Few real estate counters have been spared a Covid-induced battering.
But 2020 has turned out to be particularly brutal for shareholders of Redefine Properties — until recently the JSE’s second-largest SA-based property company.
Though the company still appeared on a number of stock-pick lists earlier this year, the share price has slumped more than 70% since early January.
That compares with the SA listed property index’s drop of 50% over the same time.
This year’s sharp decline wiped billions off Redefine’s market capitalisation (currently at R12.4bn), and the company lost its spot in the JSE’s top 40 index. It also places Redefine among the listed property sector’s worst performers for the year to date.
While brutal, this year’s fall isn’t unjustified: lockdown-related rental relief and weak demand for retail, office and industrial space have severely hurt earnings.
It’s particularly acute in the company’s retail portfolio, which includes stakes in flagship assets such as Centurion Mall, East Rand Mall and Maponya Mall in Gauteng and Matlosana Mall in Klerksdorp in the North West.
Redefine CEO Andrew König recently warned that distributable income and dividend payouts for the year to August are likely to decline by about 45%. The company is expected to release its annual results on November 30.
Nesi Chetty, senior property fund manager at Stanlib, says significant impairments across Redefine’s SA portfolio and underlying offshore investments have further weighed on the share price. He refers to, among others, a devaluation of R442m of the carrying value of Redefine’s 45.4% stake in Polish retail play EPP.
The latter is now worth about R8.6bn. Similarly, Redefine’s 29% interest in UK-focused RDI Reit was written down by R121m.
In addition, Chetty says Redefine created uncertainty in the market with regard to how the acquisition of a portion of the Mall of the South in Aspen Hills, Joburg, would be structured.
Details of the deal were recently disclosed, which Chetty says has provided more comfort to investors.
Then there’s the issue of higher-than-average debt.
Old Mutual Investment Group portfolio manager Evan Robins says though management is actively trying to reduce Redefine’s loan-to-value (LTV) ratio, the market remains concerned about the level of gearing within the company.
It’s about 44%; investors typically feel more comfortable with LTV ratios closer to 35%.
Still, it seems the stock has been oversold and the market hasn’t given enough credit to management’s efforts to restructure the business.
König has made impressive headway in recent months in streamlining Redefine’s sprawling R90bn portfolio by selling noncore assets and simplifying its offshore strategy.
Since June, Redefine has generated about R8bn in proceeds from the sale of its stake in RDI Reit and a student housing development in Australia, most of which will be used to repay debt.
In addition, Redefine’s offshore focus will now shift exclusively to Poland, Eastern Europe’s largest economy, where the company already has sizable exposure to shopping centres via its stake in EPP.
In 2018, Redefine entered Poland’s burgeoning logistics sector through Netherlands-based European Logistics Investment (ELI), a joint venture with US investors Madison International Realty and Polish developer Griffin Real Estate.
Redefine’s Polish logistics venture offers particularly exciting growth prospects and could provide a solid hard-currency underpin to earnings over the next few years.
ELI’s portfolio has nearly doubled in two years from nine to 17 light manufacturing, warehouse and distribution centres.
Five more properties are under construction, with a further six developments in the pipeline, bringing the total value of ELI’s logistics portfolio (including land holdings) to €416.9m. The development pipeline is worth a further €240m.
The properties, which count European supermarket giants Kaufland and Carrefour among their tenants, are spread across major Polish cities including Warsaw, Krakow, Gdansk, Opole and Lodz.
Though the exposure to the Polish logistics sector represents only about 4% of Redefine’s total assets — versus EPP’s 10% of assets — König sees "huge" potential to grow ELI’s portfolio. He’s targeting a €1bn asset value within the next five to seven years. The plan is to take the Polish logistics footprint from 527,000 square metres to about 2-million square metres.
"Poland is seeing a wave of new businesses wanting to move manufacturing away from Asia and closer to customers in Europe. The supply chain disruptions from Covid-19 are proving to be the biggest motivator," he says.
Speaking about the investment case for Poland’s logistics sector, Pieter Prinsloo, former CEO of Hyprop Investments who now runs Redefine’s European interests, says the country’s growing popularity as a Central European logistics hub is driven by lower labour and operating costs, compared to many of its neighbouring countries.
In recent years, the Polish government has also invested heavily in upgrades to the country’s road infrastructure network, which has increased its appeal as a manufacturing, warehousing and distribution base.
Prinsloo says logistics is one of the few subsectors of the broader real estate market that has proved resilient during Covid lockdowns.
"There was no forced government closure of manufacturing and distribution activities in Poland. Demand was in fact boosted by the global rise in e-commerce and courier service activity during the April to June lockdown," he says. "ELI’s cash flow was hardly affected by Covid."
He adds that new logistics properties can be developed at attractive initial yields exceeding 7%, well ahead of average local debt funding rates of about 2%. Prinsloo says investor demand is further supported by relatively short construction lead times and lower capital spend than typically required to build shopping centres and office blocks.
Analysts believe Redefine’s efforts to simplify its offshore strategy and repay debt by selling noncore assets will start paying off over the next year or two.
Chetty reckons these measures will ensure that Redefine emerges from the pandemic with a stronger balance sheet and a sharper focus on its standing portfolio. Meanwhile, the exposure to Poland via EPP and the growing logistics pipeline should provide a buffer against continued weakness in the SA property market.
"We expect Redefine to be through the worst of the impairment cycle when it reports full-year results in November."
He adds: "The significant discount to our written-down NAV provides a sufficient margin of safety for an investment in Redefine. As such, we continue to see longer-term value in Redefine."
Ridwaan Loonat, property analyst at Nedbank CIB, has a similar view. He says recent offshore disposals will give Redefine breathing space to absorb any further asset devaluations.
Though Loonat has a neutral recommendation on Redefine, he says the company’s investment case remains intact for patient investors.
At current levels of about R2.34, Redefine trades at a 76% discount to NAV and an attractive 16% dividend yield.
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