Property stocks that generate the bulk of their earnings in SA have generally delivered dismal returns year to date — both on the capital and income growth front.
But there are exceptions — and logistics player Equites Property Fund is one. It has appeared regularly on fund managers’ stock pick lists since it made its JSE debut in June 2014 and continues to deliver above-market returns despite SA’s sluggish economy.
Dividend payouts for the six months to August 31 are up 9.3%. That is no easy feat, given how many of its peers are reporting a drop in dividends this year as higher vacancies and lower rentals bite into earnings. Equites also boasts a 14% share price return year to date (to October 15), in contrast to the SA listed property index’s 4% fall over the same time. Over the past five years, Equites has delivered an annualised total return of 22% a year.
Portfolio growth has also been spectacular. Assets have swelled from 17 properties worth R1bn at listing to more than 50 properties worth R13.5bn today. The portfolio of mostly logistics properties — modern warehouses and "big-box" distribution depots — is spread between SA (62% of the value) and the UK (38%).
The key question for investors who don’t yet own Equites shares is whether they have missed the boat. After all, the stock looks fully priced at first glance at a forward dividend yield of about 7.5% versus the sector’s average 10%. But it appears that the premium Equites is trading at is justified and that there is still value to be had.
Keillen Ndlovu, head of listed property funds at Stanlib, says Equites remains a good long-term "buy and hold". Besides above-market dividend growth prospects, he likes the company’s low gearing of 27% and overall cost of debt of 5.76%, which he says points to a strong balance sheet and a well-managed debt and risk policy. "The average lease expiry profile of almost 10 years with average annual rental escalations of close to 8% also makes the portfolio quite defensive."
Ndlovu believes that Equites offers investors a good balance between local and offshore property exposure. Logistics as an asset class has also been more resilient than the office and retail sectors. "Logistics is the only SA property sector where landlords are still getting inflation-beating rental growth on lease renewals," he says.
The sentiment was echoed by Equites CEO Andrea Taverna-Turisan at the results presentation in October. He said the company has benefited from its exposure to the right sector, with strong demand for high-quality logistics properties being driven globally by growth in e-commerce and a move towards greater efficiencies in supply chains.
The company initially bought logistics properties from other developers, but Taverna-Turisan said it is becoming harder to find buildings that meet Equites’ investment criteria, which means its own development pipeline is becoming increasingly important. Equites recently entered a partnership with UK-based greenfield developer Newlands Property Developments, which will allow it to develop logistics stock at yields of 100-150 basis points below market value.
Management expects dividend growth of 8%-10% for the full year to February 2020. Analysts expect the sector as a whole to deliver average dividend growth of 1%-2% over the next six to 12 months.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.