TRADE of the MONTH

Equites and L2D present different perspectives

Equites Property Fund, the JSE’s only specialist industrial real estate play, continues to impress.

Since listing in June 2014, Equites has grown its portfolio carefully and now owns various properties with blue-chip tenants who have signed long leases.

This real estate investment trust (Reit) is managing to enhance its earnings and assets simultaneously. Equites appeals to investors who are seeking specialisation. Most property funds tend to own a mix of office and retail properties but Equites has carefully selected industrial assets.

The company joined the JSE with a portfolio of 17 Western Cape-based properties valued at about R1.2bn. The company has since expanded rapidly to own more than R6bn. The company also ventured overseas early on. CEO and one of its founders, Andrea TavernaTurisan, spent some time studying and working in the UK and, last year, Equites acquired high-quality distribution centres there. The other founders were Giancarlo Lanfranchi and the consortium of Kevin Dreyer, Johnny Cullum and Alex von Klopmann.

Equites acquired three properties in the UK totalling about £62m. It also bought eight logistics properties from developer and capital growth fund Attacq in Waterfall City. These deals increased the portfolio value to more than R6bn.

The UK’s logistics sector is growing and offering a large degree of deal flow. TavernaTurisan and his management team have experience and connections in the market, which they intend to grow into a substantial offshore component of Equites.

The company raised R1bn in new equity in November last year, showing that investors are confident about the group’s prospects. It announced 20% growth in distributable earnings for the six months ending August last year.

This year, too, has been good for Equites so far. The company boasts a total return of 8.54% year to date to the end of March. This is impressive against the sector’s total return of 1.37%.

Equites is also healthy from a debt point of view. At yearend, its loan to value (LTV) ratio was 11.8%. This is much lower than many other listed property companies, whose LTVs are often around 40%.

The future looks bright for Equites and investors are keenly awaiting their next set of financial results.

Liberty Two Degrees (L2D) has yet to lay out its investment and expansion plans. The company listed last December, offering exposure to its portfolio of large shopping centres. These include the Sandton City complex, the Eastgate complex, Melrose Arch, Liberty Midlands Mall and Nelson Mandela Square.

The Reit’s assets are valued at about R8.6bn, with R6bn being real estate and cash of R2.6bn making up the rest. The R6bn makes up roughly a fifth of Liberty’s R30bn property portfolio. Effectively, L2D offers exposure to portions of a bunch of assets.

Investors have asked why more of the R30bn portfolio was not included in the listing. It may have been more attractive for the listing just to include three major shopping centres and larger portions thereof.

Nevertheless, L2D has said it has a management team with deep property experience and

Some investors hope that L2D will be more bold in the near future. They would like the fund to acquire new assets in SA or near SA — such as in Namibia

a sustained track record in acquiring, developing and managing some of SA’s “flagship property assets”.

“Management remains optimistic with the quality of the underlying environments that underpin the resilience and defensive nature of the portfolio, and with the opportunity of having R2.8bn cash available for acquisitions,” said CEO Amelia Beattie.

Some fund managers have questioned how it will spend this cash.

Stanlib’s head of listed property funds, Keillen Ndlovu, has been contrarian to those investors wanting to be exposed to larger portions of Sandton City and Eastgate, for example. He says L2D offers diversification, and provides more than just exposure to the premium malls.

But in an economy that is barely growing and with paltry retail sales growth, shopping centres are under pressure. Many large premium malls have struggled in 2017 so far.

Some investors hope that L2D will be more bold in the near future. They would like the fund to acquire new assets in SA or near SA — such as in Namibia. It may be a bit early to judge L2D but until it develops a clear investment plan which it conveys to the public, it does not scream out as a buy.

There are also uncertainties as to how well Melrose Arch and Sandton City will perform in the near future. Sandton had a lot of action from African tourists but these consumers are also under pressure. Nigeria’s economy shrank 1.5% last year, its first shrinkage since 1991.

At this stage, it may be best to wait for L2D to clarify what other shopping malls the Liberty group could add to the listed vehicle and if it may develop new centres from scratch any time soon.