Equites Property Fund
Why is this global property fund so different from that of its peers, whose share prices had already been decimated prior to the virus-induced downturn in the economy?
The price declines of Equites’ competitors were subsequently compounded by the lockdown, with work from home and social distancing having a severe impact on the retail trade, as well as office rentals. (Retail malls and offices have been in oversupply for the past few years).
Equites is focused entirely on property ownership of logistics operations. The benefit of this is burgeoning global growth in e-commerce (and the associated delivery of products), a theme that is likely to be long term.
So the brick and mortar shopping model seems to continue to be less relevant in today’s social and economic environment, as reflected in companies such as Amazon, which has its own product profile, as well as those of independent retailers. Deliveries can be made door to door, in 24 or 48 hours, depending on the status of the client. Walmart, one of the largest global retailers, has made substantial progress in the US for prompt delivery.
So, lifestyle changes have changed the way people are shopping, and the bricks and mortar model is unlikely to see any major uplift soon.
The recently announced deal by Equites with the Shoprite group is a game changer, with leases for a 20 year period on two distribution centres, one in Cape Town and the other in Centurion.
This is a R4.1bn joint venture, with Equities ownership worth R2bn.
The leases in addition have regular annual escalations as well as an option for further ten year extensions.
Equities results for the year ended February 2020 recently released, was a positive surprise, with an increase in distribution of 9.4% from 138.4 cents to 151.3 cents. This compares favourably to other REITS, many of whom, either halted distribution payments or reduced them.
The growth in headline earnings of 15.2% from 109.4 cents to 125.9 cents was also a surprise to the market.
Loan to value, one of the most important financial metrics of 26.1%, vs 26.9%, was due to a successful capital raise early in March 2020, and reflects a sound financial profile are regards risk management.
Liquidity reflects cash and available facilities of R1.5bn an increase of R600 million, compared to the previous financial year, with a NAV of R17.55 (a discount to the current market price of R16.85).
SA rental collections since February 2020 were 92.8% of rental due, whilst its UK operations reflected tenant retention of 100%.
E-Commerce in the UK, is a strong growth area, with major multinational tenants, and is way ahead of its SA peers. Equities portfolio is worth R14.9bn, with the UK operations contributing 25.5% to group revenue.
The group weighted average lease expiry of 10.2 years, is a positive aspect, with a Blue chip tenant profile, in a specialised logistics model.
The company’s conservative managements has erred on the side of caution, saying it cannot make any forecasts around dividend payments for its 2021 financial year. The company has a good track record, with dividend increases of around 9% since listing in 2014, and could be bought into market weakness.