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Morningstar | Only Select Few of Vicinity’s Malls Delivering Strong Sales. FVE Unchanged at AUD 2.60

Vicinity Centres announced 2.0% growth in comparable tenant sales across its core retail assets for the year to March 2019. This metric looks respectable in the current weak retail environment, but we are cautious about the sustainability of these metrics as much of the uplift was attributable to 7.7% growth at the recently reinvigorated Chadstone shopping centre (20% of portfolio). There was significant variability in operating performance with the remaining malls faring worse than the iconic Chadstone. Comparable sales growth was 5.6% for the Direct Factory Outlets, or DFOs, at 11% of portfolio; the premium CBD assets at 15% of portfolio posted flat sales and the 46% of malls that Vicinity categorises as "high potential" achieved just 0.6% sales growth. Sales data was not released for the underperforming noncore malls, which make up 8% of the portfolio.

We see no compelling catalysts ahead that will trigger a broad-based rebound in Australian consumer spending and hence tenant sales across the Vicinity portfolio. We retain our view of tepid long-term annual rental growth around 2%. Vicinity reiterated fiscal 2019 guidance for funds from operations, or FFO, of AUD 18.0 to AUD 18.2 cents per security, or cps, and distributions at the upper end of the 95% to 100% target range of adjusted FFO. Our per security forecasts change slightly to incorporate progress on the on-market buyback. We forecast fiscal 2019 FFO of AUD 18.2 cps, at the top of the guidance range and distributions of AUD 15.8 cps. Our fair value estimate remains AUD 2.60, with narrow-moat-rated Vicinity fairly valued at current levels.

Vicinity advised discussions are ongoing around the sale of 12 noncore shopping malls with a book value around AUD 1.0 billion. Given the Australian market is awash with vendors trying to sell poorly performing shopping malls, it seems highly unlikely that Vicinity will execute a sale soon let alone near the book value of these challenged assets. Our central scenario is Vicinity will need to discount these assets by 10% to secure a sale.

Net property income, or NPI, was similarly mixed across the portfolio. The 46% of malls that Vicinity denotes as "flagship" delivering very strong NPI growth over the nine months to March 2019. NPI growth for Chadstone, premium CBD malls and DFOs were 6.0%, 4.7% and 8.0%, respectively. The problem is the high potential malls (46% of total malls by value) experienced a 1.1% decline in NPI, dragging down core portfolio NPI growth to 1.9%.