Resilient: back on track
The mall owner has cleaned up its balance sheet, but winning back its darling status might be harder
Resilient Reit shareholders, who have taken a colossal knock on both capital and income growth, will no doubt welcome the prospect of inflation-linked dividend increases next year. However, analysts say investors shouldn’t expect a meaningful recovery in the company’s share price anytime soon.
Resilient’s share price is down 60% since early 2018 following accusations of insider trading and share price manipulation.
It then became the subject of an investigation by the Financial Sector Conduct Authority (FSCA). The company was cleared on insider trading claims but the FSCA still needs to rule on market manipulation in Resilient shares and possible false reports relating to the company.
Market criticism also prompted management to unbundle its cross-holding in Fortress Reit and restructure its BEE scheme, the Siyakha Trust, which slashed its previously fat dividend payouts.
That’s in stark contrast to the double-digit dividend growth to which Resilient shareholders had become accustomed.
Resilient MD Des de Beer is now forecasting growth of 5% for the year to June 2020, which would have been closer to 7% had it not been for the rental concessions given to Edcon.
Granted, 5% is hardly spectacular, but it is comfortably ahead of the average 2% that analysts expect from the sector as a whole.
And, based on a solid performance from its R23.3bn portfolio of 28 local shopping centres, it’s possible the company will continue its above-market dividend growth track record in 2021.
For the 12 months to end-June, sales growth in Resilient’s malls averaged 5%, rental renewals came in at 2.2%, and vacancies were kept in check at a just 1.8%. Some centres are still achieving double-digit sales growth, such as i’langa Mall (15.8%) in Mbombela, The Crossing in Mokopane (14.6%) and Mahikeng Mall (13.1%) in North West. That’s comfortably ahead of other listed mall owners, most of which have seen sales growth slow to the low single digits.
De Beer, a banker-turned-developer, was one of the early movers into underserviced townships and rural areas in the early 2000s. He ascribes the outperformance of Resilient’s portfolio to its exposure to mining towns such as Burgersfort, Kathu and Mahikeng where rising commodity prices have led to pay hikes and greater retail spending. "Every time the iron ore price spikes and Kumba pays a bonus to its employees, retail sales do well."
De Beer notes a similar pattern in malls in areas with high numbers of government employees and social grant recipients. The vacancy rate at the 75,000m² Mams Mall in Mamelodi, Tshwane, for example, was 10.9% when the mall opened in November 2018 but has already dropped to 4.5%. "The residential expansion in the Mamelodi area is relentless, so it’s a catchment area with plenty of growth potential," he says.
But looking ahead, De Beer sees little opportunity to build more malls in SA. "The concern is that we are running out of retail tenants. Overseas retailers are exiting and no new brands are taking their place."
Unsurprisingly, he is keen to increase the company’s offshore exposure, which sits at 32.5% of assets. "We will be spending a lot of time looking for new opportunities offshore."
That includes the UK, which is seemingly cheap, he says.
The key question is whether investors, badly burnt by Resilient’s performance last year, should increase their weighting to the stock. Some have done so already, judging by the 8% rally that followed the release of the company’s results on Friday.
Nedbank Corporate and Investment Banking property analyst Ridwaan Loonat has placed a "hold" recommendation on Resilient.
He says while the company offers a low level of gearing, a defensive SA portfolio, sound operating metrics and offshore exposure via its R9.7bn stake in Nepi Rockcastle, most of its income (around 72%) is derived from SA, where consumers are under pressure. "And we don’t expect to see a rapid recovery in retail sales as consumer confidence remains low and debt levels continue to rise."
Investec Asset Management portfolio manager Peter Clark wants closure on the FSCA investigation. "Governance issues have eased for now, though no party has been held to account. We are waiting to get further clarity and finalisation around these issues," he says.
There is also a view that at current levels of about R63 Resilient still isn’t cheap, though its 2017 high of R151 is a distant memory.
Evan Robins, property portfolio manager at Old Mutual Investments, says while Resilient trades at a decent discount to NAV (around 10% earlier this week), most of its peers now trade at a far more substantial gap. "So the days of an opportunistic bargain purchase of Resilient, relative to the sector, are gone."’