Vicinity Centres: Result 2016

Vicinity’s first full year results shows the evolution of the company after last year’s merger.

In June 2015, Vicinity didn’t exist. Instead it was two individual property companies called Federation Centres and Novion Property Group. However, with its first full-year results since those two businesses merged, this $13 billion retail property company has taken big steps to announce itself as an individual entity in its own right.

Table 1: Vicinity's 2016 result
Year to June 30 ($m) 2016 2015 /(–)
(%)
Total revenue 1,020 1,003 2
Corporate overheads 81 105 (23)
Borrowing exp. 181 206 (16)
U'lying net profit 758 692 10
U'lying EPS (c) 19.1 17.6 9
DPS (c) 17.7 16.9 5
Gearing (%)* 25.9 28.0 n/a
NTA per share ($) 2.59 2.45 6
Final distribution 8.9 c, unfranked,
ex date passed
* Net debt / (total tangible assets – cash)

For 2016, total operating costs fell $24 million or 23% as the company raced ahead of even its own expectations for cost savings from the merger. With another $18 million worth of savings locked in through 2017, the merger is looking like a great deal. When the dust settles, the company should have generated more than $50 million in annual savings.

Vicinity also sold 10 properties in the financial year, for total proceeds of around $1.1 billion. These were mainly low-quality sub regional and neighbourhood properties and won’t be missed.

Whilst the asset sales meant income for the year only increased by 2%, it will improve the quality of the company’s property portfolio as sub regional and neighbourhood properties tend to have lower occupancy and relatively poorer specialty sales per square metre. Operating metrics have already improved, with the portfolio benefitting from higher occupancy, higher specialty sales and higher comparable income growth of around 3%.

The company is still pressing ahead with redevelopment. Development work was completed for five properties in 2016 and has been a great success so far, performing better than expected with a yield of 9%. Development will continue to boost growth with another $3.7 billion of development scheduled through to 2018 of which Vicinity’s share is $1.7 billion.

Due to the ongoing asset sale reducing the amount of income coming through, underlying earnings will fall in 2017 to between 18.6 and 18.8 cents per share with total dividends reducing by approximately 2% to around 17.3 cents per share.

Next year’s lower earnings is no cause for concern, though, and just reflects how Vicinity is becoming a better company. We'd conservatively estimate long-term rental growth to be around 2–3%, which together with an unfranked distribution yield of 5.4% would give a total implied (pre-tax) return of 7–8%. Bear in mind, though, that you'd only get that return if the assumptions are right and you hold forever. If the market changes its view on pricing the stock and you sell, then this will influence the price you get and the returns you make (or the loss you suffer).

That said, in the current low interest rate environment this might not be a bad deal for some long-term investors looking for stable income. However, for us to feel comfortable recommending for all members, the yield would have to be much higher than it is currently. HOLD

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