Has Vicinity Centres (ASX:VCX) finally put its COVID-19 armageddon in the rear view mirror?

Nick Sundich Nick Sundich, May 4, 2023

Vicinity Centres (ASX:VCX) is one property stock we’ve been keeping our eyes on for several months. Vicinity Centres has some of the most highly coveted, high-lease retail assets in Australia, but is highly reliant on foreign tourists. This led to the business essentially going into limbo for several months. Even as malls have been permitted to re-open post-pandemic, the company’s share price has continued to lag. But with a 13% gain in 12 months, is it the start of a period of growth?



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Who is Vicinity Centres?

Vicinity Centres is a shopping centre landlord, operating shopping centres and leasing them to tenants. The company was created in 2015 from the merger of Federation Centres and Novion Property Group. It has over 60 shopping centres under management, consisting of ~7,100 individual retailers.

Vicinity’s $22bn portfolio includes several flagship stores, including Chadstone shopping centre in Melbourne, Queens Plaza in Brisbane and Chatswood Chase in Sydney and corporate offices at certain sites.  


Vicinity copped a massive hit from the pandemic

COVID-19 forced the shutters down on non-essential retail and sent Vicinity swinging from a $346.1m profit in FY19 to a $1.8bn loss in FY20. Although essential retailers in suburban malls mitigated the damage, its CBD assets were hit by people working from home and the elimination of tourism through border closures. The company undertook a $1.2bn capital raising in the early months of the pandemic and wrote down $1.79bn from its portfolio. 

In FY21, Vicinity still made a statutory net loss but only $258.0m. Snap lockdowns impacted store trading and visitor numbers, but visitation numbers quickly returned whenever restrictions were lifted. In every quarter of FY21, visitor numbers at stores excluding Victoria and CBD assets in all states were above 90%, and retail sales were above 2019 levels. Vicinity’s Victorian assets suffered more time in lockdown than any other Australian state and even without lockdowns, CBD flagship stores were impacted by an absence of tourists and office workers.

Nevertheless, by the second half of FY21, retail sales across the entire portfolio were under 4% below pre-COVID levels and visitation numbers at over 75%.  


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A slow recovery and even slower shareholder response

Let’s fast forward to FY22, a period that included the Delta Lockdowns and the Omicron wave but also included the re-opening of Australia’s international borders. The company returned to NPAT profitability, making $1.2bn. Its FFO came in at $598.1m, or 13.1cps, and it paid a distribution of 10.4c, representing a 95.3% payout of Adjusted FFO. So, the only way from here was up, right? Well, yes and no as the share price chart below illustrates. The company remains below its pre-COVID levels.


Vicinity Centres (ASX:VCX) share price chart, log scale (Source: TradingView)


In 1HY23, Vicinity made FFO of $357.1m or 7.84cps (up from $287.7m in the prior corresponding period). But it only made an NPAT of $176.3m, down from $650.2m in 1HY22, and its NTA was cut by 2 cents to $2.34. The catalyst for the latter was non-cash items including a net property valuation loss of $109.2m.

You see, even though shoppers returned to suburban malls, the company’s flagship malls in the CBD that relied on international tourists and office workers were slower to recover. Adding insult to injury was the rapid rise in interest rates.


A fresh update

On Tuesday May 2, Vicinity released a quarterly trading update that appeared somewhat more optimistic, albeit cautiously. It reported that retail sales were up 13% from 12 months ago, but were expected to moderate in the current quarter (4Q23) given cost of living pressures. Visitation at its non-CBD malls was 93% of pre-COVID levels, although international tourism was only 70% of pre-pandemic levels. Although tourists have returned, the lucrative China segment has substantially lagged. This was because the country has been slower to re-open and tourists have taken post-COVID trips at countries closer to home.

Having previously guided to FY23 FFO of 14.0-14.6cps and AFFO of 11.8-12.4cps, it told shareholders it would reach the top end of the guidance range and would payout 95-100% of AFFO. At its May 2 closing share price of $2.07, Vicinity is trading at a 11.5% P/NTA discount and a P/FFO multiple of 14.3x. Assuming it achieved guidance and paid out 95% of AFFO, it is yielding ~5.5%.


Recovery will continue to lag

Clearly, the recovery at Vicinity’s CBD assets will be continue to be slow. This hasn’t stopped the company from paying distributions, so this could be one for dividend investors. However, investors looking for growth would be better looking elsewhere, in our view. Amongst property stocks, you would be safer investing in this company compared to office REITs, but there are better growth opportunities elsewhere in the market.



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