Fund review

STANLIB Property Income Fund outperformed its benchmark by 1.44% in the third quarter of 2019, delivering a -2.74% gross total return compared with the benchmark’s gross return of -4.18%. This quarter’s outperformance is attributable to the fund’s continued underweight position in Intu, as well as underweight positions in Redefine and Fortress B. Overweight positions in Sirius, Investec Australia and Safari also contributed to outperformance. Overweight positions in Dipula-B, Hammerson, MAS and underweight positions in Capital & Counties, SA Corporate and RDI detracted from performance. The fund has delivered a positive return of 1.66% in the year to date, outperforming the benchmark by 3.20%.
Outperformance is largely the result of an increasingly defensive approach in taking underweight positions and avoiding companies with weak property fundamentals, while concentrating on stronger asset quality companies with stronger balance sheets and better growth prospects.

Market overview

Over the past quarter, SA listed property (JSE All Property Index) delivered a total return of -4.18%, underperforming cash (STeFI Composite Index at 1.8%), underperforming SA bonds (ALBI or JSE All Bond Index at 0.78%) and outperforming SA equities (FTSE/JSE All Share index at -4.49%). The rand weakened 7% against the US dollar over the quarter, with pure offshore stocks the best performers in the All Property Index (Sirius +19%, Capital & Counties +14%, Hammerson +13% and Investec Australia +10%). Brexit uncertainty and market balance sheet concerns continued to weigh on Intu, a stock we do not hold, which fell -39% in the quarter. There was a nervous atmosphere at the beginning of the third quarter property reporting season, given a weak backdrop in the first half of 2019.

In July, UK results were released by Hammerson, Intu and CapCo. As anticipated, Hammerson’s results were reasonable compared with Intu’s, which appears to have balance sheet concerns. CapCo continues to try to unlock shareholder value through a demerger of its operations. On the SA side, Gemgrow announced a merger with Arrowhead, which has since been completed. Vukile agreed to purchase a single asset from Rebosis, having initially considered acquiring three assets. Safari received a cash offer for all its shares at R5.90/share from Community Property.

In August, it became increasingly apparent that weaker retail landlords were accepting materially lower rentals from tenants. Not all companies showed this dynamic, with Resilient showing the resilience of its well-regarded centres and asset quality in its results. Emira’s results showed a continued increase in its offshore exposure, pivoting its weighting from Australia to the US as the South African operations delivered negligible growth. Nepi-Rockcastle delivered a good set of results, showing the benefits of strong GDP growth in Poland, Romania and Central and Eastern European geographies. The Fourways Mall redevelopment, an asset of Accelerate Property Fund, officially opened in a tough retail environment. Delta and Rebosis began talks about a potential merger.

In September, Growthpoint reported a reasonable set of results, with 4.6% growth in distributable income per share driven in large part by its offshore operations. Fortress Fund reported results showing that Fortress-B could see downside risk if the operating environment continues to weaken, while the Fortress-A units continued to provide defensive income growth. In results from Accelerate Property Fund it stated it would consider retaining distributable income to reinvest in the company.

Looking ahead

The All Property Index (ALPI) offers a forward dividend yield of about 9%, which is marginally above SA‘s 10-year bond yield. We anticipate dividend growth rate of 0% to 1% over the next 12 months. In the short term, dividend growth will remain under pressure from weakening property fundamentals and anaemic SA GDP growth. We encourage investors to take a long-term view in this (cyclical) sector, as we expect normalised real distribution growth will potentially return to the sector from 2021. In the current environment, we would consider the yield dynamic of the sector as the key driver of short-term total investor returns.
The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

STANLIB Property Income fund outperformed the benchmark by 1.79% for the second quarter of 2019, delivering a 3.27% gross total return compared to the benchmark gross return of 1.48%. This quarter’s outperformance is attributable to our underweight positions in Intu, Capital and Counties, RDI REIT and over-weight positions in Fortress A and Investec Australia Property fund. Over-weight positions in Sirius, Fairvest and Rebosis and under-weight positions in Nepi Rockcastle and Delta Property Fund detracted from performance.
Current outperformance is largely a result of our defensive approach of taking under-weight positions and/or avoiding companies with weak property fundamentals and concentrating on quality companies with stronger balance sheets and better growth prospects.

Market overview

Over the past six months, SA listed property (JSE All Property Index) delivered a total return of 2.77% outperforming cash (STeFI Composite Index at 3.6%) but underperforming SA bonds, ALBI (JSE ASSA All Bond Index) at 7.6% and SA equities, ALSI (FTSE/JSE All share index equities) which delivered a 12.2% return for the quarter. Despite the rand strengthening against the US dollar over the first half of 2019, most of the pure offshore stocks contributed positively to the All Property Index (NepiRockcastle, MAS, EPP, Sirius and Investec Australia Property Fund) except for the UK focused funds.

The South African local property fundamentals continue to remain under pressure with the weak GDP growth figures of -3.2% for first quarter of 2019 creating a bleak outlook for local property sector. Management teams are reacting through the sale of non-core assets and deleveraging of constrained balance sheets. Equity capital raising doesn’t appear to be an option for most companies due to elevated forward dividend yields. During the quarter, Rebosis opted to skip payment of an interim dividend to shareholders, choosing to service its debt and Delta opted to reduce their pay-out ratio to 75% to create room for excess cash reserves. Despite this challenging environment, we continue to see specialist property operators in South Africa attracting equity capital. Equites (industrial specialist), Store-Age (self-storage specialist), Vukile (township retail specialist) have raised a combined total of R 2.0 billion during the quarter. The specialist counters also continue to trade at a premium to net asset value compared to the rest of the sector.

On the mergers and acquisitions side, SA Corporate received a number of offers following a departure of both CFO and CEO. Safari and Fairvest have announced a firm intention to merge with a swap ratio of 0.45 Safari shares for each Fairvest shares.

Corporate activity during the quarter also included, Vukile concluding an agreement with Rebosis to acquire three of its shopping centres pending a successful due diligence and EPP selling 70% of its shares in office parks in line with its strategy to focus the business towards the retail sector. Going into the second half of 2019 we expect further asset sales to be announced by companies reporting during this period.

Nepi Rockcastle has been cleared by the FSCA on all the allegations laid upon the company. The market manipulation investigation regarding Fortress and Resilient are still ongoing. Both Resilient and Fortress have been working on restructuring of their respective BEE vehicle. Resilient received the shareholder approval to dissolve BEE structure through share buy-back and Fortress has also implemented a buy-back programme to buy back its shares from its BEE trust.

Looking ahead

The All Property Index offers a forward dividend yield of about 9%, which is marginally above SA‘s 10-year bond yield. We anticipate dividend growth rate of 2% to 3%. In the short term, dividend growth could be under pressure from weakening property fundamentals and anaemic GDP growth. We encourage investors to take a longterm view in this cyclical sector.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur.

Fund review

Over 3Q18 the fund outperformed the benchmark by 1.0%. Over the past quarter, the top contributors to fund performance were the underweight positions in Growthpoint and Attacq and the overweight positions in Investec Australia and Nepi Rockcastle. Attacq continued to see negative share price performance from what was, in our view, an overvalued price. Growthpoint was driven lower by a continuing weaker SA outlook manifesting, while Investec Australia benefited from the expectation of an Australian listing in the medium term. Nepi Rockcastle continued to see and benefit from strong fundamentals in its operating regions. The top detractors to fund performance were the underweight positions in Emira and Fortress-A, with investors continuing to seek the safety of Fortress-A while seeing reduced risk in Emira, post recent shifts in its portfolio weightings.

Market overview

On a total return basis in 3Q18, listed property (-1.0%) underperformed local bonds (+0.8%) and cash (+1.7%), while outperforming local equities (-2.0%). A 15bps weakening in the SA 10-year bond yield in 3Q18 marginally impacted the sector over the quarter, but a weak outlook from Growthpoint, a sector heavyweight stock, saw it fall -9% in the quarter. Currencies saw marginal shifts as well over the quarter, with the ZAR weakening 3% versus the US$ and 2% versus the EUR over the quarter.

SA Property Index (SAPY) stocks with double-digit positive performance in 3Q18 were limited to three counters, namely EPP (+18%), Fortress-A (+15%) and Equites (+14%). These stocks reflect a preference by investors for certainty in earnings and offshore exposure, with many of the other better performing stocks in 3Q18 also reflected an offshore earnings dynamic. Stocks with a significant SA portfolio element struggled to perform well in a deteriorating SA outlook, with Growthpoint (-9%), Hyprop (-6%) and SA Corporate (-6%) reflecting this dynamic. The quarter was also characterised by weaker outlook statements from many companies with material SA exposure, such as Rebosis (-13%), Attacq (-9%), Accelerate (-11%) and Arrowhead (-6%).

We find the local economic environment remains challenging and we do not expect a material improvement in operating conditions in 2019. Risks could potentially still be to the downside, if GDP growth does not show a market improvement in the medium-term. Earnings from companies with offshore exposure and reasonable GDP growth fundamentals are likely to outstrip growth from SA companies with property portfolios that are largely SA exposed.

Looking ahead

Effective 1 October 2018, we have shifted the benchmark for the fund to the All Property Index (ALPI). Over the next 12 months, we anticipate 5-6% distribution growth for the ALPI, with the potential that weakening ZAR dynamics could imply even higher ALPI dividend growth. SA listed companies with significant offshore exposure should in aggregate continue to exhibit double-digit distribution growth in ZAR, over the next 12 months. The ALPI currently offers a forward yield of 9.1%, which is above the SA 10-year bond yield (9.0%) and represents what we believe remains an attractive entry point into property that discounts in large part the anticipated and continued income growth of the sector. Having done in-depth analysis, we expect fundamentals reflecting dividend growth and asset quality in stocks such as Resilient and Nepi Rockcastle to reassert. Over the next 12 months, we expect listed property to deliver double-digit returns and believe the current entry point is attractive.

The commentary gives the views of the portfolio manager at the time of writing. Any forecasts or commentary included in this document are not guaranteed to occur