The Vicinity Centres (ASX: VCX) FY20 annual report released yesterday disclosed a blowout statutory loss of $1.8 billion. The announcement saw the Vicinity Centres share price fall by more than 4%. The major contributor to the loss was property valuation decline of $1,718 million and an impairment of goodwill of $427 million. In July, Vicinity Centres disclosed an 11.4% decline in valuation. Accordingly, the company has cancelled its June distribution.
The Vicinity Centres report goes on to point out that net property income (NPI) had reduced by $204 million, or 22.96%. $169 million of this was due to the impact from the coronavirus. $109 million due to rent waivers, and $60 million due to rent deferrals. The latter part reflects a heightened collection risk in these times. The company is continuing to negotiate short term lease variations.
Moreover, the company has seen a slide in occupancy rates from 99.5% down to 98.6%. In addition, the real estate investment trust (REIT) finds itself in the firing line again as Victoria has re-imposed restrictions due to the pandemic second wave.
Vicinity Centres report – the good news
The good news is that most of the country has opened up again, this has provided some positive results. For example, in June the portfolio's store visitation, as a percentage of FY19, stood at 51%. While 90% of stores were trading as compared with FY19. Moreover, the company has moved from 33.7% gearing to 25.5% after a $1.2 billion institutional placement. And much of this debt is not due until at least 2022.
To understand the financial performance of a company such as this, you need to know how REITs report, and how it all hangs together. For example, statutory profit, or loss in this case, are derived from following accounting standards. This means inclusion of things like devaluation and the loss of goodwill. However, neither of these issues have anything to do with the level of cash the company has. And in this case it has little to do with the company's ability to generate revenues.
REITs also use a method called funds from operations or FFO. For the benefit of the Vicinity Centres report, this is the equivalent of earnings, or earnings per share for a standard company. The company's FFO for FY20 was $520.3 million. This was a reduction of 24.5% compared with FY19. While this is not a great result, it takes into account the real-world impacts of coronavirus, and is far more informative than a $1.8 billion statutory loss.
Where to now for the Vicinity Centres share price?
The Vicinity Centres report also disclosed the company's thinking on the move to online shopping. While we are seeing a phenomena of the rapid move to online shopping, we are also seeing many stores become omni channel. That is, to use a multitude of sales and delivery channels. For instance, Michael Hill International Ltd (ASX: MHJ) yesterday announced a move to a range of new sales channels. These have included click and collect, click and reserve, as well as a drop shipping model.
In all of these cases, there is a need for a physical store, both for sales and for the delivery options. The REIT has also been able to review the tenancy mix and will be evolving over time to reflect both non-discretionary stores, as well as in-demand retail.
Foolish takeaway
I believe the Vicinity Centres report showed a very good company wrapped in a poor FY20 performance due to coronavirus. However, by the REIT's own admission, recovery of these stores and centres will take a long time. Moreover, while I agree with the omni channel focus, there is still likely to be less retail outlets for any given chain. Moreover, the Victorian experience shows us how rapidly this coronavirus can take off. Until we either learn to live with it, or finally get a working vaccine, then there is a chance for intermittent lockdowns to occur.
Personally, I feel there is far too much uncertainty around the sector of large format, largely non-discretionary retail centres. In fact, anything requiring regular gatherings of large crowds is hard to foresee happening anytime soon. As such, it's likely the Vicinity Centres share price will continue to face significant headwinds over the near term.
