Logistics-focused Equites Property Fund is one of the only local real estate investment trusts (Reits) to pay out its full dividend and increase its distribution per share in the face of the Covid-19 crunch.
But its share price fell almost 6% on Tuesday, following the release of the fund’s annual results for the year ended February 28, 2021.
The group’s full-year distribution per share was up 2.4%, to 155 cents (2020: 151.39 cents).
Equites declared a final dividend of 80.56 cents per share. For its half-year to the end of August 2020, the group declared an interim dividend of 74.44 cents per share, which brought its total distribution for the year to 155 cents per share.
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The 2.4% increase in total distributions is in line with its market guidance of 2-4% growth for the year. However, this is a far cry from the over 9% growth it achieved for its previous financial year, which was pre-Covid.
Equites is also paying shareholders 100% of the full-year dividend, while most of its JSE-listed peers have reduced payouts (introducing payout ratios) in order to conserve cash and weather pandemic pressure on balance sheets.
Some counters, like Redefine Properties and Rebosis, have opted not to pay over the last year as a result of spiralling debt or loan-to-value (LTV) ratios. Many listed property funds have also deffered interim dividends to year-ends.
Equites CEO Andrea Taverna-Turisan brushed aside the market’s reaction, telling Moneyweb the group has delivered a strong set of full-year results compared to most of its property peers.
“I wouldn’t pay much interest to the share price reaction, because we have posted another sector-beating performance despite Covid-19,” he says.
“The pandemic has also affected our business, but the strength and quality of our logistic-focused portfolio has given us an edge,” he adds.
“We have managed to increase our distributions and are one of the only SA Reits to be paying out a 100% dividend.”
Equites notes in its results announcement that the growth it achieved was driven by strong growth of 6.7% in its South African like-for-like net rental income.
It attributes this to robust in-force contractual lease escalation, coupled with no tenant defaults and limited lease expiries during the period.
“While the past year has been one of the most challenging to date, Equites has benefitted from a defensive and high-quality logistics portfolio in SA and the UK, a conservative capital structure as well as a prudent approach to liquidity management throughout the pandemic,” Taverna-Turisan points out.
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“Our financial performance over the past 12 months is testament to the strength of our tenant base, our sound investment philosophy, and our prudent financial risk management policies,” he adds.
The Cape Town-based Reit, which listed on the JSE in 2014 with a portfolio valued at around R1 billion, has grown the portfolio to R19.3 billion (to the end of its 2021 financial year).
Taverna-Turisan says around 65% of the group’s purely logistics property portfolio is in SA, while the balance is in the UK.
During its financial year the group’s SA portfolio was devalued by 5.7%. This comes as something of a surprise considering its strong tenant profile and like-for-like rental income growth of 6.7%.
Nevertheless, it is worth noting that the fund provided “short-term cash flow relief” to some of its tenants in SA totalling R42 million due to Covid-19.
Commenting on the market’s reaction to the latest results, Evan Robins, portfolio manager at Old Mutual Investment Group, says: “Perhaps the market was expecting better forward guidance from Equites and was not expecting any devaluation in the portfolio.
“As Equites is not cheap, the market is pricing it with high expectations.”
Equites is currently trading at a premium to its net asset value (NAV), which highlights the strength of the fund in comparison to the rest of the Reit sector. The sector is trading at around a 25% discount to Nav.
High quality tenants
“Equites can get distribution growth even in this environment because they have an industrial portfolio let to high quality tenants with long leases that escalate annually, hence there are contractual increases and less lease expiries leading to negative lease reversion,” says Robins.
“However, the fund has not been immune from Covid and the SA economy … Its portfolio’s fair values were reduced. Had it not been for Covid-19, the fund’s distribution growth would have been more than double what was achieved,” he adds.
Nesi Chetty, senior listed property fund manager at Stanlib, believes the market reaction to Equites’ results may be a case of profit-taking.
“We continue to favour the defensive qualities in the Equites portfolio and see very little disruption to their logistics portfolio … The demand for quality logistics assets in the UK is still very high and we feel longer term there is certainly scope for capitalisation compression in that market,” he says.
“The valuation of the group’s UK portfolio increased 5% on a like-for-like basis for the year and 9.7% including the impact of a weaker rand,” notes Chetty.
“The transactional market for logistics assets in the UK is fairly fluid with Equites able to get asset sales away at fairly decent premium to NAV. Take-up of space was strong in the prior period in the UK with some 50 million square feet of warehouse leases signed – Amazon being the lion’s share of this at 25%,” he adds.
Chetty says the LTV of Equites, at around 30%, remains conservative relative to its peers.