SIM Property comment - Jun 12 - Fund Manager Comment12 Sep 2012
SIM Property Fund Quarterly Commentary
SA Listed property continued to outperform the JSE All Share Index during the second quarter of 2012, returning 10.3%% versus an almost flat All Share Index (1%). Year to date (YTD), listed property has returned 19.2%, outperforming the general market by 12%. Stocks that performed particularly well during the quarter were Growthpoint (+15%), Hospitality A (+11%) and Resilient (+11%). Poor performers included Sycom (-3%) and Hospitality B (-15%). There was a great deal of corporate activity during the quarter. Vukile, Hospitality, Arrowhead, Rebosis all raised additional capital to fund acquisitions. Furthermore, there was an outright new property listing (Ascension Properties Limited) and a failed new listing (Herman's and Roman's Property Limited). Given the composition of the sector with respect to size (few large funds and many small- to mid-sized funds), consolidation is always going to be a theme. During the quarter, Redefine expressed an interest in Fountainhead, while Capital expressed interest in SA Corporate.
What SIM did?
Gerhard Cruywagen and Asheen Rabilal took over responsibility for managing the SIM Property Fund from March 31, 2012. The portfolio has been realigned to reflect their revised thinking and portfolio construction process and thus made material changes to the composition of the Fund's portfolio during the second quarter. The major changes are outlined below -
- We reduced our holdings in Acucap, Fountainhead, Hyprop, Sycom and Capital Shopping Centres.
- We increased our holdings materially in Capital, Vukile, the 'A' units of certain funds, and we also added to our holdings in Emira, SA Corporate and Rebosis.
- We participated in the Ascension new listing ('A' units only), placing about 2% of the Fund in these property shares. The forward initial yield of 10% is very attractive, combined with a guaranteed 5% a year growth in distributions for the first five years. Our participation also earned the Fund a 2% pre-commitment fee.
- We did not participate in the Herman's and Roman's listing because it was far less favourably priced, and its listing subsequently failed to get off the ground.
- We increased our exposures to Rebosis and Hospitality A when we participated in their capital raising.
Reasons for re-positioning the SIM Property Fund
The property portfolio had significant positions and biases towards the retail property sector. While we continue to believe that this is the highest quality sector, the valuations of funds with such exposure (ACP, FPT, HYP, SYC) were already being rewarded with a premium rating (low dividend yield) to the rest of the sector. We could not justify retaining such large positions in the Fund, given limited remaining upside from an improving rating. In contrast, our purchases for the quarter were trading on very depressed ratings compared to the sector average, and hence even more so relative to the holdings that we sold. In our view, owning these counters offers - 1) Clearly higher returns from their initial income yield. 2) Greater probability of a positive return from an improved dividend yield rating. The missing component is distribution growth, over which we have less certainty. However, counters tend to trade at depressed ratings because of short term disappointments or depressions in earnings/distributions. With respect to property, this could be due to high current vacancies, for example. This is certainly the case in the office sector. Emira is a prime example of this and is now one of our larger holdings. Based on our mean reversion beliefs, we feel that over the medium to longer term these counters also have greater upside potential distribution growth simply from improvements in operational fundamentals, such as vacancies. Sometimes the expected reversions may take a long time to materialise; on other occasions the benefits could be earned more quickly, increasing the need to position ourselves early in such counters. An example of this in the second quarter was Vukile. We increased our exposure from 0% to 4.6% of the Fund on the basis of its then 9% forward yield versus the sector yield of 7.8%. Since then, we have seen Vukile rapidly rerate to a 7.8% yield, while the sector rerated to 7.6%, implying significant outperformance by Vukile in a short space of time. On other occasions, things may get worse before they get better, which we would then use as an opportunity to further increase our holdings. During the quarter we did so in Emira and SA Corporate. We also increased exposure to 'A' units of certain funds because we believe this adds a stable element to portfolio returns, given their current yields trading in excess of the sector average, and greater certainty of inflation-like distribution growth. This is especially attractive in an environment where distribution growth is likely to face headwinds from rising costs in excess of rental growth, and also where interest rates have likely bottomed and are more likely to rise rather than fall from here. We also aim to increase the Fund's exposure to property funds with good BEE credentials. For now these include Rebosis and Ascension. We believe such funds are well placed to win lower risk government leases, which are of longer duration, there's greater certainty of above-CPI rental escalations and low vacancy risk.
Outlook
With the strong performance of the sector this year, the listed property market is trading on a forward yield of 7.6%, placing it on the slightly expensive side. To expect continued strong sector level performance from such elevated levels may be optimistic. Operationally, vacancies are likely to remain high in the short term, particularly in the more cyclical offices sector. Medium to longer term, rising costs, particularly electricity and rates that are growing in excess of rental growth, are likely to dampen prospects for distribution growth. However, we believe there is value in certain counters that trade at significant discounts to the sector average.
SIM Property comment - Mar 12 - Fund Manager Comment14 May 2012
Market review
SA listed property continued to outperform both bonds and shares. Holdings in the fund which performed well during the quarter are Resilient (+15%), Growthpoint (+11%) and Hyprop (+11%), while Hospitality B (-21%), Hospitality A (-8%) and SA Corporate (-2%) underperformed. Results reported in the end-December reporting season generally met expectations. One feature of the reporting season was that costs continue to rise faster than income. Outlook statements remain cautious, and prospects for economic growth are uncertain. Corporate activity in the sector remains high. Several small funds were listed during 2011, and Redefine recently indicated that it intends bidding for Fountainhead. If successful, this bid will continue the theme of fund consolidation.
What SIM did?
While the underlying property cycle remains moderately weak, we are attracted to the resilience of retail property. We invested further in Hyprop and Rebosis, which is a mixed fund with a predominance of retail exposure. We also re-invested the Growthpoint distribution, and added to Capital, which has an office and industrial focus. We reduced exposure to SA Corporate ahead of results, which disappointed the market.
Performance and reason
We hold funds with significant, high quality retail holdings, such as Hyprop, Acucap, Sycom and Fountainhead, as well as Capshop, which is the largest owner of major UK shopping centres. At the same time, we are underweight in the more cyclical office and industrial sectors. This positioning has hurt recent relative performance, but we expect retail property to remain relatively resilient in the current cyclical downturn, as it has been in the past. We are also overweight hotels, which is the most cyclical property sector of all. The sector has been oversupplied since SA hosted the Soccer World Cup, and only now has occupancy leveled off, albeit at lower levels, and started to show signs of improvement. Hospitality B units, to which we have small exposure, has borne the brunt of the underperformance of this sector, but the A units have also been affected. The fund is planning a rights issue to reduce debt. Relative to equities, the property business model is asset-rich, high-yielding and transparent, being based on contractual leases. This model serves listed property well in times of uncertainty over economic growth.
Outlook
We forecast distribution growth of 6% for SA listed property for the next 12 month period, and the forward yield is 7.7%. Escalations of 6-9% are being achieved on renewals, and other than for offices, expiring rents are not too far from market rents than for offices, expiring rents are not too far from market rents due to rapid increases in the latter during the previous up cycle. As noted, costs are increasing faster than income: IPD figures for 2011 indicated a 17% increase in costs. In particular, costs of electricity and rates, which are administered, stand out as increasing particularly rapidly. To the extent that these are passed on to tenants, they increase the total cost of occupancy, and are likely to be a drag on future rental increases. Vacancy rates have increased, especially in office space, but seem to be manageable. Most management teams expect office vacancies to level off. The challenge for us will be to further upweight the more cyclical office and industrial sectors in preparation for the next direct property upswing. Gerhard Cruywagen and Asheen Rabilal will take over responsibility for managing your fund.
SIM Property comment - Dec 11 - Fund Manager Comment22 Feb 2012
Market review
SA listed property continued to outperform both bonds and shares over 2011. Yields on SA listed property and bonds managed to remain relatively stable in the face of concerns over global growth and European sovereign debt in the aftermath of the credit crisis and despite considerable rand weakness. Listed property yields were more stable than bond yields during the second half of the year. Bond yields initially fell in line with their foreign counterparts, but then rose swiftly as the rand weakened in September. The best performing holdings in the fund during the year were the retail-dominated funds, Sycom (+24%), SA Corporate (+20%) and Acucap (+17%), while Hospitality B (-48%), Emira (-6%) and Hyprop (+1%) underperformed. Results reported during the end-September reporting season generally met expectations. A feature of the reporting season was that costs continue to rise faster than income. Outlook statements are more cautious than before, as expectations for economic growth are being revised downwards.
What SIM did
While the underlying property cycle remains moderately weak, we are attracted to the resilience of retail property. We took advantage of a short-term oversupply of Hyprop units in the aftermath of an issue to buy the Atterbury portfolio of regional shopping centres to add to our Hyprop holding, and also bought more units in recently-listed Rebosis, which is a mixed fund with a retail and office focus. We added to holdings in Redefine and Emira, where we believe the refilling of high office vacancies offers a longer term value opportunity. Redefine unbundled a portfolio of secondary properties to unitholders, which was subsequently relisted and we hold as Arrowhead A and B units.
Performance and reason
We hold funds with significant quality retail holdings, such as Hyprop, Acucap, Sycom and Fountainhead, as well as Capshop, which is the largest owner of major UK shopping centres. At the same time, we are underweight in the more cyclical office and industrial sectors. This positioning has cost the Fund some recent relative performance, but we expect retail property to remain relatively resilient in the current cyclical downturn, as in the past. We are also overweight in hotels, which is the most cyclical property sector of all. The sector has been oversupplied since SA hosted the Soccer World Cup, and only now is occupancy beginning to level off, albeit at lower levels. Hospitality B units, to which we have small exposure, has borne the brunt of the underperformance of this sector. Relative to equities, the property business model is transparent, based on contractual leases, asset rich and high yielding. This model serves listed property well in times of uncertainty over economic growth.
Outlook
On a clean-price basis, we forecast distribution growth of 6% for SA listed property for the next 12 month period. Escalations of 6% to 9% are being achieved on renewals, and expiring rents are 6% to 9% are being achieved on renewals, and expiring rents are not too far from market rents due to rapid increases in the latter during the previous upcycle. Our forecast of distribution growth at the beginning of the year was 8%. The main reason for reducing forecasts is prudence over cost increases. In particular, costs of electricity and rates, which are administered, stand out as increasing particularly rapidly. To the extent that these are passed on to tenants, they increase the total cost of occupancy, and are likely to be a drag on future rental increases. Vacancy rates have increased, especially in office space, but seem to be manageable. Most management teams expect office vacancies to level off. The challenge for us will be to further upweight the more cyclical office and industrial sectors in preparation for the next direct property upswing. Currently the SA sector yield 12 months out is 8%.