Liquidity keeps top SA estate stock afloat
● Big isn’t always better when it comes to financial performance, but a combination of scale, a diversified portfolio and a strong balance sheet has helped Growthpoint Properties, SA’s largest listed real estate stock, deliver a solid performance in the face of the pandemic.
Growthpoint, which has a R157bn property portfolio across multiple sectors in SA, Australia, the UK and Eastern Europe, announced this week that it was paying an interim dividend of 58.50c a share for the six months ended December 2020.
Although its distributable income of R2.5bn in the six months was 21.6% lower than the same period in the previous year, the fact that it was paying a dividend — especially one that was 80% of total distributable income — was welcome news in a sector in which there has not been much to cheer about since the pandemic arrived on our shores.
Keillen Ndlovu, head of listed property at Stanlib, says Growthpoint’s payout ratio was higher than the minimum 75% of distributable income that real estate investment trusts (Reits) are required to pay to shareholders in terms of legislation.
Ndlovu expects the majority of listed Reits to pay out the minimum 75% “save for some who face solvency and liquidity challenges”.
Growthpoint group CEO Norbert Sasse says though “the fact that we are spread across all three sectors [office, retail and industrial] has helped us where some funds which are purely retail may have suffered more than ourselves”, the group’s work on its balance sheet has also paid off.
Sasse says Growthpoint was also the only real estate investment trust to undertake an equity raise last year, raising R4.3bn, which helped reduce debt on its balance sheet.
He says the group “fundamentally believed that it was the right thing to do”.
“Many of our competitors are in positions where they haven’t paid a dividend or couldn’t pay a dividend because of solvency and liquidity issues and their covenants with banks.
“Our priority literally from the day Covid set in last year was to sort out liquidity, solvency and the balance sheet,” says Sasse.
Estienne de Klerk, CEO of Growthpoint Properties SA, says the group’s total debt “on a consolidated basis” was R61.8bn, while the South African balance sheet specifically had debt of about R37.8bn in the six months ended December, down from R43.3bn in the same period last year.
De Klerk says this means the South African portfolio’s gearing is sitting at 35.5%. Most analysts in SA prefer companies to have gearing levels of less than 40%.
“If you think about Growthpoint, the big plus for investors is that it is a solid, well-diversified business with a strong balance sheet which can sustain quite a punch and they know our management team,” says De Klerk.
“We have been around a while. They know that we always give a consistent and transparent message to our investors as to what is going on in the business.”
That’s not to say Growthpoint has not had its difficulties. It reported that its crown jewel, the V&A Waterfront in Cape Town, for instance, was “severely impacted by various lockdown restrictions”, the “absence of foreign tourism” and its “cruise terminal’s closure and leisure limitations”.
Growthpoint said retail turnover at the V&A decreased by 36%, while hotel occupancy rates there were about 20% compared with 70% during the same six months in the previous year.
Across the group, Growthpoint’s office vacancy factor has also increased to a hefty 18% from 15.4% in the same period last year due to “weak renewal success rate” and tenants “consolidating and reducing space”. Ndlovu says a “recovery in tourism and travel in the future should help to boost Growthpoint’s V&A Waterfront, and off a very low base”, but that the outlook for the office sector, where vacancies are sitting at about 16% on average, is “uncertain due to the dynamic shift to working from home by most major corporates”.
“The challenge with the office market is that the corporates, though they will continue to pay the rent, are likely to reduce space as leases expire. Some corporates are already looking to sublet some of their space. This puts pressure on already high vacancy rates in the office market.”
Nevertheless, Growthpoint’s sheer size and reach have protected it better than most.
Though some in the investment community have in recent years favoured special-focus property funds, be it retail, logistics or industrial — because of the potential for outperformance, in a global crisis such as a pandemic having a large reach across different sectors can be just what the doctor ordered.
“If you are a small fund in this environment and one of your big tenants goes bust, that’s a major proportion of your portfolio. The advantage of a Growthpoint is that they are not beholden to one or two tenants and their risk is reduced,” says Evan Robins, a portfolio manager at Old Mutual Investment Group.
“Your risk gets spread across far more tenants in different sectors and that definitely helps.
“I look at Growthpoint like an aircraft carrier. It can take quite a lot of shots but it probably isn’t going to sink.
“But with a smaller ship, one shot can knock it down.”
But the drawback to this argument is that this diversification across the South African economy, in particular, also means Growthpoint becomes “captive” to it, Robins says.
“When you get to Growthpoint’s size there is not much you can do about the economy.
That’s maybe the flip side of diversification. You are a bit of a captive of the economy. An aircraft carrier can’t really turn, whereas a smaller ship can.”
Glen Baker, a portfolio manager at Anchor Capital, says that overall the “portfolio effect has been a good one” for Growthpoint.
But Baker says while having a diversified portfolio has proven useful in a crisis, future performance is not guaranteed and nimbler competitors may be quicker to respond to changing markets.
Our priority [since] Covid set in was to sort out solvency and the balance sheet
Norbert Sasse
Growthpoint group CEO