The Vicinity Centres (ASX: VCX) share price is still 25% lower than its pre-COVID high, as we can see on the chart below. Could the ASX dividend stock be an undervalued investment opportunity?

The real estate investment trust (REIT) owns a portfolio of property centres across Australia, with a stated $23 billion of retail assets under management (AUM) across 59 shopping centres.

Its assets include local shopping centres and DFOs across the country and 50% of Australia's largest mall, the Chadstone Shopping Centre in Melbourne, Victoria.

There are two key reasons why I like this business.

One vital financial metric for a REIT is the adjusted funds from operations (AFFO), which is essentially the net rental profit.

Vicinity Centres' distribution payout ratio target range is between 95% and 100% of AFFO, which can create a good distribution yield.

The business expects its AFFO per security to be at the top end of its guidance range between 11.8 cents and 12.2 cents per security. In the FY24 first-half result, it paid a distribution of 5.85 cents.

According to Commsec, the ASX dividend stock is predicted to pay a distribution of 11.7 cents per security in FY24. This translates into a forward distribution yield of around 6%. By FY26, it's predicted to pay a distribution per security of 12.5 cents, which would be a yield of 6.25%.

The payout could increase in FY25 and FY26 — and growing passive income is one of the main things I look for when choosing ASX dividend shares.

Australia's cities continue to grow, and the number of shoppers keeps increasing, but there isn't any more space in suburban locations for large shopping centres to be built.

Of course, there's a danger that e-commerce could challenge the relevance of physical retail stores.

In its FY24 half-year update, Vicinity Centres said that its occupancy rate increased to 99.1%, with a leasing spread (rental increase) of 3.3%, so the lease metrics are still attractive.

I think many retailers will still want a physical presence in the future, even if e-commerce plays a bigger role. Shopping centre spaces could be used for purposes beyond retail, such as education, entertainment, and so on. The underlying land also has a lot of value.

Vicinity Centres reported its net tangible assets (NTA) was $2.29 at December 2023, so the Vicinity share price is at a 13% discount to this.

In addition, the ASX dividend stock is spending hundreds of millions of dollars in the next few years to improve and expand some of its existing assets, which will lead to a boost in rental profits once those projects are finished.

If the rental income can keep growing, then I think Vicinity Centres could be a compelling pick for the long-term with the ASX dividend stock's irreplaceable shopping centres, including the excellent Chadstone Shopping Centre asset.