How to invest now that shopping centres are reopening

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Vicinity Centres is Australia's second-largest listed manager of retail property, with $22 billion under management across 61 high-quality assets and direct ownership interests in the vast majority of those centres.

While there is still uncertainty around COVID-19, and rolling lockdowns remain a possibility into the future, in our view VCX provides a great opportunity to benefit from the re-opening theme in Australia.

Highest quality assets and wide geographical footprint

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Vicinity's portfolio of assets includes many of Australia's most well-known and best-performing centres, from DFO Homebush, Queen Victoria Building and Chatswood Chase in Sydney, to Chadstone, Emporium and DFO in Melbourne, DFO in Perth and Queens Plaza in Brisbane.

Their assets are leased by some of Australia's largest retailers including Woolworths, Coles, Wesfarmers, WHL, Myer, Accent Group and Cotton-On, with a weighted average lease expiry (by income) of approximately 3.3 years.

In looking at the current location mix, management has ensured a broad exposure with assets split by state as follows: NSW (12), Queensland (10), South Australia (4), Tasmania (2), Victoria (20), Western Australia (15). This diversification has proven particularly important during COVID-19, where the likes of Western Australia, South Australia, Queensland and Tasmania have held up extremely well while Victoria and New South Wales suffered.

Supportive COVID-19 response maintains strong occupancy

Management has supported the Australian economy and COVID-affected tenants throughout the pandemic in the form of $231 million of retailer assistance and the negotiation of over 6700 lease variations.

This has helped many businesses weather the storm and enabled Vicinity to maintain a strong occupancy rate of 98.2% despite the challenging retail landscape. Ideally, as customers return to centres on mass and drive sales for retailers, those short-term lease variations can continue to be reverted to and gradually beyond pre-COVID levels.

Particularly encouraging is the number of COVID lease variations to have already been wound back from a level of 73% of tenants in April 2020, to 18% in January 2021, and just 10% in June 2021.

Development project pipeline

In addition to current investments, the business continues to drive growth through identifying new opportunities, with management highlighting a vision to continue the transition from being a retail REIT, to forward-thinking real estate business.

Primarily, management are looking to enhance current retail sites, while also capitalising on mixed-use opportunities by diversifying into areas such as office towers, a measure that brings a varied source of income and looks to extract maximum returns out of the land available.

Mixed-use developments and retail enhancements in the pipeline include Chadstone and Box Hill in Victoria, Bankstown Central and Chatswood Chase in NSW and Galleria in WA.

Net loss reduced credit ratings maintained with strong balance sheet  

In their FY21 results released in August management confirmed a statutory net loss of $258 million but the positive noted here is the vast improvement against the $1.8 billion loss experienced in FY2020.

Added to this, in examining their capital structure, strong liquidity of $2.4 billion and a conservative gearing position maintained at 23.8% have both helped VCX to maintain its strong investment-grade credit ratings.

Re-opening play with macro tailwinds

Vicinity is arguably the REIT most exposed to an economic and health recovery. Vicinity in our view has the strongest balance sheet of the large and high-end mall operators listed in Australia, so the risk of another dilutive equity raising is low.

At these prices' dividends (10 cents per share) equates to approximately 6% yield. We feel in time with the reopening there's a good chance for dividends to recover back towards pre-COVID levels of 15 cents per share or approximately or 9.5% yield at these prices.

Therefore, we feel there's not only a good chance for the share price to recover back somewhere towards the pre covid levels but also a good chance for dividends per share to recover as well.

For investors who can look past the shorter-term uncertainty of COVID, the eventual re-opening in our view provides a great opportunity to buy a quality business on a substantial pull-back.

With macro tailwinds of improved consumer sentiment, a falling unemployment rate and household savings at almost double the five-year average, we believe VCX is in the position to continue the bounce-back through FY22 and beyond.

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Michael Wayne is the managing director of Medallion Financial Group. With considerable experience in financial markets, Michael provides advice to a range of clients in both domestic and international equities, exchange trade funds (ETFs), managed funds and corporate deal flow.

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