Last week’s renewed sell-off of the Resilient group of companies has created fresh panic among investors, and understandably so, given the dominance of long-time market darlings Resilient Reit and stablemate Nepi Rockcastle, Fortress Income Fund and Greenbay Properties in the JSE’s real estate index.
The group, which was founded by former banker Des de Beer, Barry Stuhler and Jeff Zeidel in the early 2000s, makes up as much as 40% of the listed property sector’s value with a combined market cap of R267bn (as at January 9). The group is one of the largest mall owners in SA (mostly in secondary cities and rural areas) and has in recent years become a popular rand hedge play given its sprawling footprint in Central and Eastern Europe (CEE) via Nepi Rockcastle. The latter became the JSE’s largest property stock following the mega-merger of Romanian-focused Nepi and Polish-focused Rockcastle in July last year with a then gross market cap of R120bn.
The group of companies, which have cross-holdings in each other, are widely held by institutional investors and pension funds. However, panic selling in the wake of ongoing rumours that one or more of the group’s companies may be the next target of New York-based short-sellers Viceroy Research wiped off a substantial R33.4bn in the group’s collective market value in the 10 days to January 19. Share prices (with Fortress A units the only exception) were down 15%-17% over the same time.
In an interview with Bloomberg last week, Viceroy founder Fraser Perring said that later this month the firm would identify at least one SA company whose shares were overvalued. He declined to elaborate. Viceroy made a packet by betting on Steinhoff’s share price collapse after tweeting a link to a 37-page report in late December detailing how Steinhoff had used off-balance-sheet entities controlled by current and former company insiders to obscure losses and inflate earnings.
The question arises why the market has assumed that the Resilient group is next in Viceroy’s firing line and not other sector heavyweights such as Growthpoint Properties, Redefine Properties or Hyprop Investments.
SA’s top-rated property analyst, Naeem Tilly, a former Avoir Capital Markets director who joined Catalyst Fund Managers earlier this year, says the Resilient group is a natural target for market rumour because of its crossholdings and outperformance of the broader market.
"Nonetheless, those who follow the company closely understand its business model," Tilly says.
The group has in recent years consistently outperformed its peers, in terms of both income and capital growth. Last year, all five counters were among the sector’s top performers, notching up total returns of 66% (Greenbay), 38% (Resilient Reit), 37% (Fortress B) and 23% (Nepi Rockcastle) respectively — comfortably ahead of the sector’s average 17% for 2017.
Before the recent share price slump, the counters were trading at forward yields of 3%-4.5% versus the sector’s average 7%. Investors generally assume the lower the yield, all other things equal, the more expensive the stock, and vice versa.
Tilly says the group has also embarked on a bold offshore expansion drive though large acquisitions in Europe, which some may argue is similar to Steinhoff. But Tilly says even if Viceroy has insider information that may form the basis of a report on a Resilient company, any suggestions of irregularity would still needed to be tested. "At this stage, the market has been reacting purely to speculation," he says.
Craig Smith, head of research at Anchor Stockbrokers, says there is no basis to assume that the group is involved in anything untoward simply because it has consistently outperformed the market and may be the subject of Viceroy’s so-called next report.
"The fact that these stocks trade at low yields and sizeable premiums to net asset value is not a new revelation. They have been trading at a premium for a number of years because investors are prepared to pay for superior distribution growth and management’s long-term track record of creating value for shareholders."
Furthermore, Smith notes that the Resilient group of companies has fairly conservative gearing levels (typically below 30%) relative to peers based on reported loan to values. The quality of the underlying property portfolios has also improved substantially over the past 12-18 months. For instance
Nepi Rockcastle has recently acquired a number of high-quality dominant shopping centres in major capital cities in the CEE region.
De Beer himself believes the recent share price falls were triggered solely by one or two local hedge fund managers who have embarked on an orchestrated campaign to short-sell the group’s shares. "Unfortunately that has also affected sentiment among our retail investors," he says. De Beer claims that the timing of the short-selling is no accident. "It coincided with the group’s closed period and comes at a time that the market is very fragile following the Steinhoff collapse."
Both Resilient Reit and Fortress have now decided to release interim results earlier than planned — on January 26 and February 2 respectively, instead of February 8. "We want to get out of our closed period as soon as possible so that we can talk to investors," says De Beer. He says even if Viceroy were to release a report on Resilient, there would be nothing in it to justify the past two weeks’ panic selling.
"We have absolutely no concerns."
Analysts seem to agree that there isn’t anything unusual in the Resilient group’s historical numbers that would be cause for concern. But, as Tilly points out, analysts’ company forecasts and recommendations are reliant on the information provided to them by management teams.
If the Resilient group is indeed the subject of another Viceroy report, it could be that the New York-based outfit may have picked up on a Noseweek article published in 2011 pertaining to anonymous rumours circulating back then accusing the group
of involvement in shady property deals. But both the JSE and a Fluxmans Attorneys investigation exonerated the group of any wrongdoing at the time.
Meanwhile, most institutional fund managers still appear to be backing the group. Stanlib, the largest institutional player in the listed property space, with R28bn under management, says it will continue to hold shares in the Resilient group of companies.
Keillen Ndlovu, head of listed property funds at Stanlib, says Resilient’s management as well as the group’s corporate sponsors have indicated that "everything is fine", adding that should further information become available, they may reconsider their position.
Analysts say the unprecedented share price volatility caused by the Viceroy rumours has made it difficult to predict what level of returns the property sector as a whole is likely to deliver for 2018.
Ndlovu says the past two weeks have been the most volatile in the history of the SA property sector, adding that market uncertainty is likely to linger over the next few weeks, "especially now that hedge funds have supposedly come into play".
Tilly agrees that property share prices could remain erratic in the short term but he still expects the sector to deliver an average 12%-14%/year total return over the next three years. Dividend growth should come in at just more than 8% for 2018 as a whole (11% in 2017).
However, Tilly stresses that there will be a big divergence in individual stock performance.
"Most SA-centric property companies are likely to achieve low single-digit and even negative dividend growth due to an underperforming SA economy, while fast-growing counters with an offshore footprint are likely to outperform, given the positive yield spread created by low funding costs."
Smith says while property investors are likely to remain somewhat skittish in the short term given the large weighting of the Resilient group of companies in the sector, demand for offshore property stocks backed by quality management teams with a proven track record is likely to remain strong over the next 12 months.
"In contrast, demand for SA-focused stocks will largely depend on the local political landscape, which will affect investor confidence. Property fundamentals in SA, however, remain under pressure as the weak economy and battered consumer sentiment continue to translate into higher portfolio vacancies and slower rental growth."
Anchor Stockbrokers is forecasting a 13.5% total return for the listed property index for 2018 and average dividend growth of 10% (weighted).
But, as Smith points out, it is extremely difficult to forecast total returns for the year ahead as price movements are being influenced by increased activity among traders and hedge funds (as opposed to long-term investors) on the back of market speculation. Moreover, potential political outcomes will affect investor appetite and currency movements.
Anchor Stockbrokers estimates a bear-case scenario of 8.4% and a bull-case scenario of as much as 25.5%.
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