By David Winning
SYDNEY--Vicinity Centres (VCX.AU) has dropped plans for more major asset sales and the establishment of a A$1 billion wholesale fund with a unit of Singapore conglomerate Keppel Corp. (BN4.SG), citing a glut of malls on the market that has dragged down transaction values for retail property in Australia.
The Aussie real estate investment trust laid out its strategic shift on Wednesday alongside a 72% fall in annual profit, illustrating the challenges faced by owners of regional and neighborhood malls at a time when e-commerce is growing in popularity and Australian consumer confidence remains weak.
Vicinity Centres made a net profit of 346.1 million Australian dollars (US$235.2 million) in the 12 months through June, sharply down from A$1.22 billion in the same period a year earlier. The result included a A$237.1 million net decline in the value of its property portfolio, especially in Western Australia, where an improvement in resources spending hasn't yet buoyed sectors such as retail.
Funds from operations fell 1.1% to 18.0 Australian cents per security, at the bottom end of guidance provided as recently as April. Stripping out the impact of asset sales made during the year, funds from operations rose by 2.0%.
Vicinity has been striving to refocus its portfolio more on flagship malls such as Chadstone in Victoria state, which it jointly owns with closely held Gandel Group, and on so-called direct factory outlets. These malls have proved more resilient to the headwinds blowing through Australia's retail sector.
An overall 1.3% net valuation drop in Vicinity's property portfolio over the past six months masked a 1.2% valuation gain in its flagship portfolio. The weighted average cap rate across the group's portfolio tightened by 1 basis point to 5.30% between January and June.
In a bid to counter the trend of consumers shopping for clothes and other products online, Vicinity plans to add either apartments or more food-and-entertainment hubs to its portfolio. However, these ambitions have been complicated by a lack of buyers for smaller malls.
The company last year offered neighborhood malls worth up to A$1 billion for sale, aiming to free up capital for investment in larger properties, but wasn't able to offload all of them.
"As the year progressed, however, investor demand for retail-property funds continued to soften globally," Chief Executive Grant Kelley said. "Compounded by a crowded divestment market, this has impacted retail-property pricing in Australia."
Mr. Kelley said it was in Vicinity security holders' best interests to not proceed with the proposed Vicinity Keppel Australia Retail Fund, nor to sell any other significant assets for now.
"Our focus will now be on maximizing the value of these assets through continuing to enhance the retail mix, leveraging ancillary income opportunities, identifying and driving operational efficiencies and making targeted investment into the assets as appropriate," the CEO said.
Vicinity forecasts funds from operations of between 17.8 and 18.0 cents per security in the new fiscal year, and a distribution payout ratio at the upper end of 95% to 100% of adjusted funds from operations.
Shares in Vicinity were down 1.2% at A$2.50 in mid-morning trade.
Write to David Winning at firstname.lastname@example.org
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August 13, 2019 21:39 ET (01:39 GMT)Copyright (c) 2019 Dow Jones & Company, Inc.