Listed property: still riding the e-tail wave

Equites, the JSE’s only specialist logistics real estate investment trust, continues to deliver the goods.

The warehouse and distribution centre developer is one of only a handful of SA property stocks that can still afford to pay a dividend.

Most other Reits are expected to postpone dividends and hold on to their cash instead, as potential losses from Covid-19 lockdown-induced rental holidays, tenant defaults and bankruptcies start to mount.

Equites, under CEO Andrea Taverna-Turisan and COO Riaan Gous, last week continued its stellar dividend growth track record, declaring a 9.4% increase for the year to end-February.

The stock has also held up significantly better than most of its peers on the capital growth front. Its share price is down only about 16% year to date compared with a 48% slump for the SA listed property index (Sapy) as a whole. While many former blue-chip Reits are now trading at discounts to NAV exceeding 50%, Equites’ discount to NAV sits at less than 5%. The company is trading at a dividend yield of about 9%, half the sector’s average 18%.

So value chasers, understandably, will probably reckon that Equites is looking a tad expensive — especially given how many bargains the sector offers, with plenty of Reits trading at record high yields of 20%-40%.

Yet most analysts and fund managers believe there are still reasons to buy Equites if you don’t already own the stock.

One such reason is that the company is a pure logistics play, and well positioned to cash in on the growing e-commerce trend, especially in a post-pandemic economy.

The company owns a R15bn portfolio of modern warehouse and distribution centres let to major retailers, manufacturers and third-party distributors across SA and the UK. SA tenants include Woolworths, Checkers, TFG and Puma and Amazon, along with Nestlé and Tesco in the UK.

Ridwaan Loonat, equity analyst at Nedbank CIB, says logistics has proven to be the most defensive property sector since the Covid-19 pandemic hit SA’s shores earlier this year. That’s clear from Equites’ still-high rental collection rate in March and April of 92.8% in SA and 100% in the UK.

Moreover, 80% of the company’s SA tenants and 100% of its UK tenants remained operational during the two countries’ respective lockdowns. That compares to much lower numbers for the retail and office sectors.

Loonat believes many companies will have to rethink their supply chain operations and look to strengthen their online capabilities after the lockdown. "That bodes well for last-mile service providers and owners and developers of modern logistics facilities."

He says investors can take additional comfort in the company’s long weighted average lease expiry of an average 10.2 years and in-force annual rental escalations of 7.6%, which creates income certainty and should support continued earnings growth.

Also, the Equites portfolio is virtually fully let at 99.8%.

Meago Asset Managers MD Anas Madhi, says given how poor earnings visibility has become, thanks to the pandemic, property investors have to be more discerning than ever in their stock selection.

He says: "Now is the time for investors to carefully screen for stronger companies with sustainable cash flow, quality assets and decent balance sheets able to withstand the global recession."

Madhi believes Equites ticks all these boxes. "In addition, Equites still looks attractively priced, despite having only declined 16% year to date relative to the 48% decline of the Sapy."

Metope Asset Managers investment analyst Kelly Ward agrees that Equites remains one of the JSE’s best property buys. She says the company has a tangible, high-quality asset base, an experienced management team and a robust balance sheet that can withstand short-term uncertainty and potential valuation declines.

Ward refers to Equites’ conservative loan-to-value ratio of 26% (against a sector average of close to 40%) and says there is little reason to expect marked valuation declines on the portfolio, given the strong tenant covenants and long-dated lease profile.

"Though there are obviously heightened risks to the sector as a whole, we believe Equites is better placed than most to navigate increased uncertainty.

"We expect rent collection to remain strong — unlike funds with significant retail exposure where tenants have not been able to trade, operate, or even gain access to their premises due to the lockdown," she says.