Is it Redefine’s time to shine?

After going nowhere for the past four years, Redefine Properties’ share price has rallied almost 30% in the past three months.

Granted, its recovery has happened in tandem with most other local property stocks, on the back of looming interest rate cuts, rand strength, no load-shedding, a better than expected election outcome and improved trading metrics in mall, industrial and office portfolios. 

Still, Redefine has outperformed the South African listed property index, with a total return of 30.4%, vs 23.8% in the year to date (January to August), figures from Anchor Stockbrokers show.

That follows a period of sector underperformance, with above-market debt levels cited as a key concern by analysts.

In addition, Redefine’s sprawling real estate portfolio, which historically comprised a rather mixed bag of assets spread across multiple sectors and geographies, weighed on the share price in recent years. 

As a result, the real estate investment trust (Reit) traded at a sizeable discount to NAV of more than 50% for most of 2021, 2022 and 2023, well ahead of the sector’s average 35%-40% over the same time. 

But it seems the tide is finally turning. Most analysts now have a buy recommendation for Redefine, as the company continues to streamline its portfolio, improve the quality of its assets and derisk its balance sheet.   

It’s one of the most traded counters on the JSE, which means its shares are easy to buy and sell in small or large tranches

Redefine is the second-largest domestic Reit on the JSE after Growthpoint Properties, with a market cap of R34bn.   

Speaking at Redefine’s recent Capital Markets Day in Sandton, CEO Andrew König said the company has emerged from a five-year transformation period, which has led to significant shifts in its geographical and asset composition. 

Back in 2019, Redefine had exposure to four regions — South Africa, the UK, Poland and Australia — and multiple subsectors, including both traditional (retail, office and industrial) and alternative asset classes (student accommodation and hotels).

At the time, its R95.4bn asset platform was still heavily weighted towards South Africa at 76% by value (see graph). Today, Redefine’s portfolio, now worth R100.4bn, focuses on only two regions — South Africa and Poland — and is split 62/38, roughly in line with Redefine’s long-term local/offshore target.   

The Polish portfolio is now skewed towards retail, with a small exposure to logistics, offices and self-storage, while the South African portfolio offers a good mix of retail, offices and industrial property.

The company has eliminated its holdings in other listed entities, which analysts typically don’t like.   

König said Redefine has transformed its property asset platform by reducing exposure to “multiple risk universes” through targeted disposals and the reallocation of capital to high-growth sectors and geographies such as Central and Eastern Europe.

In the past five years, the company sold underperforming and noncore properties worth a hefty R42.3bn, while acquisitions totalled R38.8bn.   

The most noteworthy addition to the local portfolio was the remaining 80% of Mall of the South (77,000m2) that Redefine didn’t already own, for R1.8bn. It is one of Joburg’s largest shopping centres. 

Earlier this year, management sold Bryanston Shopping Centre and reinvested the proceeds in a 50.9% stake in the 15,775m2 Pan Africa Shopping Centre in Alexandra, northeast of Sandton.

The two acquisitions place Redefine in the position of being the largest South African mall owner on the JSE in terms of gross lettable area.

Redefine has also increased its stake in Polish mall owner EPP from 95.5% to 99.2%. It is, incidentally, also the largest retail landlord in Poland.

At the recent event König said: “Our transformation didn’t happen by accident. We didn’t just sit back and manage what we had — we were very deliberate and opportunistic.’’

Redefine has seen improved operating metrics in all subsectors, which is placing upward pressure on rentals. In the retail sector, rental reversions are starting to turn positive, which König said suggests the industry is about to enter a growth phase.   

Even the long-suffering office sector is showing signs of life, with Redefine’s office vacancy rate improving from about 15% two years ago to 12.2%.

The recent strength of the property sector has surprised many, including me

—  Ridwaan Loonat

Redefine has maintained its earnings guidance of distributable income per share at 48c-52c for the full year to end-August, against last year’s 51.53c.     

König stressed that the company’s strength still lies in its portfolio being diversified between various real estate asset classes, which allows for stable returns by limiting the cyclicality of different subsectors.

In addition, offshore diversification mitigates against domestic economic risk, König said.

But why Poland?

König noted that the country remains on a stronger economic trajectory than Western Europe, with its GDP per capita forecast to exceed that of the UK by 2030.

Poland has a well-educated and productive workforce and underpins household spending, which in turn supports sales in Redefine’s Polish mall portfolio. 

GDP growth forecasts for 2024, 2025 and 2026 are at 2.4%, 3.6% and 3.2% respectively. The country has a solid public infrastructure, a liquid real estate market with no limits on capital flows and an EU-aligned regulatory framework, König added.   

There are reasons apart from the impressive headway Redefine is making in refining its asset platform for the company reappearing on fund managers’ buy lists.

For starters, it’s one of the most traded counters on the JSE, which means its shares are easy to buy and sell in small or large tranches.

Given that the portfolio is well spread across multiple commercial real estate sectors, it is widely regarded as a liquid proxy for investing directly in commercial real estate — without the hassle and risk of managing and owning physical property.

Though Redefine’s loan-to-value ratio still sits at an above-market 42.6%, Naeem Tilly, portfolio manager and head of research at Sesfikile Capital, says that with interest rates expected to decline and asset values holding up, gearing is no longer a primary concern. 

He says: “Management is also now more front footed, evidenced by the acquisition of Pan Africa Shopping Centre. We believe Redefine still plans to degear but will look at EPP and its joint venture businesses to do so.”

The stock is relatively inexpensive relative to its peers, Evan Robins, portfolio manager at Old Mutual Investment Group, points out. At this week’s level of R4.85, the stock is still trading at a discount to NAV of close to 38% and a dividend yield of 10%. That compares with an average sector discount of about 19% and a dividend yield closer to 8%.  

Robins believes Redefine’s management must be commended for simplifying the portfolio and improving the average quality of its properties.

However, on the downside, he says: “Gearing on a see-through basis remains higher than we would like,” and this is holding back Redefine’s “rating and opportunity set”. 

Ridwaan Loonat, senior property analyst at Nedbank CIB, who has an overweight recommendation for Redefine, agrees that the stock offers further recovery potential despite the recent rally.   

Expectations that South Africa will soon enter a rate-cutting cycle will lower debt funding costs and provide an underpin for further earnings and share price growth.

But Loonat says investors should curb their short-term share price expectations given how strong the rebound has already been.

“The recent strength of the property sector has surprised many, including me,” says Loonat. “So I won’t be surprised if we see some profit taking.”