Luxury's Foothold

1H23 RESULT

Need To Know

• Small beat on earnings with a ‘less negative’ outlook than feared.  
• Low quality upgrade to Adjusted Funds from Operations (AFFO) guidance on a reversal of prior year leasing provisions.
• Maintain our Hold rating.

Result Highlights

Funds from Operations (FFO) A$357m vs market at around A$311m (excluding the provision reversal of $A25m). Ex-provisions FFO was A$332m vs A$311m. 

DPS of 5.75cps is marginally ahead of market. 

Occupancy improved 30bps to 98.6%. 

Cap rates +3bps to 5.33% resulting in a A$109m (-0.7%) decrease in portfolio valuation. 

Net Tangible Assets per security (NTAps) largely flat (-0.2%) at A$2.34.

Guidance upgrade: FY23 AFFOps increased from 10.9-11.5cps to 11.8-12.4cps.  

Investment Thesis

Another AREIT which has avoided market fears of large cap rate expansion and collapsing sales growth. The underlying result was a small beat to consensus. Group earnings likely to be 1H skewed due to an increasing cost of debt for the second half, benefit from prior year provisions and a loss of leases due to developments, i.e., Chatswood (NSW) loses it Fresh Food and Dining Hall.

Chadstone (VIC) remains the poster child of the group with developments progressing and centre sales remaining resilient due to its strong exposure to luxury tenants. Management indicated that any slowdown in sales is expected to largely be offset by a re-opening of tourism from China. 

The Balance sheet appears to be in a strong position. Gearing is 25.7%, up only 0.6% and at the lower end of the 25-35% range. Weighted Average Cost of Debt (WACD) increase 0.3% to 4.3% and hedging for the group was 81% for the period. 

The upgrade to AFFO guidance creates a bit of a mirage given its driven by a A$25m reversal of prior year provisions but it implies a FY23 DPS of 11.6cps, a ~7% upgrade to consensus (10.9cps). 

Overall, the result gave some much needed clarity on the impacts from rate hikes and easing sales penetration from online retailers. With NTAps largely flat on 2H FY22, it’s clear that cap rate expansion is currently applying less pressure to the portfolio valuations than what the share price is implying (17% discount). Management did however indicate a softer second half given further RBA rate hikes are expected to come through this calendar year (2023).

We Maintain our Hold.

Figure 1: Vicinity remains at a 16% discount to book value.