Track record and range of assets offer hope

It’s not clear what has been behind the recent sell-off of Hyprop Investments. The share price touched a two-and-a-half year low of R95 this month despite fairly solid results. Hyprop is one of only a handful of SA-focused property stocks that managed to achieve inflation-beating distribution growth this year.

It declared an 8.8% increase in dividend payouts for the 12 months to June, well ahead of the 4%-6% achieved by most other SA-focused property stocks in the year to date.

Hyprop’s SA portfolio of R29bn includes nine upmarket shopping centres including Canal Walk in Cape Town, Rosebank Mall and Hyde Park Corner in Johannesburg, and Clearwater Mall on the West Rand. Its above-market dividend growth performance was supported by strong growth in its portfolio of six shopping centres in Southeast Europe.

It seems investors have been spooked by management’s cautious performance outlook for the year to June 2019. Though Hyprop’s SA mall portfolio is regarded as highly defensive, as they all dominate their catchment areas in prime urban locations, the portfolio hasn’t been immune.

The consumer-spending slowdown has prompted retailers to reconsider store expansions. Hyprop forecasts dividend growth to slow to between 5% and 7% next year, an outlook Anchor Stockbrokers investment analyst Pranita Daya says is “worse than expected”. But she also says management typically underpromises and overdelivers so it is likely Hyprop will achieve dividend growth at the top end of its forecast next year, depending on how quickly the SA economy recovers and whether retail spend takes a further knock.

Trading density growth (turnover/m 2), used to gauge the strength of the retail environment, has slowed significantly in SA malls. Hyprop’s malls recorded average trading density growth of only 0.5% for the year to June, down from 5% two years ago.

CEO Pieter Prinsloo said at the company’s results presentation that most local shopping centres have had a difficult year, given an oversupply of retail space coupled to consumers spending less. “Sales growth is just not there,” he said. Shoppers were becoming more value-conscious.

Hyprop, nevertheless, has few empty stores in its malls with almost the entire vacancy left last year by the demise of Stuttafords already re-let. The vacancy has declined from 2.4% to 1.9% in the 12 months to June. However, despite sufficient demand from retailers to fill empty space, Prinsloo said rental growth was under pressure as retailers become more resistant to rental hikes. Hyprop recorded an average 1.5% rental reversion on its mall portfolio in the year to June, markedly down from the average 4% achieved on lease renewals a year earlier.

The question is where growth will come from, given SA’s depressed economic outlook. Prinsloo said yieldenhancing growth opportunities in SA were becoming scarce. Portfolio growth will come from Southeast Europe: “We can still buy quality shopping centres in Southeast Europe at yields of 7%-8% with debt funding rates at 3%-3.5%. Trading density growth is also far more robust than in SA.”

This month Hyprop was trading around R95 — 22% down from its January peaks. It places the counter at a discount to NAV of more than 7%. That’s attractive given Hyprop’s assets and its track record.