TRADE of the MONTH

Equites and L2D present dif­fer­ent per­spec­tives

Financial Mail - Investors Monthly - - Opening Bell - Alis­tair An­der­son

Equites Prop­erty Fund, the JSE’s only spe­cial­ist in­dus­trial real es­tate play, con­tin­ues to im­press.

Since list­ing in June 2014, Equites has grown its port­fo­lio care­fully and now owns var­i­ous prop­er­ties with blue-chip ten­ants who have signed long leases.

This real es­tate in­vest­ment trust (Reit) is man­ag­ing to en­hance its earn­ings and as­sets si­mul­ta­ne­ously. Equites ap­peals to in­vestors who are seek­ing spe­cial­i­sa­tion. Most prop­erty funds tend to own a mix of of­fice and re­tail prop­er­ties but Equites has care­fully se­lected in­dus­trial as­sets.

The com­pany joined the JSE with a port­fo­lio of 17 Western Cape-based prop­er­ties val­ued at about R1.2bn. The com­pany has since ex­panded rapidly to own more than R6bn. The com­pany also ven­tured over­seas early on. CEO and one of its founders, An­drea Tav­er­naTurisan, spent some time study­ing and work­ing in the UK and, last year, Equites ac­quired high-qual­ity dis­tri­bu­tion cen­tres there. The other founders were Gian­carlo Lan­franchi and the con­sor­tium of Kevin Dreyer, Johnny Cul­lum and Alex von Kl­op­mann.

Equites ac­quired three prop­er­ties in the UK to­talling about £62m. It also bought eight lo­gis­tics prop­er­ties from de­vel­oper and cap­i­tal growth fund At­tacq in Water­fall City. These deals in­creased the port­fo­lio value to more than R6bn.

The UK’s lo­gis­tics sec­tor is grow­ing and of­fer­ing a large de­gree of deal flow. Tav­er­naTurisan and his man­age­ment team have ex­pe­ri­ence and con­nec­tions in the mar­ket, which they in­tend to grow into a sub­stan­tial off­shore com­po­nent of Equites.

The com­pany raised R1bn in new eq­uity in Novem­ber last year, show­ing that in­vestors are con­fi­dent about the group’s prospects. It an­nounced 20% growth in dis­tributable earn­ings for the six months end­ing Au­gust last year.

This year, too, has been good for Equites so far. The com­pany boasts a to­tal re­turn of 8.54% year to date to the end of March. This is im­pres­sive against the sec­tor’s to­tal re­turn of 1.37%.

Equites is also healthy from a debt point of view. At yearend, its loan to value (LTV) ra­tio was 11.8%. This is much lower than many other listed prop­erty com­pa­nies, whose LTVs are of­ten around 40%.

The fu­ture looks bright for Equites and in­vestors are keenly await­ing their next set of fi­nan­cial re­sults.

Lib­erty Two De­grees (L2D) has yet to lay out its in­vest­ment and ex­pan­sion plans. The com­pany listed last De­cem­ber, of­fer­ing ex­po­sure to its port­fo­lio of large shop­ping cen­tres. These in­clude the Sand­ton City com­plex, the East­gate com­plex, Mel­rose Arch, Lib­erty Mid­lands Mall and Nelson Man­dela Square.

The Reit’s as­sets are val­ued at about R8.6bn, with R6bn be­ing real es­tate and cash of R2.6bn mak­ing up the rest. The R6bn makes up roughly a fifth of Lib­erty’s R30bn prop­erty port­fo­lio. Ef­fec­tively, L2D of­fers ex­po­sure to por­tions of a bunch of as­sets.

In­vestors have asked why more of the R30bn port­fo­lio was not in­cluded in the list­ing. It may have been more at­trac­tive for the list­ing just to in­clude three ma­jor shop­ping cen­tres and larger por­tions thereof.

Nev­er­the­less, L2D has said it has a man­age­ment team with deep prop­erty ex­pe­ri­ence and

Some in­vestors hope that L2D will be more bold in the near fu­ture. They would like the fund to ac­quire new as­sets in SA or near SA — such as in Namibia

a sus­tained track record in ac­quir­ing, de­vel­op­ing and man­ag­ing some of SA’s “flag­ship prop­erty as­sets”.

“Man­age­ment re­mains op­ti­mistic with the qual­ity of the un­der­ly­ing en­vi­ron­ments that un­der­pin the re­silience and de­fen­sive na­ture of the port­fo­lio, and with the op­por­tu­nity of hav­ing R2.8bn cash avail­able for ac­qui­si­tions,” said CEO Amelia Beat­tie.

Some fund man­agers have ques­tioned how it will spend this cash.

Stan­lib’s head of listed prop­erty funds, Keillen Ndlovu, has been con­trar­ian to those in­vestors want­ing to be ex­posed to larger por­tions of Sand­ton City and East­gate, for ex­am­ple. He says L2D of­fers di­ver­si­fi­ca­tion, and pro­vides more than just ex­po­sure to the pre­mium malls.

But in an econ­omy that is barely grow­ing and with pal­try re­tail sales growth, shop­ping cen­tres are un­der pres­sure. Many large pre­mium malls have strug­gled in 2017 so far.

Some in­vestors hope that L2D will be more bold in the near fu­ture. They would like the fund to ac­quire new as­sets in SA or near SA — such as in Namibia. It may be a bit early to judge L2D but un­til it de­vel­ops a clear in­vest­ment plan which it con­veys to the pub­lic, it does not scream out as a buy.

There are also un­cer­tain­ties as to how well Mel­rose Arch and Sand­ton City will per­form in the near fu­ture. Sand­ton had a lot of ac­tion from African tourists but these con­sumers are also un­der pres­sure. Nige­ria’s econ­omy shrank 1.5% last year, its first shrink­age since 1991.

At this stage, it may be best to wait for L2D to clar­ify what other shop­ping malls the Lib­erty group could add to the listed ve­hi­cle and if it may de­velop new cen­tres from scratch any time soon.

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