Morningstar | Transitioning Vicinity Centres to a New Analyst
We make no changes to our AUD 2.60 fair value estimate for Vicinity Centres following the transition to a new analyst. The majority of Vicinity's malls dominate their catchment areas. These regional and subregional malls adequately service demand, enjoying efficient scale characteristics, which underpin the firm's narrow economic moat. Our medium fair value uncertainty and standard stewardship rating also remain intact. At current prices, securities in Vicinity screen as fairly valued.We expect Vicinity's retail malls to continue benefiting from sustainable competitive advantages, and the firm's strategy of continually redeveloping and upsizing malls helps strengthen these competitive advantages. CEO Grant Kelley is also focusing on skewing Vicinity's portfolio to the larger, moaty assets with a AUD 1 billion divestment programme announced in 2018. A significant proportion, AUD 631 million, has already been divested--much of this to no-moat SCA Property. This improves Vicinity's portfolio, in our view, because we expect inferior rental growth from many of the sold assets compared with the balance of Vicinity's portfolio.
However, increasing online sales presents a challenge to physical retailers, and in turn owners of retail assets such as Vicinity. While we expect e-commerce growth to lower the rent growth trajectory, we do not expect returns to fall below the firm's weighted average cost of capital of 7.6%. We also 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 of about 2%.
Vicinity Centres is engaged in property investment, property management, property development, leasing and funds management.Co.'s operating segments include: Property Investment, which is involved in investment in retail property; and Strategic Partnerships, which is involved in property management, development, leasing and management of wholesale property funds. Co.'s portfolio is comprised of Australian retail assets. As of June 30 2016, Co. had 91 retail assets under management. Co. had an ownership interest in 81 of these assets.
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