The results reported by several property stocks in recent weeks are a fresh reminder of just how brutal 2020 was.
Few of the sector’s 50-odd real estate investment trusts (Reits) were able to grow revenue, and most were forced to cut dividends.
However, analysts canvassed by the FM say there are plenty of reasons not to shy away — and have picked their best bets in the sector.
For a start, Catalyst Fund Managers portfolio manager Mvula Seroto argues that investors need to think long term, and forget about short-term yields.
He believes the sector is attractively priced, as it trades at a current forward yield of 10.4% (calculated in terms of funds available for distribution) and a discount to NAV of close to 30%.
That’s despite value chasers piling back into property stocks in recent months. The SA listed property index (Sapy) has already recovered 36% from its end-October lows, when it was trading at an average 55% discount to NAV.
However, be prepared to see share prices seesaw in the short term.
In the year to date alone, the differential between the best-performing Reits and those that fared worst is a whopping 82% — Texton is up 65% since early January while Dipula A has shed 17% over the same time.
Texton’s rally no doubt comes off an extremely low base and better-than-expected results, while Dipula’s drop may have been fuelled by the company withholding dividends.
Other top performers in recent weeks include UK-focused RDI Reit, which notched up 40% in February on the back of a buyout offer from Starwood Capital. Fellow UK-focused counter and Covent Garden owner Capital & Counties rallied 26% in February as the accelerated rollout of vaccines in the UK boosted hopes of an earlier reopening of shops and restaurants. Redefine, which was one of the sector’s worst performers last year, closed 25% higher in February as management continues to make headway in reducing debt levels.
Redefine was one of the dividend disappointments of 2020, along with EPP, Fortress and Dipula — which didn’t return a cent to shareholders.
In fact, only five out of the 20 companies on the Sapy reported some form of growth in distributable earnings for their 2020 reporting periods, data from the SA Reit Association (Sareit) shows.
The five are German business park owner Sirius Real Estate, self-storage counter Stor-Age, retail-focused Vukile, Investec Property Fund and specialist logistics business Equites.
The losses reported by most Reits are due mainly to the rental relief offered to struggling tenants — especially smaller mom-and-pop stores, restaurants, bars, cinemas and other entertainment venues.
Sareit estimates Reits contributed a hefty R3bn worth of rental discounts and deferments between April and December last year.
More importantly, 80% of the R3bn comprises rental discounts — and not simply deferments — and as such won’t be recouped. Mall and hotel owners were hardest hit.
But it’s not all bad news. Seroto says despite the sector being hit by widespread income losses, many companies nevertheless resumed dividend payments — albeit mostly at reduced ratios of closer to 75%-85% of distributable income instead of the 100% that property investors were accustomed to in the past.
Seroto says: "Whether or not to declare dividends has been a difficult decision for most management teams as they grapple with Covid’s short-term impact on operations and elevated gearing levels. So it was encouraging to see a number of SA Reits resolve to pay a cash dividend and offer attractively priced reinvestment options."
Craig Smith, head of research at Anchor Stockbrokers, believes the sector has, for the most part, shown its resilience.
"It’s not to say that the next 18 to 24 months won’t still be challenging. There’s considerable work to be done to repair balance sheets, and SA property fundamentals are likely to deteriorate further until SA enters a prolonged period of increased economic activity," he says. "But the sector has largely weathered the storm."
Stanlib head of listed property funds Keillen Ndlovu cites a determined effort by Reits to cut debt and strengthen balance sheets as a key theme to emerge from recent results.
This is being achieved mostly through lower dividend payout ratios, property sales and dividend reinvestment programmes. The main aim of reducing loan-to-value ratios is to prevent Reits from breaching debt covenants and banks from calling in loans. Ndlovu says: "The average loan to value for the sector now sits at about 42%, and most Reits are doing their best to take it to below 40%."
It also seems that the sector is through the worst in terms of property devaluations. Ndlovu refers to asset write-downs already slowing to the single digits, compared with an average 15% last year.
What’s more, vacancies have been largely contained in retail and industrial portfolios. However, the office market is now the big worry. "We don’t know when people will return to offices and in what format or structure," says Ndlovu.
Seroto voices a similar sentiment. "We are seeing tenants consolidating and reducing office space requirements. The current weak macro-environment and uncertainties related to the impact of working from home continue to put pressure on this sector."
Smith agrees, saying that while retail — especially large regional and super-regional malls — were the biggest concern 18 months ago, "this has now firmly shifted to the office sector".
Interestingly, sector heavyweight Growthpoint reported at its results presentation last month that only 30% of its commercial tenant base’s workforce has yet to return to the office.
Given that it’s the biggest office landlord in SA, one can assume that Growthpoint’s numbers are fairly representative of the broader trend.
The question is, which are the stocks to buy now? Top of the lists presented by Ndlovu, Metope research head Kelly Ward and Reitway Global chief investment officer Garreth Elston are Waterfall developer Attacq, nonmetropolitan mall owner Resilient, logistics business Equites, Poland-focused EPP and UK-based mall owner Hammerson.
Attacq
The company’s SA property portfolio is worth R20bn, while its offshore interests include a R1.8bn stake in European-focused MAS Real Estate. Attacq owns the development rights at the huge Waterfall mixed-use precinct near Midrand as well as a number of shopping centres, including Waterfall’s Mall of Africa, Eikestad Mall in Stellenbosch and MooiRiver Mall in Potchefstroom.
Ndlovu believes the counter is oversold. It trades at a 60% discount to NAV versus the sector’s average 30%. He says key positives are that the portfolio is fairly new and well maintained. Leases are also longer than the market average. The company has an above-market loan to value and below-market interest cover ratio. Both these issues will be addressed if management’s disposal plans are successful, which Ndlovu says will in turn drive above-average share price growth.
Resilient
Owner of a portfolio of more than 20 shopping centres, the company’s mostly dominant retail offerings are in rural areas and smaller cities like Tzaneen, Mbombela and Brits, as well as in Gauteng townships like Mamelodi and Soweto. Resilient also has an indirect holding in Hammerson and Eastern European mall owner Nepi Rockcastle.
Ward says the latest results have again proved the resilience of the company’s local shopping centre portfolio. Retail sales for the six months to December declined by only 1.6% year on year despite Covid-related trading restrictions. Vacancies remain low at 2.1%. "All cross-currency swaps on foreign investments have been removed, so the latest numbers reflect a low base from which to grow," says Ward.
Ndlovu says Resilient has one of the "strongest and best-managed" balance sheets in the sector. Its loan to value sits at 33.7%, compared with the sector average of 42%, he says. Also, Resilient is one of fewer than a handful of Reits that have maintained a 100% dividend payout ratio, which he says speaks to the company’s healthy balance sheet. The latter will be further strengthened when it sells more properties. Management recently sold Murchison Mall in Ladysmith and is in talks with the Public Investment Corp to buy Resilient’s stakes in seven shopping centres.
Equites
This company is the JSE’s only pure logistics business and owns a R16bn portfolio of A-grade, modern warehouses and distribution centres in SA (55%) and the UK (45%). Equites continues to grow its portfolio aggressively through a significant development pipeline and acquisitions. The company is exposed to quality tenants such as Shoprite, Pick n Pay and TFG in SA, and Amazon, Tesco and DHL in the UK. Ward says its long lease expiry profile protects its income stream from short-term pressures. The business is also well capitalised, with a loan to value of just below 30% at the last reporting period. Equites is one of the few property stocks whose share price is nearly back to pre-Covid levels. And though it’s not trading at a large discount, it does offer superior growth prospects.
EPP
The company’s €2bn property portfolio includes 25 retail projects, making it the largest mall owner in Poland. The company has reappeared on fund managers’ stock pick lists despite lingering concerns about its high loan to value of about 55%.
Elston believes EPP’s strategy of recovery and disposals should result in the company improving its debt levels and financial structure over the coming months. In addition, retail sales in Poland are likely to recover fairly quickly, given the country’s progress with its vaccination rollout. It has some of the highest vaccination rates per capita in Europe at 3.3-million doses, which were administered to 5.7% of its population by February 27, versus the EU average of 4.8%. Ward notes that while EPP should not currently be viewed as an income play, the share price is poised for a significant rerating. "The assets are attractive and well maintained, and Poland remains a very liquid market in Central and Eastern Europe," she says.
Hammerson
This UK-focused mall owner experienced widespread income and valuation losses over the past two or three years. It wasn’t simply the effect of Covid, but also rising e-commerce and Brexit concerns. Still, its share price has rebounded more than 40% in the year to date. Yet the counter is still trading at a 55% discount to NAV. Hammerson remains one of the largest and most diversified retail portfolios in the UK and Europe — its £6.3bn portfolio spans the UK, Ireland, France and Spain and includes flagship leisure and shopping destinations such as Brent Cross in London, the Bull Ring in Birmingham, the Dundrum Town Centre south of Dublin and Les Terrasses du Port in Marseille.
It also owns stakes in various premium outlet centres that sell discounted luxury brands, as well as what are known as value villages.
Elston says Hammerson is now a very different company to what it was this time last year. He refers to a new management team, a better-structured balance sheet and adequate reserves to meet all its financial obligations. He adds: "The UK is also rapidly approaching the reopening of its economy and has had one of the globe’s most effective vaccine rollouts, which augurs well for a sustainable reopening of retail destinations."
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