Ann: September 2020 quarterly update, page-34

Private Client Research

9 November 2020

Vicinity Centres

Operational update

1.

2. 3. 4.

5.

We maintain our Buy recommendation on Vicinity with a $1.70 target price.

•

•

•

Recommendation

Buy

Risk

Higher

Target price

$1.70

Last price

$1.40

Price Performance 3.00

2.50

2.00 A$

1.50 1.00 0.50

Nov-19 Feb-20 May-20 Aug-20

VCX share price (A$) S&P/ASX 200 (rebased)

Vicinity Centres (VCX) provided a September-quarter update and Ord Minnett makes

the following observations:

	The group’s operating metrics were severely affected by the lockdowns in Victoria
1	during the first quarter, given its 52% weighting to that state. More importantly,
2	we were encouraged by the sharp recovery in foot traffic in Victorian assets in
3	the past two weeks from about 30% of pre-COVID levels to 80%. We expect
4	Melbourne retail operating metrics to quickly recover to levels similar to Sydney.

We forecast Vicinity’snet operating income (NOI) will rebound from the severe

rental assistance required in 2020 and stabilise at 83% of 2019 levels in 2021.

Based on an assumed payout ratio of 95% of adjusted funds from operations

(AFFO), we estimate Vicinity offers a stabilised DPS yield of 7.3% in FY22.

We also believe the 40% implied peak to trough impairment in book values is

far too high. We forecast a 25% decline (10% has already been booked) and

are comfortable Vicinity’s balance sheet can absorb this. We note gearing would

rise from 25.5% to about 31% under our scenario.

No guidance was provided, although Vicinity intends to pay a 1H21 distribution

–we estimate 3.3cps.

Cash collection–Cash collection was 56% of gross billings in the first quarter, or

76% excluding Victoria and CBD, up on 49% for the June quarter. Victoria was a

clear drag on cash collection as 83% of Vicinity’s Victorian tenancies were closed

for 12 weeks, from August to October. Vicinity is continuing to negotiate short-term

lease variations, which is affecting the cash collection numbers. We expect a sharp

increase in cash collection in November and December following the easing in

restrictions in Melbourne over the past two weeks.

Foot traffic–Centre visitation for the week ended 3 November was 80% of last

year’s level, or 96% excluding Victoria and CBD. Visitation in Melbourne has

rebounded strongly following the easing of restrictions, rising to 79% of lastyear’s

level, up from 30% two weeks ago.

Sales growth–Total portfolio retail sales growth, on a moving annual total (MAT)

basis, was down 15.2%, or down 1.7% excluding Victoria and CBD. First-quarter

sales growth was 1.1% excluding Victoria and CBD, and down 32% on a portfolio

level including them. The portfolio quarterly sales growth (-32%) was in line with

the June quarter, but materially better excluding Victoria and CBD (+1.1% vs

-14.7%). Supermarkets, discount department stores (DDS), department stores and

mini majors are reporting positive MAT growth (excluding Victoria), offset by

specialty stores and other retail (such as cinemas, travel agents, etc). At a state

level, Tasmania, South Australia, and Western Australia outperformed Queensland,

NSW and Victoria.

Private Client Research

Price Performance

Summary Investment Thesis and Valuation

Investment Thesis

COVID-19 is having a major impact on Australian regional malls. We assume a 25% peak to trough decline in asset values and further material abatements and provisions for the remainder of CY20 and then assume ~13% lower NPI for CY21 from the pre-abated and provisioned CY20 NPI. Vicinity owns some very high-quality retail assets, has some good mixed-use development opportunities but also has a reasonable tail of assets. Its balance sheet is in good shape, which should allow it to absorb future devaluations. We believe the stock has been oversold trading with ~40% implied peak-to-trough write-down in its asset values (11% decline was booked in the Jun-20 half). We believe its Victorian exposure (52%) has weighed on its price but with COVID-19 case numbers dramatically reduced and restrictions being eased, we expect a quick rebound in operating performance, similar to what has been experienced in the other states. We believe Vicinity has over corrected due to this.

Valuation

Abs Rel

Company Data

Shares O/S (mn) 52-week range ($) Market cap ($ mn) Exchange rate Free float(%)

YTD -43.8% -32.5%

1m -3.1% -7.1%

3m 12m 10.2% -47.2% -3.6% -33.1%

4,530 2.71-0.91 4,618.72 1.37 81.3% 22.83 22.7 41 AS51 REITs

3M - Avg daily vol (mn) 3M - Avg daily val ($ mn) Volatility (90 Day)
Index
BBG BUY|HOLD|SELL

Key Metrics (FYE Jun)

$in millions Financial Estimates

4|4|3Our June 2021 price target is $1.70 per share based on a NAV of $1.74 and NPV of $1.62. For the NAV, we

NOI 684 615

Adj. EBITDA
FFO per share
BBG FFOPS
AFFO per share
DPS 0.08 0.09

Margins and Growth

NOI margin NOI growth EBITDA margin EBITDA growth

Ratios

Adj. tax rate
FFO payout
AFFO payout
Net debt/EBITDA
ROA 3.2% 3.2% ROE 4.7% 4.6%

Valuation

Net debt/EV
Dividend yield
EV/EBITDA 13.9 15.2 Adj. P/E 10.3 13.1 P/FFO 10.2 13.1 P/AFFO 12.7 15.6

P/ BV

0.6 0.6

JPM EM Currency Index Australia Breakeven 10Yr S&P/ASX 200 VIX INDEX

Quant Styles:

Size LowVol Value

FY20A FY21E

FY22E FY23E

736 755 717 735 0.12 0.13 0.13 - 0.11 0.11 0.10 0.11

94.7% 94.7% 19.8% 2.5% 92.2% 92.1% 15.4% 2.5%

0.0% 0.0% 0.8 0.8 1.0 0.9 4.7 4.6

3.7% 3.8% 5.3% 5.4%

0.4 0.4 7.3% 7.6% 13.1 12.7 11.3 10.8 11.2 10.8 13.0 12.5 0.6 0.6

forecast a decline in values of 15% (following an 11% decline for 2H20) and value the Funds Management business at 15x. Our NPV is calculated using five years of AFFO, a beta of 0.88 and a discount rate of 8.3%. We use a 3.0% risk free rate, 1.25% long-term growth rate and 6.0% equity risk premium. We have lowered our risk- free rate 50bps and our long term terminal growth rate by 25bps.

696 621 0.14 0.11 0.15 0.11 0.11 0.09

92.6% 93.3% (23.0%) (10.1%) 94.3% 94.3% (21.1%) (10.8%)

Performance Drivers

0.0% 0.0% 0.6 0.8 0.7 0.9 5.3 5.5

Market Sector Macro

Style Idiosyn.

Factors
Market: MSCI Australia

Sect: Real Estate Ind: Real Estate Macro:

18% 6%

2%
8%

66%

1Y Corr

0.83 0.76 0.76

0.18 -0.16 0.11

-0.38 -0.32 0.26

0.4 0.4 5.5% 6.1%

6M Corr

0.74 0.79 0.79

0.24 -0.33 -0.20

-0.49 -0.70 0.44

Source: Ord Minnett Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and Ord Minnett estimates for all other tables.