FY20 results hide a great company. What's next for the Vicinity Centres share price?

The Vicinity Centres share price fell lower yesterday after the REIT revealed a large statuory loss from devaluations. Where to from here?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Vicinity Centres (ASX: VCX) FY20 annual report released yesterday disclosed a blowout statutory loss of $1.8 billion. The announcement saw the Vicinity Centres share price fall by more than 4%. The major contributor to the loss was property valuation decline of $1,718 million and an impairment of goodwill of $427 million. In July, Vicinity Centres disclosed an 11.4% decline in valuation. Accordingly, the company has cancelled its June distribution. 

The Vicinity Centres report goes on to point out that net property income (NPI) had reduced by $204 million, or 22.96%. $169 million of this was due to the impact from the coronavirus. $109 million due to rent waivers, and $60 million due to rent deferrals. The latter part reflects a heightened collection risk in these times. The company is continuing to negotiate short term lease variations.

Moreover, the company has seen a slide in occupancy rates from 99.5% down to 98.6%. In addition, the real estate investment trust (REIT) finds itself in the firing line again as Victoria has re-imposed restrictions due to the pandemic second wave. 

Vicinity Centres report – the good news

The good news is that most of the country has opened up again, this has provided some positive results. For example, in June the portfolio's store visitation, as a percentage of FY19, stood at 51%. While 90% of stores were trading as compared with FY19. Moreover, the company has moved from 33.7% gearing to 25.5% after a $1.2 billion institutional placement. And much of this debt is not due until at least 2022. 

To understand the financial performance of a company such as this, you need to know how REITs report, and how it all hangs together. For example, statutory profit, or loss in this case, are derived from following accounting standards. This means inclusion of things like devaluation and the loss of goodwill. However, neither of these issues have anything to do with the level of cash the company has. And in this case it has little to do with the company's ability to generate revenues. 

REITs also use a method called funds from operations or FFO. For the benefit of the Vicinity Centres report, this is the equivalent of earnings, or earnings per share for a standard company. The company's FFO for FY20 was $520.3 million. This was a reduction of 24.5% compared with FY19. While this is not a great result, it takes into account the real-world impacts of coronavirus, and is far more informative than a $1.8 billion statutory loss.

Where to now for the Vicinity Centres share price?

The Vicinity Centres report also disclosed the company's thinking on the move to online shopping. While we are seeing a phenomena of the rapid move to online shopping, we are also seeing many stores become omni channel. That is, to use a multitude of sales and delivery channels. For instance, Michael Hill International Ltd (ASX: MHJ) yesterday announced a move to a range of new sales channels. These have included click and collect, click and reserve, as well as a drop shipping model.

In all of these cases, there is a need for a physical store, both for sales and for the delivery options. The REIT has also been able to review the tenancy mix and will be evolving over time to reflect both non-discretionary stores, as well as in-demand retail. 

Foolish takeaway

I believe the Vicinity Centres report showed a very good company wrapped in a poor FY20 performance due to coronavirus. However, by the REIT's own admission, recovery of these stores and centres will take a long time. Moreover, while I agree with the omni channel focus, there is still likely to be less retail outlets for any given chain. Moreover, the Victorian experience shows us how rapidly this coronavirus can take off. Until we either learn to live with it, or finally get a working vaccine, then there is a chance for intermittent lockdowns to occur. 

Personally, I feel there is far too much uncertainty around the sector of large format, largely non-discretionary retail centres. In fact, anything requiring regular gatherings of large crowds is hard to foresee happening anytime soon. As such, it's likely the Vicinity Centres share price will continue to face significant headwinds over the near term.

Motley Fool contributor Daryl Mather has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

A smiling businessman in the city looks at his phone and punches the air in celebration of good news.
Broker Notes

These ASX 200 shares could rise 50% to 60%

Brokers believe these shares could deliver big returns for investors.

Read more »

A girl is handed an oversized ice cream cone with lots of different flavours.
Best Shares

8 ASX All Ords shares that tripled in value in FY25

Just 8 out of the 500 companies making up the ASX All Ords achieved share price growth of 200% or…

Read more »

Broker written in white with a man drawing a yellow underline.
Broker Notes

Brokers name 3 ASX shares to buy today

Here's why brokers are feeling bullish about these three shares this week.

Read more »

Woman with a scared look has hands on her face.
Broker Notes

Bapcor shares fell more than 30% yesterday. Should investors buy in the dip?

Is this a value opportunity?

Read more »

A man sits thoughtfully on the couch with a laptop on his lap.
Broker Notes

Broker raises price targets on 2 ASX 200 shares to buy

Ord Minnett has just upped its 12-month share price targets on 2 buy-rated ASX 200 stocks.

Read more »

Man with rocket wings which have flames coming out of them.
Share Gainers

Guess which ASX All Ords stock just rocketed 34% on strong earnings growth

Investors just sent this ASX All Ords stock surging 34%. Here’s what’s happening.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why DroneShield, Gentrack, Metals X, and Northern Star shares are tumbling today

These shares are ending the week in the red. But why?

Read more »

A businessman looking at his digital tablet or strategy planning in hotel conference lobby. He is happy at achieving financial goals.
Share Gainers

Why Dimerix, Newmont, Regal Partners, and Titomic shares are storming higher

These shares are having a good finish to the week. Let's see why.

Read more »