2018 is turning out to be rather stormy for the listed property sector - and we’re barely three months into the year. The main reasons for the 17% decline of the SA Listed Property Index (SAPY) thus far in 2018 are twofold:
- Treasury yields in the US have risen sharply in recent months, knocking property stocks all around the world due to their sensitivity to interest rates.
- The share prices of the Resilient stable (Resilient REIT, Fortress Income Fund, NEPI Rockcastle and Greenbay) have declined by as much as 50% after allegations of share price manipulation surfaced in January.
Given that the abovementioned companies constitute roughly 35% of the property index, it is no surprise that the SAPY is down 17% for the year.
The issues with Resilient have forced investors to look deeper into the financial statements of their property holdings, and the message from the market is clear: it wants predictable income streams backed by quality, physical property. Not income streams sweetened by external and unsustainable income sources.
This brings us to Fairvest Property Holdings (Fairvest) - one of the smaller companies in the sector, but nevertheless one with a quality portfolio and a track record of outperformance. And we should mention, it’s a property-pure play with no "alternative" income sources.
A specialist in lower LSM shopping centres
Fairvest is a specialist owner of non-metropolitan shopping centres, including convenience, community and regional centres. These shopping centres serve the lower LSM market in what can be regarded as high-growth nodes situated close to key commuter networks. The portfolio currently consists of 41 properties valued at R2.08 billion.
A key strength that continues to drive Fairvest’s outperformance over its peers is its specialist focus on lower LSM community and neighbourhood shopping centres. Their portfolio differs from the likes of sector heavyweight Hyprop, which owns dominant larger shopping malls that are facing headwinds in the form of oversupply and a secular shift to online retailing. The stronger performance of community and neighbourhood centres can be seen from the chart below, which compares the trading density growth of the different types of retail properties for the third quarter of 2017.
Retail Property: Annualised trading density growth for Q3:2017
Fairvest increased its distributions to shareholders (DPS) by 9.53% for the six months to 31 December 2017 - well above inflation and in line with the roughly 10% growth achieved during the past three years.
Importantly, Fairvest hasn’t supplemented its growth rate by including non-recurring, financially engineered and once-off inclusions disguised as annuity income streams. This tendency is becoming more prevalent amongst local property companies that are struggling to grow their DPS at the same rate as enjoyed the past couple of years.
Valuation and outlook
At a price of R2.20, Fairvest trades at a 2018 DPS yield of 8.71% and in line with its Net Asset Value (NAV). Whilst the stock has rerated in recent months (it typically trades at a 10%-15% discount to NAV), I believe it will continue to outperform the SAPY and provide sound, low risk prospective returns for its shareholders. This is due to its leading position in its sub-market, strong operations and selective opportunities for small, bolt-on acquisitions.
Investors are effectively buying an instrument with an 8.7% yield that has the ability to compound at around 9% over the medium term. Fairvest’s total shareholder return during the past five years was an impressive 117% and I see it as a benchmark that should be sustained over the next five.
Wim Prinsloo, CFA
Portfolio Manager at True North Capital Management
Wim Prinsloo serves as portfolio manager at True North Capital Management. He holds an honours degree in investment management from the University of Pretoria and is a CFA charter holder.
Wim’s work at True North includes the management of the firm’s equity and property unit trusts, development of its investment processes and ensuring best-in-class service to clients. He benefits from 7 years of experience in the investment industry and is a member of the Investment Analyst Society of South Africa.