Some fund managers maintain that Growthpoint’s chunky R4.3bn capital raise last week is a good move — and not the first glimpse of a looming implosion.
"It’s a sign of confidence given the size of the equity raise, the speed of implementation and the diversity of local and offshore participants. Growthpoint was not as desperate to raise cash compared with some other Reits [real estate investment trusts]," says Keillen Ndlovu, head of listed property at Stanlib.
SA’s largest real estate company surprised the market with its plan to raise R4bn through a bookbuild — the first major capital raise in the sector since March.
In the end it scored R4.3bn after selling shares at R12 each — a 6.3% premium on the average price for the 30 days before the transaction.
The stock was snapped up within a day — more than half of it by local buyers, according to Growthpoint SA CEO Estienne de Klerk who said it was "encouraging to receive strong support from so many local and global investment institutions".
The problem came the day after, when Growthpoint’s share price collapsed 16.4% to below R12 — its biggest decline since March 23.
But De Klerk says the whole sector fell on Thursday and he urges investors not to read too much into the movement.
"The listed sector made gains after the US election and Pfizer’s vaccine announcement. Then I believe there was some profit-taking and hedge funds and other parties may have sold for different reasons," he says.
But it’s not as if Growthpoint raised the money to mop up assets in the sector, which has had an extremely trying year.
And an update accompanying the bookbuild was hardly cheering. For example, the renewal success rate in its key office segment was just 68%, and it says many tenants "are waiting to assess the effects of the pandemic before committing to office space, resulting in low new letting levels".
Growthpoint’s crown jewel, the V&A Waterfront, still has only about two-thirds of the foot count it did before the pandemic struck, pushing revenue 41% lower for the three months ended September, year on year.
Much of the capital raise is being used to settle the debt it took on after buying a 51.2% stake in British community shopping centre owner Capital & Regional at the end of 2019.
That asset, unsurprisingly, is having an "extremely challenging" time, says Growthpoint, thanks to the UK’s second hard lockdown.
Ndlovu says Growthpoint and other property funds need to reduce their loan-to-value (LTV) ratios "and raising capital is one way in which they can do this".
LTV measures the ratio of a company’s debt to its assets. SA fund managers prefer property companies’ LTVs not to exceed the 35%-40% range.
The share issue will cut Growthpoint’s LTV from 43.9% as of the end of June to about 41.5%.
While the market may have been happy to back the issue, it’s still dilutive for existing shareholders.
Ndlovu says Growthpoint was trading at a very large discount to NAV, which is why the capital raise will lead to a dilution in the equity of existing shareholders. "So the raising of capital is a trade-off between equity dilution and decreasing the LTV ratio."
LTVs have become one of the biggest headaches for investors in SA’s property sector; the ratios are rising because asset values are falling, not because Reits are taking on more debt. It’s estimated that property values would need to fall at least another 20% on average for LTVs to get to the 50% covenant level, the general maximum level for most Reits.
Besides raising equity, property firms can sell assets or cut dividends to try to get their LTVs down.
All the options have complications.
To maintain Reit status, a company must pay a minimum of 75% of its earnings as a dividend. The income is then taxed in the hands of shareholders and not at company level.
SA Reits have typically paid 100% of distributable earnings as dividends since late 2013 when the Reit dispensation was introduced. But they have struggled to do so this year after being forced to provide rental discounts and other relief to tenants during the lockdown.
As for selling assets, Thabo Ramushu, executive director at Meago Asset Management, says very few listed funds have managed to sell properties at attractive profits.
Still, some unlisted companies are looking to snap up bargains from listed funds with very high LTVs, such as Rebosis, which has an LTV in excess of 60%.
So what about further equity raises?
"In the past, capital was easy to come by but now we are in a much tougher economic environment and investors are more circumspect," says Evan Robins a fund manager at Old Mutual Investment Group.
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