Resetting the dividend growth yardstick in listed property

Attacq's performance is underpinned by a quality R20.5bn SA portfolio and, in particular, the development of the Waterfall precinct where 59% of its retail, office and mixed-use, light industrial and hotel assets are located. (Picture: Supplied)
Attacq's performance is underpinned by a quality R20.5bn SA portfolio and, in particular, the development of the Waterfall precinct where 59% of its retail, office and mixed-use, light industrial and hotel assets are located. (Picture: Supplied)

In recent years, listed property results have mostly been a time of gains and few losses. But a tough and deteriorating domestic economy has contributed to a somewhat different picture this year. Recent results across the sector pointed to a slowdown in dividend growth as the new benchmark for what has historically been termed “good growth”.

“Today, 4% to 6% is the new 8% to 10%,” quipped Fairvest Property Holdings CEO Darren Wilder. Other sector-wide themes that emerged included a shift away from exposure on the continent, as well as a foray into the challenging UK retail space.

Fairvest Property Holdings, among the few listed property entities to post above-market growth, delivered an 8.1% increase in distribution per share (DPS) for its year to 30 June 2019. But even this R3.16bn SA-focused real estate investment trust (Reit), which concentrates on more defensive non-metropolitan and rural shopping centres and lower-LSM market, has its forward look set at a less lofty 4% to 6% for 2020.

Fairvest has R200m-odd of headroom on the balance sheet, loan-to-value (LTV) is a low 27.9% and its interest-cover ratio is strong at 3.6 times. But stress is starting to come through the business, Wilder tells finweek. “The key deviation is vacancies [up from 3.5% to 4%] and growth in rental on renewals.”

Hyprop Investments is at the opposite end of the spectrum, with its higher-LSM centres and larger R42bn portfolio. So too in dividend growth. A revised strategy from its new board includes repositioning the SA portfolio, exiting its Africa interests and improving dominance in Eastern Europe.

The retail-focused Reit’s DPS declined 1.5% for the year to June 2019, predominantly on the back of underperformance of its 14% Africa portfolio. Hyprop has already reduced its Africa exposure, having sold two malls in Zambia and Ghana, one post the period. Hyprop, whose 61% SA portfolio includes super-regional mall Canal Walk, successfully refinanced R8.5bn worth of debt following Moody’s concern about its LTV.

Now down to 35.2%, the aim is to reduce LTV to below 30%, a figure Moody’s considers appropriate. “We don’t have to reduce our debt. We do that to retain the Moody’s rating. From a bank perspective, interest-cover ratio is a bigger thing,” new CEO Morné Wilken tells finweek.

And Hyprop’s interest cover is a healthy four times.“Hyprop has been hurt by the rest of Africa exposure and how they structured the debt,” according to Keillen Ndlovu, Stanlib head of listed property funds. And, he says, the Hystead structure has been misunderstood by the market. Hyprop’s Eastern Europe portfolio is held via a 60% stake in UK-based Hystead and includes retail interests in Serbia, Montenegro, Macedonia, Bulgaria and Croatia. “Both these ventures led to Hyprop’s debt going up and Hyprop being downgraded by Moody’s.

Latest results show that these issues are being addressed by new management and the business is reducing its debt. The rest of Africa assets are in the process of being sold. We believe that most of these issues are in the price now.” Attacq, meanwhile, increased DPS by 10.1%, exceeding the top end of its guidance for the full year ended 30 June 2019. Its target of between 8% to 10% DPS growth for 2020 is a standout in the sector.

Its performance is underpinned by a quality R20.5bn SA portfolio and, in particular, the development of the Waterfall precinct where 59% of its retail, office and mixed-use, light industrial and hotel assets are located. Attacq’s flagship retail asset, Mall of Africa, realised a 13.1% increase in trading density, and interest in its first residential high-rise development, Ellipse Waterfall, has exceeded expectations with over 80% of the first phase already sold.

The Reit’s R27bn of total assets includes a 22.8% interest in Central and Eastern Europe-focused MAS, equating to 11.8% offshore exposure. Attacq also aims to exit Africa. It’s rest of Africa assets dropped to below 2% post year-end.Fortress Reit’s annus horribilis appears to be at an end after being cleared of insider trading and share manipulation – allegations that saw its share price tumble.

For the year to end-June, its ‘preferred’ low-risk A shares delivered distribution growth of 4.32%, but its higher-risk B shares fell 12.28%.Fortress’s mostly defensive commuter-focused, lower-LSM retail assets comprise 20% of the R54bn portfolio. And it has 35% offshore exposure through its 23.9% interest in NEPI Rockcastle. But this Reit’s tale is about its plan to grow logistics properties to two-thirds of its total portfolio. 

Fortress has one of the largest logistics property developments pipelines in SA, accounting for around R4bn to R5bn. “Our four to five-year goal is to have our direct property roughly two-thirds logistics and one-third retail,” new CEO Steve Brown tells finweek. “R3bn is currently under development, and to build the top structure will cost another R4bn to R5bn. That will add roughly R8bn to income-producing property,” says Brown. 

Funding will come via R10bn of non-core assets (office and industrial portfolios and Resilient shares) earmarked for disposal. “The disposal of the office and industrial assets will give us more than enough cash to fund the development pipeline,” he says. Brown says they are also entering into more JVs with tenants. “It binds them into the property as a co-owner and allows us to recycle our capital and make a bit of a profit on the development. We’d like to do more of that.”

Growthpoint Properties’ story is two-fold. It’s partly about a potential venture into the much-maligned UK retail space, and partly about its outlook on future distribution. The country’s largest primary listed Reit, whose group property assets increased by 4.9% to R139.4bn for the year to 30 June 2019, confirmed discussions for a majority stake in UK-listed Reit Capital and Regional via cash and new shares. 

“It’s a surprise announcement,” says Ndlovu, surmising that Growthpoint is looking for further growth opportunities and diversification out of SA. “Perhaps Growthpoint has ‘priced in’ Brexit and the negative impact of online shopping as well as CVAs [a debt arrangement often used by struggling retailers] in the UK. Capital and Regional’s share price has fallen significantly due to these challenges in the UK.” Growthpoint, he says, may be looking to take advantage of this. 

“Disruptions in the region have created an entry point,” says Norbert Sasse, group CEO of Growthpoint. While DPS increased 4.6%, marginally up on its market guidance, a strained SA economy impacted Growthpoint’s around 70% domestic portfolio that contributed a mere 0.5% to distribution growth. Amplified investment in Growthpoint Australia (GOZ) and Central and Eastern Europe through GWI, grew Growthpoint’s offshore exposure to 30.3%. It was these international operations that contributed the 4% bulk of distribution growth.

Growthpoint’s 50% share in the V&A Waterfront, arguably the best real estate in SA, according to Bandile Zondo, equity research analyst at SBG Securities, contributed 1.5% to distributable income growth against -0.2% from the SA portfolio. And vacancies reduced from 1.8% to 1.2% in contrast to the SA portfolio where vacancies climbed from 5.4% to 6.8%.

Growthpoint, whose Moody’s rating was upheld, expects dividend growth, if any, to be nominal for the year ahead, and could not be pressed for a firm number. Zondo interprets this as likely to generate 0% to 4% DPS growth for FY2020. The outlook over the next year will be 0% to 1% distribution growth for the sector, down from the 2% to 3% outlook before the August/September reporting season, says Ndlovu.

This article originally appeared in the 26 September edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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