REITs

Vicinity increases valuations by $245m, raises guidance and flags a return to shopping centres

By Market Index
Mon 20 Jun 22, 4:31pm (AEDT)
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Key Points

  • Vicinity also announced preliminary 30 June 2022 asset valuations which indicate a $245m, or 1.7%, uplift in book values
  • Closing out covid-lease variation negotiations and collecting current and outstanding rent remain key priorities
  • Full year distribution for the six months ending 30 June 2022 is expected to be “towards the lower end” of the REIT's 95-100% of AFFP target range

Vicinity Centres (ASX: VCX) was up 6% after lunch following revelations that the shopping centre REIT upgraded funds from operations (FFO) to be at or above 12.6c per security (previous guidance of 11.8 cents to 12.6 cents) while adjusted FFO (AFFO) is now expected to be at or above 10.3c per security for FY22.

Cash collections for the second half FY22 to date have also improved moderately to 91% of gross billings, from 89% of gross billings as at 28 April 2022.

Managements notes today’s guidance update largely reflects the sustained strength of retail sales and improved negotiation outcomes with retailers, hence the stronger than expected cash collections.

Uplift in book values

Vicinity also announced preliminary 30 June 2022 asset valuations which indicate a $245m, or 1.7%, uplift in book values - 5.4 cents per security - for the six months to 30 June 2022 plus a modest tightening of the weighted average capitalisation rate to 5.31% from 5.35%.

Management notes flagship Premium, Outlet and Sub-regional centres - a dominant driver of increased preliminary asset valuations - continued to benefit from stronger transactions, with pricing of third-party interests in assets where Vicinity is a joint owner delivering meaningful valuation gains.

Outlet valuations continue to grow, while CBD asset valuations remained in line with 31 December 2021.

With weekend visitations now at 85% of pre-covid levels, the REIT expects the outlook for CBD retail to improve, with centres eventually returning to their former vibrancy.

Key priorities

Grant Kelley, CEO notes while trading conditions continue to support Vicinity’s ongoing recovery from the pandemic, closing out covid-lease variation negotiations and collecting current and outstanding rent remain key priorities in the lead up to 30 June 2022.

“The updated FY22 earnings guidance today demonstrates our continued focus on collecting current and overdue rent,” said Kelley.

“Furthermore, while we are mindful of the inflationary and rising interest rate environment, we continue to observe favourable trading conditions that support our recovery from the pandemic as well as our long-term growth agenda.”

Recent results

At the half year Vicinity reported a statutory net profit after tax of $650.2m, up $1.04bn (1H FY21: statutory net loss after tax of $394.1m).

Highlights at the interim included:

  • Low gearing of 26.3% and liquidity of $1.8bn

  • NTA of $2.28 underpinned by 2.3% uplift in asset valuations

  • Occupancy maintained at 98.2%

Vicinity’s full year distribution for the six months ending 30 June 2022 is expected to be “towards the lower end” of its 95-100% of AFFP target range and will be announced together with Vicinity’s FY22 annual results 17 August.

Vicinity

Vicinity Centres share price over 12 months.

What brokers think

Early June Morgan Stanley retained an underweight rating over concerns Vicinity’s rebound could take longer than anticipated.

The broker is concerned that funds from operations will continue to disappoint due to weaker longer-term trading conditions and has a price target of $1.82.

Meantime, Macquarie remains attracted to the defensive cash flows of Vicinity, and early June upgraded the REIT to Outperform from Neutral.

With the balance sheet and hedging profile screening positively against peers, the broker raises the target price to $2.01.

Goldman Sachs believes the shares remain attractive particularly on a rising interest rate environment and retains a Buy and price target of $2.10.

Consensus on Vicinity is Moderate Buy.

Based on the four broker’s that cover Vicinity (as reported on by FN Arena) the stock is currently trading with 6.0% upside to a target price of $1.94.

Based on Morningstar’s fair value of $2.10 the stock appears to be undervalued.

Forecast dividend yield for FY22 and FY23 are 5.3% and 5.8% respectively.

Written By

Market Index

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