Rental squeeze continues for top JSE property groups

Investors hoping that dividends from property stocks will quickly bounce back to pre-Covid levels shouldn’t hold their breath.

It’s true that the sector has emerged from lockdowns and trading restrictions in better shape than many expected. Mall owners, whose revenues were particularly hard-hit in 2020 by the widespread rental relief granted to struggling tenants, saw an encouraging rebound in foot count and sales turnover last year. And overstretched balance sheets have by and large been restored.

But the December results reported last week by some of the listed property sector’s big guns confirm there’s still a long road ahead before improved trading conditions will translate into a full recovery in earnings and dividend payouts. In fact, some counters have still not resumed interim dividends — most notably former market darling and blue-chip mall owner Hyprop Investments and Waterfall City developer Attacq.

Disappointingly, both companies decided to skip payouts for the six months to December. They will, however, look at paying an annual dividend for the full year to June in line with legislation, which requires real estate investment trusts (Reits) to pay out at least 75% of their distributable profits within four months of their year-end.

Sector heavyweights Growthpoint Properties and Resilient Reit — one of SA’s largest owners of nonmetropolitan shopping centres — respectively declared a 5.1% and 11.8% year-on-year uplift in dividends a share for the six months to December.

Still, both counters’ distributions are below pre-Covid levels in absolute terms. Growthpoint’s 61.5c dividend for the six months to December is 42% less than the 106c paid out for the six months to December 2019, while Resilient’s latest payout of 226.62c a share still lags 15% behind 2019’s 267.96c.

The bad news is that it may take "a few more years" before the absolute value of dividends paid by Reits reach pre-Covid levels, says Naeem Tilly, portfolio manager and head of research at Sesfikile Capital.

He cites various reasons for this: "Rentals have rebased, costs have grown aggressively and debt reduction activities, such as discounted dividend reinvestment programmes and disposals, have diluted the earnings base."

Tilly says that though payout ratios may increase again over the next few years, it’s also likely that several stocks will want to keep cash back for capital expenditure.

There are exceptions, like logistics owner Equites Property Fund and Stor-Age Reit, as well as rand hedge counters Sirius Real Estate, which owns German business parks, Industrials Reit, based in the UK, and Irongate, which focuses on Australia.

Industry players say reduced payout ratios and the rather dim prospects for a real recovery in dividend payouts any time soon may explain why many Reits continue to trade at sizeable discounts to NAV. For instance, Growthpoint, Hyprop and Attacq are trading at discounts to NAV of more than 35%.

However, at last week’s results presentation, Growthpoint CEO Norbert Sasse said investors can’t be blamed for being pessimistic given the level of uncertainty about SA’s economic recovery, sky-high unemployment figures and electricity supply issues. He stressed that demand for shopping centre, office and industrial space is ultimately linked to the performance of the underlying economy.

"Yes, the economy has reopened, people are shopping and travelling again and employees are returning to the office. So everyone is feeling a bit better about life in general," he said. "But we don’t have a real sense of optimism about SA’s economy and we certainly can’t say that every aspect of our local business has turned the corner."

Sasse said while Covid-related rental discounts have shrunk noticeably, there’s still an oversupply of retail and office stock across SA, which continues to place downward pressure on rentals. He notes that landlords have to be far more open to negotiating prices or they risk losing tenants to competitors. Rentals on lease renewals across Growthpoint’s SA portfolio dropped by an average 15% in the six months to December year on year.

Hyprop CEO Morné Wilken, who told investors last week that the company will resume interim dividend payouts only when the market "stabilises", echoed a similar sentiment. He said foot count across Hyprop’s portfolio of seven malls — including large landmarks such as Rosebank Mall and Hyde Park Corner in Joburg and Canal Walk in Cape Town — was up an encouraging 5.1% in the six months to December year on year. Sales turnover simultaneously rose a decent 11%. Yet Hyprop’s rental reversions were an average -13% across its malls in the six months to December. That’s on top of a 23% drop in rentals on lease renewals in the six months to December 2020. "We have had to drop rentals and shorten our leases to retain key tenants and ensure our malls remain relevant," he said.

The upside, said Wilken, is that rentals are now at more affordable levels than they have been for many years, which is clearly encouraging retailers to roll out more stores. He referred to a number of tenants that are planning to open up new shops in Hyprop’s eight malls over the coming months. These include Zara, Starbucks, Pep Home, Birkenstock, Totalsports, Big Blue, Clicks Baby and Nicci.