Resilient by name, resilient by nature
Listed property group issues disappointing results but is expected to outperform others
● Resilient, which has been battered this year, may just be in a better shape than people thought back in January.
The listed property group, which owns shopping centres such as Irene Village Mall, Secunda Mall, Brits Mall, Jabulani Mall in Soweto, The Grove Mall in Pretoria and i’langa Mall in Nelspruit, and has stakes in retail landlords in Eastern Europe, released disappointing financial results on Friday last week for the year to June.
It and its associated companies, Fortress, Nepi Rockcastle and Greenbay Properties, have seen their share prices plummet this year as investors sold shares because of concern they might be overvalued.
Nearly R120bn was wiped off the collective market capitalisation of the four listed entities year to date, after share-price drops ranging from 41% to 62%. The combined market cap of the four groups was about R267.2bn on January 9 before the sell-down, and has shrunk to about R150bn today.
Before the sell-off, the four listed entities made up as much as 40% of the value of the FTSE/JSE South African listed property index (Sapy).
Shares in the four were widely held by pension fund managers such as the Public Investment Corporation and by large institutional investors. As such, shareholders across a wide spectrum, including retail investors and pensioners, have been affected by the massive value destruction.
Resilient, which has invested its resources to own more than R20bn worth of property directly, achieved flat dividend growth in the reporting period, declaring a dividend of 565.44c, marginally lower than the previous year’s 567.29c. It also forecast that its dividend would be between 550c and 560c for the 2019 financial year, or between 2.7% and 0.96% lower.
CEO Des de Beer said the group had to work its way through a difficult operating environment, which included a weak consumer sector and an economy struggling to grow.
Though listed property is down close to 20% so far this year, largely thanks to the share price collapse of Resilient and its associated companies, the group is still expected to outperform many of its peers over the next few years.
Analysts said that even though Resilient’s dividend growth projections had weakened for 2019, it owned a strong portfolio of property and listed investments.
It has made a number of changes to how it accounts for its broad-based black economic empowerment fund and has removed the confusing cross-holding it had with Fortress, which provides more clarity to investors.
Resilient’s dividend growth had been far better than other funds for a number of years, regularly coming out well above inflation.
Many fund managers pumped their money into the stock for years as they were attracted by unbelievable dividend growth. Growth in dividends has been the main metric against which property funds are judged since the listed property sector was formalised in SA in the early 2000s.
For its June 2014 financial year, Resilient grew its dividend 20.94%, followed by 21.8% in 2015, 25.1% in 2016 and 16.1% in 2017.
By comparison, the dividend of the largest listed property fund in SA, Growthpoint Properties, climbed 6.5% in its June 2017 financial year, 6% in 2016, 7.5% in 2015 and 8.3% in 2014.
Stanlib head of listed property funds Keillen Ndlovu said Resilient’s South African portfolio had remained “relatively strong amid a tough economic environment. The total vacancy rate for their portfolio was 1.7%, an improvement from 1.9% in 2017. Rents on expiring leases were positive at 4% for renewing tenants, and 4.8% sales growth in the malls was above market average.”
He said the group’s balance sheet remained strong and its debt level was low, with loan-to-value of about 30%, which was below the market average of 35% to 40%.
Ndlovu said the underlying portfolio was sound and new valuers had been appointed to address market concerns that Resilient properties might be overvalued. So it was pleasing that the portfolio was revalued upwards by 3.9%. “Like-for-like net property income was a positive 5% while the same number for some of the companies in the sector is flat, if not negative,” he said.
“The tough economic environment is expected to continue to weigh on the underlying performance of the property portfolio for Resilient, as well as for the sector as a whole, but given the above-average operational performance we expect Resilient to fare better than market average,” said Ndlovu.
Reitway Global portfolio manager Garreth Elston said Resilient had refocused and was being managed by a team with a consistent record. “Results, as expected, were severely impacted by the precipitous fall in the value of the company’s listed investments. But, on the positive side, the company’s physical portfolio performed well and appears to be defensively structured to weather the current economic situation.”
The Sapy, which was down 20.5% by the close on Wednesday this week, includes the top 20 largest property companies with their primary listings in SA, and features a mix of property developers and real estate investment trusts (Reits). The all property index, which includes all real estate companies listed on the JSE, was down 18.7%.
Resilient has shed 62% year to date, following a consistent sell-off in its shares and no consistent signs of recovery. The sell-off in Resilient shares began in January after people suspected it was the subject of a report by US firm Viceroy Research.
Resilient’s share price had traded at a larger premium to its net asset value for a number of years and there were suggestions that Viceroy would reveal why this was so. However, the report turned out to be about Capitec. But the sell-off persisted and soon a group of hedge fund and asset managers began alleging that Resilient’s directors had found ways to artificially raise its share price.
There were suggestions that Resilient’s cross-holding with Fortress, which Resilient
Purely looking at the SA assets, Resilient will likely perform well compared to its peer group
Garreth Elston
Reitway Global portfolio manager
directors formed and listed in 2009, had helped to boost the share price of each.
Critics said that since the group was a Reit, most of its dividend should come from rent from properties and not from other sources, based on rules governing such investment vehicles.
The group has since removed this crossholding, which had a negative effect on its dividend growth.
“The malls are performing well, vacancies are under control, and developments are on track,” said Elston. “We were very pleased to see that the company’s assets were valued by JLL, and are of the opinion that the market will take comfort in these valuations.”
Resilient was stable even if it faced a few headwinds, he said.
The value of its listed investments may not recover particularly quickly and troubled retailer Edcon remains one of its main tenants.
The Financial Sector Conduct Authority’s market abuse unit has been investigating the severe share price falls in Resilient and its associates. The probe is twofold: it is investigating possible insider trading and price manipulation in the Resilient group companies’ shares; and possible false and misleading reporting about the group. The authority has not released any findings.
Elston said he and others might not rush into buying Resilient, primarily due to the negative outlook for the South African economy and how this would affect South African Reits.
“The investments of the company that are currently attractive would be certain parts of the offshore exposure. However, this can be accessed directly in the market without having to go through Resilient. Purely looking at the South African assets, Resilient will likely perform well compared to its peer group due to the defensive nature of its physical portfolio.
“Having a global mandate, we have a different view and approach, and a very wide universe to consider in choosing investments, and thus compare South African companies to a full global set, rather than just local peers, in deciding whether to invest,” said Elston.