Time to get back into Equites?
Is the perennial market darling still on the pricey side or is it a good time to increase your weighting to Equites Property Fund, given its 23% share price slide over the past year?
That’s the question property punters are no doubt pondering amid lingering uncertainty about whether real estate stocks are likely to stage a comeback this year. South Africa’s listed property sector wasn’t a great bet in 2022, with the index ending the year down 7.3%. Capital losses were propped up by a fairly decent 7.8% dividend yield, which brought the sector’s total return into positive territory, albeit only 0.5%.
Equites underperformed the index by a sizeable margin with a total return of -19.5% in 2022. Last year’s aggressive sell-down came on the back of rising interest rates and food and fuel costs, which the market feared would dampen retail sales — and subsequently demand for logistics properties (warehouse and distribution space).
There was also a perception that the counter was looking expensive following a stellar performance during the pandemic. Equites was one of only a few real estate investments trusts (Reits) that emerged relatively unscathed from Covid due to its exposure to the logistics property sector.
That sector was a major beneficiary of the pandemicinduced surge in e-commerce and supply chain disruptions. Equites’s fairly large exposure to the UK (38% of assets) has no doubt also weighed on investor sentiment given that British property valuations have come under pressure following higher interest rates and debt costs.
Analysts expect the sector to deliver an improved performance this year with total returns in the region of 10%-14% due to a more stable earnings growth outlook and expectations that interest rates and inflation will soon start to peak.
The good news for Equites shareholders is that it is likely to outperform the index given its value proposition and decent earnings growth outlook.
In fact, Equites is one of Stanlib’s top property picks for 2023. As Nesi Chetty, fund manager and head of property at Stanlib, points out: “One can’t ignore the sustainable growth in quality in Equites’s underlying asset base. So we expect the company’s distribution growth to hold up a lot better than that of its peer group.”
Other positives include a conservatively funded balance sheet with a below-market loan to value of 33.3%. Chetty expects long-term structural changes in shopping and supply chain trends to continue driving demand for logistics property from both occupier and investor markets, which in turn will support rental growth.
He says Equites is well positioned to capitalise on demand-led growth opportunities given its strategic land bank and development capabilities. In South Africa alone, Equites has a R3.7bn development pipeline spanning 329,788m2 of prime logistics space. In addition, Equites recently concluded a major deal with Shoprite to develop a logistics campus for the grocer on the East Rand comprising an enormous 92,791m2 at a cost of R1.245bn.
The existing South African portfolio of 1.3-million square metres is fully let, which clearly underscores the level of demand for warehousing space. Chetty says that given last year’s sizeable share price drop, Equites now looks “attractively priced” on current valuations, both on a yield and NAV basis.
At current levels of about R16, Equites offers a forward dividend yield of just more than 10%, notably higher than the 7% or so buyers were getting about a year ago. Granted, Equites is trading at a relatively smaller discount to NAV than most other real estate counters about 14% vs the sector’s 30%. But this has to be seen in the context of the company offering superior growth prospects compared with many of its peers.
Management has provided 4%-6% distribution growth guidance for the full year to end-February. And unlike most other Reits that have lowered their dividend payout ratios to between 75% and 90% of distributable profits, Equites is still committed to a 100% payout ratio.
Analysts expect the sector to deliver an improved performance this year with total returns in the region of 10%-14% due to a more stable earnings growth outlook and expectations that interest rates and inflation will soon start to peak