Back on the radar and do­ing rather well

Financial Mail - Investors Monthly - - Analysis - Joan Muller

In­vestec Prop­erty Fund’s (IPF) share price hasn’t ex­actly shot the lights out in re­cent years. In the two years to July 12 the stock is down about 6%. But the counter has prob­a­bly been overly pun­ished fol­low­ing the di­lu­tive R7.1bn Zen­prop deal that was an­nounced in late 2015.

The trans­ac­tion, one of the largest con­cluded by a listed prop­erty fund in 2015-2016, nearly dou­bled IPF’s port­fo­lio at the time, tak­ing to­tal as­sets from R8.7bn to R17bn. An­other trans­ac­tion that pro­vided fur­ther scale was the Grif­fin deal in 2015, which com­prised 22 prop­er­ties, mostly in­dus­trial build­ings, from Grif­fin Hold­ings for R826m.

Though the R7.1bn ac­qui­si­tion from Zen­prop was re­garded as a coup for IPF, as it bulked up the fund’s port­fo­lio with a num­ber of qual­ity shop­ping cen­tres and of­fice blocks, share­hold­ers were not over­joyed that it was go­ing to place a damper, al­beit tem­po­rary, on div­i­dend growth. The lat­ter slowed from 6.1% for the year ended March 2016 to 2.4% for the year ended March 2017.

IPF may also have lost some favour be­cause it hasn’t grown its off­shore foot­print as ag­gres­sively as some of its peers. The fund’s only off­shore ex­po­sure is to the Aus­tralian prop­erty mar­ket via a R1.3bn stake in sis­ter com­pany In­vestec Aus­tralia Prop­erty Fund, which amounts to close to 6% of to­tal as­sets of R18.8bn. That com­pares to an av­er­age 15%-30% for­eign ex­po­sure of­fered by many other SA-based prop­erty stocks. In ad­di­tion, IPF is ex­ter­nally man­aged by In­vestec Prop­erty, whereas in­vestors nowa­days pre­fer prop­erty funds to be in­ter­nally man­aged.

IPF is likely to start reap­pear­ing on in­vestor radars now that the di­lu­tion­ary im­pact of the Zen­prop ac­qui­si­tion has been ab­sorbed. At its re­cent an­nual re­sults pre­sen­ta­tion, man­age­ment said the fund would re­vert to its his­tor­i­cal 7%-8% div­i­dend growth for the year end­ing March 2018. More­over, IPF is now trad­ing at an at­trac­tive dis­count to the sec­tor given a for­ward yield of close to 9% ver­sus the sec­tor’s av­er­age 7.5%.

The fund’s un­der­ly­ing port­fo­lio is also per­form­ing well. Jay Pa­day­atchi, di­rec­tor of Meago As­set Man­agers, says for IPF to have achieved 8.7% growth in net prop­erty in­come for the year ended March in the chal­leng­ing en­vi­ron­ment is im­pres­sive. Cost-to-in­come ra­tios con­tinue to im­prove: to 15.2% from 16.1% a year ear­lier. In ad­di­tion, IPF’s port­fo­lio va­cancy of 1.4% is also among the low­est in the sec­tor. “These num­bers un­der­score the qual­ity of the port­fo­lio and the ex­per­tise of the man­age­ment team,” says Pa­day­atchi.

IPF’s mea­sured ap­proach to off­shore ex­pan­sion may also turn out to be a bless­ing as there is a view that some funds are en­ter­ing off­shore mar­kets too late, over­pay­ing for as­sets in the process. CE Nick Ri­ley says they have been look­ing for deals in the UK and Europe. But he’s not con­vinced that now is the right time to in­crease the com­pany’s off­shore ex­po­sure. “Pric­ing in many mar­kets ap­pears to be at the top of the cy­cle, which has been driven up by cheap money. What hap­pens when in­ter­est rates start to rise? We be­lieve there will be a pull­back and we’ll wait for prices to come down be­fore we buy.”

Re­gard­ing in­creased ap­petite among in­vestors for niche prop­erty plays that fo­cus only on one sub­sec­tor, Ri­ley says IPF has no in­ten­tion to move away from its di­ver­si­fied ap­proach. “We have op­er­ated across all sec­tors of the prop­erty mar­ket for 35 years and re­main com­fort­able to be well di­ver­si­fied across the re­tail, of­fice and in­dus­trial sec­tors.”

He con­cedes that in­vestors don’t nec­es­sar­ily like ex­ter­nal man­age­ment com­pa­nies, but says there is no in­ten­tion to in­ter­nalise this func­tion. IPF and In­vestec Prop­erty re­cently re­newed their man­age­ment con­tract un­til 2025. “In­vestec is a well-re­spected brand, whose in­ter­ests are closely aligned with that of IPF.”

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