UBS Research - 10/03/2018 First Read: Vicinity Centres "Asset...

UBS Research - 10/03/2018

First Read: Vicinity Centres "Asset disposals remain difficult; lots more to do"
Partial execution considered only a fair outcome
VCX has partially executed on its divestment program (11 of 14 assets, $631m of up to $1b) with discussions ongoing for the remainder of the assets (3 assets, VCX share $222m). 10 assets have been sold to SCP (conditional on capital raising) for $573m (7.1% cap rate, 7.24% passing yield vs VCX BV cap rate 6.6% & UBSe 7.5% passing yield), a 7% discount to VCX June 18 BV. The other asset, Belmont Village sold to a private investor for $58m (14% premium to book). The pricing relative to book value is below expectations; however, the listed market is attributing a larger discount for these non-core assets (VCX trading 13% disc to NTA). We continue to monitor the execution on the remaining 3 assets (Corio Central, Lennox Village, Halls Head Central), but we consider it a fair result in a transactional market that appears to be thinning out.
Impact to the portfolio and FFO; buyback now likely
The assets sold had specialty sales psm of $7,611. Post these asset sales VCX portfolio comparable specialty sales psm increases by 1.4% to $10,279. The impact of these announced assets sales is 3-4% dilution to FFO and ~300 bps reduction in gearing. With asset sales proceeds to be received next week and VCX trading at a 13% discount to NTA, the buyback becomes a sensible use of proceeds and is likely to recommence.
Reinvesting in the best, selling the rest: Impact on VCX?
In the event VCX are successful on 1) execution of the remaining non-core asset sales ($222m); and 2) launching the $1b wholesale fund (March 2019 expected), VCX will have pro-forma gearing 18% (vs 26.4% June 18, $2.5b capacity going to 30% gearing) and a number of reinvestment opportunities (currently $450-500m pa FY19-21; technology driven operational initiatives, retail/mixed use devt and buyback). The targeted end result: superior FFO growth with NAV upside from mixed use opportunities; however FY19/20 appear to be transition years (divestments to hit FFO, UBS estimates assume $1b in 1HFY19 and $1B in 2HFY19).
Valuation: $2.92
FY19e NAV of $2.96 reflects a 1yr forward property yield of 6.1% (book cap rate 5.36%), 13x our FY19 Mgmt EBIT and $0.15b for enhanced devt value (no value included for mixed use). DCF $2.90 (8.0% discount rate). NTA $2.97UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of such reports. Investors should consider research reports as only a single factor in making their investment decision. Important information including analyst certification and required disclosures regarding specific companies, derivatives or other instruments discussed in the email is included in the relevant latest research report. Such reports are provided to our clients through UBS Neo and, where appropriate, UBS.com. Where such report is not attached and/or hyperlinked you should refer to UBS Neo for a copy. You should also refer to the public disclosures website at http://www.ubs.com/disclosures for required disclosures regarding specific companies. The message is subject to the Global Research Disclaimer available at http://www.ubs.com/disclosures. (c) UBS 2018. All rights reserved. Intended for recipient only and not for further distribution without the consent of UBS.