PICK OF THE MONTH

Increased offshore expansion is likely to come predominantly from Poland

I ncome-chasing investors looking to hedge currency bets both ways (against a potentially stronger or weaker rand) should look afresh at Redefine Properties.

The counter, the JSE’s second largest SA-based property stock after Growthpoint Properties with a market cap of R61bn, is currently trading at an attractive discount to the sector and offers a relatively cheap entry point for investors with a three-to-five-year horizon.

Redefine’s forward dividend yield is close to 9% against a 7.2% average for the listed property sector as a whole. The portfolio is well-diversified and positioned to weather potential storms in any particular region. Redefine offers investors exposure to rand-based office, retail and industrial property assets in SA as well as a mix of hard currency income streams through its Polish, UK, German and Australian interests.

The portfolio has an 80% local and 20% offshore split. The latter comprises, among others, Redefine’s 39.5% stake in pure Polish property play Echo Polska Properties (EPP), a 29.8% stake in UK and German-focused Redefine International as well as a 25.4% stake in Australian-listed Cromwell.

The counter was somewhat out of favour in 2013-2015 following market perceptions that it owned too many older, smaller properties in secondary areas. But management, under CEO Andrew Konig and co-founder and executive chair Marc Wainer, has made headway, offloading the rats and mice and investing the proceeds in bigger, better buildings.

Redefine’s portfolio has undergone a major transformation since 2014, not only in terms of quality and scale but in its geographical footprint.

Total assets have grown 75% over the past two and a half years, from about R48bn in August 2014 to R84bn at endFebruary. Its flagship SA assets now include a number of large shopping centres including Centurion Mall and East Rand Mall (50%) in Gauteng, Matlosana Mall in Klerksdorp and Blue Route Mall and Kenilworth Centre in Cape Town. Redefine’s offshore interests doubled from just more than R8bn in August 2014 to R16.4bn.

Over the past year alone, assets valued at more than R15bn were acquired. Big-ticket deals include Redefine’s muchtalked about entry into Poland in mid-2016 when it managed to pip fellow South African bidders to the post for a R4bn stake in EPP. EPP, which owns 25 shopping centres and office blocks across Poland, listed on the JSE in September.

This year Redefine also acquired former JSE-listed development play, The Pivotal Fund, which added 32 locally based properties worth R10.4bn (including developments under construction and land holdings) to its portfolio. These include a number of Agrade assets such as the new landmark Alice Lane office complex in Sandton. Redefine recently also invested R337.9m in Australia’s high-growth student housing market via a 90% stake in Journal Student Accommodation Fund. The latter has received approval to start building 804 student beds in June at a prime site that Redefine owns in Melbourne, just up the road from Melbourne University.

That management’s transformation strategy is paying off is clearly underscored by the solid set of interim results announced this month. The company managed to deliver inflation-beating dividend growth of 7.5% for the six months ending February, which is no easy feat in the current uncertain economic and political climate.

As Meago Asset Managers director Jay Padayatchi points out: “While Redefine’s outlook for distribution growth has been revised marginally downwards, which is to be expected given the weak SA macro-economic outlook and difficult trading environment, net operating income growth of 5.9% and a high tenant retention ratio of 86% should provide comfort to shareholders.”

Konig said at the interim results presentation that management’s focus will remain on diversifying, expanding and improving the company’s portfolio. The company is likely to further increase its offshore exposure to about 25%-30% of total assets, from just less than 20% currently.

“Geographic diversification remains important as it enables us to access stable revenue flows and broaden our funding sources at attractive interest rates.”

Konig said increased offshore expansion in the short term is likely to come predominantly from Poland via EPP. “We like Poland as it still offers strong growth opportunities over the next few years and is the largest economy by far in Central and Eastern Europe.”