Company Reports

Vicinity Centres’ portfolio includes a wide variety of Australian retail property assets. Its largest asset is 50% ownership of Chadstone in Melbourne, which represents about AUD 3 billion of the AUD 15 billion portfolio at the end of June 2024. Central business district assets make up about 15% of the portfolio, including Sydney’s Queen Victoria Building, Strand Arcade, The Galleries, Brisbane’s QueensPlaza and Uptown, and Melbourne’s Myer Bourke Street and Emporium. Vicinity also owns factory outlet centers and suburban and country shopping centers, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington and Broadmeadows in Melbourne, and WA centers in Karratha, Mandurah, and Rockingham.

No-moat Vicinity Centres reported funds from operations of AUD 14.6 cents per security, down 3% year on year, largely due to lower property income and higher interest costs. The result was 1% above our forecast and the top of the guidance range. Vicinity will pay a final distribution of AUD 5.9 cents per security in September, taking total fiscal 2024 distributions to AUD 11.75 cents, down 2%. Guidance was also better than we expected. We now forecast fiscal 2025 FFO per security of AUD 14.6 cents per security and distributions of AUD 12.4 cents per security, both toward the lower end of the guided ranges. We had previously forecast small reductions in both.

We maintain our fair value estimate of AUD 2.15 per security for no-moat-rated Vicinity Centres following the transition of coverage to a new analyst. We think the REIT is in good shape to withstand a potential retail slowdown. Portfolio occupancy remains high at 99.1%. Admittedly, its average lease is only 3.6 years, compared with 6.8 years at no-moat Scentre Group—specialty tenants only—and 5.3 years at Region Group, though the latter is more convenience-focused than Vicinity. However, we’re not overly concerned because the shorter lease length is partly a function of development projects and some shorter leases signed during the pandemic. New leases signed during the first half of fiscal 2024 averaged a slightly longer 4.5 years, while Vicinity has achieved 2.6% increases on new leases so far this financial year.

Vicinity Centres’ portfolio includes a wide variety of Australian retail property assets. Its largest asset is 50% ownership of Chadstone in Melbourne, which represents about AUD 3 billion of the AUD 14 billion portfolio at the end of December 2023. Central business district assets make up about 15% of the portfolio, including Sydney’s Queen Victoria Building, Strand Arcade, The Galleries, Brisbane’s QueensPlaza and Uptown, and Melbourne’s Myer Bourke Street and Emporium. Vicinity also owns factory outlet centers and suburban and country shopping centers, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington and Broadmeadows in Melbourne, and WA centers in Karratha, Mandurah, and Rockingham.

Vicinity Centres’ portfolio includes a wide variety of Australian retail property assets. Its largest asset is Chadstone, which makes about AUD 3 billion of the AUD 14 billion portfolio. CBD assets make up about 15% of the portfolio, including Sydney’s QVB, Strand Arcade, The Galleries, Brisbane’s Queen’s Plaza and Myer Centre, Melbourne’s Myer Bourke St and Emporium. Vicinity also owns factory outlet centers, and suburban and country shopping centers, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington Central and Broadmeadows Central in Melbourne, and WA centers in Karratha, Mandurah, and Rockingham.

We increase our fair value estimate for no-moat Vicinity Centres by 4% to AUD 2.15 per security following the release of first-half earnings, driven by the time value of money and solid leasing performance. Management reaffirmed full-year guidance for funds from operations at the top end of the range of AUD 14.1 to AUD 14.5 cents per security. The distribution was AUD 5.85 cents per security in the first half. We forecast the full-year distribution to be AUD 11.5 cents, representing a yield of approximately 6% based on the prevailing security price.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Vicinity Centres’ portfolio of Australian retail assets is high but varying quality. Its largest asset by far is Chadstone, which makes about AUD 3 billion of the AUD 14 billion portfolio. CBD assets make up about 16% of the portfolio, including Sydney’s QVB, Strand Arcade, The Galleries, Brisbane’s Queen’s Plaza and Myer Centre, Melbourne’s Myer Bourke St and Emporium. Vicinity also owns factory outlet centres, and many suburban and country shopping centres, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington Central and Broadmeadows Central in Melbourne, and WA centres in Karratha, Mandurah and Rockingham, to name a few.

We raise our fair value estimate for Vicinity Centres by 10% to AUD 1.70 per share, with occupancy rates holding up significantly better amid the ongoing pandemic than we’d previously anticipated. While we always assumed long-term occupancy rates would remain high given the quality of Vicinity’s locations, Vicinity has maintained strong occupancy of 98% in the first-half of fiscal 2021. Consequently, the earnings trough caused by continuing coronavirus containment measures is likely to be shallower than we’d previously forecast. Vicinity screens as modestly undervalued, trading at a 7% discount relative to our revised fair value estimate.

Vicinity Centres’ portfolio of Australian retail assets is high quality on average, though it has a wide variety. Its largest asset by far is Chadstone, which makes about AUD 3 billion of the AUD 14 billion portfolio. CBD assets make up about 16% of the portfolio, including Sydney’s QVB, Strand Arcade, The Galleries, Brisbane’s Queen’s Plaza and Myer Centre, Melbourne’s Myer Bourke St and Emporium. Vicinity also owns factory outlet centres, and many suburban and country shopping centres, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington Central and Broadmeadows Central in Melbourne, and WA centres in Karratha, Mandurah and Rockingham, to name a few.

No-moat Vicinity Centres’ shares are trading in line with our retained fair value estimate of AUD 1.55 after rallying in recent weeks following the lifting of COVID-19 lockdown restrictions in Victoria. The September 2020 quarterly operational update was in line with our expectations and we make no changes to our long-term forecasts. Vicinity’s September 2020 quarter was hindered by strict lockdowns in Victoria, travel restrictions, and subdued CBD activity.

We reduce our fair value estimate for Vicinity Centres by 23% to AUD 1.55 and no longer attribute a moat rating to the group. Our high uncertainty and Standard stewardship ratings are unchanged. Despite our lower fair value, the recent rights issue and current pricing still understate the value.

We are placing both Vicinity Centres and Scentre Group under review as we reassess the moats of the high-end Australian mall operators. We removed the moats for Stockland and GPT Group earlier in 2020, in part due to the challenges in their retail portfolios. Vicinity and Scentre have substantially higher quality retail portfolios. That said, the challenging conditions in the face of COVID-19 and acceleration of market share growth of e-commerce warrants a review of the moats.

Narrow-moat Vicinity Centres announced a large capital raising, comprising a fully underwritten AUD 1.2 billion institutional placement at AUD 1.48 per share and a retail security purchase plan, or SPP, at the same price or lower to raise up to another AUD 200 million.

We reduce our fair value estimate for narrow-moat Vicinity Centres by 19% to AUD 2.10 from 2.60. We expect consumers to switch online during the health crisis, and limit discretionary spending until the economy improves.

Vicinity Centres’ fiscal 2020 interim result revealed earnings in line with management expectations, and our forecasts. However, the group reduced full-year guidance after a material decline in foot traffic since late January, due to the novel coronavirus, and extrapolating this effect into the future. The new guidance is for funds from operations, or FFO, to be in a range of AUD 17.2-17.4 cents per security, down from AUD 17.6-17.8 cents.

Narrow-moat-rated Vicinity Centres announced it will dispose of two assets and use the proceeds to pay down debt. The immediate effect is a minor reduction in funds from operations, or FFO, guidance for fiscal 2020, as the assets sold were substantially higher yielding than the interest on the debt being paid down. Management had announced in August 2019 that further asset sales would be suspended given unattractive pricing for retail assets and a crowded divestment market.

Vicinity Centres' first-quarter trading update revealed plenty of activity at the group, including developments, solar installations, and a share buyback. It was enough to hold their own in a challenging environment for retail. But despite all the upward striving, the sluggish retail environment and the varied quality of Vicinity’s portfolio holds down our enthusiasm.

Narrow-moat-rated Vicinity Centres reported a lacklustre fiscal 2019 result. Vicinity’s bifurcated retail property portfolio saw its high-quality assets perform well, but was hampered by weaker performing properties that are either lower-quality, or in economically sluggish regions such as Western Australia. That dynamic is likely to persist. The result has no impact on our investment thesis with much of the bad news for retail property already priced in. The stock trades close to our unchanged AUD 2.60 fair value estimate.

We make no changes to our AUD 2.60 fair value estimate for Vicinity Centres following the transition to a new analyst. The majority of Vicinity's malls dominate their catchment areas. These regional and subregional malls adequately service demand, enjoying efficient scale characteristics, which underpin the firm's narrow economic moat. Our medium fair value uncertainty and standard stewardship rating also remain intact. At current prices, securities in Vicinity screen as fairly valued.