Vicinity Progress on Strategy but Stat Profit in major decline
Vicinity announced the results of the first half of FY19 this week with some progress on its strategy but with a significant reduction in statutory profits to $235M, down from $755M for the pcp. The major loss of profit is largely due to the change in valuations gains over the period with major gains reported in last years results now in stark contrast to valuation declines starting to bite.
Vicinity saw this coming and in August 2018 set a clear direction to rebuild a sustainable growth platform for securityholders by;
divesting non-core assets to focus on their destination portfolio of approximately 50 market-leading assets,
creating value by realising mixed-use opportunities on Vicinity’s land-holdings and
expanding the wholesale funds platform.
The results this week affirmed the strategy but the challenges to execute remain significant.
Funds From Operations for the group were $349.5 million or 9.06 cents per security (down -0.8%). Adjusting for divestments, comparable FFO per security growth was 2.0%, which includes development completions, comparable NPI growth of 1.1% and benefit from the securities buy-back. The FY19 interim distribution was 7.95 cents per security, reflecting an adjusted FFO payout ratio of 95.2%.
Since June 2018, Vicinity have disposed of 12 assets worth $631M with most being acquired by SCA Property Group in October 2018. A further 12 Centres worth $1bn are earmarked for transition to a new wholesale partnership with Keppel Capital, though progress on this has slowed.
Across Vicinity’s 62 shopping centres, the portfolio remains close to full occupancy at 99.7%, in line with June 2018 results. Total portfolio MAT growth was 2.7%, up from 1.2% at June 2018. Specialty and mini majors MAT growth was 4.2%, up from 1.6% at June 2018, underpinned by Chadstone (+12.4%) and the DFOs (+6.7%).
Specialty MAT for the total portfolio was $10,746 on a per sqm basis, up 6.0% since June 2018, with a specialty occupancy cost of 15.2%. Chadstone and the Premium CBD assets on average reported more than $18,400 per sqm in specialty sales, with a specialty occupancy cost of 17.5%.
The total portfolio leasing spread was 4.4% for the period, with good results for both renewals and replacements. The highly productive DFO Outlet Centre portfolio achieved very strong leasing spreads of 15.9% for the period.
Vicinity’s 62 direct-owned retail properties were revalued during the period, recording a net valuation decline for the six months of $37 million or 0.2% decrease. Vicinity’s Flagship portfolio reported a net valuation gain of 2.4% or $168 million, reflecting strong sales performance and capital improvements.
Vicinity is now generating a sizable income stream from non leasing income with total ancillary services (which includes electricity, media and parking) now contributing 12.0% of NPI. Excluding electricity income, ancillary income streams were up 4.8% over the period. Vicinity is investing $73 million in its solar energy program, with eight projects now built and an additional 14 projects under construction. Vicinity is at the leading-edge with its integrated energy strategy, trialling bi-facial solar panels, solar glass, battery storage and blockchain energy technology to further reduce reliance on grid electricity, better utilise its physical assets for solar energy generation and drive future value in this space. These strategies will help to increase the margin Vicinity can derive from its energy management.
Vicinity have forecast FY19 FFO per security of 18.0 to 18.2 cents, in line with previous guidance and reflecting comparable growth of 2.3% to 3.4%.
Despite these underlying improvements in income, sales and occupancy, the sector still faces headwinds with softening cap rates and weakening consumer demand likely to maintain pressure on the asset class for the short term. As the chart below indicates Vicinity have underperformed against the ASX200 with a -3.7% loss in shareprice since Jan 2018 compared to an average 7.4% gain.
VCX Trading Chart vs ASX200 AREITs
Blue - VCX
Purple - ASX200 AREITs