Vicinity Centres: Interim result 2019

If Vicinity were a basketball team, it would have the raw ingredients to be something great. The assets are in there: Chadstone playing LeBron James; Melbourne's Emporium as Kevin Durant; Sydney's Queen Victoria Building as Stephen Curry. These are premium locations with high-performing centres. Unfortunately, the supporting cast consists of locations such as 'North Shore Village', 'Victoria Park Central' and 'Kalamunda' - some distinctly minor league shopping strips.

That's a problem, because as any sports fan knows; a team of mugs with a couple of superstars is no chance against one filled with 'above-averages'. It's why Vicinity is so eager to move on a few of their benchwarmers. Far better to reinvest the proceeds into paying down debt, buying back shares and funding the development pipeline.

Asset sales to remain challenging

The trust's latest results lend support to that strategy. Isolating the average effect of Chadstone, the trust's premium CBD locations and its Direct Factory Outlets, there was impressive growth in sales ( 5.8%), re-leasing spreads ( 10.9%) and net property income ( 4.0%).

Performance in the rest of the portfolio was less impressive, with slower growth in sales ( 1.0%), negative re-leasing spreads (-1.4%) and declining property income (-0.7%) - highlighting the two-speed nature of the portfolio.

Vicinity has made some headway, as we noted when the trust sold a number of centres in the first half. The trust now owns centres in 62 locations around Australia - down from 74 this time last year. Management had hoped to reduce that to 50 this financial year, with a further four sales planned worth a combined $300m. The proposed launch of a wholesale fund in partnership with Keppel would also allow Vicinity to offload a further $1bn worth of assets.

Unfortunately, management noted that the market for 'capital transactions had worsened materially'. Many retail property trusts appear to have the same plan, with few takers for rural and neighbourhood-style locations. Management now believes the properties are likely to be sold some time in the next financial year. Their commentary, coupled with a 0.2% valuation decline across the portfolio, suggests it's likely more sales will occur at a discount to book value.

In the meantime, assuming no further sales in this financial year, management has guided to funds from operations of 18.1 cents per share - representing like-for-like growth of about 2.8 per cent. After adjustments for maintenance capital expenditure and lease incentives, distributable profit is likely to be about 16.5 cents per share. That leaves the stock offering a prospective free cash yield of around 6.7 per cent - plus the benefit of any further buybacks.

That figure is almost certain to fall once planned asset sales are complete, but investors should be compensated by a higher growth rate. The stock hovers above our buy price, but we'd wait for a bit of clear space before upgrading. For now, the stock remains a HOLD.