Will U-turn on UK foray contain the pain?

This month’s renewed sell-down of Equites Property Fund raises the eternal conundrum: should you exit before the price weakens further, or should you buy more shares now at what may turn out to be bargain-basement levels?

The former market darling’s R27bn portfolio of logistics properties — state-ofthe-art warehouses and distribution centres — is split 70/30 between South Africa and the UK.

Equites was a major beneficiary of the pandemicinduced shift to online shopping and disruption of global supply chains. It was one of only a handful of JSElisted real estate investment trusts whose share price rebounded to pre-Covid levels within a year after the pandemic hit in March 2020.

However, the stock has taken a beating over the past year on the back of higher interest rates, constrained capital markets (especially in the UK), a dip in consumer spending and recessionary fears.

Following the release of its annual results to endFebruary this month, the stock slipped to a new three-year low of about R14. That’s nearly 40% down on its early-2022 record high of R23 and places its forward dividend yield at an attractive 12%.

Renewed share price weakness comes after management revised its distributable earnings guidance downwards for the year to February 2024 to 130c-140c a share. That implies dividend payouts will drop 17%-23%, given the 169.60c a share (up 4.1% year on year) declared for the year to end-February.

The revised guidance is a result of management’s decision to remove crosscurrency interest rate swaps from distributable earnings, among others. There has also been an unexpectedly large writedown of 21% in the UK portfolio value — from £348 to £305m. The latter led to Equites’s loan-to-value levels jumping from 31.5% to 39.7%.

Liliane Barnard, CEO and portfolio manager at Metope Investment Managers, says the environment for real estate owners in the UK is now “extremely difficult”.

She says high and sticky inflation is driving up interest rates at a rapid pace. In addition, Brexit has caused the UK economy to shrink. On top of that, Russia’s war in

Ukraine has led to a flight of capital out of the UK market and banks being more cautious in their lending.

The unfortunate result, says Barnard, is less capital available for real estate investment and development, which is contributing to downward pressure on valuations.

However, the good news is that Equites has reacted swiftly to try to limit further potential downside from its UK exposure by embarking on an aggressive disposal strategy. Management plans to sell its stake in a joint venture development platform in the UK and shift its growth focus back to South Africa.

Noncore properties will also be sold. Five assets worth R2bn have already been disposed of since its year-end, with another R3.3bn worth of assets on the market. The proceeds will be used to reduce debt.

Though it plans to retain its 10 income-producing properties in the UK, Equites now sees better development opportunities in South Africa, where there’s “unabated” demand for warehousing. In fact, the company recorded a 20% jump in rentals for Agrade warehouses in the year to February on the back of record-low vacancies of less than 2%.

A key question for investors is whether there is more bad news in the offing. Or will the company’s deteriorating fortunes be short-lived?

Equites CFO Laila Razack believes the UK valuation writedowns are already in the base. “We expect to see an improvement in UK values within the next 12 months, though this will be driven by the interest rate environment,” she says.

Razack adds: “We also believe that prioritising our loan-to-value and the strength of our balance sheet places us in an exceptional position to deliver future sustainable growth to shareholders.”

Most analysts seem to share her view, with Bloomberg’s one-year consensus forecast reflecting a strong buy recommendation on Equites.

Equites was a major beneficiary of the pandemic-induced shift to online shopping and disruption of global supply chains. It was one of only a handful of JSE-listed Reits whose share price rebounded to pre-Covid levels within a year after the pandemic hit in March 2020