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Emira Property Fund feels the pinch

The first of the property companies falter.

Emira Property Fund has joined its listed property peers by offering a sober outlook on SA’s worrying state of the economy, with negative implications for its dividend. 

On Monday, the mid-cap company (R7.8 billion) forecast a negative growth in its dividend per share of about 2% for the year to June 30 2017.  Dividend payouts are one of the key metrics investors typically use to judge a property company’s performance and investment case on.

Emira’s bearish dividend outlook is due to property fundamentals that are under strain – with an increase in vacancies for its office properties, negative rental reversions on expiring leases, the inability to sell its underperforming properties and ballooning funding costs.

“Economic conditions have deteriorated throughout the last six months, with the decline accelerating over recent months, and materially increasing pressure on the fund’s tenants,” it explains.

SA’s rising interest rate cycle has made funding deals more expensive, resulting in more property companies concluding deals in offshore markets – where there is low cost of debt and higher yields on properties. This cocktail of low debt cost and high yields on properties in offshore markets instantly boosts dividend payouts.  Read more here.

Emira’s sentiments have been echoed by sector heavyweight Growthpoint Properties, which pegged its full-year 2016 dividend guidance at about 6% – much lower than its 8% to 9% historic guidance. Read more here.  

Counters like Redefine Properties, Hyprop Investments and Vukile Property Fund also recently highlighted the difficulties of consistently delivering inflation-beating dividend payouts to income-chasing investors, implying that lower dividends might soon be the new normal. 

Grindrod Asset Management’s chief investment officer Ian Anderson describes Emira’s headwinds as a “perfect storm”, as “this is the first negative news out of the SA listed property sector this year and it is likely to take most of the market by surprise”.

Anderson says a slowdown in dividend growth has long been anticipated in the market, but not negative growth in dividends in 2017.   “No other listed property company in SA has guided for negative dividend growth in the short-term, with most still confident they can produce real growth in the dividend over the next 12 to 18 months,” he tells Moneyweb.

Emira’s turnaround

The company’s office properties appear to be the real pressure point. In recent years, office properties have underperformed other asset classes due to the glut of new office space across SA and faltering demand for older buildings.

Emira owns retail and industrial properties collectively worth about R13 billion and has offshore investments through its 4.9% holding of Australian Securities Exchange-listed Growthpoint Properties Australia. 

Under former CEO James Templeton, Emira has successfully turned its property portfolio over the past three years by reducing its exposure to struggling B-grade (typically older) office properties and shifted its focus to prime office and retail properties.  At one point, Emira’s office vacancies were close to 15% but have since declined to 9.3% (for the six months to December 2015).  Using proceeds from the sale of its struggling office properties, Emira improved the quality of its existing properties through refurbishments.

Turning the ship

Management, led by current CEO Geoff Jennett, believes that pressures in the office sector are not likely to re-occur to this sort of extent in the foreseeable future. “Management is very focused on filling the fund’s vacancies through the increased use of tenant incentive and marketing programmes, as well as re-evaluating all alternatives to improve the quality and let-ability of the portfolio,” the company says.

Meago Asset Managers executive director Anas Madhi says although Emira’s announcement is unexpected and surprising, management has been proactive in announcing the dividend update, as the company has not yet released its full year 2016 results.  “Management will urgently need to convince the market that they have developed a strategy to address these headwinds, as their peers continue to positively perform in a similar trading environment. Alternatively, we see Emira’s share price under strain in months to come,” says Madhi.

Its share price has not shot the lights out so far this year, as it has been down by 3.27% at the time of writing. 

Elmira Property Fund

Emira expects tough conditions to continue well into 2017, but thereafter it sees stability. It expects real dividend growth (exceeding inflation) to be in 2018. The listed property manager of Old Mutual Investment Group’s MacroSolutions boutique Evan Robins says hopefully Emira’s negative guidance rebases the company and “in a sense ‘de-risks’ the balance sheet so it can grow dividends from these new levels”.

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I believe there is a film called “there will be blood”. I also believe I commented on a posting entitled “there will be tears” about these property trusts

there’s also a film called surely Australia can’t be that miserable that you sit in from of your PC all day, comment on moneyweb articles and tell the rest of the world what a wonderful time you are having in Australia.

Most of SA’s property funds / trusts are in the same position. The long awaited is finally happening.

the REITS have outperformed and each year we are told it cannot last forever. The reason, I believe, is simple, analysts and journalists are not accountants doing maths, they look at assets and compny and price as if it was that sort of investment. You get a wrong view. Property is a long term holding, the initial vehicle served as a high yield counter to bonds and fixed income instruments. The enemy of property is interest rates rising and other securities offering similar yields.

Looked at this way, it isn’t really supposed to double each 4 years as many have done and continue to do. It also gives an indication why many of the high yield counters have a mid range valuation. That is correct, similar income can be found at lower risk, etc. If, as you suggest, this marks the end for the sector, valuations would be far lower.

Emira is the first and thus far the only REIT with a negative yield growth. I believe the company is like a wounded animal, that there is much more to it than to economic or market conditions or vacancies or high costs covering unsecured loans,- as reasons thus far given. This, in my view, has more to do with how management functioned in the change between CEO’s and how it positioned itself in the changes from 2014 when the Rand depreciated, interest rates looked likely to star to rise in RSA and not elsewhere.

At the top of the high yield REITS to have declared is SACorporate, yield up 10.6%, second is Arrowhead, yield up 9.6%. There are others, only Emira is negative and so far only Octodec’s dividend was below expectations- residential is lagging and unlike Emira, there is a reason why Octodec missed what the others managed, yields are up on 2015 across the board for all RSA based REITS. I write as an investor, it is not an opinion or hope or view. I own just 2 stocks- AWA and SAC. AWA is trading mid range and offers 10% yield with a projected forward yield of high 8% to mid 9%, last declaration was up 9.6%. SAC is trading at its previous highs and offers 8%, historical yield growth is mid 8%. These valuations are correct given the market, the type and position of the funds, etc. For the relative safety of SAC you get next to no premium when it trades at 5, for the higher risk of AWA you get roughly 25% premium when it bobs around at 8. Conditions do not favour the sector, sentiment doesn’t favour local counters. It’s in the price. You as investor choose yield at a price and concentrate much less on price than you do on yield growth and that is all about management. This Emira shock is big because a prop company functions only when it can grow the yield, it isn’t a setback, it’s enough to be fatal when it fails to do that. The hope/understanding is that so long as a company grows the yield it is performing as required and the market will reflect that by a higher valuation. That means when yield is up and share price is down it is likely because the market conditions cause it and if the company maintains yield the valuation will return along with the improving market. As it stabilises interest rates will rise to stem inflation and price yield will likely turn more negative.

Come end of the year, I hope you will not take it at all personally when the REITS again turn out to be among the best performers on the market, and instead properly study why. Do the actual maths holding between 3 to 5 years and you will see that they have quite a way to go still. The high valuations they enjoyed early 2015 was due to overvaluation of most other counters with poor P/E ratios and most important the interest rate hikes had yet to begin and other income securities offered much lower returns. A company like Redefine went from being a 8% to 7% to a 6.5% yield and in these new conditions has had to give something back, and today you get 8%. Emira will need to fall quite a bit before it looks attractive again. If management can get its act together, it could become a very good buy. It is not a competition to see who wins, not to me anyway, if it doesn’t perform well I loose money. If it falls apart as you think it now is, then I loose my income and money. Nothing nice there, it’s real life. I’m not hoping everyone piles into the sector, we used to get much better yield when the sector ws hidden and almost totally neglected and feared and so unbelievably not understood. Any accountnt with half a brain who didn’t invest in property after the 2002 lows is an accountant where the glass is half empty. What I am instead trying to say is those who headed the warning it cannot keep on beating the general market totaly missunderst and the sector, that is not the measure, the mesure is yield, it is an income stream not a capital gains. Or at least, it’s not meant to be, and now is. Almost all the money is in growth stocks offering low yield of 3% offshore listings. If, as I expect, recessionary conditions prvail in RSA, there are going to be some really good buys, it was easy to find 14% yield in 2003, I would expect quite a number will reach lows where 12% will be available from quite a selection.

It’s good sector, it has a wide range of counters and the maths should tell you that the high yield counters can beat bonds and so, if nothing else, can hold present valuations. Any appreciation in yield can convert to an appreciation in valuation giving it an added edge against bonds. You can trade, even short term. But the purpose is a long term investment very similar to bonds and fixed income. It carries higher risk and to counter that it offers growth potential. To achieve the investment yield you require you cn almost throw a dart, just hope it doesn’t hit Emira right now is all. To achieve yield and growth you choose the right mangement. Bit of homework.

It is and has been my only sector and investments since 2003 so I speak as someone who has experienced the rapid rise and what is happening now. It has still some way to go, don’t count it out. Whilst I would not advise or suggest you invest if you do not feel comfortable there, I do wonder why you haven’t, how many years have you waited for the collapse, they’ve all been wasted years, what if you are still wrong, how many more wasted years. If you purchased SAC in 2009 for 2.60 you would today be getting a 16.5% yield, how mny years if you buy it today at 5 to get tht yield, those are wasted years -[I did buy in 2009, this is real life experience asking why you don’t invest in the sector]. I invest for income and have gotten both income and growth. I would have invested and been very happy I did if the growth was half what it has been, I’d calculated just short of 8 years to double the value of the investment, not every 3-4. You’ve missed out and I believe if you really think about that, you might well ask yourself why, and why it might please you the dire predictions have started to come true for Emira, to throw out the sour grapes and do the maths, as an investment and not as a trade. The sector is very poorly understood in RSA, it forms a tiny part of total fund holdings or diversified portfolios, yet it wins year after year. It gets all this airplay because it continues to outperform and still it is a small play that gets touted as a future loser. The airplay is more repeated bumf with very little understanding of the actual sector as an income investment. The core is what the Property Unit TrustS used to be and there are PUTS like counters still there, I own Arrowhead for that. Far too many are investment companies more than asset owners, boutique assets, a bit of all sorts. PUTS was plain and simple accretive income, some are still there. They carried the sector till early 2015, now the sector is being carried by the boutique and fund of fund and offshore REITS.

I have invested with Gerald Leissner [AWA] since 2003, you find a better investment and manager from 2003 to 2016 that offers high yield. I am not crowing on my luck/success. I’m hoping you look at the sector again. Yes, it grew too fast, no one denies that, we didn’t expect it and do not think the collapse is any nearer if the slows,- I hope. Be well.

End of comments.

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