It seems property punters are starting to increase their weighting to SA-biased stocks again, albeit selectively. One of the few local mid-cap counters that has re-emerged on investor radars in recent months is Gauteng-focused Octodec Investments. Its share price is up 14% year to date, ahead of the SA listed property index’s (Sapy) meagre 2%.
Octodec is one of the biggest residential landlords in the Pretoria and Joburg CBDs. Its rental flat portfolio, aimed primarily at lower-to middle-income tenants, contributes 32% of the fund’s rental income. The company also owns a sizeable inner-city retail portfolio and several suburban shopping centres. Retail contributes 24% of rental income while offices, industrial buildings and other (auto dealerships, health care and hotels) contribute 16%, 7% and 11.5% respectively.
Octodec is one of only three property stocks that Allan Gray, traditionally underexposed to listed property, recently singled out as a company that ticks most of the boxes in terms of its investment criteria.
Allan Gray portfolio manager Mark Dunley-Owen believes there is now selective value to be had in the property sector after last year’s correction in share prices — the Sapy shed 30% in 2018.
"We have begun selectively investing in listed property companies that are priced below our assessment of intrinsic value, in particular those run by management that is aligned with shareholders, uses appropriate financial gearing, focuses on cash flow rather than accounting earnings, and prioritises long-term value over short-term metrics.
"Octodec’s buildings are functional and affordable … Most of their properties are on short-term leases with rentals that reset to market levels regularly, unlike many other property companies. Their properties are valued sufficiently cheaply to make redevelopments attractive as and when demand grows," he says.
This month Octodec released flat dividend growth (0%) for the six months ended February, but results were in line with market expectations given the economy and little, if any, new demand for space. Flat or negative dividend growth has been a theme among SA-focused property stocks that have released results in recent months.
Octodec MD Jeffrey Wapnick said at the results release that the poor economic environment, exacerbated by rising costs and political uncertainty, has weighed on confidence and spending power. The portfolio was affected by rising pressure on rental income growth, an increase in operating costs and higher finance charges. Management expects a 2% drop in dividends for the full year ending August.
But Wapnick said Octodec has been positioned to withstand the tough trading environment and provide shareholders with sustainable value creation. "We focused on managing vacancies, improving the value of existing assets and recycling capital through the disposal of noncore or underperforming properties."
With the election over, he said, political risk and uncertainty is expected to settle, restoring some confidence. Wapnick believes that improved conditions from 2020 should provide the stimulus to return Octodec to positive dividend growth territory.
This month Octodec was trading at a 34% discount to NAV and a forward yield of 11% — not a shabby proposition for income chasers given that cash in the bank is likely to earn you 8.5% interest at most.
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