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US props up Emira distributions

Had Emira not invested in the US, its half-year distributions would have showed barely any growth.
Emira's CEO, Geoff Jennett, at the company's Knightsbridge HQ. Picture: Author

Emira Property Fund’s offshore investment drive into US retail property is delivering dividends for the group, which posted a 3.1% increase in distributions on Wednesday for its half-year ending 31 December 2018.

The latest dividend growth may seem pedestrian, but had the mid-cap South African Real Estate Investment Trust (Reit) not invested in the US, its distributions would have showed barely any growth for the period.

Commenting on the group’s performance, Emira CEO Geoff Jennett told Moneyweb that it was a “good set of results” in the context of the tough local economic environment. He says Emira’s US expansion, which now is well progressed, helped to counter the effects of challenging local conditions.

“Our US investments contributed most of the growth during the period of around 2.8% to distributions. If we did not expand to the US, our South African growth would have come in at around 0.3%. We believe our offshore foray is paying dividends and it is our strategy to make further investments into this market, together with our expansion into the residential sector in SA,” explains Jennett.

Emira is the only South African Reit currently invested in the US. It now owns six “power retail centres” in the US jointly with its Dallas-based co-investment partners, the Rainier Group. Emira purchased an equity stake valued at US$R6.1 million in the 308 209ft2 Truman’s Marketplace shopping centre in the mid-western state of Missouri at an expected equity yield of 11.1%.

Jennett says the six retail centres that Emira has invested in thus far in the US, cover more than 1.8 million square feet of retail space. Emira’s total equity investment in these centres is valued at US$50.5 million or more than R700 million in terms of the current exchange rate. Emira also has a long-time stake in Growthpoint Properties Australia (GOZ), valued at some R918 million. But, Emira’s US investments will overtake GOZ in 2020 in terms of having the largest offshore investment market.

“We plan to more than double our investments in the US by 2020, with several more acquisitions in the pipeline in states such as Texas, Alabama, Oklahoma, Virginia and Florida. Emira’s current exposure to the US sits at around 5% and we plan to increase this to around 11% by 2020,” he adds.

Besides its offshore diversification, Emira expanded further into SA’s residential sector during the half-year reporting period through the acquisition of a 34.9% stake in Alt-X listed Transcend Residential Property Fund. The deal was valued at R300 million, however Emira has also provided mezzanine funding to Transcend to the tune of R143 million.

“Transcend is an exciting prospect for us in the residential space, with a portfolio of 21 residential properties making up over 4 600 units that are managed by IHS,” says Jennett.

“It extends our foray into residential following our investment into the conversion of the old Sasol offices in Rosebank into middle-income residential apartments to let. The redevelopment, which is a joint venture with the Feenstra Group, will have 282 units and be valued at R207 million upon completion in May,” he adds.

Emira’s diversification drive into the US market and through its new residential investments in SA comes in the wake of a much-needed office overhaul, which has seen it slash its poor performing office portfolio from 73 properties in 2011 to 44 last year. Most of the disposals were B-grade properties.

Jennett says Emira’s R1.8 billion BEE deal to sell a portfolio of 25 office properties to Inani Prop Holdings in October last year, will see Emira’s office portfolio stand at just 20 properties by its full-year ending in June. The first 11 assets as part of the deal only transferred in January, just before the end of the half-year reporting period. After all the transfers take place, Emira will only have A-grade and P-grade offices in its directly held portfolio.

At the end of 2018 Emira had a diversified portfolio of 104 directly held South African properties, valued at R12.7 billion. However, this included the 25 office properties sold to Inani, which were yet to transfer.

During the period, Emira also managed to bring down overall portfolio vacancies from 4.5% to 3.7%, however, its gearing breached the 40% mark. Jennett says once all the properties in the Inani deal have transferred, Emira’s loan to value ratio will come down to around 37% well before its full-year end in June.

Stanlib analyst and portfolio manager, Ahmed Motara, says Emira’s latest results are in line with its guidance and highlighted the good work management has done to dispose of poor performing office sector properties.

“It is also important to note that without its offshore dynamic, Emira would have shown very little growth in distributions from its local portfolio. This reflects the tough economic environment in SA currently,” he adds.

On Emira’s choice to go into the tough US property market, Motara says that sentiment around US retail is still being negatively affected by perceptions on the growth of e-commerce.

“Many are watching Emira’s expansion in the US with interest. However, it is still early days and without seeing the physical retail assets, it is difficult to offer real insight into the value to be had and the longer term investment case,” he concludes.

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