Resilient REIT: Tentatively resilient, for now
The embattled mall owner, whose share price took a 60% pounding last year, is starting to reappear on investor radars
While the market awaits the conclusion of the Financial Sector Conduct Authority’s (FSCA) prolonged probe into allegations of share price manipulation and insider-related trading against Resilient Reit and its associate companies, it appears that investor sentiment is on the mend.
The stock rallied about 6% last week following the release of its interim results.
This week the share price touched R64.50, which brings Resilient’s share price recovery close to 14% year to date.
While the stock is still nowhere near its early 2018 highs of about R150 — and is highly unlikely to get back to those levels any time soon — analysts say increased appetite for Resilient shares has been driven by encouraging results, including a solid performance of the company’s underlying property portfolio.
Resilient’s retail portfolio has recorded 4.7% comparable sales growth for the six months to December, comfortably ahead of the 1.4% recorded for SA shopping centres as a whole in the fourth quarter (MSCI figures). Resilient owns stakes in 28 malls across SA worth R23.4bn.
It is a dominant retail player in secondary cities, townships and rural areas such as Mbombela, Polokwane, Mahikeng, Tzaneen, Secunda, Kimberley, eMalahleni, Brits, Soweto, Mamelodi, Soshanguve and Thohoyandou.
Some of its shopping centres — most notably i’langa Mall (18.8%) in Mbombela, Mahikeng Mall (19.7%) and Arbour Crossing (10.2%) on the KwaZulu-Natal south coast — are still achieving double-digit sales growth, which analysts say is impressive given depressed consumer spending.
Resilient’s vacancies, another key retail performance metric, are at a lowly 1.6% compared to the SA average of 4.4% (MSCI figures).
Keillen Ndlovu, head of listed property funds at Stanlib, says the latest results confirm that Resilient’s business is operationally sound. After its restructuring, Resilient now has one of the strongest balance sheets in the listed property sector, with a lower loan-to-value ratio (25.7%) than any of its peers, he says.
Metope Investment Managers CEO Liliane Barnard echoes the sentiment, saying that Resilient’s operational performance is impressive against the backdrop of weak economic growth. She believes the company’s sales growth of 4.7% for the six months to December is likely to be comfortably ahead of that of most other listed companies, which Barnard expects to report sales growth of less than 2% when their results for December are released over the next few weeks.
She says Resilient is also outperforming in terms of rental growth — it recorded a 1.3% average rental increase on lease renewals and a 6.3% increase on new leases for the six months to December. "This is a very strong performance when compared to the negative lease reversions reported across the industry."
Craig Smith, head of research at Anchor Stockbrokers, says recent performance figures confirm the high quality of Resilient’s SA property portfolio. "The company also has one of the most experienced and dynamic management teams in the sector who have proved their capability as good allocators of capital," he says.
Resilient was co-founded by lawyer-turned-banker Des de Beer and developers Barry Stuhler and Jeff Zidel in the early 2000s, and was one of the first developers to bring formal shopping centres to underserviced township and rural areas. Via Nepi Rockcastle, it was also the first SA property player to enter Eastern Europe.
Notwithstanding a strong operational performance, Resilient declared a 14% drop in dividend payouts for the six months to December year on year, a sharp reversal of the double-digit dividend growth that Resilient shareholders had become accustomed to up until a year ago.
However, the dip was in line with expectations and comes on the back of the company’s restructuring, which was prompted by concerns around the complicated cross-holding Resilient had in Fortress Reit. Questions were also raised about the way the company accounted for interest earned on loans advanced to BEE entity the Siyakha Trusts.
As a result, management last year unbundled its entire stake in Fortress by distributing these shares to Resilient shareholders. So Fortress no longer contributes to Resilient’s distributable earnings. The bulk of its listed portfolio now features a stake (R8.47bn) in Nepi Rockcastle. It has a small (R810.68m) exposure to rand hedge play Lighthouse Capital, formerly Greenbay Properties.
Resilient has also changed the way it accounts for interest earned on loans advanced to the Siyakha Trusts, which further dented this year’s dividend payouts. Though dividend growth will take another knock for the full year to June (forecast at between -3% and -6% year on year), the company is expected to return to positive dividend growth from the 2020 financial year.
However, analysts say the outcome of the FSCA’s investigation of allegations of irregularities levelled against Resilient and its associated companies (Fortress, Nepi and Lighthouse) last year is still a key consideration for investors.
Many are unlikely to increase their allocations to Resilient until the company has been cleared of any wrongdoing.
"We will retain a neutral position in Resilient until the FSCA probe has been concluded," says Ndlovu of Stanlib, the largest institutional investor in the JSE’s property sector.
Investec Asset Management portfolio manager Peter Clark agrees: "The yet-to-be completed investigation by the FSCA remains a clear risk. The final rounds of Resilient’s restructuring and the resetting of its strategy also still need to be accounted for."
Edcon’s financial situation is another worry. The struggling clothing retailer has asked its SA landlords to reduce the rent for its 1,350 Edgars, Jet, JetMart, and CNA stores by 41% for two years, which will place pressure on property companies’ distributable income.
The outcome of the proposal is still uncertain as landlords have signed nondisclosure agreements with Edcon. The retailer contributes 6.4% (around R5.5m a month) to Resilient’s total contractual rental income. But the general view is that Resilient is well-priced at current levels from a valuation point of view. The stock is trading roughly in line with its disclosed NAV and offers a dividend yield of 9.3%, similar to the sector average.
The company’s low level of gearing means it is also well-placed to grow its assets if and when good buying opportunities arise.
Barnard says: "Resilient is a sound business, but it is subject to the economic environment. We expect the company to outperform its peers over the longer term. Once the FSCA has released its report, and assuming no damming outcome, we see no reason why this share cannot regain an above-market rating and in time claw back a good part of its lost value. Until then, investors should bear in mind the additional risk the incomplete FSCA investigation brings to the business."