The JSE’s only pure logistics play has by and large dodged the Covid bullet. It’s one of less than a handful of property stocks whose share price is already back to pre-pandemic highs of R20-R22 a share. In contrast, the listed property sector as a whole is still trading 27% below its early-2020 levels.
Unlike most JSE-listed real estate investment trusts (Reits) which either slashed or suspended dividends over the past two years, Equites Property Fund continues to grow payouts. For the year to end-February 2021, dividends were up 2.4%.
Management, led by CEO Andrea Taverna-Turisan, is expected to declare a further 5%-6% uplift in dividends when results for the 2022 financial year to end-February are announced this week (May 4). Equites’ outperformance has been driven by its exposure to the SA and UK logistics markets — modern warehouses and distribution centres used by retailers and online platforms to store goods before delivery.
Over the past two years, demand for logistics properties has been buoyed by a surge in virtual shopping and global supply chain disruptions. This has forced retailers to bolster e-commerce offerings and stockpile more goods.
Equites’ portfolio is split roughly 65/35 between SA and the UK. Its tally of A-grade tenants include Amazon and parcel delivery groups DHL and Hermes in the UK, and Shoprite Checkers, Pick n Pay, Massmart and The Foschini Group in SA.
Equites has grown its logistics portfolio aggressively since listing on the JSE eight years ago, from R1bn in mid-2014 to R21.2bn (August 2021). The company’s UK foray has been particularly successful. Last month (April) Equites cashed in on rapidly rising demand for logistics space in the UK, and a subsequent rally in logistics property values, by closing a R2.28bn deal with European grocery giant Lidl.
The company, via its partnership with UK-based Newlands Property Developments, has sold a 40-acre piece of land in Basingstoke to Lidl and will also undertake infrastructure developments on the site.
Taverna-Turisan expects to make a post-tax profit of R400m from the transaction, which he says will contribute significantly to Equites’ growth in net asset value in the current financial year (to end-February 2023).
Equites will use the proceeds of the sale to help fund the rollout of the UK expansion strategy. Taverna-Turisan says Equites’ UK development pipeline is potentially worth about £1bn (R19.8bn) over the next five years.
But the question for investors is how much share price upside is left, given that the perennial outperformer is now looking expensive compared with other SA-based Reits. As Kelly Ward, head of research and portfolio manager at Metope Investment Managers, puts it: “Equites trades at a premium to book value, so it is certainly not a value play at these levels.”
She says its entry into the UK logistics sector in 2016 was nevertheless well-timed, with the company already benefiting from strong rental growth. E-commerce continues to boom in the UK, driving demand for logistics and warehouse space, which bodes well for further value unlock in Equites’ joint venture with Newlands.
The outlook for the SA logistics sector doesn’t look as rosy. Ward says there is limited rental growth potential in the local market. She cautions that there could be significant rental reversions when current leases expire — though Equites’ leases are long-dated, with a weighted average lease expiry period of a substantial 15 years. Still, Ward says it could have negative implications for valuations.
Equites trades at a premium to book value, so it is certainly not a value play at these levels
— Kelly Ward, head of research: Metope Investment Managers
Naeem Tilly, head of research at Sesfikile Capital, agrees that Equites won’t be immune to general pressure on rentals in the SA real estate market on the back of a weak economy, which could see some corrections to rentals on leases that expire. But he believes Equites’ earnings growth outlook remains robust. “Risk in SA is low, given a long-weighted average lease expiry and blue chip tenant profile.”
Tilly expects dividends to continue growing by 5%-6% over the next few years, while NAV growth will be supported by the rollout of the UK development pipeline.
Ridwaan Loonat, senior property analyst at Nedbank CIB, is equally bullish about Equites. He believes investors will be willing to continue to pay a premium for the counter given its specialist focus on logistics and secure and growing earnings stream.
Loonat says: “Its share price is above pre-Covid levels but that doesn’t mean Equites is expensive. The company has grown earnings through the pandemic crisis, achieving a three-year compound annual growth rate in dividends per share of 6% since 2019.”
He adds: “This is well above its peers who have had to sell assets to lower gearing or alter their funding structures, which saw earnings fall over the same period.”
Equites is now trading at a forward dividend yield of 8% and a premium to NAV of about 22%.
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