Listed property: beware sky-high yields
SA’s listed property shares are trading at never-before-seen yields. But not everything is what it seems
Perennial blue-chip property stocks like Hyprop, Redefine, Vukile and EPP are trading at dividend yields of unbelievably tempting levels of between 30% and 40%.
Consider that late last year, these real estate investment trusts (Reits) were trading at yields of below 14%.
In fact, some lower-rated property stocks like Fourways Mall owner Accelerate can now be bought at a yield of 72%.
That means every R100 invested in any of these companies should return a cash dividend of between R30 and R72 over the next year, right?
In theory, perhaps.
But analysts are warning investors not to be dazzled by what may at first glance appear the buying opportunity of the century.
Given the inverse relationship between share prices and yields, the 50% crash in the SA listed property index (Sapy) year to date (-67% since January 2018) has sent yields of a number of stocks into the stratosphere.
Though no-one disputes the value created by depressed share prices, analysts say sky-high dividend yields are misleading.
That’s because most property companies are likely to skip, cut or postpone dividend payments this year due to increased cash flow concerns in the wake of the Covid-19 lockdown and what looks increasingly likely to be a prolonged economic recession.
All property sectors will therefore be impacted, but mall owners will be hardest hit by an immediate drop in cash flow given the 80% rental and operating cost discounts that large retail tenants such as Mr Price, TFG, Pepkor, Truworths and Woolworths are insisting on for April.
Moreover, retail landlords may be forced to offer many of their smaller, struggling mom-and-pop stores rental relief long after the lockdown is lifted to help keep them afloat.
Kelly Ward, investment analyst at Metope Investment Managers, warns: "As landlords prepare to face a battle with tenants over rents owing, we may see a pullback in earnings, as well as the introduction of lower payout ratios and retained income across the Reit sector."
She refers to Hyprop, Redefine, EPP, Texton and Accelerate, which have already postponed dividends in order to shore up cash reserves to strengthen balance sheets and cover overhead costs (debt and interest repayments, rates and utility bills an staff salaries).
Liberty Two Degrees, Growthpoint and Attacq, among others, have in recent weeks withdrawn their 2020 dividend payout guidance on the back of an increasingly uncertain earnings outlook.
More will no doubt follow suit. "So while the yields look attractive at face value, even after accounting for a significant reduction in earnings, dividends may not materialise," says Ward.
Though it has become increasingly difficult for analysts to make earnings and dividend growth forecasts, Nedbank CIB property analyst Ridwaan Loonat estimates that a 20% reduction in rental income across the listed sector this year could translate into a 30% drop in dividends — assuming costs remain constant.
However, he says, current market pricing is implying a 50% drop in dividends. That’s based on the Sapy’s dividend yield of about 19% (on pre-coronavirus growth estimates) compared to its long-term average of 8.5%.
In fact, Loonat says that stocks that are still paying dividends "will not be rewarded for doing so, in our opinion. Investors are now more interested in companies with low gearing and strong balance sheets."
So when will dividend payments resume? Market talk is that the JSE and the National Treasury may introduce measures to allow property stocks to withhold dividends for up to two years without the risk of losing their Reit status.
But analysts say that even if Reits start paying dividends again in year three, many companies may be forced to reduce payout ratios if vacancies and rentals come under further pressure over the next 12 to 24 months.
The bottom line is that investors who are now buying shares at historic dividend yields of, say, 30% may effectively only get 10% by the time dividends are resumed.
As to when share prices could bounce back, analysts agree that ongoing market volatility makes it difficult to call the bottom of the market. But Loonat says if history repeats itself and international real estate indices follow the same recovery trajectory as they did after the 2008/2009 global financial crisis, there is potential for a 95% gain over a two-year period.
In Anchor Capital’s latest asset allocation report, fund manager Glen Baker puts it differently: "We estimate that many property counters are fundamentally worth 50%-100% more than their current share prices."
The question for value chasers taking a longer-term view is which property stocks to buy. Anchor Capital singles out sector heavyweights Growthpoint and Redefine. "For the more conservative investor, Growthpoint, with its lower loan-to-value [ratio] and diversified portfolio, is the most appropriate entry into the sector, and for the more risk-tolerant investor, we believe Redefine is offering significant value."
Meago Asset Managers director Anas Madhi’s preferred stocks are Investec Property Fund (IPF), Nepi Rockcastle and Equites, the JSE’s only pure logistics play.
He says IPF raised capital prior to the Covid-19 outbreak to increase the company’s diversification into logistics warehouses across Europe, widely regarded as one of the more defensive subsectors of the market given the expected growth in e-commerce.
"We also like that Nepi Rockcastle has a strong balance sheet and exposure to high-quality, dominant shopping centres in Central and Eastern Europe that should bounce back once trading in the region resumes."
Madhi says Equites looks attractively priced, and declined only 14% year to date compared to the Sapy’s decline of more than 40%.
Ward favours "high-quality businesses with robust balance sheets that can withstand short-term uncertainty and potential valuation declines". Her top picks are Resilient Reit, Nepi Rockcastle and Equites. Ward says Resilient and Nepi Rockcastle boast strong management teams and conservatively managed balance sheets, while Equites has a high-quality logistics portfolio, which is well set to weather a sustained downturn in traditional retail markets.