Big player: Pineslopes shopping centre forms part of Fortress’s R30.2bn local property portfolio Reit’s Pineslope shopping centre in Fourways, Johannesburg
Big player: Pineslopes shopping centre forms part of Fortress’s R30.2bn local property portfolio Reit’s Pineslope shopping centre in Fourways, Johannesburg

Shareholders of embattled property stocks Resilient Reit and Fortress Reit (B shares), which have both recorded share price losses of 62% in the year to date, will have to be satisfied with far more subdued dividend payouts than the double-digit growth they have become accustomed to in recent years.

That’s the message that emerged last week at Fortress and Resilient’s much-awaited annual results presentations and follows the restructuring of both companies’ balance sheets.

The latter was prompted earlier this year by market criticism of the cross-holding between Resilient and Fortress and how they distributed the interest accrued on loans advanced to an empowerment education scheme known as the Siyakha trusts.

The sell-off of Resilient and Fortress shares was accelerated by accusations of insider trading and share price manipulation, now the subject of a protracted probe by the Financial Sector Conduct Authority (FSCA).

Though the dividend growth numbers reported last week for the year ended June were in line with market expectations for both Resilient, at -0.3%, and Fortress B, at 4.07%, forecasts for next year surprised on the downside. That’s particularly true for Fortress.

The company’s B shareholders will have to lower their dividend growth expectations for the year ending June 2019 from a previous estimate of 5% to between -2.2% and 2.2%.

Resilient is forecasting dividend payouts to drop between 0.9% and 2.7% for its 2019 financial year. Neither Resilient nor Fortress has ever reported a drop in dividends.

Resilient still delivered growth of 25.1% and 16.1% respectively for the June 2016 and June 2017 reporting periods, while dividend payouts for Fortress B shareholders rose by 90.5% and 25.1% over the same period. Fortress A shareholders have a preferential right to dividends, with annual growth fixed at either 5% or, consumer price index, whichever is lower.

Though the subdued dividend growth numbers for 2018 and 2019 are no doubt a concern for many, analysts say they are satisfied that investor concerns around the cross-holding structure and Siyakha trusts have been adequately addressed by both management teams.

In addition, the underlying SA portfolios of both companies are still delivering a solid performance.

"We believe both businesses to be in good shape operationally," says Metope Asset Managers investment analyst Kelly Ward. She notes that a key takeaway from Resilient and Fortress’s results presentations, as well as recent announcements from other property companies and retailers — most notably Shoprite, a major tenant of both Resilient and Fortress — is that the SA economy really is in a tough spot.

"Both Resilient and Fortress’s retail portfolios have performed admirably in this environment, delivering 4.8% and 4.1% retail sales growth respectively for the year to June," says Ward. That compares with overall year-on-year retail sales growth of just 0.7% in June, as recently reported by Stats SA.

Ward says while Fortress’s office and industrial portfolios are showing weakness through higher vacancies, management has proactively implemented a strategy to dispose of these asset classes and deploy the proceeds into the better-performing logistics and retail sectors.

Fortress is one of the largest logistics property players in SA and owns a R30.2bn local portfolio of logistics, office, industrial and retail properties.

The retail properties include a number of rural commuter malls that cater to lower-income shoppers, and urban convenience centres such as Pineslopes shopping centre in Fourways, Johannesburg.

Resilient owns 26 shopping centres (excluding developments under construction) across SA worth R22.8bn, mostly dominant malls in secondary cities and rural areas such as Mall of the North in Polokwane, Brits Mall in the North West, Galleria Mall in Amanzimtoti and Jabulani Mall in Soweto.

Resilient and Fortress also have a sizeable exposure to offshore real estate markets through stakes in Central and East European mall owner Nepi Rockcastle and infrastructure play Greenbay Properties.

Ridwaan Loonat, property analyst at Nedbank Corporate & Investment Bank, has a buy recommendation on both Resilient and Fortress B. He says last week’s results show that Resilient’s retail portfolio is defensive, borne out by the still-low vacancy rate of 1.7% and the fact that it has achieved inflation-beating sales growth in a tough market.

Loonat says Resilient and Fortress B are both trading at a discount to NAV and at forward dividend yields of about 10% and 12% respectively, which offer value relative to their peers and the SA listed property index, currently at just under 9%.

Ward agrees that Resilient and Fortress B are poised for a further rerating despite the uptick of about 15% already seen in both share prices since end-July.

"Resilient and Fortress’s underlying portfolios are of a high quality and we are confident in their ability to deliver on earnings growth," she says.

Analysts expect Resilient and Fortress B to return to inflation-beating dividend growth in the financial year to June 2020 once the effects of the Siyakha trusts’ restructuring as well as the unbundling of Resilient’s shareholding in Fortress B are fully reflected in the base.

However, Ward says it’s important to note that Resilient’s income distribution base has been fundamentally and irreversibly changed following the distribution of its Fortress B shares (169-million) to shareholders in May via a return of capital.

"The transaction only affected Resilient’s dividend growth in the second half of the 2018 financial year," Ward says.

"So the impact of the Fortress share unbundling will again be seen in the first half of Resilient’s 2019 financial year. Thereafter the reduced distribution will be in the base."

Though it appears to be a somewhat complicated transaction, Ward stresses that Resilient shareholders have not been penalised. "Investors who have kept their Fortress B share allocations are still getting that income — they are just receiving it directly from Fortress as opposed to getting it through Resilient."

Meanwhile, analysts say that despite investors seemingly regaining (albeit tentatively) appetite for Resilient and Fortress, any meaningful recovery in their share prices is unlikely to happen until the FSCA releases its findings on potential insider trading and share-price manipulation.

The market is no doubt also waiting to see whether the boards of Resilient and Fortress accede to the request made last week by a number of heavyweight institutional investment managers to commission an independent investigation into the various allegations made against the group of companies.