Recent results released by property stocks reflect a growing divergence in the performance of individual counters, suggesting that the sector’s long-awaited recovery won’t be a one-way bet.
The real estate investment trust (Reit) sector appears to be through the worst operationally, with rentals slowly but surely starting to rise as more vacant space is mopped up in retail, industrial and office portfolios.
But persistently high interest rates are still eating into the profits of several property stocks — some more than others. In the past few weeks, at least 10 Reits released results for the June reporting period, painting a disparate earnings growth picture.
This ranges from a high of 19.9% (Attacq) to a low of -10% (Growthpoint Properties). The earnings growth outlook for the next six to 12 months remains equally varied.
Independent property analyst Keillen Ndlovu’s research shows that only 12 of the sector’s 23 largest stocks expect to grow distributable income per share for the 2024/2025 financial year.
Lighthouse Properties (+42%), MAS Plc (+21.2% to 32.8%), Attacq (+17% to 20%), Fortress Real Estate (+14.1%) and Nepi Rockcastle (+5.5%) lead the pack.
Seven have provided either a negative or negative to slightly positive guidance, with Octodec Investments (-3.7% to -11.1%) Growthpoint (-2% to -5%), Burstone Group (-2% to -4%) and Dipula Income Fund (-4.1%) at the bottom.
Four funds — Accelerate, Delta, Exemplar and Spear Reit — have provided no guidance for their next reporting periods. Still, it’s not all bad news. Ndlovu says the sector is shifting towards earnings growth, with the sector average expected to return to positive territory in 2025.
In addition, most Reits, South Africa-focused ones in particular, have already staged a share price recovery after the formation of the government of national unity (GNU) and thanks to a stronger rand, improved GDP growth prospects and imminent rate cuts.
Individual property counters’ stock market performance has nevertheless been somewhat erratic year to date.
While the South African listed property index rebounded 23% from January to mid-September, some stocks have notched up less than 5%.
These include former market darling Equites Property Fund, MAS, Hammerson and Safari Investments. Anchor Stockbrokers figures show that struggling Fourways Mall owner Accelerate has been the worst-performing Reit year to date, shedding 28%.
One of the standout performers on the upside is Attacq, the developer of mixed-use precinct Waterfall City in Midrand.
The stock advanced about 10% last week after the company released a stellar set of results for the year to June, bringing its share price increase to 42% year to date.
Attacq, alongside Nepi Rockcastle, Fortress, Resilient Reit and Vukile Property Fund, is among the handful of property stocks that are already — or almost — back to pre-pandemic share price levels.
Attacq has had a particularly eventful year on the corporate action front, concluding several big-ticket deals which have boosted earnings.
The biggest among them was the sale of a 30% stake in Waterfall City to the Government Employees Pension Fund (GEPF) for R2.7bn, which was used to reduce debt.
The company also disposed of its remaining 6.5% stake in Eastern Europe-focused MAS for R773m. The proceeds were used to buy the remaining 20% of Mall of Africa that Attacq didn’t already own, for R1.1bn.
Last month, Attacq announced the sale of its interests in three loss-making African malls, two in Ghana and one in Nigeria, to unlisted Africa-focused real estate fund Lango. The company has also invested about R50m in share buybacks in the past year.
We’re going to focus on our own backyard in the medium term. Further development at Waterfall City is where we can now get the best cash-on-cash returns
— Jackie van Niekerk
According to CEO Jackie van Niekerk, these transactions have positioned Attacq “very much as a South Africa-focused real estate play’’.
Though not ruling out future offshore expansion, she says: “We’re going to focus on our own backyard in the medium term. Further development at Waterfall City is where we can now get the best cash-on-cash returns.’’
Attacq achieved a 19.9% year-on-year increase in distributable income per share for the 12 months to June, well ahead of its 10%-12% guidance, which translates into dividend growth of 19% on an 80% payout ratio.
Van Niekerk refers to the GEPF deal as the single biggest driver of the “exceptional” results. It meant that a large portion of debt could be repaid, which significantly reduced interest costs.
The company’s loan-to-value ratio simultaneously dropped from 37.3% to 25.4%, which Van Niekerk says places Attacq in a good position to execute on its 44,000m² Waterfall City development pipeline.
Earnings growth was supported by a solid 8.1% growth in net operating income across Attacq’s property portfolio as well as cost containment, most notably utilities and diesel expenses.
The full ownership of the R6bn Mall of Africa, which anchors Waterfall City and remains Attacq’s crown jewel, also contributed to better than expected income growth.
The mall, which at 130,000m² is the largest shopping centre built from scratch in South Africa, has virtually zero vacancies. Several retailers are keen to open new shops or expand existing ones.
New tenants set to open up shop at Mall of Africa this year include international fashion and accessories brands Kate Spade, Coach and Benetton.
Rental reversions at the mall clocked in at a healthy 6.8%. In fact, Attacq is one of few Reits that is already reporting rental growth on lease renewals in all its malls, with an average 5.6% reversion achieved across its portfolio for the year to June.
Besides Mall of Africa, Attacq owns nearby Waterfall Corner and five other retail precincts — Eikestad Mall in Stellenbosch, MooiRivier Mall in Potchefstroom, Garden Route Mall in George, and Brooklyn Bridge and Lynnwood Bridge in Pretoria.
Mall of Africa outperformed in terms of trading density (sales per square metre) growth at a monthly 23%, while Garden Route Mall, Eikestad Mall and MooiRivier Mall all achieved close to 16% for the 12 months to June.
Attacq’s entry into the residential space four years ago, via various phases of its Ellipse apartment offering at Waterfall City, has paid off handsomely.
To date, 619 units out of a total 672 have been sold. A new development, comprising another 200 apartments attached to Mall of Africa, will be launched in February.
Though Attacq’s earnings growth rate for the year to June already surprised on the upside, management expects another 17%-20% uplift in distributable income for the year to June 2025.
That will take its five-year compounded annual income growth rate (from 2021 to 2025) to an impressive 21.9%.
Van Niekerk believes the company’s above-market earnings growth performance will continue to underpin the share price, which she says is still “very cheap”.
Despite touching a five-year high of R13 this week, the share is still trading at a discount to NAV of 27%.
Still, as Nedbank CIB senior property analyst Ridwaan Loonat points out, short-term profit-taking across the Reit sector is highly likely, given how much property share prices have already rallied year to date.
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