Vicinity Centres: pullback offers chance to buy in

Following a golden seven-year period, 2017 has proven to be a reality check for listed property trusts.

Following a golden seven-year period for AREITs (property trusts), 2017 has proved to be quite the reality check for much of the listed property sector. This has not necessarily reflected stock specific issues, rather just the elevated valuations apparent in the sector as at June 30, 2016.

With bond yields surging higher from artificially depressed levels since last year, many so-called “bond proxies” have sold off, in turn restoring some value to the yield-focused AREIT sector. This is the case for Vicinity Centres, which has receded 15 per cent over the past six months.

Expectations for the upcoming first-half results remain subdued, in part reflecting management efforts to divest lower quality assets and reposition the portfolio. Since December 2015, the group has divested about $1.4 billion of assets. The strategic intent is to recycle this capital into its higher returning development pipeline, which represents sensible capital management.

Today, VCX is a retail-focused powerhouse with more than $23bn of assets under management across 87 Australian shopping centres. With a strong balance sheet and $3.7bn pipeline of identified projects, the group is well placed to steadily grow.

Recent news flow has been positive, with the group firstly announcing healthy property revaluations. This has increased VCX’s net tangible asset backing by 5.4 per cent to $2.73 per security.

A credit rating upgrade to “A stable” from S&P followed in January, reflecting S&P’s view of improved asset and earnings quality. We tend to agree with this assessment. VCX’s portfolio metrics continue to impress, with occupancy of 99.4 per cent and a weighted average lease expiry profile of about six years. The balance sheet remains well placed, with gearing likely to remain at the low end of management’s target range of 25-35 per cent in the near term.

VCX should pay out distributions of about 18c per security over the next 12 months. This equates to a yield of about 6.3 per cent.

Given the recent pullback in its security price, coupled with sound future prospects and a solid yield, VCX presents as a worthy research target for income-focused investors with a reasonable time horizon.

Adrian Ezquerro is a senior analyst at Clime Investment Management.

www.clime.com.au

ASX code: VCX

Share price: $2.86

Industry: Real estate

Forecast Distribution: 18c