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Edited Transcript of VCX.AX earnings conference call or presentation 18-Feb-20 11:30pm GMT

Half Year 2020 Vicinity Centres Earnings Call

Feb 23, 2020 (Thomson StreetEvents) -- Edited Transcript of Vicinity Centres earnings conference call or presentation Tuesday, February 18, 2020 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Carolyn Viney

Vicinity Centres - Chief Development Officer

* Grant Lewis Kelley

Vicinity Centres - CEO, MD & Director

* Justin Mills

Vicinity Centres - Chief Strategy Officer

* Nicholas Schiffer

Vicinity Centres - CFO

* Peter Huddle

Vicinity Centres - COO

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Conference Call Participants

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* Adrian Dark

Citigroup Inc, Research Division - Director and Analyst

* Andrew Dodds

Jefferies LLC, Research Division - Equity Analyst

* Grant McCasker

UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate

* Richard Barry Jones

JP Morgan Chase & Co, Research Division - VP

* Simon Chan

Morgan Stanley, Research Division - VP & Equity Analyst

* Stuart McLean

Macquarie Research - Research Analyst

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Presentation

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Operator [1]

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Thank you for standing by and welcome to the Vicinity Centres' FY '20 Interim Results Briefing Conference Call. (Operator Instructions)

I would now like to hand the conference over to Mr. Grant Kelley, CEO and Managing Director. Please go ahead.

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [2]

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Good morning, everyone, and thank you for joining us today for Vicinity's FY '20 interim results briefing. I'm Grant Kelley, CEO and Managing Director of Vicinity.

Before we begin our formal presentation, could I take a brief moment, please, to acknowledge the untimely passing several days ago of one of our directors, Ms. Wai Tang. Wai contributed tremendously to the company in her 6 years with both Vicinity and one of its predecessor entities, Federation Centres, and was a great mentor and friend to us all. On behalf of the entire company, could I extend our condolences and best wishes to Wai's husband, Kee, and their extended family.

Turning now to our presentation. And joining me today 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. In the room with me also is Penny Berger, our Head of Investor Relations.

We'll begin today's presentation with highlights of the 6 months to December 2019, a view on the current environment and an update on FY '20 guidance. 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 guidance for FY '20 and open up the lines for any questions.

Turning first to the results on Page 4. And I'll start by outlining the first half performance to 31 December, followed by our outlook for the second half of the year, which is likely to be more challenging given recent external events and specifically the novel coronavirus outbreak.

But to begin, and for the first half, Vicinity delivered solid financial and operating results. Statutory net profit for the 6-month period was $242.8 million. FFO per security was $0.0895, reflecting 1.5% comparable growth. Transaction activity during the period was in line with strategy. We divested 3 noncore assets for $227 million at a 0.4% discount at June 30 combined book value. We recycled those proceeds in 3 ways: first, acquiring 50% of Unit Hill Factory Outlets, subject to ACCC approval; second, buying back Vicinity's securities at a 14.1% discount to NTA; and third, funding the development pipeline, which has reached several milestones during the period.

In our development business, the Hotel Chadstone Melbourne opened in November. Construction of The Glen's major redevelopment is now complete. We've also opened The Markets at Roselands in New South Wales, transforming the lower ground floor into a fresh food market hall.

Continued active tenant remixing and portfolio enhancement has also improved sales growth. Specialty and mini major MAT was up 3.7%, which is 60 basis points higher than June 2019. Specialty productivity was also strengthened with MAT per square meter of just over $11,400, up 2.9% over the 6 months.

Vicinity's balance sheet has also been materially strengthened during the period. We issued Vicinity's first euro-denominated debt, EUR 500 million of 10-year bonds in October, and extended a further $1.7 billion of bank debt. Collectively, these initiatives have reduced Vicinity's average cost of debt and extended the duration and improved the diversity of our funding sources. Gearing remains well within our target range at 27.3%, and we've maintained our strong investment-grade credit rating.

Turning now to Slide 5. And I will touch on several of the key factors influencing spending within Australia. Despite some positive macro factors such as low interest rates, improving housing prices, especially in Melbourne and Sydney, and a tightening labor market, we are not yet seeing this translate into retail spending or positive consumer sentiment, which is now well beneath its long-term average. This negative sentiment has been compounded by retailer administrations, and we remain generally cautious regarding the retail environment over the near term. Additionally, since the end of January, we have confronted fresh headwinds with the coronavirus outbreak.

And turning to Slide 6. It has become increasingly clear that this outbreak runs the risk of materially impacting global trade and travel, which will clearly have knock-on effects for retail. Already at Vicinity, over the past 3 weeks, we have seen a material decline in foot traffic across a number of key centers, particularly those with a high proportion of international visitors. And this, in turn, is impacting sales. Consequently, we are forecasting at this point modest reductions in percentage rent, ancillary income and hotel bookings at the affected centers.

Based on current observed trends across the portfolio, we have therefore revised FY '20 FFO guidance, down from $0.176 to $0.178 per security to $0.172 to $0.174 per security. While we are obviously disappointed that novel coronavirus will detract from an otherwise solid first half result, we believe it is prudent to reset expectations given what we are seeing today.

We'll no doubt return to this in Q&A, but for now, I'll hand you over to Nick, who will take you through the financials for the first half in detail.

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Nicholas Schiffer, Vicinity Centres - CFO [3]

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Thanks, Grant, and good morning, everyone. I will start on Slide 8. Our statutory net profit for the period was $242.8 million, including FFO of $337 million and a net statutory valuation decrement of just over $50 million. On a per security basis, FFO was $0.0895, down 1.2%. After adjusting for asset divestments, comparable FFO per security growth was 1.5%.

The key contributors to underlying growth were comparable NPI growth of 2.5%; lower corporate overheads, which had a positive 1.2% impact; and the benefit of the securities buyback, which contributed a further 1.7% to growth. These items were offset by the decline in income from centers held for development, which had a negative 0.8% growth impact; lower fee income from less development activity and the sell-down of wholesale assets, which had a negative 1% impact on growth; and a negative 2.3% impact from lower surrender payments received from tenants in this half compared to the elevated amount in the prior period.

The AFFO payout ratio of 94.9% for the first half is marginally below our target range due to the timing of maintenance capital expenditure. However, the full year payout ratio is expected to be at the higher end of our 95% to 100% range.

Turning now to Slide 9 and valuations. The valuation outcomes as at December continued to highlight the quality of our Flagship portfolio, which includes Chadstone, the Premium CBD assets and the DFOs. Net valuation growth for this portfolio of 2.8% or $208 million was underpinned by further income growth and some tightening in cap rates. The gains on the Flagship portfolio were outweighed by declines within the core portfolio, particularly in WA, where the leasing environment remains challenging. We also saw valuation declines at assets that require repositioning. That includes assets held for development and those that were undertaking significant remixing such as Bayside.

Overall, this resulted in a net valuation decline of $81 million or 0.5% for the 6-month period. The average portfolio capitalization rate tightened 4 basis points to 5.26%, reflecting further improvement in portfolio quality.

Moving to Slide 10. The balance sheet was further strengthened following another period of active capital management. We issued EUR 500 million of 10-year bonds under our EMTN program, opening new markets for Vicinity and further diversifying our funding sources. We also extended $1.7 billion of bank facilities and repaid $400 million of higher-coupon Australian dollar bonds in December.

This combined activity significantly enhanced our debt profile. Our duration was extended by 1.3 years to 5.4 years, and our average cost of debt reduced by 30 basis points to 4.2%. We expect our cost of debt to continue to fall to around 4% by 30 June. We maintained our strong investment-grade credit ratings of A/stable from S&P and A2/stable from Moody's. Gearing of 27.3% remains well within our target range of 25% to 35%, and we are maintaining prudent liquidity levels. This provides us with ample capacity to reinvest into our retail and mixed-use development pipeline, potential acquisitions and for the repayment of near-term debt expiries.

I'll now hand you to Peter to take you through the portfolio performance.

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Peter Huddle, Vicinity Centres - COO [4]

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Thanks, Nick, and good morning, everyone. I will start on Slide 12 for a review of our portfolio performance. In the first half, we have seen an improvement in 2 of our key portfolio metrics, sales growth and net property income. Portfolio MAT growth has strengthened from 2.7% at June to 3.2% at December. Chadstone sales growth of 7.8% at December is up 90 basis points since June. This strong performance reflects not only its status as Australia's premier retail destination but is also the result of the introduction and expansion of a number of high-profile retailers over the past 18 months.

For net property income, the comparable portfolio average growth of 2.5% was driven by strong results from Chadstone and the DFO portfolio, with the remainder of the portfolio being relatively flat. The result of the CBD centers was impacted by works associated with the introduction of Australia's first e-sports arena at Emporium, along with other planned remixing activities at Sydney's Queen Victoria Building, where luxuriers and additional premium retailers are being introduced onto the ground floor.

There has been a declining leasing spread compared to our 2019 annual results. This has been driven in part by our focus on transferring holdover leases onto longer-term arrangements together with the lease-up of long-term vacancies, which particularly impacted our core portfolio. We are, however, still seeing strong double-digit leasing spread growth through our DFO portfolio and solid uplifts for the CBD centers.

Chadstone's leasing spread was flat but represented relatively low deal activity and was impacted by short-term arrangements for retailers within impending development impacted zones and the introduction of key new concepts that require tenant relocations, which included some surrender payments from those tenants.

Turning to Slide 13. We have remained focused on creating the best retail offerings for each market. A key focus for the 6 months was the significant increase in vacant shop specialty leasing. This was offset in part by a large single vacancy to maintain occupancy at a high 99.5%.

Strengthening the quality of portfolio rent has been a key priority. And as a result, there has been an approximate 40% reduction in short-term deals compared to the same time last year. And the majority of these short-term deals relate to centers with impending development activity. Unfortunately, in the past few months, there has been a number of retailer administrations announced. However, the impact on the Vicinity portfolio remains limited, with a total 63 stores or less than 1% of income exposed to these groups, of which 41 stores continue to trade. It should be noted that the quantum of retailer administrations seen recently is above that experienced in the past 2 years but well below FY '17 numbers, and they were not unexpected.

Foot traffic across the portfolio for the 6 months to December 2019 was up 0.8% on the prior corresponding period. Our Sydney CBD centers were impacted by the light rail infrastructure works, which completed in late 2019. Excluding these centers, portfolio of foot traffic increased by 2% on average.

While luxury and DFO sales performance was strong for this reported period, our early read on the second half of the financial year is that the coronavirus is impacting both foot traffic and sales at a number of our key centers, as Grant noted earlier.

Turning to Slide 14. Carolyn will shortly talk to you about our development pipeline as part of the phased approach to working through our total asset strategies or master plans. As an operational team, we focus on the presentation and offer of our centers. In some markets, particularly where gentrification has taken place, this will require a small amount of enhancement works to be undertaken. These upgrade works look to revitalize the presentation of our centers, particularly our key entry statements, public amenities and food offerings, and are often undertaken in conjunction with tenant remixing projects. These works position an asset to cater for their evolving catchments and may set the foundations for a larger retail or mixed-use development phased over time.

As an example, we have completed remixing activities and by year-end, an upgrade at Northland, and upgrades are underway at both Victoria Gardens and Altona Gate. The positive results of Northland's remix have seen the traffic and sales performance metrics lifted by 5% compared with the prior corresponding period, while the Victoria Gardens were in advanced planning for a number of future retail and mixed-use developments.

Turning to Slide 15. The portfolio's retail mix continues to evolve to meet customer expectations. In Vicinity, a key strategy is to secure new-to-market retailers via our flagship centers. This slide shows a snapshot of the exciting new brands and retailers that have recently joined our portfolio. As an example, we are pleased to welcome 2 new international brands, Morphe and Lancel, who opened in our portfolio. And in the next month, Fortress Esports is set to become a major attraction opening at Emporium.

As you can see from the slide, the addition of new retailers is not isolated to our Flagship portfolio. On the right-hand side are examples of on-trend retail introduced into our core assets, some of which have been complemented by ambient upgrade works with the aim of delivering market-leading destinations within their trade areas.

Turning now to Slide 16. As shown on the chart, the majority of retail categories have recorded an improvement in MAT growth over the past 6 months. With our leading DFO portfolio, the leisure category continues to perform well, with very strong growth of 15.3% for sporting goods and athleisure retailers. Reinforcing our focus on expanding retail offerings that are consumed on site, retail services and food catering categories are both up circa 5%, underpinned by wellness, hairdressing and beauty, optometrist and cafés and restaurants.

Vicinity remains the leader in luxury retail with more than 50 stores across 6 centers offering luxury brands, and we have active plans for further growth in this category. These brands are performing strongly and continue to be a key driver of sales, increasing by 30.2% on an MAT basis, with same-store luxury sales up by 15%.

Before handing to Carolyn, the global event of Black Friday in November was a success for our retails. It grows in importance each year and demonstrates that customers want physical interaction in store, and we expect this trend to continue. We welcomed 1.8 million customers through our centers on the day, up 15% compared to 2018, with the DFO, a particular beneficiary of the event, experiencing more than 60% growth in visitor numbers. While, of course, some drag forward of Christmas expenditure, combined November and December 2019 sales were up 4% on the prior year.

I will now hand over to Carolyn to provide you with an update on our development projects.

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Carolyn Viney, Vicinity Centres - Chief Development Officer [5]

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Thanks, Peter, and good morning. I'll start on Slide 18. Vicinity has a $3.2 billion development pipeline with Vicinity interest at $1.8 billion. This translates into Vicinity development spend of around $300 million each year with these projects targeting a stabilized yield of between 6% and 8% and an IRR of 10% or higher.

Our project pipeline is focused on the assets we own in eastern seaboard CBDs and metropolitan markets, where 50% of Australia's population now lives. Our approach takes advantage of the strength of these markets as well as the location of our centers within or close to public transport hubs, making them attractive to both further retail investment and increasingly complementary mixed-use additions.

As Grant mentioned, project completion milestones for the half included the opening of Hotel Chadstone, completion of the final construction stage of The Glen and the opening of The Markets at Roselands. Good progress has been made in respect of our future project pipeline, with a total of 25 DAs lodged in 2019 or on track to lodge in 2020, including the Chatswood Chase and Chadstone.

I'll now move to Slide 19 and an overview of the current projects in the pipeline. This slide is an overview of the larger projects underway and those in detailed planning. As mentioned, Hotel Chadstone opened in November and has added significant amenity to the Chadstone precinct, with the 250-room 5-star hotel catering to the center's domestic and international visitors along with corporate travelers to the growing Monash economic regions.

At Emporium, the Southern Hemisphere's first video gaming and e-sports entertainment venue, Fortress Melbourne, is scheduled to open next month. With digital games, the world's largest entertainment market, with more than the movie and music industries combined, we anticipate Fortress will follow international trends, becoming a major attraction for gamers, families and tourists.

And in WA, the project at Ellenbrook Central in Perth northeast growth corridor is on track to complete in the second half of the year, adding Kmart, fresh food mini majors and specialty retail stores to the center.

Now turning to Slide 20, which takes us through our major redevelopment of Chatswood Chase. We expect the redevelopment of Chatswood Chase to commence this year, repositioning the center and catering to Australia's wealthiest catchment, Sydney's North Shore. Principal town planning consents have been received already, and secondary amendments are expected to be approved in the coming months. The construction price and contract has been agreed we could build up, significantly derisking the cost of the project, and we continue to progress pre-leasing discussions to secure key retailers prior to commencing the project. Project is targeting a development yield in excess of 5.5% and is expected to be completed by 2022, transforming the retail offer to a premium shopping destination and adding co-working and office space for 1,400 new workers.

On to Slide 21. Chadstone is continuing to evolve with 5 development applications lodged in late 2019. The key projects include a new 9-story commercial office building, expansion of the current dining terrace and leisure precinct, upgraded fresh food precinct, repurposing space for the expansion of luxury retailers and more than 1,400 additional car spaces across 2 car parks. Already Australia's leading retail dining and leisure destination, these projects will deliver new services and experiences with Chadstone playing a vital role as Melbourne's population grows, as expected, by more than 2 million people by 2036.

Turning now to Slide 22. We're making great progress on our project pipeline. The table on the left lists DAs lodged for approval in 2019, while the table on the right lists the approvals we propose to lodge later this year. As you'll see, in addition to the significant investments planned for Chadstone and Chatswood, 18 other DAs were lodged or are on track to lodge, demonstrating the significant progress made in realizing additional value from the portfolio.

Almost $1.2 billion of the planned investment relates to mixed-use projects, principally in Melbourne and Sydney, where our focus is on densifying the strategic assets we own in urban locations experiencing population growth and enhanced by existing and planned government investment in transport infrastructure. Our priority retail projects are also concentrated along the eastern seaboard, again leveraging the locational fundamentals of these centers and their strong and growing trade areas.

Whether mixed use or retail, all of the priority projects demonstrate the strength of our existing land holdings and their attractiveness for a range of uses complementary to retail. I look forward to updating you as these projects progress towards delivery.

I'll now hand you over to Justin.

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Justin Mills, Vicinity Centres - Chief Strategy Officer [6]

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Thank you, Carolyn, and good morning. Moving on to Slide 24. Ancillary income grew 5.7% for the half, led by growth in Vicinity Media up 8% and managed car parking up 4.7%. This was partly offset by casual leasing and ATMs. Ancillary income now contributes almost 13% of total NPI, up from 11.6% in June.

A particular highlight is the performance of our digital screen network, which now comprises of 122 internal screens and 15 external roadside billboards. For the half, 19 new screens were added to the portfolio, and another 17 are planned for installation by June 30. Beyond this, a strong pipeline of new projects exist that will continue to support our growth.

As well as maximizing existing income, the team are focused on delivering new revenue. Leveraging our national WiFi network of 13 million unique devices, we launched on-device advertising across 34 centers in August to better connect with our consumers and drive retail sales. Additionally, we've also had success in securing key brand sponsorships, including Lexus signing a 3-year Chadstone valet sponsorship agreement.

Our award-winning solar investment program continues with 6 installations switched on during the period, including Australia's largest solar car park at Elizabeth in South Australia with 1,400 covered parking spaces. Return from solar investment is strong, with an average yield of 12.9%, with more opportunities across the portfolio.

Moving to Slide 25. Our approach to sustainability continues to be recognized as industry leading. In July, we announced our net carbon 0 target by 2030 for our wholly owned retail assets and were recently included in CDP's Climate A-list, recognizing our approach to managing climate change. In addition to this, we performed well in industry sustainability surveys, ranking third globally by GRESB and sixth in the DJSI.

Now we all know too well Australia has been devastated by bushfires in recent months. To date, Vicinity has donated approximately $370,000 to support immediate emergency response and the longer-term rebuilding efforts of impacted communities. We're matching dollar-for-dollar donations by our teams who have been extremely generous, and we supported the All-In retailer fundraising efforts on the 9th of January, donating the equivalent of that day's rent of participating stores. What these extreme weather events highlight is the importance of the work that we've been doing for a number of years to strengthen the climate resilience of our portfolio as well as our continued efforts to lower carbon emissions that reduce the impact on the environment and lower operational costs of our centers.

Finally, we're advanced in the implementation of our Modern Slavery action plan that allows us to better understand, manage and ultimately report on operational and supply chain risk in the business.

I'll now hand you back to Grant.

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [7]

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Thanks, Justin. Turning to Slide 27 and to summarize. We delivered solid first half financial results and continue to focus on our strategic priorities despite a generally subdued retail environment and recent adverse external events. Our strengthened balance sheet continues to position us well for the future. We focused the development pipeline on the eastern seaboard with retail and mixed-use opportunities that will further strengthen the portfolio and drive growth. Where appropriate, we will continue to strategically reposition and enhance the portfolio where acquisitions and divestments are in the interest of security holders.

Despite the challenges, sales within the portfolio continue to grow, and we are committed to providing our customers with the most relevant and in-demand retail mix. And we've revised FFO guidance, as mentioned previously, for FY '20 to be within the range of $0.172 to $0.174 per security.

I'll now open up the lines to any questions. (Operator Instructions) With that, I'll hand back to the moderator

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Simon Chan of Morgan Stanley.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [2]

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I've got 2 questions. The first one is a simple one. Just wondering if you got any insights as to what percentage of your centers' MAT across your tenants are actually tourism-related.

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [3]

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So it's a slightly complex question because of our luxury sales, which contribute 2% to rental income, so percent of rental income is 2% across the business, a large component of that is luxury. Of that luxury, about 30% is due to international tourism. So Simon, what we flagged here is a material impact from the decline in tourism due particularly to the travel ban on incoming Chinese tourists.

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Simon Chan, Morgan Stanley, Research Division - VP & Equity Analyst [4]

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Yes, fair enough. And then just my second question today, Chatswood Chase redevelopment. I guess can you remind us what the expectation of lost rent could be on an annual basis once that goes partially off-line from the middle of the year? And also, how much is lost rent at the moment per year? I'm just trying to figure out if it goes up or goes down.

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Nicholas Schiffer, Vicinity Centres - CFO [5]

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It's Nick Schiffer here, Simon. In terms of Chatswood Chase, we're looking at lost rent of something in the range of sort of $20 million to $30 million over the course of that project. In terms of lost rent sort of on a historic average basis, it is likewise sort of within that range, sort of circa $20 million to $30 million as well.

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Operator [6]

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Your next question comes from Grant McCasker of UBS.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [7]

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Just going into the second half impact you have from the novel coronavirus. You have just outlined sort of the range in outcomes you're seeing across your various assets. You say down 8% across the portfolio. Can you give a guidance, a crop -- around your different assets?

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [8]

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Yes, sure, Grant. Let me pick up the overall trend line, and then I'll ask Nick to deconstruct as much as he is able to at this point the estimates of reduction in revenue and income. But roughly 1/4 of our centers experienced slightly positive traffic effect during the past 6 weeks since the commencement of the year. About 58%, however, were marginally negative between 0% and 10%. And 15% of the centers have had an impact of greater than 10%. And those centers that have been impacted have tended to be larger or flagship assets because those are the ones, obviously, with the highest correlation to the tourist shopper. And hence, that's why the guidance review has been in the range of which it has. With that, I'll ask Nick to maybe deconstruct the respective impacts.

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Nicholas Schiffer, Vicinity Centres - CFO [9]

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Thanks, Grant. I'll try and give a broader answer here because I suspect there might be other questions that go to the impact of the virus, how we're thinking about it and guidance. So maybe to start, our -- the business performance through to end December and the outlook that we foresaw at that time through the end of the financial year was actually very solid. NPI might have been a touch softer. There might have been some assets that -- the development assets that were going through stabilization, but we very much felt confident with the guidance range that we set and that we were going to come within that guidance range.

Obviously, towards the back end of January and the pretty severe impacts that we saw resulting from the coronavirus gave us reason to go through and analyze how those potential impacts could roll through our portfolio. So maybe to start, the centers where we have seen the largest impact are Chadstone, the CBD centers, Chatswood, The Glen, Box Hill and the DFOs. Now all of them, of course, have not been impacted uniformly, but they're probably the key collection of centers where there's been an impact.

In order to determine, to quantify the potential FY '20 impact, we then looked at a variety of sort of NPI line items. So it's already been called out, sort of the percentage rent line item. There's also car park income. There's mall space income, which includes casual mall leasing and media. There's the new hotel, Hotel Chadstone, which was actually performing in line with expectations through to 31 December, and it was looking positive for the remainder of the year as at December. And then beyond that, there's also sort of broader issues around potential vacancy outcomes, administration outcomes, and of course, marketing spend that we need to undertake to reignite, reenergize foot traffic through the centers when the virus sort of concerns start to dissipate. So these are various line items.

We then looked at a range of sensitivities across those line items to try and drive a sense of potential outcomes or scenarios to drive potential outcomes. And those scenarios provided the bookends that you see effectively calculated through to the amended guidance of $0.172 to $0.174.

To go through the individual line items and just talk to those, so percentage rent is really an estimate based on a per lease calculation, then impacted by a ratio that we define as footfall, and that is observed footfall over the 3 weeks to sales. And we apply discrete ratio assumptions to the DFOs at 1:1 and to the other centers that I mentioned at 0.75:1. And when you calculate that through, we come up with a specific assumption around potential impacts for luxury, luxury and other percentage rent.

Car park has been observed. Of course, with car parks, we see financial performance on a daily basis around car park-driven income through our centers. So that's easily observable and sort of easily calculated based on that.

Mall space income, so casual mall leasing and media, is probably less observable than car parks but nonetheless is observable through both anecdotal inquiry with our customers, being the media organization or the casual mall tenants and the fact that we've had a number of cancellations across those 2 buckets.

Then finally, Hotel Chadstone. Of course, there's been booking cancellation, and we see those impacts quite directly. And of course, we know that international tourists will be significantly lower than what we had otherwise planned for in a normalized environment. Vacancies, administration and marketing, et cetera, we make assumptions for. So I'll stop there, and hopefully, that's a complete answer for everyone.

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Grant McCasker, UBS Investment Bank, Research Division - Head of Australian Real Estate Research Team, Executive Director & Equities Analyst of Real Estate [10]

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Nick, that color is fantastic. So I guess it's a moving piece at the moment. But have retailers come to you asking for rental abatements, increased marketing levy at this point? Or is that something that may come through throughout the rest of 2020?

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Peter Huddle, Vicinity Centres - COO [11]

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It's Peter here. There has been some activity in terms of assistance for retailers. We look at those things on a case-by-case basis and working with our retailers to complete that.

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Operator [12]

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Your next question comes from Stuart McLean of Macquarie Group.

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Stuart McLean, Macquarie Research - Research Analyst [13]

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Just on the coronavirus to begin with as well. When do you assume a recovery comes through? Have you assumed a recovery? Since you've got about a $15 million impact to 2 halves, but annualized, that is kind of a $30 million impact. So how are you thinking about potential recovery?

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [14]

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Look -- go ahead, Nick.

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Nicholas Schiffer, Vicinity Centres - CFO [15]

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Thanks. Thanks, Grant. At this point, our guidance, of course, covers only the period through to 30 June. As I mentioned, in thinking about the outcomes, we looked at a range of scenarios. So those scenarios, of course, can alter both to sort of the severity around individual line items, also around the duration. So it could be shorter. It could be up to 30 June. We haven't been sort of specific around a particular outcome. Of course, no one knows whether it's going to go beyond 30 June. Clearly, we hope it doesn't. So...

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Stuart McLean, Macquarie Research - Research Analyst [16]

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If it does go out to 30 June, so you believe your guidance would be factoring that in?

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Nicholas Schiffer, Vicinity Centres - CFO [17]

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Our guidance absolutely factors in a scenario that sees it go out to 30 June.

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Stuart McLean, Macquarie Research - Research Analyst [18]

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Okay. Perfect. And then also just on the developments, just 2 kind of related questions. One is Chatswood. The yield there has fallen from 5.5% to 6% to just 5.5%. Just wondering what's driven that. And what are you expecting for an initial yield there?

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Carolyn Viney, Vicinity Centres - Chief Development Officer [19]

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Thanks. It's Carolyn. Look, as you know, we try and give you the best guidance we can in the planning stages of these projects. And as we move them towards final approval, we generally tighten up on how we see that yield. So in the recent period, where we've got much closer to starting construction and tying in key tenants to that project, we've fixed on a stabilized market yield of 5.5% and an IRR greater than 10%.

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Stuart McLean, Macquarie Research - Research Analyst [20]

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Okay. And so is the 5.5%, therefore, lower income assumptions that you've been discussing with tenants? So what's the driver there?

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Carolyn Viney, Vicinity Centres - Chief Development Officer [21]

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Well, the driver is a range of factors. We've spent a lot of time in the last 6 to 12 months derisking that project. We've obviously obtained our primary DAs for that project. We've locked in a builder for our pricing program. Peter and his team have been doing a lot of work with pre-leasing of the tenants. And in the current environment, we remain very confident about Chatswood as a luxury premium destination in Sydney. We've reflected all of those things and taken off, as you would expect, a weighted risk position to it and arrived at 5.5%.

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Stuart McLean, Macquarie Research - Research Analyst [22]

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Okay. And maybe just on returns in development. Just looking at The Glen, how is that stabilizing? And the reason I ask is I look at the implied NOI coming out of the asset, it seems to be around $20 million. But the new development should have added $15 million to what was already a base of $11 million. So just wondering what kind of I'm missing there.

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Carolyn Viney, Vicinity Centres - Chief Development Officer [23]

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Sure. I'll let Peter talk to the income. But I guess the observation I would make in relation to the project, generally, we completed that last big construction stage late last year. We're in the process of backfilling the David Jones box with a range of mini majors. So when we get all those retailers open and we saw the centers completely open, we'll be closely monitoring how it's performing. But of the piece that is open and that is, of course, the majority, the number of retailers across the dining and the food retail areas, that fresh food precinct downstairs, they're trading incredibly strongly. And that's all before the 500 apartments that we have on top of the center settle and people move in later this year. So we're still optimistic about the right product being created at The Glen.

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Peter Huddle, Vicinity Centres - COO [24]

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Yes, I'll just add to that. I think you also got to take into account that the major stage openings didn't open on 1 July. They opened from August and progressively throughout the year. So there needs to be probably a more thorough reconciliation. You don't have visibility to that, but we can provide some insight into that. And with all retail projects there's obviously -- for the first couple of years, we have some stabilization dollars going into the P&L to assist positioning of those centers in the market so that they're successful.

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Stuart McLean, Macquarie Research - Research Analyst [25]

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So put another way, you'd expect the book value of $390 million to be continued to mark up over time?

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Peter Huddle, Vicinity Centres - COO [26]

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Yes.

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Operator [27]

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(Operator Instructions) Your next question comes from Andrew Dodds of Jefferies.

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Andrew Dodds, Jefferies LLC, Research Division - Equity Analyst [28]

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Just 2 quick ones from me. 2.5% comp NOI growth is a fair improvement on the pcp. I was just hoping to get an idea of what centers were excluded from that number.

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [29]

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Yes, sure. Thanks a lot, Andrew. I'll perhaps turn it over to Nick and then Peter, for any commentary on the -- what I think was a very strong NPI comparable performance.

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Nicholas Schiffer, Vicinity Centres - CFO [30]

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Thanks, Grant. So in line with prior treatments, we've, of course, excluded the sold -- the centers we sold during the period, Corio, Mt Ommaney and Lennox. We then exclude centers in predevelopment, which are Bankstown, Galleria, Chatswood and Myer Centre Brisbane. And we exclude centers that are development impacted, so DFO Perth, Mandurah, Ellenbrook, QueensPlaza, Roselands and The Glen.

In terms of overall NPI, the comp NPI reflects 85% of the VCX total NPI. So it's a pretty complete measure or it provides a good picture of the broader health of the portfolio.

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Andrew Dodds, Jefferies LLC, Research Division - Equity Analyst [31]

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Great. And then just on leasing spreads, they're down at 12% this year, core down 11%. Are you able to split out WA within that number?

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Peter Huddle, Vicinity Centres - COO [32]

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Yes. The WA continues to be challenging for us. The interesting one with WA is we have seen, I believe, 9 straight months of MAT growth, an MAT growth beyond 4%, which is higher than the portfolio. We're not seeing it just yet translate into leasing spread activity. Leasing spreads in WA are double digit down. So when you break that out, when you break WA out, obviously, it's a lot better. But we're hopeful with increased economic conditions in WA and the sales performance, that we start seeing some recovery there.

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Operator [33]

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The next question comes from Adrian Dark from Citigroup.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [34]

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I think first question is probably for Peter. Just in relation to the core portfolio performance, comparable NPI growth there is still slightly negative. I was interested in your thoughts on essentially what the path is to returning that to growth. Is that something that you can see in the near term? Or are you expecting more of a flat outcome for that portfolio over the short to medium term?

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Peter Huddle, Vicinity Centres - COO [35]

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Adrian, it's a really good question and probably a complicated answer. It really -- the core portfolio is a function of where we're investing in capital in the core portfolio, particularly on the ambiance projects that we spoke about. Whether it's Northland, Altona Gate, Victoria Gardens, we see a path to growth in those in the short to medium term. We're doing a lot of remixing strategies obviously as well, particularly in terms of Northland, Bayside. And again, we see that as short-term vacancy increases to allow the remixing to occur to return to a path to growth. And then we -- so they're the 2 main ones.

And then we spoke about WA as well. So WA is probably centers such as Galleria, for example. Instead of doing the larger development as planned from the prior years, we're now focused on more of ambient upgrade in terms of Galleria to reposition it back into the marketplace and then a master plan that can be rolled out and phased over time when it makes sense to redevelop that center with more significant capital. So it's a long answer to your question, but it's not a simple answer.

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Adrian Dark, Citigroup Inc, Research Division - Director and Analyst [36]

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That's helpful. And then second question is probably for Grant or Justin just in relation to potential disposals. Obviously, it was topical on our last results call, and I think you were pointing to a relatively tough market at that point. You have been able to get some asset sales away over the half. Could you just provide an update on how you're thinking about that at this point, please?

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [37]

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Look, I think, Adrian, the emphasis of the company today, having, I think, done the majority of the nonstrategic divestitures, is to optimize the performance of what we've got. That doesn't mean that we're not open to inbound inquiry on any asset because our objective is always to realize value. But fundamentally, as a management team, our focus is shifting very deliberately now to improving the performance, as Peter just outlined, for the core most especially.

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Operator [38]

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Your next question comes from Richard Jones of JPMorgan.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [39]

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Just in terms of Chatswood, obviously, it's a pretty -- yes, it's a pretty big spend on the project. But just wondering, one, I guess, does it have Board approval? And secondly, what do you need before you get Board sign-off? And I guess are you confident given the retail backdrop of spending $1.1 billion on the asset?

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [40]

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We typically don't disclose our Board decisions. But what I would say is that the management team has set a series of gates for the actual commencement of the project, most especially an effective lease-up, particularly in luxury, which I'll ask Peter to maybe talk about in a moment. But where we've shifted to, as a general comment on project approval, is cross-functional efforts across both finance, development operations, most especially -- and within the operations team, especially focusing now on the gating issue of can we lease the new build up.

And as we deconstruct other assets that perhaps were commenced in the mid-2010, oftentimes, I think that assumption around leasing was maybe excessively optimistic. And I think the -- we need to pressure test leasing more so now than in the past, and that will be the key gate for Chatswood to pass through.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [41]

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Okay. So can you maybe give us a bit more color on pre-leasing on where it's at and what it needs before you start?

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Peter Huddle, Vicinity Centres - COO [42]

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Richard, I think it's probably worth to mention as well that from Chatswood's point of view, a significant amount of the incremental retail -- incremental space coming on board is actually commercial. So we're in the market pre-leasing commercial as well. There's less than 10,000 square meters of additional retail space. And in my personal point of view, I think it's appropriate and clearly not overbuilt in the marketplace unlike other developments that I've seen around the country.

And from a pre-leasing perspective, we're targeting in excess of 20% of the GLA for specialty retailer from an income point of view committed before commencing the project. And we're specific in terms of positioning Chatswood for -- it would not be a surprise to anyone, for the key luxury precincts, which are looking for significant placement in the wealthiest area in Australia. So we're targeting commitments from key retailers that are international retailers and the best of domestic retailers to commit before commencing the project.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [43]

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All right. Just to clarify that comment, so does the luxury component you're referring to suggest you're targeting 20% of the luxury space being pre-committed? Is that what you're saying?

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Peter Huddle, Vicinity Centres - COO [44]

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No. We're saying 20% of the space, and we have specific precommitments for specific luxury retailers as well.

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Richard Barry Jones, JP Morgan Chase & Co, Research Division - VP [45]

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Okay. Just a separate question. Just in terms of the buyback, is that -- can we get a comment on your thoughts around the buyback at the moment?

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Nicholas Schiffer, Vicinity Centres - CFO [46]

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Sure. It's Nick Schiffer here. So over the last 2 years, you'd be well aware that we've invested roughly $520 million in the buyback. In the last 6 months, the buyback has bought at a 14.1% discount to NTA.

Look, our balance sheet is in very strong shape. We continue to have a variety of applications for our balance sheet capacity, whether it be some of these great developments we've been talking about, more modest sort of ambience-related CapEx, potential for acquisitive growth or for a buyback. I think in the past, Grant's been keen to ensure that where we've mobilized the buyback, it's been funded through asset sales. That probably remains a component of our thinking. But in terms of when and how and to what level of sort of capital we think into the buyback going forward, I won't be drawn on that other than to say it's one of our options available to us.

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Operator [47]

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

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Grant Lewis Kelley, Vicinity Centres - CEO, MD & Director [48]

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Great. Thank you very much. Thanks to everybody for their participation on today's call. We sincerely appreciate everyone's time. And that actually concludes our formal presentation for today. Thanks once again, and we look forward to catching up with many of you over the coming weeks.