1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector: Real Estate||52-Week Range: A$2.36 – 2.92|
|Industry: REIT||Market Cap: A$10,646.9m|
We rate VCX as a Neutral for the following reasons:
- VCX trades on a 6.2% discount on price to NTA and our valuation. VCX trades on an attractive dividend yield of 6.5%.
- High quality property portfolio (high occupancy, stable rental growth etc.) with resilience to weakening retail sales environment through its portfolio repositioning.
- Decent development pipeline to power growth at decent initial yield and IRR.
- Retail environment remains challenging and expected to remain so over the next 12 months as households remain constrained by high debt levels and lack of wage growth despite stable unemployment in the eastern states which encourages consumer spending.
- Robust FY19 earnings guidance despite weak retail environment.
We see the following key risks to our investment thesis:
- Increase in interest rates adversely affecting the Company’s cost of debt and consumer spending in retail sector.
- Rise in unemployment, resulting in lower consumer retail spend and thereafter affecting rental growth and property valuations.
- Inability to mitigate consequences that arise from weak retail environment.
- Weaker property fundamentals than expected.
- Tenancy risk/retailer bankruptcies resulting in higher vacancies across the asset portfolio (e.g. Dick Smith) and adverse effect on earnings.
- Development schedule delays and project cost blowouts.
- Any reduction in investor interest for bond-proxy stocks.
Figure 1: Centre Type
Source: Company, FY18
Figure 2:Properties by geography
Source: Company, FY18
Vicinity Centres (VCX) reported FY18 results, reporting FFO per share of $0.182 which exceeded analyst estimates of $0.181, giving a boost to VCX’s share price. Comparable underlying earnings (after adjusting for acquisitions and divestments) were down 1.3%.
Distribution per security was 16.3 cents, down from 17.3cps in FY17. Net tangible assets (NTA) was up +5.3% to $2.97, driven by asset valuation gains. VCX maintained balance sheet strength with solid gearing position of 26.4% and interest cover of 4.8x.
VCX’s property portfolio retained healthy fundamentals with occupancy rate improving from 99.5% to 99.7%. VCX trades on a 6.2% discount to NTA and our valuation, and on an attractive dividend yield of 6.5%.
VCX retains: 1. a robust FY19 outlook with earnings growth of between +3.4% to +4.6% (despite challenging retail environment persisting); 2. strong development pipeline to drive earnings in the future; and 3. repositioned portfolio mix towards growth categories to support future MAT growth hence.
We retain our Neutral recommendation.
- Key highlights from FY18 results: Funds from Operations of 633.1m was down -1.3% on pcp after adjusting for acquisitions and divestments Distribution per security was 16.3 cps, down from 17.3cps in FY17. During FY18, gearing rose to 26.4% from 24.7% in FY17, however was still at the lower end of target range of 25% to 35%. The interest cover ratio fell to 4.8x from 5.6x in FY17. The portfolio occupancy was strong at 99.7% and Net tangible assets (NTA) was up +5.3% to $2.97, driven by asset valuation gains and securities buyback.
- FY19 Guidance. Management provided the following guidance commentary for FY19: 1. FFO guidance for FY19 was 18.0 to 18.2 cps reflecting comparable growth of +3.4% to +4.6%. 2. distribution payout ratio is expected to be at the upper end of the target range of 95%-100% of AFFO or 85%-90% of FFO. 3. Management has planned divestment of up to $1.0bn of non-core assets. 4. A$300m of non-core assets will be divested. 5. Maintenance capital expenditure and incentives in total for FY19 are expected to be approximately A$80m to A$90m (~0.6% of gross asset value). 6. Management announced establishment of ~$1bn wholesale fund, 50:50 joint venture with Keppel Capital. 7. Management expects no major change to the current retail environment over the next 12 months. 8. Management indicated securities buy back in FY19 to enhance FFO per security.
- Property portfolio metrics improved. Portfolio occupancy increased from 99.5% to 99.7%, and leasing spreads remained positive at 0.7%. Comparable specialty sales per sqm increased 7.5% to $10,133, with specialty occupancy cost of 14.7%, reflecting portfolio repositioning undertaken through the year and benefits from ongoing active management. Specialty store and mini major MAT growth was 1.6%, up from 0.8% on the prior period, with retail services, food catering, leisure and homewares categories showing strong growth.
- Establishment of wholesale fund. VCX announced the establishment of a 50:50 joint venture with Singapore’s Keppel Capital to manage a new $1bn wholesale property fund, Vicinity Keppel Australia Retail Fund (VKF). The fund is proposed to be seeded with ~$1.0bn of assets from Vicinity’s balance sheet. In our view, this planned fund would expand VCX’s wholesale funds management platform and would generate additional income streams.
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VCX’s FY18 Results Summary
Figure 3: Summary of VCX FY18 Results
Figure 4: Debt metrics
Figure 5: Property Portfolio fundamentals
Figure 6: Development pipeline
Strong progress on retail development pipeline – Highlights 1. Mandurah Forum was successfully completed. 2. Chadstone hotel construction commenced in 2018 and is on track to be delivered on time (late 2019) and budget. The project is forecasted to provide development yield of >8% and IRR of 10%. 3. Stage one and two of the Glen are open and stage three is fully leased. Development yield >7% and IRR >13% is forecasted. 4. DFO Perth is 100% leased and expected to provide development yield of >11% and IRR >16%. 5. Victoria’s Secret flagship store on track for opening in December 2018 and is forecasted to provide development yield of >6% and IRR >10%.
Figure 7: VCX Financial Summary
Source: : Company, BTIG, Bloomberg
Vicinity Centres Ltd (VCX) is a ASX listed REIT holding a quality retail portfolio and fully integrated asset management platform. VCX owns ~A$14.9 billion of retail assets. Some notable retail assets that Vicinity Centres owns or has an interest in include: Chatswood Chase (NSW), Chadstone Shopping Centre (VIC), DFO South Wharf (VIC), QueensPlaza (QLD), Emporium Melbourne (VIC) and DFO Homebush (NSW). VCX is the result of the merger between Federation Centres and Novion Property Group.