Vicinity’s capital raising highlights risk to retail valuations

Over the past two months, the listed A-REIT’s have announced $2.8 billion of capital raisings to support their balance sheets as the early effects of the COVID19 pandemic came to light. The largest raising, $1.4 billion by Vicinity Centres (ASX: VCX), accounts for half the amount raised to date. The VCX raising and the presentation accompanying the capital raise highlights the severity of the impact on the retail sector and also provides a small window to peer through to the outlook for the next six months.

Valuations for June 2020

Aside from the size of the capital raising, VCX’s announcement on 1 June 2020 highlights the risk to retail valuations that are likely to come through in the June 2020 accounts for other retail oriented AREITs.

  • VCX currently expects its portfolio to be revalued downwards by 11% - 13% as at June 2020. This represents a reduction of $1.8 billion - $2.1 billion in value on VCX’s $16.0 billion portfolio. Whilst VCX has not provided any details of which properties have been affected the most, suffice to say, this has significant implications for the value of other retail properties in Australia. While the decline mentioned above is for the ‘whole’ portfolio, it is possible that some properties may have little or no valuation movements whilst others would have larger movements, perhaps in the order of 15%+ declines.
  • ​We estimate the revaluation will reduce the NTA of VCX by around 17.5%, (based on a 12% midpoint decline in valuation). Thus, the NTA at December 2019 of $2.90 per security is expected to fall to around $2.39 per unit from the revaluation alone. The institutional capital raising, which is dilutive, is estimated to reduce NTA further to $2.23 per unit – all up, a 23.1% fall in NTA is expected for the 6 months to June 2020.
  • At the other end of the spectrum, Arena REIT (ASX: ARF), on 2 June 2020, announced that it expects June 2020 revaluations to increase by around $15M. This represents a 1.8% increase on ARF’s $853.3M portfolio, equivalent to about a $0.05 per unit increase in the NTA of $2.18 per security. Similarly, ARF did not provide any details about the properties which contributed the most, but we expect that some development projects will have contributed to the gain in addition to valuation gains in mature assets. ARF management also announced that it has received approximately 90% of rental payment from tenants for the 3 months to May 2020 and that rent relief has largely been through the deferral of rent.