Redefine Properties, one of the JSE’s biggest property guns, appeared on multiple stock-pick lists earlier this year. That came on the back of a double-digit dividend yield and management making impressive strides to streamline the portfolio and repair an overstretched balance sheet.
Yet the real estate investment trust (Reit) is still trading at a 43% discount to NAV. And despite delivering a decent set of results this week — distributable income is up 26% for the year to August — there’s been little movement in the share price.
Redefine CEO Andrew König ascribes the large discount to NAV at which Redefine and many of its peers are trading partly to the government earlier this year introducing regulation to allow retirement funds to increase their offshore allocation from 30% to 45%.
“There was a large outflow of pension fund investments from the JSE almost overnight. Reits suffered a large part of that,’’ he says.
König notes that local pension funds now have only 2%-3% of their capital allocated to the South African real estate sector, while traditionally the benchmark has been 11%. “So there’s been a big outflow of funds from South African Reits with no new uptake, which translates into sluggish share prices.’’
There’s been a big outflow of funds from SA Reits with no new uptake, which translates into sluggish share prices
— Andrew König
König believes the sector has effectively been dealt a double whammy as the sharp rise in bond yields this year also took the shine off listed property.
He says bonds have become particularly attractive among income-chasing investors who are now looking for more certainty in the higher interest rate and inflation environment.
He adds: “So now we’re not only competing with bonds but also with offshore general equities.’’
Yet, notwithstanding lacklustre demand for listed property as an asset class, König says Redefine used the pandemic as an opportunity to improve its business. “Our asset base is now significantly simplified and well positioned for growth.’’
Since November 2019 management has sold a hefty R28bn worth of assets, using the proceeds to help pay off debt. That has enabled the company to lower its loan-to-value to 40.2%, down from 44% pre-Covid.
Disposals include a number of South African retail centres and industrial properties. Redefine also exited its Australian student housing interests and sold its stake in UK-focused RDI Reit. Poland is now the company’s sole offshore destination.
It accounts for 34% of Redefine’s asset base after the takeover and delisting of Polish mall owner EPP in early March. Redefine now owns 95.5% of EPP, up from 45.4% previously.
Referring to the timing of EPP’s takeover and delisting, König says if the deal hadn’t got the go-ahead there probably would have been no EPP today. “And Redefine would have had a R6bn impairment on its books.’’
He says the European funding environment has changed dramatically since Russia invaded Ukraine. But fortunately the takeover meant quick action could be taken to restore EPP’s liquidity issues. A number of EPP’s retail properties — and three offices — were sold. This raised the equivalent of R3.3bn, which was used to pay off debt.
Though EPP’s R26bn retail-focused portfolio contributed a large chunk to Redefine’s earnings for the six months to August, to help boost EPP’s liquidity no income from the company was included in dividend payouts.
König says shareholders will start sharing in the dividend upside from EPP’s take-over from 2023
However, König says shareholders will start sharing in the dividend upside from EPP’s takeover in 2023. Meanwhile, EPP’s malls have already bounced back from pandemic-induced trading restrictions.
He says though foot count in the portfolio is still 12% below pre-Covid levels, sales turnover is 5% ahead of 2019 levels. “The war has actually bolstered spend in Polish shopping centres, given how many Ukrainians have crossed the border,’’ says König.
Redefine also owns a R4bn stake in Polish logistics platform European Logistics Investment (ELI). König concedes risks that could affect Redefine’s Polish interests include a “dark winter” in Europe amid higher inflation, rising energy costs and potential gas shortages.
He adds: “On the flipside, you see logistics benefiting from a move to ‘friend shoring’, where European companies move into friendlier territories where they can do business safely, like Poland where ELI is situated, fuelling growth in demand.”
Performance metrics such as the vacancy rate, foot count and sales turnover in Redefine’s South African shopping centre portfolio, including Gauteng super-regional centres such as Centurion Mall and East Rand Mall, have also bounced back.
However, the vacancy rate in Redefine’s office portfolio increased from 12.9% to 14.4% in the year to August, despite the company seeing an encouraging uptick in inquiries in recent months. König argues that that compares favourably with some companies, where office vacancy rates are still scaling 30%.
Analysts believe Redefine offers value at current levels of about R4.15. Ridwaan Loonat, senior property analyst at Nedbank CIB, has an “overweight” recommendation on Redefine.
He says: “Results were decent with earnings above guidance. Vacancies have reduced, valuations have increased and rental reversions have stabilised.’’
Management has also delivered on its promises to cut debt. However, Loonat says the market was expecting a higher dividend payout ratio than the 80% the company opted for.
We remain bullish on Redefine given its very attractive valuation on both a distributable earnings yield (14%) and a net asset value (43% discount) basis
— Naeem Tilly
Naeem Tilly, portfolio manager and head of research at Sesfikile, says: “We remain bullish on Redefine given its very attractive valuation on both a distributable earnings yield (14%) and a net asset value (43% discount) basis.’’
Though office fundamentals are still weak, the outlook for the South African retail and industrial sectors is encouraging, he says. Tilly also likes Redefine’s Polish exposure. “The country remains an attractive investment destination in the long term, driven largely by consumption growth.’’
Though economic growth will be negatively affected by higher energy prices and interest rates in the short term, Tilly says this will be softened by high wage inflation due to low unemployment, an additional 14th month pension paid to retirees by the Polish government as well as anti-inflation measures and energy subsidies offered to Polish consumers.
Liliane Barnard, CEO and portfolio manager at Metope Investment Managers, says a lot of work has been done over the past two and a half years to improve Redefine’s liquidity and debt metrics. “That has placed the company on a better footing to deal with the current environment of heightened uncertainties, rising inflation and interest rates.’’
Barnard adds: “At the current dividend yield of 10.5%, with the potential upside of an increasing payout ratio over time and a resumption of full EPP dividends flowing to SA, we think Redefine should be included in a diversified portfolio.’’
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