Is Equites Property Fund still worth paying a premium for?
Equites might be more expensive than most property companies out there, but its prospects are far brighter
Given the sizeable discounts to NAV that many property stocks are offering, is it still worth paying a premium for market darling Equites Property Fund?
It’s an apposite question to ask, considering the 30%-plus dip in share prices of many property stocks over the past 12 months. Almost no-one has been spared, including Hyprop (down 34%), Accelerate (down 38%), Fortress B (down 31%) and Rebosis (down 85%).
But Equites, as the JSE’s only property company to give you pure exposure to logistics, has still been a regular on fund managers’ stock pick lists. And despite the fact that its share price has been somewhat volatile in the past year (down nearly 2%), it is still up 50% over a three-year period. As a result, Equites is now trading 20% above its NAV.
Equites’ forward dividend yield is 7%, one of the lowest among the sector’s 50-odd stocks.
Analysts admit that Equites may look expensive. But the consensus is that this premium is justified, given that it continues to deliver an above-market earnings performance.
Management, under CEO Andrea Taverna-Turisan, COO Riaan Gous and CFO Bram Goossens, earlier this month declared dividend growth of 11.8% and distributable earnings growth of 37.2% for the year to February.
"There aren’t many listed property companies delivering 12% distribution growth in this tough market,’’ says Nesi Chetty, head of property at Momentum Investments.
Most other real estate stocks that have released results in recent months have seen dividend payouts drop, or slow to low single digits as higher vacancies and lower rentals start to eat into profits.
Chetty says Equites boasts an uninterrupted double-digit dividend growth track record since listing on the JSE in mid-2014.
"So despite the company trading at a seemingly demanding forward yield of 7%, investors are getting stronger dividend growth from Equites than other property counters," he says.
Still, Taverna-Turisan’s company expects that dividends will slow somewhat to between 8% and 10% in the 2020 financial year.
Chetty says that’s still comfortably ahead of the rest of the sector. "Our view is that Equites still offers value and is a key addition for investors looking to diversify, not just into property but into a specialised sector [logistics] that is bucking the slower growth trend seen in the retail and office markets," he says.
The company owns 49 warehouse and distribution centres across SA and nine properties in the UK. The portfolio has grown from an initial R1bn at listing to R12bn, which Chetty thinks provides management with the scale to cash in on the best acquisition and development opportunities in the SA logistics market.
Equites’ exposure to the UK, which has increased to 32.7% of the portfolio, also provides a hard currency buffer against potential weakness in SA. Chetty says demand for warehouses and distribution centres in the UK, which is being fuelled by e-commerce, remains strong, despite angst over Brexit.
Keillen Ndlovu, head of listed property funds at Stanlib, has an equally bullish view on Equites. He says the stock remains a good long-term buy-and-hold. He refers to the company’s low debt level equal to 26.9% of its equity, which points to a strong balance sheet and a well-managed debt and risk policy.
Ndlovu says that as an asset class, logistics has proved to be more resilient than the office and retail sectors. "Logistics is currently the SA property sector that offers the best rental growth prospects and has the lowest vacancies," he says.
Allan Gray, which has traditionally held an underweight position in listed property, places Equites among just a handful of property companies that ticks its boxes.
Portfolio manager Mark Dunley-Owen says Allan Gray has recently begun to selectively invest in listed property companies. Its bias is towards companies "run by management teams that are aligned with shareholders, use appropriate financial gearing, focus on cash flow rather than accounting earnings and prioritise long-term value over short-term metrics".
Despite Equites trading at a premium to NAV and its relatively low dividend yield, Dunley-Owen likes the fact that its gearing is low, its accounting is transparent and management has a substantial shareholding.
Speaking at the Equites results presentation, Gous said that despite tough business conditions driven by weak GDP, demand for modern logistics properties has been supported by the change in SA’s retail landscape.
This has pushed retailers to focus increasingly on optimising supply chain efficiencies, he said. "Retailers have also started identifying the importance of e-commerce in their operations and are gearing up for future demand in this space," said Gous.
To prepare for this, Equites has bought large tracts of land in key logistics nodes, specifically in Gauteng. "We are well-placed to take advantage of pent-up demand," he said.
He said the portfolio’s current low vacancy rate of only 0.9% and the 7% rental growth it is getting on lease renewals in the year to February underscore just how resilient the logistics sector is — despite SA’s bleak economic climate.
Gous stressed that logistics tenants are quite particular about their individual requirements, which is why it’s important to build the right product from scratch. "Tenants will enter into a 10-to 12-year lease only if we offer them a bespoke product that suits their specific needs."
But there’s certainly growth potential. Gous pointed to latest projections of online sales, estimated to reach R62bn in SA by 2020, a 36% increase on 2018 sales figures (see graph).
He said that was expected to create additional demand for 130,000m² of warehouse space in SA in the next 18 months. "E-commerce will have a major impact on demand for our products in the next five to 10 years."