Equites Property Fund: quality doesn’t come cheap
The listed property sector has had a tumultuous year, making it increasingly difficult to forecast returns as the share prices of many counters continue to see-saw. Rand hedge stocks, for instance, of which many ended 2016 in the red, are now mostly back in the black while the reverse is true for a number of SA-focused counters.
However, one counter that is proving surprisingly resilient is Equites Property Fund, the JSE’s only specialist industrial play. The company owns a R6.4bn portfolio of modern logistics warehouses, properties that are typically used by major retailers and importers to store their goods before they are distributed to stores or online shoppers.
Despite a pull-back in the share price from late March to early April following President Jacob Zuma’s cabinet reshuffle, Equites is still up 9% year to date, bringing the 12-month gain to 30%. That compares to the index’s overall rise of 1% and places Equites as one of the top four performers among the JSE’s 57 property counters over a one-year period, according to figures from Absa Wealth & Investment Management.
Investors who bought the share nearly three years ago when it listed in June 2014 would have seen a substantial 63% return on capital (excluding dividends). Demand for the stock has no doubt been driven by the fact that Equites has a specialist niche offering, differentiating itself from most other property funds that own a mix of retail, office and industrial buildings. The management team is also highly regarded and brings a strong entrepreneurial flair to the table. The company was formed by Cape-based industrial property developers Andrea Taverna-Turisan and Giancarlo Lanfranchi — both of Italian descent — with a consortium led by Jonny Cullum, Kevin Dreyer and Alex von Klopmann, who merged their privately held portfolios before the listing.
Management, led by CE Taverna-Turisan, a mathematics honours graduate from King’s College London, has also impressed the market by putting its money where its mouth is. At the time of listing, Taverna-Turisan said they would like to grow the portfolio from R1bn to R4bn within five years. That target was breached in less than two years. By the end of February, total assets stood at R6.2bn, up R2.1bn or 51.4% from a year earlier.
Equites has also delivered on the earnings growth front. Last week the company declared a 14% increase in dividend payouts for the year ended February, ahead of the 10%-12% forecast made 12 months ago and double the 7% average growth that most other SA-focused property counters have delivered this year.
Despite the aggressive growth in the portfolio over the past year, vacancies and tenant defaults remain close to zero. That’s no easy feat given the stagnating economy, which is making it increasingly difficult for landlords to retain tenants. Moreover, the net property expense ratio has been reduced to 2.5%, down from 3.5% in February 2016, despite ever-higher administered and utility costs.
Taverna-Turisan says the company’s performance was further buoyed by yield-accretive acquisitions including eight A-grade logistics properties in Waterfall, Midrand, bought from JSE-listed developer Attacq. Equites also entered the UK market last year, which Taverna-Turisan says was prompted by the shortage of high-quality modern warehousing stock in SA and the need to mitigate emerging market risk.
"We chose the UK as we all have extensive experience in that market. Besides, the UK is one of the leading countries in terms of the adoption of online shopping, which is a key driver of demand for logistics and distribution warehousing."
The company has invested £63m in three distribution centres, two of which are let to retail giants Tesco and Amazon. Taverna-Turisan would like to grow the company’s UK interests from 18% of total assets currently to 25%. "But it’s still early days and we don’t want to force deals."
The key question for investors is whether the stock offers further upside, given how strong the share price has already run. Liliane Barnard, CE of Metope Investment Managers, believes Equites offers "fair value" considering its premium to net asset value and uncertainty around further sovereign downgrades.
At current prices, Equites provides investors with a solid income yield of 7.2%, in line with the sector average, and the prospect of continued double-digit dividend growth for the year ahead, she says.
"Equites will remain a long-term core holding in our investment portfolios. We think the portfolio is managed by an excellent management team and is of a high quality with a strong tenant base and long lease profile, which provides certainty of income."
Evan Robins, portfolio manager at Old Mutual Investment Group MacroSolutions, has a similar view. He says Equites may be fully priced, but that’s because investors are prepared to pay for quality. "You are buying a high-quality, growing income stream in a focused fund, run by industrial property specialists with a short but very strong listed track record."