Redefine Properties goes big in Poland
The latest R2.9bn Polish acquisition should help position the company’s stock for a potential rerating
Redefine Properties, one of the largest property stocks on the JSE, with a market cap of R60.4bn, hasn’t exactly shot the lights out in terms of share price growth — the stock has been trading in a fairly narrow band of R10-R12 for most of the past three years.
That suggests that the market doesn’t yet appreciate the strides that Redefine’s management, under CEO Andrew König, has made in recent years to improve the quality of its sprawling real estate portfolio.
The fact that Redefine is one of a dwindling number of SA-based property stocks that is still achieving dividend growth exceeding 5% a year (5.5% for the six months ended February) has seemingly also gone unnoticed.
The counter is trading at a forward dividend yield of close to 10% (at a share price of R10.65), which looks well-priced compared with the listed property sector’s average 8.5%. However, analysts believe that last week’s R2.9bn Polish acquisition should help place Redefine on the radar of a wider investor audience and position the counter for a potential rerating.
Redefine announced last week that it has stepped up its expansion drive into the fast-growing Polish market with the acquisition of a 95% share in a portfolio of nine logistics properties for €185.8m.
The portfolio of modern, high-spec warehouse and distribution centres was bought at an initial income yield of 7.1%.
The portfolio is 98% occupied by blue-chip tenants such as Kaufland, Carrefour, Saint Gobain, Hellmann, Eurocash and DSV.
The properties have a combined gross leasable area of 313,507m² and a weighted average lease expiry of 3.5 years. The acquisition marks Redefine’s first offshore entry into the burgeoning logistics property market, which has over the past two years become one of the best money-spinning subsectors of the European real estate market. Redefine has simultaneously entered into a deal with European industrial property developer Panattoni in which it has an "exclusive priority right" to acquire another 24 newly developed warehouse and logistics properties over the next five years.
The deal was sourced by Griffin Real Estate, a leading Polish property group and Redefine’s local partner, which will own the remaining 5% of the logistics portfolio.
The R2.9bn acquisition takes Redefine’s exposure in Poland to close to R9bn, which accounts for just more than 10% of its total property assets worth R88.5bn.
Late last year it acquired a 25% stake in a portfolio of 28 shopping centres across Poland via a R907.9m investment in Chariot Top Group. Redefine also owns a 36.2% stake in fellow JSE-listed Echo Polska Properties, a retail-focused, pure Polish play.
The latest acquisition means that Poland is now Redefine’s largest offshore market in terms of geographical exposure, followed by Australia and the UK via JSE-listed RDI Reit (see graph).
Peter Clark, portfolio manager at Investec Asset Management, says the Polish logistics acquisition is accretive and will therefore boost dividend (or distribution) growth from the outset.
"It will also go a long way to reduce the need to use nonrecurring income growth to support distribution growth."
Clark refers to the growing but unpopular trend among property stocks to add trading and development fees and other one-off sources of revenue — other than pure rental income — to dividend payouts.
He says this practice, together with the fact that Redefine has a stretched balance sheet with a relatively high loan to value of 40.1% (at end-February), have weighed negatively on investor sentiment.
However, Clark says management has made good headway in addressing investor concerns by using capital from asset sales to pay down debt. He refers to the proceeds from Redefine’s recent disposal of its holding in Cromwell Australia that have been used to reduce gearing and partly to buy the Polish logistics portfolio.
Clark says it is also encouraging that management is dealing with corporate governance issues and streamlining the business, particularly with respect to geographic exposure.
Until recently, some investors regarded Redefine’s portfolio as overly diversified and complicated in terms of its various offshore holdings.
"Overall, Redefine now looks attractive on a yield and growth basis. All indicators suggest that management is making sound decisions in a constructive direction.
"However, time will tell if management makes good on its commitments to the market and whether the company will be rewarded from a rating perspective," Clark says.
Craig Smith, head of research at Anchor Stockbrokers, has a similar view, saying that it welcomes Redefine’s intention to replace nonrecurring income with accretive deals such as the logistics acquisition, as it will increase the quality and sustainability of earnings.
"The transaction also looks attractive given the rising e-commerce trend in Central and Eastern Europe [CEE] — the region’s logistics offering is currently undersupplied to cater for expected growth."
Smith says it is also impressive that Redefine has managed to secure the right to purchase Panattoni’s future development pipeline given that the latter is regarded as one of the best logistics developers in Europe.
"We think this is the strategic benefit of Redefine’s relationship with Griffin as we doubt Redefine would have been able to secure such a portfolio without Griffin’s network and proven track record in the region."
König says the company’s entry into the Polish logistics market is opportune as the country is benefiting from a significant increase in demand for modern warehouse and distribution centres on the back of robust retail growth.
He notes that industrial vacancies in Poland were at historical lows of 4.8% at the end of the first quarter and that limited supply of new industrial stock is being brought to the market because of recently introduced limitations on agricultural land trades in Poland.
"That has slowed down the development pipeline and increased the value of zoned land holdings," says König.
Construction costs have also increased by about 20% over the past year, which he says has already placed upward pressure on rentals of new industrial buildings and should make it easier to let existing properties.
Redefine’s expansion trail into Poland, like that of many of its SA-based peers who have also in recent years extended their footprints into the CEE region, has been driven by limited growth opportunities in its own backyard.
König says that despite the positive changes in SA’s political landscape, improved business and consumer sentiment has not yet filtered through to increased take-up of local office, retail and residential space. And the chances that SA landlords will see a reversal of fortunes any time soon seems unlikely.
"We don’t believe that there will be any meaningful increase in demand for space in SA until the economy starts growing by at least 3.5%, effectively double the current GDP growth rate."