The outlook for ASX shopping centre conglomerates Vicinity Centres (ASX: VCX) and Scentre Group (ASX: SCG) has been downgraded as coronavirus takes a toll on the Australian retail sector. Ratings agency Moody’s has revised its outlook on the two groups from ‘stable’ to ‘negative’ as a result of deterioration in the retail environment.
Despite this, Vicinity Centres shares are up by 7.73% and Scentre Group shares are up by 9.90% at the time of writing.
Scentre Group owns and manages the Westfield shopping centres in Australia and New Zealand. Moody’s affirmed Scentre Group’s issuer ratings, but according to The Age, its outlook was revised to negative “due to the high likelihood that further deterioration in the retail environment, caused by the coronavirus pandemic, will pressure Scentre’s revenue, income, and leverage metrics.”
Scentre Group has $2.5 billion of bonds and bank facilities maturing through to December 2021. This morning, the group announced that it had obtained additional unsecured bank facilities that increase its available liquidity position to $3.1 billion as at 1 April 2020. The new facilities have a 2-year duration and will provide Scentre Group with further funding flexibility over the coming period.
Scentre Group previously suspended its full year outlook as a result of the coronavirus pandemic. Moody’s says it expects deterioration in the Groups earnings and earning-based metrics, admitting ongoing changes to the industry reduce the ability to forecast accurately.
Moody’s also downgraded its outlook on Vicinity Centres, which it said is exposed to the declines in tourism. Vicinity has a 50% interest in Chadstone, Australia’s largest shopping centre. Moody’s says Vicinity is the leading retail landlord within the luxury segment in Australia.
As quoted in The Age article, Moody’s commented:
Vicinity’s largest asset, Chadstone, caters to affluent tourists from Asia and Vicinity also has a total of six shopping centres that offer luxury brands and a hotel attached to Chadstone. The reduced foot traffic will weigh on the turnover rent (the percentage of sales that tenants pay to landlords above the base rent), ancillary income, and hotel bookings.
Vicinity has also withdrawn its FY20 guidance, citing deterioration in the retail trading and operating environment. Moody’s analysts are predicting that “deterioration in tenant credit profiles, along with government pressure, will prompt landlords to offer abatement, deferral, and/or rent relief,” according to The Age.
Retail sector suffering
The change in outlook comes as many shopping centre tenants including beauticians, cinemas, gyms, massage services, and pubs are closed on government orders. Food courts can still operate but may only offer takeaway. Many retailers have chosen to shut stores as social distancing rules have seen a sharp drop in foot traffic.
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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.