Investors looking to share in the spoils of the retail rebound don’t necessarily have to stash their cash in the retailers themselves. If you’re wary of concentration risk and you’re after a high and growing dividend stream, perhaps it’s time to consider a punt on the landlord instead of the tenant.
Granted, the share prices of several JSE-listed mall owners have already rallied strongly since November, but most are still trading below pre-Covid levels — and at sizable discounts to NAV.
The investment case for convenience shopping centres — smaller neighbourhood centres of between 5,000m2 and 25,000m2 that cater to basic needs — seems compelling, and more so for those in township and rural areas that serve lower-income shoppers.
Those have by all accounts emerged in better shape from lockdown trading restrictions than their fancier urban counterparts with restaurants, cinemas and the like.
Dipula Income Fund — whose R9bn portfolio includes 100 malls across SA, mostly smaller convenience centres — has been a major beneficiary of this trend. About 65% of Dipula’s income comes from retail centres in places like Hammanskraal in Tshwane, Tembisa on the East Rand, KwaDesi in the Eastern Cape and Umzimkhulu in KwaZulu-Natal. The rest of its assets are split between offices, industrial and residential.
Dipula surprised the market this month by reporting a healthy 8.5% rise in distributable earnings for the six months to end-February. That’s impressive considering that most property stocks reported an average 15%-30% drop in income for their latest reporting periods. The counter’s better-than-expected performance enabled management to resume dividend payments, which were put on hold last year when the pandemic hit. This year’s interim payout of 59.02c for A shares and 45.10c for B shares represent a 7.7% and 6% increase on the same period in 2019.
Dipula is one of just a handful of real estate investment trusts (Reits) that have maintained a 100% payout ratio — most have reduced it to between 75% and 85% of distributable profit to help shore up stretched balance sheets. In fact, Dipula has strengthened its balance sheet noticeably by bringing the loan-to-value ratio down by 11% to 35.7%.
CEO Izak Petersen tells IM that the pandemic has boosted demand for space in convenience centres, especially those that cater to lower-income shoppers, which have proved particularly resilient during the pandemic. "Most retailers are now chasing market share in this market segment where they can operate smaller-format stores and achieve higher trading densities [sales per square metre]," he says.
Petersen refers to aggressive growth by a number of independent retailers — "bread and butter" tenants such as grocers OBC Chicken, Roots Butchery, Econofoods and Kitkat Cash & Carry. He says national retailers also continue to expand their exposure to township economies, including Shoprite, Boxer and Pick n Pay, as well as Mr Price via recently acquired Power Fashion. Truworths also plans to enter the lower-LSM market with its Primark brand.
Petersen believes Dipula’s competitive advantage is that it’s a long-term, pure SA play: "Our story has stayed consistent. Other Reits have gone offshore or ventured into more exotic sectors. We have no intention to do that. We are sticking to our knitting as we understand our business and our markets really well."
However, Petersen concedes that Dipula’s dual share structure is a factor that may be impeding the company’s liquidity and share price performance. Though both the A and B shares have more than doubled year to date, the A shares are trading at a discount to NAV of more than 20% while the B shares’ discount sits at nearly 70%. "The share price is not reflective of the company’s intrinsic value. I think the capital structure is holding back the company’s full potential," says Petersen. "Clearly, our shares are a screaming buy at these levels."
Management is looking at ways to resolve the capital structure issue, but Petersen points out that at least 75% of Dipula shareholders need to vote in favour of converting to a single share. So it won’t happen overnight.
While the B shares are trading at a larger discount to NAV and an attractive dividend yield of about 22%, analysts believe the A shares are the more predictable choice. As Naeem Tilly, head of research at Sesfikile Capital, points out: "We prefer the A share over the B share given its preferential right to dividends, solid earnings cover of about 1.6 times and attractive distributable income yield of about 15%."
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