Vicinity 6yr FXD/FRN Green Bond
We see this primary corporate issue outperforming other A- to A+ Australian REITs over the near term.
(A2/A, Moody’s/S&P)
IPT at S/Q ASW/3m BBSW +165bps area. Indicative yield of 4.94% (25/05/2022)
Credit Fundamentals/Relative Value
Vicinity is a high-quality, leading Australian retail property group with a diverse portfolio of assets. As at Dec 21, the balance sheet is 25.6% geared (against a target of 25-35%), with a weighted average cost of debt (WACD) of 4.1%. Occupancy was 98.2% with a weighted average lease expiry (WALE) of 3.2 years.
Vicinity’s leases are protected from inflation with clauses covering annual increases of minimum 4%. We see fair value at S/Q ASW+150bps including a new issue concession (NIC) for the green bond where eligible assets must be certified as obtaining or targeting a minimum of 5 Star NABERS Energy rating or above. Thus, we see this bond outperforming other A- to A+ Australian REITs over the near term.
Liquidity will be better than many other corporates out there as it’s a A2/A rated security. Furthermore, AREITs make up a large portion of the local AUD bond index, so the investor base will be larger.
Green Bond
Eligible Assets are selected in accordance with the Sustainable Finance Framework based on criteria that align with the Green Bond Principles and contribute towards the United Nations Sustainable Development Goals.
Eligible Assets include Green Buildings, Energy Efficiency, and Renewable Energy. To be Eligible Assets, Green Assets must be certified as obtaining or targeting a minimum of 5 Star NABERS Energy rating or above. For example, Chadstone Shopping Centre in Melbourne, Victoria is 5.5 Stars.
Vicinity has an Eligible asset register of c.AUD6.3bn that could be used to meet these requirements. Under the NABERS rating system shopping centres are rated from one to six stars, based on the energy and water efficiency of the central services and common areas of a building. This includes all facilities provided to retail tenants and the associated back-of-house facilities.
Chart 1. Eligible Asset Register
Source: Vicinity Sustainability Report
Relative Value
Fixed: ‘A- to A+’ Australian REITs (in our view, pricing around 15bps wider than fair value – inclusive of a 20bps NIC).
The Vicinity 6 year FXD also stacks up on a yield per unit of mod duration basis. These metrics are useful for those investors who want to be compensated fairly for taking duration risk.
Table 1. Mod Duration and Risk Comparison
| Issuer | Ticker | Coupon | Maturity Date | Maturity | Mod Duration | Yield | Yield per Unit of Mod Duration | Moody’s Rating | S&P Rating |
|---|---|---|---|---|---|---|---|---|---|
| GAIF Bond Issuer Pty Ltd | GAIF | 2.6 | 11/18/2027 | 5.5 | 5.1 | 4.3 | 0.8 | A3 | A- |
| Stockland Trust | SGPAU | 2.3 | 03/24/2028 | 5.8 | 5.4 | 4.7 | 0.9 | NA | A- |
| BWP Trust | BWPAU | 2.2 | 03/24/2028 | 5.8 | 5.4 | 4.8 | 0.9 | NA | A- |
| DWPF Finance Pty Ltd | DWPFAU | 1.9 | 08/04/2028 | 6.2 | 5.8 | 5.0 | 0.9 | NA | A |
| GAIF Bond Issuer Pty Ltd | GAIF | 1.9 | 12/14/2028 | 6.6 | 6.1 | 4.6 | 0.8 | A3 | A- |
| Vicinity 6yr FXD | VCX | 5.0 | 26/05/2028 | 6.0 | 5.1 | 5.0 | 1.0 | A2 | A |
Source: IAM Capital Markets
Chart 2. Relative Value
Source: Bloomberg
Floating
‘A- to A+ Australian Floating Rate Credits within the Ausbond Credit FRN Index.
Chart 3. Ausbond FRN Index Floating Rate Credits
Source: Bloomberg
