Views at a Glance / Income Report; Reduce Centuria (CNI) to add Vicinity (VCX)

By Market Matters 08 November 17

Income Report; Reduce Centuria (CNI) to add Vicinity (VCX)

Market Matters Income Update 8th November 2017

The market has clearly been strong over the past week with the ASX 200 adding +0.91% with the physiological 6000 level being breached yesterday. In terms of the MM Income Portfolio, it’s up +0.66% in the same period underperforming slightly which is to be expected given we have only ~56% of the portfolio exposed to equities.  Overall, the portfolio has gained 6.17% since inception (5th July 17)  while our cash level remains at 9.07% after allocating 7.5% into the new Bendigo Hybrid – although this security does not start trading on the ASX until the 14th December given it was tied up in the roll of an existing issue. That said, we have exposure to it, and therefore it is shown in the portfolio.

Reduce Centuria (CNI) to add Vicinity (VCX)

Overall we’re comfortable with the composition and holdings of the MM Income Portfolio however look to make one slight tweak within our property exposures. Centuria (CNI) is our second largest position in the portfolio and has done particularly well, up around ~18% since it was added on the 5th July 2017. The position was then increased through the recent entitlement offer on a 1 for 4.9 basis at $1.28 a share. Based on the average buy price the position now accounts for 8.43% of the portfolio. We are looking to reduce this by 4% leaving a 4.43% exposure to CNI, reallocating into a new ‘property’ position without increasing our overall exposure to the sector.

Vicinity Centres (VCX)  $2.71 P/E of 14.5x Expected Yield of 6.1%

We’ve written on numerous occasions about property and our reluctance to buy into a sector that has clear structural headwinds given the expectations of rising interest rates, however that we’d be open to consider ‘special situations’. When considering our large weighting to one name, and the interesting opportunity presented by Vicinity, we think it makes sense to reduce our holding in CNI and add VCX into the mix. For those not familiar with the stock, they are a Real Estate Investment Trust that was created in June 2015 following the merger of Federations Centres (FDC) and Novion Property Group (NVN).

Vicinity are in areas of property that have been hit reasonably hard, mainly shopping centres in Australia as well as an external FUM business that manages close to $10bil of assets for 3rd parties. While the portfolio is similar to SCA which was spun out of Woolies a few years ago, the FUM business adds a reasonably secure income stream to VCX.  It seems that there are some concerns in the market about their asset quality, which we don’t agree with, and importantly, we don’t think the mkt is ascribing much value (if any) to their funds management business.

This week they announced an interesting deal – in essence an asset swap – where VCX will exchange 49% of its Chatswood Chase asset for a 50% stake in GIC’s Queen Victoria Building, The Galleries and The Strand Arcade – all places that Sydney siders will be very familiar with. The Chatswood Chase asset is ripe for redevelopment and having QIC as a partner reduces the potential risks to VCX while also diversifying its footprint into prime Sydney CBD retail. It takes there exposure in CBD markets up from 11% to 15% which we think is a positive.  Also worth noting that GIC and Vicinity are partners elsewhere with holdings at Emporium Melbourne and Myer Bourke Street – so clearly they work well together.

In short,  VCX clearly have assets that are attractive long term propositions, they manage them well and have scope for redevelopment. They have a funds management business that the market is ascribing no real value to which makes them cheap in our mind plus they pay a decent yield, albeit unfranked. Furthermore,  the above discussed transaction will be earnings accretive when it completes in early 2018 while they also have an announced buy-back under way of up to 5% of issued capital.  

This prompts the question, where could it all go wrong for VCX? The main lesson taken from the GFC is around gearing levels when markets turn which forces asset sales at the wrong time. in VCX’s case, gearing sits around 25% and they have around $1bn worth of undrawn debt which combined with planned asset sales gives them of capital to fund their committed development pipeline (around $2bn) and the share buyback without become over geared.

Although it’s hard to get too excited about property assets at this stage of the cycle, the market clearly put these guys in the sin-bin around the middle of 2016 with the stock down ~25% and in our view, they’ve already priced 1. weak retail conditions 2. A changing outlook for property values amid rising interest rates. The kicker here is if interest rates stay around current levels and the retail sector does not fall apart as it’s priced to do, these guys will do ‘less bad’ than market expectations and should provide a strong return.

Reduce CNI by 4% (selling strength) to BUY VCX with a 4% allocation (buying weakness)  

Vicinity Centres (VCX)  Weekly Chart

Conclusion (s)

We are ‘tweaking’ our exposures in the property space by reducing CNI by 4% and allocating those funds to VCX

This locks in a nice profit on part of our CNI holding (~18%) however it maintains rather than increases our exposure to the sector

Selling into strength, buying weakness continues to be our mantra

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Wednesday.

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All figures contained from sources believed to be accurate.  Market Matters does not make any representation of warranty as to the accuracy of the figures and disclaims any liability resulting from any inaccuracy.  Prices as at 08/11/2017.  09.00am

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