Fairvest sticks to its script, profitably

Fairvest Property is one of a handful of SA real estate investment trusts (Reits) whose share prices are already back at pre-Covid levels.

It’s not hard to see why.

Results from the small-cap mall owner show that a number of trading metrics in its R3.425bn portfolio are moving in the opposite direction to those of most of its JSE-listed peers.

For instance, the recent trend among SA Reits has been a sharp rise in rental arrears and vacancies.

However, for the six months to December, Fairvest cut arrears from 4.5% to 3.8% (of total revenue) while vacancies dropped from 4.5% to 3.8% (of total lettable space).

The latter has fallen further to 3% in the year to date on the back of a number of new leases that have been signed with tenants looking to open new stores or expand existing ones.

Fairvest has also achieved higher rentals on renewals of existing leases — an average 1.6% — at a time when most other mall owners have to discount rentals or risk losing tenants.

More impressive is that the retail landlord has already resumed dividend growth. It declared a dividend of 10.59c a share for the six months to December. That’s up 7.2% from the 9.88c declared for the six months to June last year, albeit down 5.1% on a pre-Covid year-on-year basis.

Fairvest’s results support the notion that lockdowns have had a less dire impact on trading in convenience centres than on business in their large, fashion-led counterparts, which tend to focus more on nice-to-haves.

The bulk of its portfolio of 43 properties is anchored by a Shoprite Checkers, Spar, Pick n Pay or Boxer outlet, and cater mainly for lower-income shoppers.

Craig Smith, head of research at Anchor Stockbrokers, ascribes Fairvest’s outperformance to it being a smaller fund with a niche focus on a subsector of the market.

He says: "Rural and township malls have been more resilient than most of their urban retail peers, given the lack of e-commerce penetration in these markets and the higher weighting towards essential retailers and anchors."

For instance, Fairvest’s shopping centres have only a small exposure, or none at all, to leisure and entertainment tenants such as sit-down restaurants, gyms and cinemas.

Smith adds that the Unemployment Insurance Fund’s temporary employer-employee relief scheme payments may also have boosted spending, albeit temporarily, in Fairvest’s centres.

However, he says the government’s reduced allocations for social grants in this year’s budget speech may cause overall spending in rural and township retail centres to be lower over the next three years.

But Fairvest CEO Darren Wilder suggests that the company’s continued outperformance has been driven less by its focus on grocery-anchored shopping centres in rural and township areas than by the management team "behaving in the right way".

He says managing a property portfolio, irrespective of the sector one is exposed to, is fairly straightforward: "The focus should be on two things – leasing vacant space and collecting rentals. We do both, and we do both well."

Wilder, who is respected for his no-nonsense, hands-on approach, adds that Fairvest’s business is in good shape not because of what management has done over the past year but what it has done over the past decade.

"We never overpaid for assets in the good times. We believe you make money when you buy and not when you sell. That means our properties are able to withstand the good and bad times," he says.

Wilder has nevertheless beefed up his leasing team in recent months, which has no doubt helped the company to fill vacant stores quickly. He says: "In a bull market retailers are all chasing space, making it easy to sign new leases. In the current bear market you have to work so much harder to rent your space. So the strength of your leasing team is key."

Judging by the 12% surge in the share price last week, investors are clearly still buying into Fairvest’s growth story despite the stock already having run hard in recent years.

In fact, Fairvest was one of the top three SA-focused property counters over one, three and five years, according to the latest SA Reit Association figures.

The stock delivered an impressive cumulative total return of more than 80% for the five years ended 2020. That compares with the SA listed property sector’s dismal -34.8% return over the same time (see graph).

But have investors who don’t yet own Fairvest shares missed the boat? It doesn’t appear so. Kelly Ward, investment analyst at Metope Investment Managers, believes there’s still plenty of reasons to buy the stock. Despite returning to pre-Covid levels of about R190 last week, Fairvest is still trading at a discount to NAV of about 20%. The company is well capitalised with a relatively low 32% loan to value.

Ward points out that management is committed to a 100% dividend payout ratio.

"The business is a relatively simple one where the cash generated from operations flows straight through to shareholder hands. Management has done an excellent job of navigating through this crisis. And given the small, niche portfolio, active asset management can make all the difference in growing revenue streams."