Money&investing
Town’s V&A Waterfront, the jewel in Growthpoint's crown and traditionally its best-performing SA asset by a mile, could help lift earnings this time.
In fact, the R14.3bn mixed-use precinct, which Growthpoint co-owns with the Public Investment Corp, is bearing the brunt of Covidrelated trading and travel restrictions.
Growthpoint SA CEO Estienne de Klerk says that until March the precinct was “really pumping”. Annual retail sales and rental income growth were in excess of 5%.
Occupancies at the V&A’S 10 hotels as well as passenger numbers from cruise ships that docked at the V&A’S international cruise terminal had also been on a strong upward trajectory, which helped push annual visitor numbers to the precinct to a record 24-million.
Then Covid hit and foot count and retail sales dropped by more than 65% in the second quarter (year on year).
“The V&A’S earnings are heavily dependent on tourism,” says De Klerk. “So it’s been a bit of a disaster.”
Analysts appreciate the fact that Sasse and De Klerk haven’t tried to sugar-coat the numbers. Old Mutual portfolio manager Evan Robins says management has been forthright to the extent of talking down its own share.
“We welcome that.
There is no point pretending the market is anything but very tough and uncertain at the moment.”
While most analysts
are in favour of Growthpoint holding back dividends to help shore up cash reserves, there is a view that it’s time for management to also sell down some of its offshore positions.
Robins refers to Growthpoint’s “disappointing” foray into the UK, where it bought a 52% stake in mall owner Capital & Regional in December last year for R2.9bn. The value of that investment has since shrunk to R1.1bn. Robins says: “In this environment, with the core SA portfolio struggling, you can [hardly] afford poor results from peripheral holdings.”
He reckons Capital & Regional was always going to be a risky investment, given the “terrible” state of the UK shopping centre sector. And it didn’t get in at a discount to market value, which Robins says would have given it a cushion.
“The risk is that Capital & Regional, in which Growthpoint now has a controlling interest, will soon need more cash.”
Anas Madhi, director of Meago Asset Managers, shares this sentiment. He says given the tsunami of challenges faced by Growthpoint, the company, like some of its Sa-based peers, should look at exiting “troublesome foreign ventures with their destructive cross-currency derivatives”.
He adds: “Notwithstanding the economic impact of Covid-related lockdowns, misallocation of capital cannot only be resolved by forgoing dividends, but rather by acknowledging investment successes as well as shortcomings, and reprioritising capital accordingly.”
To boost capital reserves, Madhi says Growthpoint could consider a partial divestment of its shareholding in Growthpoint Australia, with the possibility of dual-listing the Australian-listed company on the JSE.
It could also sell out of Eastern Europeanfocused office property play Globalworth, in which it owns a 29.4% stake — or buy a controlling stake in the company, listed on the London Stock Exchange.
He believes Globalworth’s shareholder structure is likely to become problematic now that its former CEO has sold his stake in the company, leaving three strategic shareholders that need to agree on its future growth strategy.
Madhi also refers to the untimely entry into the UK retail sector via Capital & Regional, saying Growthpoint will hopefully not inject further capital into the company as and when a call for equity is made, which he anticipates will be within the next 12 months.
While the challenges faced by Growthpoint may well be amplified by the size and diversity of its portfolio, the company’s results are likely to prompt property investors to further lower their return expectations for the listed property sector as a whole.
Keillen Ndlovu, head of listed property funds at Stanlib, warns that it’s not only Growthpoint’s vacancies, arrears and bad debts that are likely to continue to increase — the same trend is expected for other Sa-focused Reits.
As a result, Ndlovu expects distributable income for the sector as a whole to fall by double digits over the next one to two years.
In response, physical property values are also likely to drop by over 10% in the short to medium term, which he says will force more Reits to retain a portion of their profits to help strengthen balance sheets.
The upshot is that listed property investors should no longer focus only on dividends, but rather on total returns.
The one ray of hope for investors is that while share price volatility is likely to continue in the short term, Ndlovu believes most of the downside is already priced in, given that the sector trades at an all-time-high discount to NAV of an average 50%.
That suggests attractive buying opportunities for patient investors.