Federation Centres: Result 2015

Despite losing his job to Federation Centres counterpart Steven Sewell upon its merger with the much-larger Novion Property Group, former Novion chief executive Angus McNaughton delivered the merged group's result yesterday.

This is due to the shock firing of Sewell recently (see Federation board fires CEO). McNaughton appears to have the backing of largest shareholder John Gandel and so we're not too concerned about the sudden change in CEO.

Of more interest, however, is the increased negative 'leasing spreads' (the percentage change between rents on existing leases and those charged on renewed and new leases) revealed in the result. While the assets contributed in the merger by Federation Centres had positive leasing spreads of 3.2%, those of Novion – which contributed two-thirds of the assets – recorded leasing spreads of negative 4.7%. 

New leases and those renewed in 2015 only comprised 11% of total gross rent but we note that Novion's assets also recorded negative leasing spreads of 3.5% in 2014. Along with the group having $1.5bn in development in the pipeline (a relatively minor 11% of the value of its existing shopping centres), 99% occupancy and Federation already taking a high share of specialty retailers' sales as rent ('occupancy cost' in industry jargon), growth will likely be moderate going forward.

We wouldn't necessarily mind this if Federation's share price was low enough to compensate but even with the 7% decline since the change in CEO, Federation is still priced at a 14% premium to net tangible assets (NTA). This is despite capitalisation rates declining from 6.60% to 6.30%, helping NTA rise 5% from $2.33 to $2.45 during 2015.

Federation intends to rebrand to 'Vicinity Centres' but its share price is still a long way from being in the vicinity of what we're prepared to pay. So despite management guiding to an unfranked forward yield of at least 6% – fairly attractive in today's low interest rate environment – Federation remains an AVOID.