Dividend growth ebbs on property stocks
Property investors will have to brace themselves for lower income returns as negative rental reversions and rising vacancies start to squeeze dividend growth.
A number of real estate investment trusts (Reits) have already reported flat or even negative dividend growth for the June and August results periods, including the likes of Octodec Investments, Delta Property Fund, Emira Property Fund and Tower Property Fund.
In 2016, the listed property sector achieved an average 11% dividend growth (Stanlib figures). While sector heavyweight Redefine Properties managed to achieve an inflationbeating 7% growth in dividend payouts for the year ending August, management warned at the results presentation earlier this week that this level won’t be maintained in 2018.
Redefine CEO Andrew Konig says it is becoming increasingly difficult for property companies to continue to deliver inflationbeating dividend growth given the many political, policy and economic headwinds.
Most property stocks are facing a double whammy: not only are local earnings under pressure due to falling demand for retail, office and industrial space, but a stronger rand has wiped out potential gains from offshore investments.
Like a number of its peers, Redefine is already forced to include fee income to its distributions in a bid to prop up flagging dividend growth — a strategy that analysts believe is not sustainable.
Others are rapidly expanding offshore to diversify earnings away from SA’s troubled economic and political landscape.
But this could come back to bite many who get their timing wrong in terms of rand exchange rate movements or, worse, overpay for assets in foreign countries that they aren’t necessarily familiar with.
Just how exactly FirstRand is funding its mega-acquisition in the UK has everyone scratching their heads.
The bank tabled a £1.1bn (around R20bn) offer for British challenger bank Aldermore on Monday and has itself made a £1.3bn (R24bn) interest-bearing loan facility available to subsidiary FirstRand International to execute the deal.
The rest of the funding was set aside for taxes related to the transaction.
The loan will be released to the Guernsey-based FirstRand International if the required majority of Aldermore’s shareholders vote in favour of the takeover. If they don’t, the loan won’t be drawn down.
If they do, and the deal receives approval from regulators, FirstRand plans to make Aldermore its fifth franchise, alongside older subsidiaries such as First National Bank and WesBank.
But at its results presentation for the year to June, the banking group said it had R19bn in surplus cash, some of which it would be using for investments.
It repeated this number in an investor presentation on Monday, saying it had enough internal cash resources to cover the acquisition. Assuming it will use its entire surplus for the Aldermore deal, there is R5.1bn missing from the equation.
FirstRand investor relations head Sam Moss says: “Of the R20bn purchase price, the goodwill represents R9bn. Only the goodwill impacts [core capital]. The remaining amount is utilised through funding capacity and cash resources.”
In other words, FirstRand is putting up R11bn in actual cash for Aldermore.