Back in the dividend game
Rate hikes and load-shedding haven’t entirely crushed the listed property sector’s recovery not yet anyway. But the key is to have an offshore hedge
Property stocks have generally surprised on the upside for the December reporting period, signalling a welcome return to earnings and dividend growth.
That’s despite higher interest rates and load-shedding eating into profits.
The sector’s improved performance follows a horrid two years when Covid forced most real estate investment trusts (Reits) to cut or suspend income payouts to shareholders.
But the rate at which distributable earnings have rebounded differs markedly for those individual Reits that have reported results in recent weeks.
Eastern Europe-focused stocks such as Nepi Rockcastle and MAS Real Estate, for example, have reported stellar dividend growth of nearly 50%.
In contrast, the recovery for South Africa-based counters such as Growthpoint Properties and Liberty Two Degrees (L2D) has been far more muted (see table).
Hyprop Investments (owner of Rosebank Mall in Joburg and Canal Walk in Cape Town), opted not to declare an interim dividend at all, despite distributable income per share rising by a healthy 30%.
South African Reits are hardly alone in confronting multiple challenges: property groups worldwide have had to contend with higher debt funding costs on the back of aggressive interest rate hikes.
But local property stocks face the added burden of surging operating costs due to load-shedding.
Ever-rising municipal rates are a further bugbear.
Mall owners, which have to run multiple generators to keep tills ringing during outages, have been particularly hard hit. Attacq, which owns Mall of Africa in Midrand, Eikestad Mall in Stellenbosch and Garden Route Mall in George, among others, burnt through R27m worth of diesel in the six months to December.
Similarly, L2D, which co-owns Sandton City and neighbouring Nelson Mandela Square as well as Midlands Mall in Pietermaritzburg, spent millions last year to keep generators running.
A failed appeal against what L2D believed was the City of Joburg’s overinflated valuation of Sandton City in 2018 has further eroded distributable profits.
The additional money L2D now has to cough up for rates shaved 2c a share off L2D’s dividends for the year to December. That meant dividend growth came in at 6.95% instead of 13%.
Growthpoint Properties, the JSE’s largest local Reit, spent a whopping R47m on diesel for the six months to December. That excludes the R21m in fuel costs at the V&A Waterfront.
Estienne de Klerk, who leads the company’s South African business, says though Reits can recoup a large portion of the costs from tenants, the real challenge is that the energy crisis is eroding landlords’ ability to increase rentals.
“Given the interest rate increases and diesel costs we’ve had to absorb, it’s actually quite remarkable that we’re still able to declare a growing dividend,” he says.
De Klerk refers to excessive rates increases and having to spend millions on creating and maintaining infrastructure in the face of deteriorating municipal service delivery as further costs that landlords and ultimately tenants have to bear.
Notwithstanding rising interest rates and operating costs, most Reits’ earnings have been propped up by a strong recovery in retail sales and demand for shopping space, an uptick in hotel occupancies, and growing revenues from offshore interests.
Hyprop reported a 15.5% increase in sales turnover at its eight South African malls in the six months to December. CEO Morné Wilken says trading was particularly buoyant in December.
At Canal Walk, a record turnover of more than R1bn was achieved in that month. He says there’s still plenty of demand for retail space, with vacancies across the portfolio dropping from 2% to 1.5% in the six months to December.
New tenants at Canal Walk in the past few months include Ted Baker, Samsonite and Yuppiechef, while Rosebank Mall welcomed Footgear, Hi-Fi Corp and Volpes.
Trading densities (turnover/m²) at Attacq’s portfolio of shopping centres grew by a similar 14.7% for the six months to December.
CEO Jackie van Niekerk says the standout performer was Mall of Africa, which anchors Attacq’s Waterfall City mixed-use node. Trading densities at Mall of Africa were up nearly 23%.
“There’s been a big rebound in people dining out, with food services growing sales by 30%. People are also spending
more money on apparel, sportswear and outdoor goods,” she says.
Negative rental reversions on lease renewals are also starting to turn positive in some centres. At Eikestad
Mall, for instance,
Attacq achieved a hefty 14% rental increase on lease renewals.
Attacq’s earnings were further boosted by an improved performance of its
Pretoria and Waterfall City-based hotels and the euro dividends received via its 6.5% stake in East Europe-focused MAS.
L2D’s Sandton City also did a roaring trade in December, generating sales turnover of a record R1.25bn. CEO Amelia Beattie says trading densities at the mall climbed to close to R10,000/m² in December, vs R6,286/m² achieved for 2022 as a whole.
She believes it’s the luxury offering that gives Sandton City its competitive advantage. Trading density at the centre’s swanky Diamond Walk wing was up 21% last year and 13% ahead of 2019.
New additions to the mall’s bevy of high-end retailers include Karl Lagerfeld, Versace and Balmain Paris. Fast food and restaurants were also among Sandton City’s strongest retail segments in the six months to December.
Sales and foot count in all L2D’s shopping centres are now comfortably ahead of 2019 levels, with trading densities up an average 17.8% in 2022.
Occupancies at L2D’s Sandton hotels have also surpassed 2019 levels, with the
Sandton Sun reaching an average 74.8% in 2022, up from 47.2% in 2021 and 66.8% in 2019.
De Klerk says shoppers have returned to larger-format malls in particular, which recorded the biggest losses during Covid. Growthpoint’s sprawling portfolio of 42 retail centres recorded 8.5% growth in trading densities in the six months to December.
Foot count is still marginally below 2019 levels.
The V&A, Growthpoint’s worst-performing property during the pandemic, has reclaimed its status as the company’s single most profitable asset.
Retail sales spiked 52% for the six months to December year on year, up 23% on pre-Covid levels. Last year 29 new stores opened at the V&A and vacancies across the precinct are at a negligible 0.7%.
Visitor numbers to the V&A are up nearly 35% but are still 21% below preCovid levels. Still, De Klerk says the precinct’s dozen hotels have also seen a nice turnaround, with revenue (per available room) in December up 18% on 2019 levels.
Hotel occupancies reached 84% at the same time, 21% ahead of December 2019 levels. Cruise liners have returned to the V&A’s shores and this has boosted hard currency spend at the V&A’s shops and restaurants.
In the three months to December, 18 vessels and about 42,000 passengers and crew docked at the V&A.
Growthpoint’s interests in Australia, UK and Eastern Europe provided a further earnings underpin. Real estate investments in these markets now make up 43.7% of Growthpoint’s total asset value of R174bn.
Group CEO Norbert Sasse describes Growthpoint’s foray into Australia in 2009 as “undoubtedly the best investment we’ve made in the past 12 years”. The company owns 62.7% of Australia-listed Growthpoint Australia, which owns a R60.5bn office and industrial portfolio.
“Back then, the exchange rate was at R6.40 to the Australian dollar. Today it sits at R12.40. So we’ve seen a very good rand hedge return,” says Sasse.
“In addition, the underlying portfolio has performed really well amid strong economic fundamentals.”
Also, Growthpoint received its first dividends since early 2020 from UK mall owner Capital & Regional, in which it bought a stake in December 2019.
While most have weathered the loadshedding storm relatively well to date, analysts believe local Reits are in for more pain. That could see property investors rotate into stocks with large offshore holdings.
Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, says despite better than expected results released in recent weeks, it’s unlikely that the listed property sector will be able to deliver inflation-beating growth in the next 24 months.
“Despite diesel cost recovery rates of about 70%, the implication of load-shedding on landlords directly and indirectly through potentially lower rental growth will be a drag on earnings,” says Tilly.
Higher offshore interest rates are also starting to bite.
But he says: “Fortunately, the South African property sector derives just less than half of its income from offshore sources.”
Tilly believes that to mitigate the risk of load-shedding, investors may need to increase exposure to either pure global counters or locally listed counters with offshore exposure.