Resilient bends to big blows
Trust and value dwindle as listed property wobbles
● The listed property sector has experienced the worst volatility in its two-decade history over the past six weeks.
It had been the best, or close to the best, performing asset class for about five years, but is losing trust among investors. Much of the panic among them has been around the Resilient stable of companies. Their market values have fallen, which has had a contagion effect in a sector worth R780-billion.
On Thursday the news got even worse for Resilient and its associate Fortress B in particular. Announcements put the two property stocks under cautionary and sent their share prices into freefall. Resilient plunged 17% and Fortress dropped 14%, before both settling about 10% lower.
On Friday, Resilient ended trade 2% lower and 54.68% down for the year at R68.50 a share. Fortress B shares lost 3.55% on the day and were down 63.32% for the year at R15.48 a share. Fortress A shares, which tend to trade less often than Bs, were down 1.25% and 12.72% year to date at R16.20.
The companies said the cautionaries were necessary because of confidential negotiations with the trustees of and other lenders to its BBBEE partner, Siyakha Education Trusts, regarding all loans to the trusts and underlying collateral. Resilient had been declaring income from these trusts as distributable but it had not consolidated these trusts into its books, according to critics.
But it is not just Resilient and its associated companies that suffered. No capital has been raised in the sector in the year to date and there are fears that some potential listings, among them Inkunzi Student Accommodation Fund, have been put on hold.
The FTSE/JSE SA Listed Property Index’ total return year to date has been close to a dismal -20%, while other equities have managed -2% and bonds have fared best, rewarding investors with close to 7%.
The Resilient stable has faced a barrage of criticism this year and has been victim of short selling and aggressive share selldowns since January 12.
The stable includes Resilient REIT, which was listed on the JSE in 2002 by former banker Des de Beer, along with other real estate entrepreneurs.
Resilient invests in dominant shopping centres, mostly in towns and has stakes in offshore shopping centre landlords.
Fortress, a local company that owns more listed industrial property than any other South African fund. De Beer and his team have been successful, especially over the past five to 10 years, regularly achieving market-leading, double-digit dividend growth and growing to sit among the top five property companies by market capitalisation on the JSE.
But 2018 has so far been an annus horribilis. It began with hedge funds shorting the shares in the middle of January in anticipation of the companies being the subject of a report by Viceroy Research.
Even after banking group Capitec turned out to be the target, the sell-off in Resilient and associated company shares didn’t stop. There were bursts of selling after the release of three other reports by asset managers earlier this month. While short sellers had run out of available stock that they were allowed to short, long-term holders and retail investors began to flog their shares in the companies, with Resilient REIT and Fortress REIT the main targets.
Fortress REIT has two share types, A and B, that cater for investors with different risk appetites. A shareholder’s dividends are capped at 5% or CPI, whichever is the lowest. But they are paid before B shareholders.
A couple of weeks ago De Beer and his team met the investment community to address concerns centred on the cross-holdings and how Resilient accounts for a broadbased black economic empowerment partner. Resilient owns about 16% of Fortress. There are also allegations that the directors and staff employ tactics to inflate the share prices, which has been disputed by De Beer.
“The companies have tended to trade at premiums well above net asset value which have been unrealistic,” said Ian Anderson, chief investment officer at Bridge Fund Managers.
Companies tended to trade at premiums well above net asset value
Ian Anderson Chief investment officer at Bridge Fund Managers
Resilient’s board last week announced an independent review led by former auditorgeneral Shauket Fakie.
Keillen Ndlovu, head of listed property funds at Stanlib, said even though no capital had been raised in the listed property sector this year, there were still 10 months left and many buying opportunities for investors.
“It’s early days for listed property this year even if it looks like its return will be the worst of the traditional asset classes. The sector has experienced the worst volatility in its history year to date. This has been driven mainly around the volatility in the Resilient stable of companies, the strengthening rand negatively affecting mostly offshore-focused property funds, global market volatility as well as potential Top 40 index exclusions for Resilient and Fortress,” he said.
But numerous listed property funds were at the most attractive buying levels since at least the 2008 recession, Ndlovu said.
“The sector is waiting for guidance from Resilient and Fortress. In general, the income growth forecasts from the sector remains intact and debt levels are reasonable. Local-focused funds are starting to benefit from the positive sentiment coming out of the domestic economy post the appointment of a new president,” he said.
“Given the extreme market volatility we have seen lately, it will not be as easy for property companies to raise capital to the same levels that we saw last year or over the previous years.”