The market clearly didn’t anticipate the extent to which higher interest rates are likely to eat into Growthpoint’s earnings over the next 12 months, judging by last week’s sell-off.
Its shares touched a three-year low of R11 after the company released results for the 12 months to June. That brings the year-to-date share price drop to about 25%.
Growthpoint is the JSE’s largest South Africa-based real estate investment trust (Reit) and is widely regarded as a reliable bellwether of the state of the broader property market.
The problem for investors — many of them major pension funds — is that they invest primarily in Reits for a predictable and growing income.
Its sprawling R180bn portfolio spans more than 500 office, retail and industrial buildings across South Africa, Australia, the UK and Eastern Europe.
While it warned investors that growth for the year to June would be muted — distributable income was just 1.3% higher — it was the rather gloomy forecast that earnings will likely fall 10%-15% next year that appeared to catch many off-guard.
Ann-Maree Tippoo, portfolio manager at Ninety One, says the guidance was a “significantly’’ larger deterioration than expected.
Management’s comments at its pre-close update certainly underplayed the extent of negative growth expected for the 2024 financial year
— Ann-Maree Tippoo
“Management’s comments at its pre-close update certainly underplayed the extent of negative growth expected for the 2024 financial year,’’ she says.
Francois du Toit, equity analyst at Anchor Stockbrokers, echoes the sentiment: “The market won’t like it.’’
However, Growthpoint group CEO Norbert Sasse says the forecast shouldn’t come as a surprise given economists’ “higher for longer” rate expectations.
He says the 475 basis point rate hike since November 2021 translates into a 60% increase in interest costs. “That’s a significant increase on R45bn of debt — even if a large portion is hedged.’’
And, warns Sasse, the company will only feel the full impact of the surge in interest rates over the next year.
“Even if rates start coming down next year, it’s only likely to happen in May or June, so we won’t really see the benefit in the 2024 results,’’ he says.
Sasse stresses that higher rates are affecting property companies across the world, so everyone’s dividend payouts will be down next year. “And unfortunately, underlying demand for property and rental growth aren’t strong enough to offset higher debt repayment costs.”
That’s despite Growthpoint’s single most valuable asset, the V&A Waterfront in Cape Town, experiencing a spectacular post-Covid rebound. Visitors have flocked back to the R20.2bn mixed-use precinct, which Growthpoint co-owns with the Government Employees Pension Fund.
That’s a welcome change from the Covid lows, when the shop, work, live and play district was Growthpoint’s worst-performing asset after being hit by lockdown trading restrictions and travel bans.
Sasse believes the V&A’s stellar turnaround reflects not only its ability to cash in on the Mother City’s growing stature as a global tourist hotspot but also an ongoing migration of people and businesses from other provinces.
Semigration is real. The stats at the V&A are astonishing. It’s a world apart from what’s happening in the rest of the country
— Norbert Sasse
“Semigration is real,’’ he says. “The stats at the V&A are astonishing. It’s a world apart from what’s happening in the rest of the country.’’
In fact, the precinct has run out of space and can’t meet demand from companies, retailers, restaurants and hoteliers that want to be there. The latest trading metrics underscore the precinct’s success: retail sales jumped 39% year on year for the 12 months to June and are now 31% ahead of 2019 levels. That compares with an average 6.2% increase across Growthpoint’s other South African shopping centres.
In December alone, sales at the V&A surpassed R1bn, up 46% y/y and 30% higher than December 2019. Retail spending was no doubt boosted by the return of cruise ships — 145,000 passengers and 40,000 crew members docked at the V&A in the year to June. That’s up from virtually zero arrivals in 2020/2021. Overall visitor numbers rose 28% to more than 23-million and are now back to 90% of historic levels.
The Waterfront’s 12 hotels also had a bumper year, with a notable recovery in occupancies and revenue since November. By June, hotel occupancies were up 56% y/y while room revenue had surged 122%.
Its offices are all but fully let too, with overall vacancies across the precinct at a marginal 0.4%. That compares with an overall 9.4% vacancy rate across Growthpoint’s South African portfolio.
Still, Sasse says the challenge with the V&A is that it’s a “capital-hungry animal’’ that requires millions to be spent every year on maintenance and refurbishments.
“We effectively run the V&A as a municipality and fund most of the service provision and infrastructure ourselves.’’
Sasse says the trading environment across the rest of South Africa remains tough as higher rates, increased load-shedding and ever-rising municipal rates continue to erode profits.
Rentals are also under pressure, with lease renewals showing an average negative reversion (drop) of 12.9% — the worst annual rental reversion yet recorded by Growthpoint.
But despite the larger than expected drop in forecast earnings for financial 2024, analysts have largely maintained a buy recommendation on Growthpoint, according to the latest Bloomberg consensus rating.
The general view is no doubt that the stock is cheap. At this week’s price of about R11, Growthpoint offers a discount to NAV of nearly 50% and an attractive dividend yield of 12%.
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