Vicinity is now looking to gradually reactivate the development pipeline

Business Strategy & Outlook

Vicinity Centres’ portfolio includes a wide variety of Australian retail property assets. Its largest asset is Chadstone, which makes about AUD 3 billion of the AUD 14 billion portfolio. CBD assets make up about 15% of the portfolio, including Sydney’s QVB, Strand Arcade, The Galleries, Brisbane’s Queen’s Plaza and Myer Centre, Melbourne’s Myer Bourke St and Emporium. Vicinity also owns factory outlet centres, and suburban and country shopping centres, such as Carlingford and Warriewood in Sydney, Buranda and Gympie in Queensland, Mornington Central and Broadmeadows Central in Melbourne, and WA centres in Karratha, Mandurah, and Rockingham. Most of Vicinity Centres’ revenue is rent from malls. The balance is mostly property management, development and leasing fees for third-party investors who hold assets jointly with Vicinity Centres. It also has ancillary income from car parking, advertising, and one-off assets such as hotels. The group’s mixed-use strategy has added value, developing apartments, offices, and hotels above or neighbouring its centres. However, the strategy to be less lucrative in the near to medium term due to pressure on house prices, office values, and tourism.

Vicinity has a number of development opportunities, many of them mixed use, involving offices, hotels and apartments. Many developments that hadn’t commenced construction were delayed by the pandemic, but Vicinity is now looking to gradually reactivate the development pipeline. Projects include an office tower on the footprint of the Chadstone mall, fully leased to Officeworks, office towers at Bankstown Central, and a redevelopment at Victoria Gardens. It also has major town centre development plans at Box Hill, and redevelopment opportunities at Chatswood Chase. The long-dated and modular pipeline gives Vicinity Centres flexibility to allocate development capital depending on demand for retail, office, apartment, hotel and other.

Financial Strengths

Vicinity Centres is in better financial health than most of its rivals after it raised more than AUD 1 billion in additional equity capital in June 2020. Gearing (net debt/assets) as of June. 30, 2022 was 25.1%, at the low end of its stated 25%-35% target. The gearing to rise gradually, and with that given Vicinity’s high-quality portfolio and income underpinned by leases. While physical asset values record their first significant increase in a while, at the December 2020 half-year results, interest rate rises could halt that momentum. There’s no anticipation that asset value declines as large as the negative 11.4% decline in fiscal 2020. However, further devaluations could push up gearing modestly. Development projects will likely push gearing up higher. Vicinity is yet to commit to decisions on several large projects though it is progressing with planning approval and some large decisions are close. It’s hard to imagine many worse scenarios for a mall operator than a pandemic, but Vicinity maintained a consistently high occupancy rate at its malls through 2020 and 2021. Operating earnings before interest are usually relatively secure and predictable over the medium term, with only 3%-4% of rental income related to tenant sales turnover. As the economy recovers the occupancy is to remain high, with the swing factor being rents.

Bulls Say

Vicinity is arguably the REIT most exposed to an economic and health recovery. Vicinity’s operating performance will likely outperform other REITs as conditions normalise.
Vicinity has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.
Vicinity has substantial development opportunities, including the Bankstown and Box Hill town centres, Chatswood Chase upgrade, and several development opportunities at its flagship Chadstone asset.

Company Description

Vicinity was created after the merger of Federation Centres and Novion in June 2015, creating one of Australia’s largest retail REITs. Its directly and indirectly owned assets have a book value of about AUD 14 billion. The assets are skewed to large, high-end shopping centres, with about half in major regional malls, a fifth in subregional, 15% in CBD locations, 13% in outlet centres, and 1% in neighbourhood malls.

(Source: Morningstar)

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