Hyprop Investments: time for investors to climb back in?

It’s not that long ago that former market darling Hyprop Investments was one of the most expensive property stocks on the JSE.

Back in mid-2017, the owner of mega-malls like Canal Walk in Cape Town, Rosebank Mall in Joburg and Clearwater Mall on the West Rand was still trading at a demanding dividend yield of close to 5% and regularly appeared at the top of most fund managers’ stock pick lists.

And with good reason.

Hyprop had built a formidable record over at least a decade of delivering above-market dividend growth, come rain or shine.

But last year, its share price slumped 35% from its January high of R122.50, which pushed the company’s dividend yield to a record high of more than 10%.

Hyprop’s sell-off was prompted by the demise of Stuttafords in late 2017, which left a chunk of empty floor space (albeit temporarily) in several of its malls.

Last year’s overall deterioration in retail trading conditions and the woes of the Edcon group further caused Hyprop to lose its shine — Hyprop has the biggest exposure to Edcon among all JSE-listed property companies. Edgars, Jet and CNA stores across its R28bn SA portfolio of nine shopping centres contribute about 7% of Hyprop’s annual rental earnings.

Analysts have also become increasingly sceptical of Hyprop’s Southeast European growth trail.

Hyprop first expanded its footprint overseas in 2016 when it bought an interest in two malls in Serbia and Montenegro.

It has since grown its Southeast European portfolio to six shopping centres worth R3.8bn. It also owns stakes in six malls across Ghana, Nigeria and Zambia worth R4.5bn.

While several SA property players have in recent years successfully entered Eastern Europe, the general view is that Hyprop’s strategy has been rather piecemeal.

In addition, it has suffered impairments on its African malls on the back of currency volatility in those countries. The unexpected resignation of long-standing CEO Pieter Prinsloo in October further dented fragile investor sentiment.

However, it appears that last year’s woes are all but forgotten given the strong uptick in investor appetite for Hyprop shares in recent weeks. The counter is up around 12% since it hit a 3½-year low of R79.45 on January 2. The key question is whether the recovery is sustainable.

And will investors miss the boat if they don’t buy Hyprop shares now? It doesn’t appear so. Analysts are adopting a cautious view and most expect Hyprop’s recovery to be tentative for the time being.

"While some level of price correction was certainly due, significant underlying earnings risk remains given the lethargic health of the SA economy and consumer," says Jay Padayatchi, director of Meago Asset Managers.

Keillen Ndlovu, head of listed property funds at Stanlib, agrees: "Despite Hyprop owning some of the best retail assets in SA, the stock is recovering off a low and volatile base."

Peter Clark, portfolio manager at Investec Asset Management, cites the poor earnings figures and updates reported by SA retailers so far this year. "That illustrates the extent of the pressure faced by the local retail sector."

Though mall owners are not immediately affected by lower retail sales growth, it can hurt them over time as it typically curbs retailers’ expansion plans and ability to absorb annual rental increases.

One of Hyprop’s biggest headaches this year will be Edcon’s restructuring and how the retailer’s rent reduction request and further closure of some stores will affect earnings.

As part of a comprehensive plan to help it recapitalise its business, Edcon has requested 31 of its landlords to cut the rent for its 1,350 Edgars, Jet, JetMart, and CNA stores by 41% for two years in exchange for a 5% equity stake in its business.

It’s still unclear whether Hyprop or any of Edcon’s other landlords will accede to its rent reduction proposal.

But Ndlovu estimates that Edcon’s proposed deal, if accepted, will result in an average one percentage point drop in dividend growth to an average 3%-4% for the listed property sector as a whole this year.

Edcon contributes about 2% of the listed property sector’s total rental income. The impact on Hyprop’s earnings is likely to be more pronounced given that Edcon contributes a much higher percentage (7%) of its rental income. When Hyprop reported its last set of results in August, its management was confident that inflation-beating dividend growth of between 5% and 7% was still achievable for the year ending June.

However, the forecast doesn’t factor in Edcon’s proposed rent holiday.

Padayatchi says if Hyprop agrees to Edcon’s request, other apparel retailers are likely to negotiate aggressively for similar discounts, creating potential for further pressure on rental income. He says there is also the risk of Edcon significantly reducing its floor space. "While Hyprop owns some of the best-quality malls in the sector, it will be difficult to fill any empty space that Edcon could leave behind. Most tenants looking to expand in a Hyprop mall found their opportunity [after] the Stuttafords closure," says Padayatchi.

Another issue that could weigh on investor sentiment is Hyprop’s exposure to Southeast Europe, specifically the structure of the real estate vehicle, Hystead, which owns these malls.

Clark says the credit enhancement fees that Hyprop earns from its debt funding agreement via Hystead, of which Hyprop owns 60%, expire either when Hystead lists as a separate vehicle or in 2021.

"Though not hugely significant, this is non-real estate-related income that will fall out of Hyprop’s earnings at some point."

However, analysts are hoping that incoming CEO Morné Wilken will take decisive action to address investor concerns.

Wilken previously headed Attacq, which owns Mall of Africa at the Waterfall precinct in Midrand, among others, before his recent short stint at the helm of European-focused MAS Real Estate. Attacq co-owns some of Hyprop’s assets in the rest of Africa.

Attacq also had a sizeable retail exposure in Eastern Europe, which was later sold under Wilken’s watch. The general view is that he is therefore well-placed to tweak Hyprop’s African and offshore strategy. The market will no doubt be keen to hear how Wilken plans to navigate the road ahead when he releases Hyprop’s December numbers at his first results presentation in March.