Financial Mail - Investors Monthly
SMART PROPERTY PLAYS
Dicing for the best distributions
Another factor that could weigh on dividend growth is potential changes to the way property companies report their results
Property punters are no doubt still reeling from last year’s value destruction when the SA listed property index (Sapy) tumbled 30% in what was the sector’s worst performance in more than 20 years. For some, the losses were far more pronounced — backers of Rebosis Property Fund B, Resilient Reit, Fortress Reit B, Intu Properties, Nepi Rockcastle, Tradehold, Capital & Regional, Delta Property Fund and Balwin Properties suffered capital losses of between 40% and 70%.
The upside of last year’s decline is that it has created cheap buying opportunities for investors who are underweight in property, particularly those looking for a high and growing income stream.
At least a dozen SA-focused real estate investment trusts (Reits) are now trading at juicy dividend yields exceeding 11%. The sector as a whole — comprising about 60 counters — is trading at a record 9.3% dividend yield.
Though offshore property counters typically trade at lower initial dividend yields than their SA-focused counterparts, a number of rand hedge counters now offer higher income growth prospects. So there’s good value to be had among both SA-focused and rand hedge property counters, says Metope Investment Managers CEO Liliane Barnard. “And in turbulent times, cash is king.”
She says that for the first time since 2009, Sapy is trading at a forward yield that is higher than that of long-term bonds, despite the 7% recovery in share prices already recorded by the Sapy year to date (to February 19). “That creates an attractive entry point into listed property,” says Barnard.
The sector is also looking cheap from a NAV perspective. Keillen Ndlovu, head of listed property funds at Stanlib, says the sector is trading at an average 10% below NAV versus its historic 11.3% premium to NAV. The last time that the sector was trading at such a sizeable discount was a brief period in late 2008/early 2009 following the global financial crisis.
Though listed property valuations look compelling, analysts warn that there is still a number of headwinds that face the sector. The market is awaiting the outcome of the Financial Sector Conduct Authority’s investigation of allegations of insider-related trading and share price manipulation against Resilient Reit and its associate companies including Fortress Reit, Nepi Rockcastle and Lighthouse Capital (former Greenbay Properties). Last year’s sell-off of property stocks was triggered by these allegations. While governance concerns are already reflected in their share prices, it is still unsure when or if they will be cleared of any wrongdoing.
There has also been rising pressure on property companies’ earnings on the back of weak consumer spending and a stagnant economy, which has dampened demand for retail, office and industrial space. Dividend growth for the sector already slowed to an average 6% in 2018 — almost half the average 10% achieved in 2017.
Ndlovu expects dividend growth to slow further this year to an average 4% as higher vacancies and lower rental reversions continue to bite into earnings. Several counters have already reported low single-digit or even negative dividend growth for the December results periods.
Edcon’s future is a key worry, especially for property counters that have a large retail exposure. Ndlovu says if listed landlords agree to the struggling clothing retailer’s restructuring proposal to cut the rent in its 1,350 Edgars, Jet, JetMart and CNA stores by 41% over two years, dividend growth for the sector as a whole could come in at a lowly 3% this year. Edcon occupies 7%-8% of the gross lettable space across SA’s 2,000-odd shopping centres and contributes an average 2% to the listed property sector’s rental income. Hyprop Investments, Liberty Two Degrees, Resilient and Rebosis have the highest exposure to Edcon among the listed mall owners.
Investec Asset Management portfolio manager Peter Clark says another factor that could weigh on dividend growth is potential changes to the way property companies report their results.
That follows the SA Reit Association’s recent push for improved reporting standards. He notes that more companies could rebase their distributable income by removing nonrecurring earnings, potentially resulting in lower-thanexpected dividend growth.
Resilient is a case in point. The company, which owns stakes in a portfolio of 28 shopping centres in SA as well as interests in rand hedge counters Nepi Rockcastle and Lighthouse Capital, this month declared a 14% drop in dividend payouts for the six months ended December (year on year). The decline comes largely on the back of the company rebasing its earnings following the sale of a stake in Fortress and a change in the way it accounts for interest earned on loans advanced to BEE entity the Siyakha trusts.
In terms of total return expectations, Ndlovu is forecasting a rather pedestrian 9.1% (base case) to 14.6% (bull case) from listed property for 2019 as a whole.
That may not seem exciting, but he says investors should remember that listed property, unlike most other asset classes, offers a high and growing income stream. “Listed property returns have historically always been driven by income rather than capital growth. Out of the total return of 394% delivered by the sector over the 15 years to end-December 2018, 300% of that constituted income return while only 94% came from capital growth.”
Given lingering risks faced by the listed property sector, IM asked fund managers which individual property stocks now offer the best buying opportunities. And should investors focus more on offshore or SAfocused property plays?
Barnard says it all depends on what your risk appetite is. She suggests that investors with a low risk profile consider Fortress A and specialist logistics play Equites Property Fund. Fortress A shareholders get preference over B shareholders in terms of dividend payouts. The counter is trading at a 7.9% forward yield (rolling 12month) with fixed annual growth pegged at either the lesser of inflation or 5%. An investment in Fortress A therefore offers a fairly predictable annuity-type income.
At a forward yield of 7%, Equites may appear relatively expensive compared to other property stocks, Barnard says. “But the company offers a long lease profile and its income generation is relatively secure, certainly in the short to medium term.” Management is also expected to continue to deliver above-market dividend growth, forecast at 9% for the 2019 financial year.
For investors with a greater risk appetite, Barnard’s suggested picks are Resilient, which trades at a 9.4% forward yield, and Vukile Property Fund (9.2%).
Following Resilient’s recent restructuring, she believes the company is now well-positioned to deliver sound distribution growth. “We like Resilient for its solid portfolio of both direct and listed property as well as its hedged-out low levels of debt.”
Vukile owns a portfolio of retail parks and shopping centres that is roughly equally split between SA and Spain. It is the first and only SA property player to date to enter the Iberian Peninsula. Flagship SA malls include East Rand Mall (50%), Phoenix Plaza near Durban, Gugulethu Square in Cape Town and Dobsonville Mall in Soweto.
“Vukile has a well-managed
local portfolio. We also like Vukile’s retail investment in the Spanish market, which should yield good income growth and positive capital uplift for the company.”
Barnard says though both Resilient and Vukile’s direct property portfolios face the threat of an Edcon closure, both have already taken measures in recent years to reduce the space let to some of Edcon’s poorer-performing stores.
Metope’s top offshore picks are Central and Eastern European-focused Nepi Rockcastle, which is trading at a 7.1% forward yield, and MAS Real Estate (6.4%), which offers exposure to the UK and Eastern Europe. “Both companies are expected to deliver solid, euro-based income growth and have low levels of hedged-out debt,” says Barnard.
Ndlovu also singles out Nepi Rockcastle as his top offshore pick. “We believe that Nepi Rockcastle still offers the best access to the entire Central and Eastern European region, not only to Romania and Poland. It now owns dominant centres in Bulgaria too and has expanded to other markets such as Hungary, Serbia, Croatia and Lithuania.”
He adds: “Nepi Rockcastle is the third-largest stock in the JSE’s all property index and has a diverse portfolio with reasonable growth prospects. And following last year’s massive price correction, valuations are undemanding at current levels.”
On the local front, Ndlovu favours Vukile and Fairvest. He says while the market was initially sceptical of Vukile’s strategy when it entered Spain 18 months ago via the acquisition of a portfolio of retail parks, Vukile’s second tranche of acquisitions — five larger shopping centres bought from global shopping centre giant Unibail-Rodamco-Westfield — has been welcomed by the market.
Though Fairvest is a small and relatively illiquid stock, Ndlovu says it quietly continues to deliver consistently good results from its exposure to rural and township shopping centres. “Fairvest’s assets are dominated by food anchors that have been delivering abovemarket trading density growth.”
UK and European-focused mall owner Hammerson and German business park owner Sirius is Clark’s top rand hedge picks. He says Hammerson has been oversold and that the company’s operational metrics are not as bad as sentiment suggests. “The current valuation is attractive. The counter trades at a dividend yield of 7.5% and a large discount to NAV. However, income is unlikely to grow significantly in the near term.”
Clark says Sirius has a unique property offering. It is the JSE’s only pure Germanfocused play, and owns a diverse and reasonably defensive portfolio of business parks.
He says the management team, led by Andrew Coombs (CEO) and Alistair Marks (CFO), is highly rated for its active management expertise.
“Overall, the company provides good income and growth prospects from a stable, developed market.”
On the domestic front, Clark singles out sector heavyweight Growthpoint as his top buy. “The company is well-positioned to weather the challenging operating environment in SA. It offers a well-diversified portfolio and provides investors with ample liquidity.”
Growthpoint trades at a decent 9.3% dividend yield and is still expected to deliver inflation-beating distribution growth this year.
Vukile owns a portfolio of retail parks and shopping centres roughly equally split between SA and Spain