ASX code: VCX
Share price: $2.86
Industry: Real Estate
Forecast Distribution: 18.0c
Following a golden seven-year period for AREITs, FY2017 has proven to be quite the reality check for much of the listed property sector. This hasn’t necessarily reflected stock specific issues, rather just the elevated valuations apparent in listed property groups as at 30 June 2016.
With bond yields surging higher from artificially depressed levels since then, many so called ‘bond proxies’ have sold off, in turn restoring some value to the yield focused AREIT sector. This has indeed proved to be the case for Vicinity Centres (ASX code: VCX), 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 $1.4bn of assets. The strategic intent is to recycle this capital into its higher returning development pipeline, which in our view represents sensible capital management.
Today, VCX is a retail focused powerhouse with over $23bn of assets under management across 87 shopping centres spanning Australia. With a strong balance sheet and $3.7bn pipeline of identified projects, we believe the group is well placed to steadily grow over the medium to long term.
Recent news flow has been positive, with the group firstly announcing healthy property revaluations that generally reflect tightening cap rates. 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 (WALE) profile of about 6 years. The balance sheet remains well placed, with gearing likely to remain at the low end of management’s target range of 25 per cent to 35 per cent in the near term. In turn, this allows considerable scope for value adding development and opportunistic acquisitions should they arise.
We expect VCX to pay out distributions of approximately 18 cents per security over the coming 12 months. This equates to an attractive yield of about 6.3 per cent.
Given the recent pull back in its security price, coupled with sound future prospects and a solid yield, we believe VCX presents as a worthy research target for income focused investors with a reasonable time horizon.