Property’s unknown unknowns

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It seems the only certainty for listed property investors in the coming months will be ongoing uncertainty.

That message was underscored again earlier this week when Redefine Properties, SA’s second-largest real estate investment trust (Reit), suspended interim dividends.

The decision not to pay a dividend follows a 32% drop in distributable income for the six months to end-February, which places Redefine as the JSE’s first major Reit to report a significant earnings decline as a result of the Covid-19 pandemic.

Though the impact of SA’s lockdown isn’t yet reflected in the performance of Redefine’s SA portfolio for the six months to February, the company’s income was hit by its exposure to offshore firms from which it received zero dividends.

Those firms, including Polish mall owner EPP, UK-focused RDI Reit and Australian-listed Cromwell, skipped payouts to their shareholders in a bid to shore up cash reserves to withstand the Covid-19 fallout.

SA property stocks are expected to follow suit.

The bad news is that there’s no guarantee that Redefine — or any of its peers, for that matter — will pay a dividend in six or even 12 months’ time.

Redefine CEO Andrew König says the "evolving unknowns" and "fluid" market conditions the company will face in the six months to August have made it impossible to provide any guidance on when dividends will be resumed.

"So we have made a decision not to make a decision," he says. "We expect a tale of two halves for the 2020 financial year and will therefore only be able to make a call on dividends when we declare full-year results in November."

There is some good news, though.

König stresses that Redefine has a healthy balance sheet and strong liquidity levels to ensure the company meets its financial commitments over the next 12 to 18 months and manages its loan-to-value (LTV) ratio — now at 44.2%. "Even if we see a drop of income of up to 50% this year, we will still be able to service our debt repayments and other obligations," he says.

Redefine has R1.6bn cash on its balance sheet and hopes to bulk that up with a further R6.3bn by end-August through the sale of its Australian interests, as well as various SA properties held for sale.

While the company still collected 72% of SA rentals in April, König says it’s difficult to predict what these levels will be for May and beyond. The rental income earned by Redefine’s local portfolio of R70bn is split as follows: retail at 44%, offices at 36% and industrial at 20%.

König argues that the diversification among different property sectors means Redefine’s portfolio is better placed to weather the Covid-19 storm than specialist players.

"But the extent of the impact of the lockdown on tenants’ financial position and how quickly trading restrictions are lifted will have a bearing on rental collection levels over the coming months," he says.

One thing is clear: there will be noticeable shifts in the way people work, live and play in a post-Covid-19 world, which will no doubt affect demand for real estate.

Mega-malls, of which SA has an abundance, could be among the biggest losers. Redefine COO David Rice says changing consumer behaviour will likely lead to a drop in visitors to super-regional shopping centres, given that they typically contain a large leisure component.

He says: "If social distancing becomes the norm, entertainment offerings will no longer be a driver of footfall at super-regional shopping centres. We think smaller, convenience-type centres anchored by a Woolies and Clicks will be where people go for shopping instead."

Rice predicts that cinemas, restaurants and gyms will take strain for at least the next six to nine months. Demand for office space may also taper off as companies become accustomed to staff working remotely.

"Smaller tenants in particular will be looking for more flexible lease terms and ways to potentially repurpose existing space," he says.

Redefine looks dirt cheap at first glance and has, unsurprisingly, appeared among a number of fund managers’ stock picks in recent weeks. The share price has tumbled more than 70% year to date, which has sent its dividend yield rocketing to close to 40%.

Keillen Ndlovu, head of listed property funds at Stanlib, believes Redefine is now firmly in oversold territory.

In addition, the stock is trading at a discount to NAV of over 75% versus the listed property sector at just over 50%. However, Ndlovu points out that the big challenge — similar to that of most other Reits — is to make accurate earning forecasts for 2020.

Ninety One portfolio manager Peter Clark agrees that while Redefine’s results revealed few forward-looking earnings clues, the company’s valuation looks "highly attractive" on all metrics. Lingering concerns include Redefine’s relatively high LTV of 44%.

But Clark says there appear to be sufficient sources of liquidity to manage any near-term debt expiries. "Though the risks are elevated, our assessment indicates they are manageable. Execution of the deleveraging strategy and a better understanding of the operational environment, both locally and abroad post-Covid-19, will be the likely catalysts to unlock value."