth. And while price inflation is adding to sales growth, all retail categories recorded positive growth in the second half, with food and dining categories, jewelry, and mobile phones delivering double-digit growth. Sales across our apparel and footwear retailers grew almost 8%, with apparel sales in both our CBDs and DFOs achieving double-digit growth, while sales for our retail services grew by almost 10%. As we forecast in our third quarter update, the rate of growth moderated in the June quarter, with department stores and the apparel and footwear and homewares categories largely flat on last year. Whilst cost of living pressures are having an impact, it is worth noting Q4 in FY '22 was a strong comparable period, being the first quarter without any COVID restrictions since December 2019. That all being said, we continue to see a notable shift in spend to experiential categories such as our food and entertainment offerings, and we expect this trend to continue into FY '24. Critical to delivering sustained income growth in FY '24 and beyond, and in the context of a remarkably resilient retail sector, we deliberately executed leasing transactions at pace in FY '23. The team negotiated the highest number of leasing deals since Vicinity's inception in 2015. Importantly, these deals were delivered with positive overall leasing spreads, representing the eighth consecutive quarter of leasing spread improvement and delivering $208 million of year-1 rent relative to $162 million in FY '22. Demand for retail space in premium centers remained strong, with Chadstone and our premium outlet portfolio achieving a positive leasing spread of more than 7%. We maintained our traditional lease structure with average duration of term of 5.2 years, with fixed annual escalators which delivered an average annual net rental growth rate of 4.62% across all new leasing deals. Of particular note, we reduced our leases on holdover by more than 40% to below 400 shops, representing 4% of income relative to 7% of income this time last year. Once again, we acted at pace to future-proof our income growth profile amid heightening macroeconomic uncertainty. Furthermore, if we exclude holdovers that are strategically held for upcoming developments, real lease holdovers totaled just over 250 stores. We observed a renewed willingness by large national retailers to lock in long-term leases. Testament to this was the greater than 200 shops we transitioned from short-term to long-term leases over the period. Tenant retention remained elevated at 74% and occupancy lifted to 98.8%, the highest point since the onset of the pandemic, with 306 vacant shops leased, representing an impressive 42,000 square meters of GLA. These portfolio metrics, coupled with our occupancy cost ratio, enables us to enter FY '24 with a strong platform for continued rental income growth. Also at the core of our leasing strategy is keeping our centers vibrant and contemporary by investing in in-demand categories, which right now include luxury, athleisure and fresh food and dining. Vicinity is a leading luxury landlord, and our partnership with these leading brands are a source of competitive advantage and pride. Luxury houses know Australia is an attractive market for growth. The pandemic certainly reinforced this, and Vicinity has the assets to support their growth ambitions, thereby delivering significant value to both the retailer and property owner. Luxury retailers generate more than $1 billion in annual sales across 66 stores, and we see significant further expansion of this category in our portfolio in the short term. Health and wellness remains an ever-evolving category, a trend fueled by the pandemic where attitudes and behaviors to health resulted in strong demand for athleisure. While our premium outlets have always enjoyed exposure to big sporting brands, we have deliberately upweighted our exposure across the broader portfolio. We have done this by expanding existing stores and introducing new brands and concepts to Australian retail. Our investment in this growing category has seen athleisure-dedicated GLA increase by 41% since 2019. Athleisure is now a destination precinct for shoppers. Somewhat linked to the focus on health and well-being is a shopper preference for quality fresh food and gourmet offers as well as better in-center dining. Shoppers are seeking out quality independent grocers while large supermarket chains are investing in their fresh food and healthy take-home meals as part of store revitalizations. In response, we have opened a number of new Coles and Woolworths stores during the year and extended our partnership with Sacca's Fine Foods with 3 stores opened in the past 3 years. In turn, this trend is creating opportunities for us to strengthen our dining precincts across our extensive portfolio, with a particular emphasis on market- and laneway-style dining as well as integrating dining with leisure options such as bowling, mini golf and bars. We recently opened a new entertainment and leisure precinct at Northland, and the social quarter at Chadstone was opened in March, which I'll talk to in more detail shortly. I will now hand to Adrian to discuss the financials in more detail.

Thanks, Peter, and good morning. Statutory net profit for the year was $272 million, reflecting a strong FFO result offset by some softening in asset valuations and other statutory movements. The FFO was up 14.5%, primarily due to a $97 million increase in NPI to $900 million. The strong NPI result was driven by the following factors: significantly improved cash collections; positive rental growth supported by our standard specialty lease terms, which incorporate fixed annual increases of between 4% and 5% as well as positive leasing spreads; a material increase in percentage rent, reflecting our successful luxury and premium outlet strategy, together with the resilient sales growth maintained throughout FY '23; and added to this, we continue to see a strong rebound in our ancillary income streams, which now exceed pre-COVID levels. And finally, our occupancy continued to improve, which delivered increased revenue from a greater number of sites open and trading during the year. NPI of $900 million also included a $29 million benefit from the reversal of prior year waivers and provisions, which was a reduction from $63 million in the prior year. Given the small ECL balance at 30 June, we do not expect any material reversals going forward. Net interest expense increased $17 million or 10%. Of the $17 million increase, higher debt volume from development completions drove a $6 million increase, while higher interest rates led to the residual $11 million increase. Net corporate overheads increased modestly on FY '22 despite inflationary pressures. Maintenance capital and leasing incentives were in line with last year at just over $100 million, and this was despite a record number of leasing deals completed. And to increase our fixed rate hedging, we terminated a number of fixed to floating interest rate swaps at a cost of $7 million. Moving on to valuations. For the second half, the portfolio recorded a modest valuation decline of 1.6% or $229 million. The valuation result reflects a 16 basis point softening of the portfolio's weighted-average capitalization rate, partly offset by robust income growth. This income growth has been supported by Vicinity's strong leasing performance in FY '22 and FY '23, which reflects the quality of Vicinity's asset portfolio. Of particular note, Chadstone's $28 million increase in valuation reflected strong income growth and the completion of the social quota, partially offset by a 12.5 basis point softening in the capitalization rate. Strong income growth, particularly from the carpark at South Wharf, drove a 0.8% increase in outlets and evaluations despite a 17 basis point softening in capitalization rates. The CBD, regional, subregional and neighborhood portfolios recorded valuation declines, reflecting softer valuation metrics and a number of asset-specific impacts. The reduced lease expiry profile at Chatswood Chase Sydney as we lead up to the major development, combined with a softening in market valuation metrics, saw the valuation reduce by $54 million. The valuation for our 25% interest in Uptown, previously Myer Centre Brisbane, was impacted due to the Myer lease expiry. Turning now to our capital structure. Vicinity's balance sheet remains in great shape, providing us with the capacity to absorb valuation pressures while also continuing to invest in our growth priorities. Gearing of 25.6% remains at the low end of our target range. With $1.2 billion of liquidity, we have comfortably provided for our FY '24 drawn debt expiry of $200 million of AMTNs and have significant capacity to fund our committed development projects. We enter FY '24 with 90% of our drawn debt hedged, thereby reducing interest expense volatility and, of course, keeping our healthy interest cover ratio well and truly within our credit ratings thresholds. Further to this, our high near-term hedging has partially mitigated the impact of higher interest rates on our weighted-average cost of debt, which increased 30 basis points this year to 4.6%. While our average debt duration is now 4 years, we are actively looking for opportunities to extend the maturity profile. We retained our strong investment-grade credit ratings of A and A2 with Standard & Poor's and Moody's, respectively, both with a stable outlook. Thanks, and I'll now pass to Peter.

Thanks, Adrian. As FY '23 demonstrates, our focus on strong capital management enables us to absorb market volatility whilst continuing to invest in our assets. During the year, we completed 5 key development projects, largely focused on fresh food and experiential retail. Pleasingly, these projects are already delivering returns in line with or above our improved feasibilities. And this is despite the cost and supply chain challenges faced by the construction industry over the past 2 years. At Box Hill and Bankstown, we completed 2 retail developments, both anchored by new format Coles supermarkets, with a range of food and service offerings to cater for their local communities. Separately at Box Hill, we developed a 3-level office podium leased for 10 years to Hub Australia, which opened in March of this year. During the year, we commenced the full revitalization of the lower ground dining and fresh food offer at Chatswood Chase. Having received an amended DA for the major Chatswood Chase project in June, we are also pleased to advise that we now have conditional approval to progress this truly market-leading development, which is likely to commence in the second half of FY '24. At Chadstone, we completed the refurbishment and expansion of Chadstone Place Office Tower and were pleased to welcome Officeworks, who have added to the growing number of corporates seeking office locations with the retail, dining and services amenities of shopping centers like Chadstone, and work is well underway on Chadstone's next major redevelopment. In terms of future projects, we were pleased to receive the DA for a significant mixed-use development of Buranda Village in Queensland. And of course, we continue to invest small amounts of capital across our portfolio to ensure that our centers remain vibrant and house the best retail and services most appropriate to these assets and the communities within which they are located. In March this year, we opened a social quarter at Chadstone. This development extends the current entertainment and lifestyle precinct into a contemporary indoor-outdoor environment with views towards the Melbourne CBD skyline. A range of well-known and bespoke dining and entertainment offers have been introduced to complement the existing retail offer, including Australia's own Legoland Discovery Centre and 13-screen Hoyts cinema complex. This project cements Chadstone as a destination of choice for domestic and international visitors less than 20 kilometers from Melbourne CBD and brings a new leisure-orientated customer to the center, benefiting from extended trading hours beyond midnight. Also at Chadstone, we commenced the exciting next stage of our mixed-use development ambitions. This project comprises the 20,000 square meter One Middle Road office tower, which will be fully integrated into the eastern side of the center over its lower levels. Leasing is progressing well, with Adairs and Hub Australia committing to 55% of the tower by income. We are currently developing one of the oldest parts of Chadstone to satisfy unmet demand around fresh food and dining. The development will see the introduction of a fresh food precinct known as The Market Pavilion, featuring 50 food retailers ranging from everyday essentials to artisan produce and specialized buys as well as alfresco Asian style dining laneway. The combined development is progressing well and is expected to open in stages from later this calendar year through to late 2024. In summary, FY '23 has been a successful year. We deliberately executed at pace to shore up our income growth profile and at the same time manage our balance sheet so that we can absorb market volatility and execute on our growth priorities. We have a clear set of strategic imperatives. We have the right executive leadership team in place to translate strategy into execution that delivers long-term sustained value accretion despite the near-term macro uncertainty. As we look ahead to FY '24, we are pleased to provide earnings guidance. We expect FFO and AFFO per security to be in the range of $0.141 to $0.145 and $0.118 to $0.122, respectively, in FY '24. Importantly, adjusting for prior year's waivers and provisions and impact of transactions, FY '23 FFO per security was $0.143. On this basis, the midpoint of our FFO guidance range implies flat growth in FY '24. However, owing to the work we have done on our operating metrics, comparable NPI is expected to grow by 3% in FY '24. And while we expect this to be offset by higher interest rate costs next year, it's important to reinforce that our core business is strong and it is growing. Thank you. And I'll now hand over the call to the operator for Q&A.

[Operator Instructions] Your first question comes from Richard Jones with JPMorgan.

A couple of quick questions. Can you give any color on retail sales through July?

Richard, we don't have July's numbers at this point in time. So June, obviously, we closed out June and reported those in the quarter. They did moderate in June. So they were less strong than April and May, but we don't have July's numbers at this stage.

Okay. Just in terms of the balance sheet, you're talking about $400 million CapEx for the year. Is there any asset sales that you're planning as a kind of funding tool for that CapEx?

Well, to a certain degree, Richard, part of the Broadmeadows transaction and the recycling of that capital was to really be earmarked for that capital program for the next year or so. At this point in time, we don't have any further asset sales that have gone to market, and we just manage that similar to how we managed the Harbour Town Gold Coast Runaway Bay transaction as we try and time up the divestment with the investment requirements.

Okay. And then one more quick one. Just Chatswood Chase. Can you give us any metrics around returns on that project? It's obviously requiring a pretty substantial uplift in average rent, given there's not a lot of new retail space being delivered. So just interested in what the return metrics look like for that project.

Sure, Richard. In terms of our approvals that we're proceeding with, the stabilized yield return is well in excess of 6%, with IRRs in excess of 10% on about a $300 million to $320 million spend, which is in the reportage we released this morning. In terms of how we've moved into that project about where we sit today, and we won't commence it till the second half of FY '24, about 45% of the income is already in -- secured through heads of agreements, and we've already locked in the construction price. So we feel pretty confident about where we are with Chatswood today. DA was formally gazetted right at the end of June.

Can I just ask, just to clarify, how is that yield calculated? Obviously, income being extremely distorted, you've written down the value of the asset a fair bit, I'm just conscious or interested in what that stabilized yield of greater than 6% is implying in terms of the rental uplift versus what base.

So Richard, we take new capital or new income in over impacted areas. So the underlying SAT asset, that is essentially demolished as part of this development, that forms the base case, that has an underlying income. And then it's obviously the new development that we're undertaking has a new set of areas and new set of income over that. So it's incremental area and income over incremental costs.

Your next question comes from James Druce with CLSA.

Just to follow up on Jones' question, can we give a sense of how strong June sales were in the pcp? I mean can you give a feel for what they were from sort of April, May to June last year? Because you say you're sort of rolling pretty high base? Just trying to get a sense of that.

James, the June quarter was 3.8%. April sales and total portfolio were 4.3% on the prior year, May was 4%, June was 2.7%, if that's helpful. And again, we -- what we commented in the lead up to the questions was the FY '22 Q4 was a very strong quarter. It was the first quarter out of lockdowns, so we're comping on that high base.

Yes. Sorry, that's what I was trying to get some color on, just a bit of context for how strong that '22 comp was, how far it was up last time.

Well, the prior year was substantially locked down last time. So it was up well and truly double digit. But we'll come back to you if that's helpful for you, James, with the exact number, but it's coming off a lockdown period.

Okay. And what's your take on the resilience of the consumer at the moment? I mean you're still seeing decent spend in restaurants, it seems, and apparel softened a little bit, but how do you sort of characterize the resilience of the consumer at the moment?

Well, our position has been remarkably resilient through this entire reporting period. As per the comments here, we did see moderation, which we expected, to sales. What we're seeing is particularly retail services, food and beverage, leisure and entertainment, still seems to be very strong sales, and we started to see more impact around fashion apparel. Probably homewares was -- from the end of the third quarter through to the fourth quarter, was one of the categories that was most impacted on a relative basis, but, again, coming off a very strong period. So from our point of view, we still see a strong consumer in the market, potentially one that's a little bifurcated at the moment, those that are impacted by interest rate increases versus those that are not. I would add, James, as well, we're seeing strong demand in our DFO portfolio. And typically, as we enter potentially more challenging times, the DFO portfolio is where you get really strong brands with a value proposition, and we see good traffic and volume coming through that portfolio.

Your next question comes from Ben Brayshaw with Barrenjoey.

I was wondering if you could just chat about the risk to some of the income growth assumptions for the next 12 months. So in other words, 20% of the portfolio is coming up for expiry, spreads are at least flat at the moment and weighted average fixed rent reviews on specialty store leasing is probably 4.75%. So I'm just wondering in terms of factoring in 3% comp NOI growth into guidance, how are you thinking about turnover rent, ancillary income and occupancy?

So all good questions. Probably the easiest way, we had a very strong year, which led to the guidance around ancillary income and, in particular, percentage rent. So in terms of our guidance moving forward, percentage rent came in -- took over $30 million, which is -- represents about 2.5% to 2.8% or so of our total gross rent. So we have forecast back ancillary rent -- percentage rent associated with an expected reduction in sales. You are right, we have about 20% of our leases coming up. Some of those leases were leases, which were extended through the pandemic. So we have another year of strong leasing activity that needs to be undertaken. Potentially, for context, and we didn't note this in our guidance, but we anticipate that they're around about a negative 1% leasing reversion. And that helps us get to that guidance number. In terms of the other items that would be watchful in more challenging economic times would be things around casual mall leasing, our media revenue business and car parking income revisitations to some of our centers. But again, in total, our ancillary income is circa $105 million, $106 million of our total income, so broadly about 10%.

And is there some allowance there for potentially moderation of occupancy over the next 12 months?

Yes. We've kept some allowances in the guidance versus, say, a pre-COVID level, and those allowances around a -- still an elevated vacancy amount. We mentioned they were at 98.8% versus pre-COVID at 99.3%, so there is some additional allowance in the guidance for essentially the similar type of occupancy, and there's some allowance in there for provisioning and, again, which we've said a few times, particularly for SME retailers and particularly for those in CBD assets.

Your next question comes from Sholto Maconochie with Jefferies.

A lot of mine are answered. But on the -- I think Chatswood Chase, I think was supposed to start first half, but everything has been approved. So is that -- how much lost rent are you assuming in guidance from that, because it doesn't get capitalized like you used to? Is there any lost rent assumed in guidance in this year? From developments?

Between FY '23 and FY '24, in our guidance we assume more lost rents, and they're across Chatswood and Chadstone, in particular, a little bit in Galleria as well. And the number is around about $25 million in loss of rent, which has kicked up from '23 which, to a certain degree, goes to explain some of the guidance for FY '24.

So it's only gone up $2 million incrementally in FY '24?

Sholto, this is Adrian here. I think what Peter mentioned was it's gone up versus FY '23. So in FY '23, it was around $12 million, and we expect that to be up closer to double, so $24 million, $25 million.

Okay. That makes sense. Okay. Okay. So that's factored in in [indiscernible]. And then on the provisioning, is it a big number you provided for CBD tenants in that provision for bad debts and things like that?

Sholto, it's come down every year for the last couple of years. As part of our ECLs, the number's broadly around $7 million to $8 million in rent assistance provisioning. On top of that, they have still an elevated -- in our view, an elevated vacancy allowance, of around circa $40 million.

Okay. And then just finally, any update on the build -- the mixed uses you've got built progressing on bringing capital partners in for that mixed use? And if so, whereabouts?

Sholto, we're still in a process. We're in about a 6-month process with external advisory on that. We're getting towards the end of that, which we anticipate to be in Q4 of this year. And subject to that being a successful outcome, the intent is to then go to market to capital raise for that. We mentioned in these results that we received the approval for Buranda and -- to proceed. And we also have more recently had the Planning Minister of Victoria call in for approval Box Hill and Victoria Gardens. So they're the 3 key priority projects that we're focused on in those endeavors.

Your next question comes from Grant McCasker with UBS.

I just want to follow up on the CapEx, you're sort of stepping CapEx from sort of $200 million to $250 million up to $400 million. Chatswood Chase isn't really up till the second half. So what's the -- where is the major amount of money going to be spent this period?

So I'll kick off, Grant. It's -- Chatswood is obviously the -- we forecast a commencement of Chatswood from late this year, early mobilization works, but really the second half of '24. So that's a considerable component of it. The other component is Chadstone. So Chadstone, we clearly have the One Middle Road office tower development plus the fresh food development there. On top of that, we still have planned projects at Bayside, which is a smaller project at the moment, Galleria, and finishing off some small projects at Emporium as well. So I think in the prior forecasts that we've had to market over the last couple of years, we also provided anticipation that we're spending about $300 million a year but with intent that it will go for $300 million to $400 million a year. So we're heading towards that larger end of that range spend as we kick off these larger projects.

So just in '23, you called out a number of sort of smaller redevelopments, refurbishment and major tenant conversions. How much was spent in '23 on those smaller projects?

Approximately $50 million.

Okay. And then so the further refurbishments and tenant conversions, what would that be in '24?

I would anticipate about the same.

Okay. Also just to confirm, that's outside of the $100 million leasing and maintenance CapEx as well.

It's in the $400 million, but outside of the leasing and maintenance CapEx of $100 million, yes.

Your next question comes from David Pobucky with Macquarie Group.

Peter and Adrian, can you hear me okay?

Yes, loud and clear, David.

Great. Just on 1 Middle Road, you're 55% pre-leased. Can you give us any color in terms of the feedback that you're getting on leasing? And are you confident that you'll be able to lease up the asset before completion?

Good question, David. Look, we've been confident in terms of leasing, we -- of that 55% leasing, we essentially speced One Middle Road, although before we commenced that we had Adairs committed at that point in time. And since we commenced that project, which was during this reporting period, we then had Hub Australia. We have a lot of tenant -- and they're at the lower levels. It's a 9-level building. So they've occupied the lower levels. So we have the more premium floors as potentially available to the market, lots of leasing interest in that. And a lot of the interest is around, which we find in Chadstone as Officeworks has just moved into Chadstone as well, is those national retailers that -- essentially not in CBDs -- that are already traditionally in regional office parks looking for better amenity. So we're confident in terms of the lease-up. Our profile in terms of the lease-up for the commercial tower is not for it to be 100% leased at practical completion of the development, which is October next year, but for that lease-up to occur to essentially 100% 18 months after practical completion. And that's what's baked into our underwriting numbers for that. At this stage, we'd like to think it's around about 75% leased up and open for October of next year, and then progressively we'll lease the rest of the asset over the proceeding 12 months.

That's very helpful. And you also noted significant capacity to fund committed development projects. But thinking longer term around the funding of development, I mean, can we expect further capital recycling to try to maintain gearing at that circa 25% level?

Though we have a gearing range of 25% to 35%, our natural inclination is to be at the lower end of that range, not the higher end of that range, and, subject to what occurs in the equity markets, then our current strategy for funding future development is the asset recycling, as long as we can get attractive pricing for those asset recyclings in the market.

[Operator Instructions] Your next question comes from Simon Chan with Morgan Stanley.

Good result. I was just wondering if you could give us a little bit more color on your FY '23 results. You upgraded guidance a couple of times during the year. Your last update was in May, so 2 months before the end of the year. And today, you ended up beating guidance by, say, $20 million or so. At the start of the year, you have been aware of your fixed bumps, 4% to 5% fixed bumps, et cetera, yet you kept upgrading and beating. But what was it that surprised you to the upside this year, Peter? Like, was it just you're calling so much more turnover rent? Was it car parking? I'm just trying to work out the reason for the beat over the last 12 months.

So for us, I thought -- when we last upgraded, which was in the midyear, and we started in the $0.13 bracket, we upgraded to the higher, and we upgraded it in February. At that point in time, we were still anticipating in February more impact on the consumer and more impact on sales. So the beat is, for us, how we would characterize it, is higher-than-expected sales, which led to higher-than-expected percentage rent income, particularly around luxury retailers, but it was also across the board. Luxury is probably about 35% of the percentage rent. Our DFOs contributed on percentage rent quite materially. It was stronger leasing performance, a higher occupancy rate than what we anticipated, stronger leasing spreads than what we anticipated. So that was obviously less vacancy that we had forecast. Better media sales income, better car parking income, particularly return of traffic on weekends to our CBD car parks led to great results in CBDs and better-than-anticipated ancillary income, and better cash collections. And the better cash collections, around 98% and a bit percent, versus sort of our expectations, which were more around the 96%, meant that we released some ECL into the result in the second half as well. So that's helpful. That's sort of how we characterize the beat, mainly a result of strong -- stronger than we anticipated economic environment and really good execution from the teams.

But I mean your rent is kind of fixed anyway, right? Like, I get about the turnover [ end ] point for luxury and DFO, but surely, you weren't expecting your tenants to go bankrupt and shut down, right? So whether or not consumer sales were strong in the second half wouldn't have impacted your rent received.

True. But I think, particularly in the scenario around SME retailers and those in CBD assets that are still paying prior debt from prior periods and the cost of doing business for those retailers escalating, we had some provisions in the half year result that dealt with an increased vacancy rate associated with that. That's a big swing factor associated with it, Simon.

That's clear. And if I could just sneak in one more. Peter, in your prepared remarks, you talked about your 13.5% occupancy costs relative to pre-COVID, 15%, that's really good. Would there be any reason as to why they're not comparable? Or are they fairly [indiscernible] comparable numbers?

There's probably 2. I mean, obviously, the pandemic period was disruptive for the industry. So we did reset some deals for short periods of time, which come up in this financial year at lower than what we would have anticipated. So we think there's a natural buffer in those deals associated if economic conditions remain challenging. And there is a little bit associated with the outperformance of luxury. So luxury retailers post pandemic have performed extremely well, which has a natural driving down of that specialty occupancy number. You would suggest that in that number, there's 0.5% to 0.75% associated with the performance of luxury post pandemic than pre-pandemic.

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

Okay. Well, firstly, I'd just like to thank everyone on the call for their attendance and their interest in our company. We think FY '23 was an extremely strong performance for our company, that we're well set up for FY '24. Our key focus was obviously on derisking our income profile moving into the next financial year. And of course, it's always about ensuring that we have really strong working relationships, particularly, across the board, but in particular with our retail partners moving forward. So on behalf of the Vicinity team, thank you again for your interest and look forward to catching up with you all in the next few weeks.