Redefine dividends remain under pressure
Investors shouldn't expect dividend payouts to return to inflation-beating growth levels any time soon
Property investors still betting on dividend payouts rising by the usual 8%-10% this year will be sorely disappointed — in recent months most real estate stocks have barely been able to achieve inflation-beating growth.
A case in point is Redefine Properties, the JSE’s second-largest SA-based real estate investment trust (Reit) after Growthpoint Properties with a market cap of R57bn, which this week declared dividend growth of a rather uninspiring 4% for the six months to February 28. Management expects similar growth for the full year to August.
Redefine’s R73bn local portfolio comprises 303 properties with 39% exposure to retail, 37% to offices and 19% to industrial buildings. It also has a small exposure to student housing as well as the hospital and hotel sector. Flagship shopping centres include Centurion Mall, East Rand Mall (50%) and Blue Route Mall in Tokai, Cape Town. Redefine’s offshore assets are valued at R19.1bn, the bulk of which are exposed to Poland through a 45% stake in fellow-listed EPP. It also has a R500m exposure to a Polish logistics portfolio, a R2bn stake in UK-focused RDI Reit and a R2.5bn exposure to Australia’s student housing market.
While Redefine’s dividend growth performance is on the lower end of management’s earlier guidance of 4%-5%, it wasn’t unexpected given the depressed state of the SA economy, a battered consumer and little, if any, new demand for office, retail and industrial space.
In fact, Kelly Ward of Metope Investment Managers notes that in the current climate, dividend (or distribution) growth of 4% is probably as good as it’s going to get. "Many of the Reits reporting results for the 2019 year are guiding towards negative growth in distribution. So while Redefine’s 4% growth is barely able to meet current inflation forecasts, it seems in this environment to be a pleasing performance," she says.
The bad news for property investors is that dividend growth is unlikely to return to inflation-beating levels any time soon. Tsitsi Hatendi-Matika, retail investment specialist at Absa Wealth & Investment Management, says investors should brace for a further deterioration in property market fundamentals over the coming months.
"We anticipate negative rental reversions, lower escalations and elevated vacancies to continue through 2019." She says Edcon’s recapitalisation, where most landlords have signed two-year rent reduction agreements with the struggling retailer, will put further pressure on an already fragile outlook for 2019, both on income and distributable earnings.
Lack of electricity and costly increases will remain a theme for the long term, which Hatendi-Matika says will further erode the profits of listed retail, office and industrial landlords.
A similar sentiment was echoed by Redefine CEO Andrew König earlier this week. Speaking at the company’s results presentation in Joburg, he said dividend growth of more than 5% is probably a thing of the past for the foreseeable future given that property companies are unlikely to have any meaningful uptick in earnings until SA’s economy starts growing again. "We need sustainable economic growth of at least 3%-3.5% a year to return to inflation-beating dividend growth."
König noted that given how diversified Redefine’s portfolio is, the company’s performance provides a good litmus test of what’s happening in the broader economy. "In the build-up to the elections most decision-makers have adopted a wait-and-see approach. No one wants to commit to a long-term lease amid ongoing political and economic uncertainty."
Redefine’s latest rental renewal rates underscore just how difficult it has become to keep tenants. While its tenant retention rate was at a relatively high 96.6% for the six months to February 28, it came at the cost of lower rentals, with lease renewals down by an average 6%.
König said while the conclusion of the elections won’t be a "silver bullet", business and consumer confidence might recover once there is more policy certainty. He said this could boost fixed investment and spending, though it will probably take a couple of years before any potential benefit from the elections outcome becomes evident.
However, it’s not all doom and gloom. Though dividend growth has slowed, income-chasers now have an opportunity to buy property stocks at 10-year-high dividend yields. A number of blue chips that were still trading at yields of below 7% about 18 months ago are currently on offer at 10%-12%.
Ward says there is no doubt that property stocks look attractive on a valuation basis. She says Redefine, which is trading at a forward yield of close to 11%, offers investors a well-diversified portfolio both from a local sectoral point of view as well as geographically, given its exposure to Poland, the UK and Australia. The investment case for Poland remains particularly sound given the country’s still-strong growth outlook compared with that of SA.
Ward notes that Poland's economic growth is expected to average 3.2% between 2019 and 2023.