Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Pandemic calls forth another capital raising
It seems that every day another ASX listed company is announcing a capital raising with mixed results. Most recently, Vicinity Centres revealed a $1.4 billion capital raising and an analyst is telling investors to subscribe.
The shopping centre landlord successfully completed the $1.2 billion institutional raise after announcing it on Monday. A non-underwritten security purchase plan (SPP) has been put in place to raise a further $200 million.
Shareholders will be able to buy up to $30,000 of new shares from 9 June 2020. The offer closes on 6 July 2020.
The issue price will be $1.48, a discount of over 8 per cent to the last closing price of $1.66 on 3 June 2020.
Johannes Faul equity analyst at Morningstar says: “We suggest investors subscribe to the SPP provided it suits individual investment goals.
“The placement price is well below our updated fair value estimate, despite our valuation being reduced to 5 per cent to $2 due to dilution from the discounted equity raising.”
The placement comes after Vicinity suffered from the pandemic lockdown. The government-mandated and voluntary store closures drove a rapid retail slowdown in March 2020.
It is the co-owner of over 60 shopping malls including DFO outlet centres, Chadstone Melbourne’s south-east and Chatswood Chase in Sydney’s north shore.
Vicinity says the value of its shopping centres has dropped by 11 to 13 per cent, or around $1.8 billion or $2.1 billion. The group notes these are preliminary and final valuations could change at their end of financial year results.
However, more than 3000 stores have now re-opened, with 80 per cent of stores now trading from a low of 42 per cent in April 2020.
Foot traffic has increased to 74 per cent of the levels at the same time in 2019 from a low of 50 per cent in April 2020.
Drew Meredith director at Wattle Partners says he would not recommend the SPP to his clients.
“The property has devalued by only 11 per cent but the problem is that it has only received around half of the rent. The net tangible asset value is well below the share price.”
Despite this, Morningstar’s Faul says: “We estimate rental income at the nadir will be 20% lower than our pre-coronavirus expectations, before a recovery burst in fiscal 2022, though not enough to make up the lost ground. Thereafter, we continue to expect rental growth about in line with inflation.”
Short-term variations to lease agreements are ongoing with a large number of its tenants. Around 49 per cent of March to May 2020 billings have been received which is in line with its expectations.
“We expect rent receipts to improve as stores continue to re-open, foot traffic increases and lease negotiations are completed,” the company said in an ASX announcement.
Vicinity says the raising will strengthen its balance sheet and the net proceeds from the placement will be used to repay debt.
Faul says: “After the placement, the group will have $2.6 billion of cash and undrawn facilities, and apart from modest debt maturity in fiscal 2021, no other debt is due until fiscal 2023.”
The fully underwritten institutional placement will reduce gearing to 26.6 per cent from 34.9 per cent pre-placement.
Vicinity Centres has cancelled its half year distribution. The company paid 7.95 cents a share in 2019. It paid an interim distribution of 7.7 cents a security for the six months to December 31.
