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European logistics boost Investec Property Fund as SA portfolio takes R900m devaluation hit

Counter pays out 95% of dividends and ‘significantly enhances’ balance sheet.
Image: Supplied

Despite an almost R900 million write-down of its South African portfolio and distributable income falling by a third, mid-cap real estate investment trust (Reit) Investec Property Fund (IPF) on Wednesday posted a better set of full-year results than many of its JSE-listed peers.

The performance comes on the back of a strong showing in its pan-European logistics portfolio, which was more resilient in the face of Covid-19 compared to its local properties.

IPF effectively paid out 95% of its dividends for the year ending March 31, 2021, significantly reduced its loan-to-value (LTV) ratio below the psychological 40% level and became the first local Reit to issue a sustainability-linked bond.

Its dividend payout and comparatively low LTV comes as many other listed property counters have been forced to reduce dividend payouts and withhold interim dividends, in addition to struggling with gearing levels well over the 40% mark.

Read: Dipula defies market with 100% interim dividend while Redefine defers decision

The Covid-19 economic crunch, which has hit earnings and consequently seen devaluations in property portfolios, has pushed many property funds to hold back some dividends and divert the funds towards boosting balance sheets and liquidity levels. Some funds have even not paid out dividends for last year.

IPF on Wednesday declared a final dividend of 47.71 cents per share (cps), taking its full-year dividend to 92.23 cps, reflecting a 95% payout ratio.

It trumpeted the fact that it “continued payment of dividends through the pandemic” in its results media statement.

“Despite significant volatility and uncertainty over the last 12 months, the fund is well-positioned for growth going forward,” said IPF, highlighting its successful degearing during the year which saw it dispose of R5.8 billion worth of property assets in the UK, Australia and Europe.

This saw its LTV drop to 38.3%.

IPF noted that while SA was “heavily impacted by Covid-19, with like-for-like net operating income down 21.2%”, its pan-European logistics portfolio “continued to benefit from structural tailwinds in Europe, [with] distributable earnings up 9.2%”.

The fund gave some R62 million in rental relief to tenants during lockdowns in the financial year. It flagged negative rental reversions, bad debts, business failures and increasing vacancy and void periods as contributing factors to the poorer SA portfolio performance.

This saw its local portfolio being devalued by 5% or R899 million.

Full year distributable earnings came in at 97.08 cents per share – a 33.8% plunge compared to the prior year, which was virtually not impacted by Covid-19. 

Commenting on IPF’s performance, joint CEO Andrew Wooler said: “The numbers reflect a divergent set of results, with the South African portfolio weathering a greater Covid impact. Europe, however, saw further tailwinds with logistics demand and structural changes accelerating through the pandemic, underpinning the fund’s stability through the downturn.”

He added that despite unprecedented levels of global uncertainty and volatile operating environments, the fund made significant progress in delivering on its stated strategy.

“This included the successful completion of the degearing flightpath following the conclusion of the pan-European light industrial platform [Peli] debt refinance in H2 and exiting of our minority positions in Australia [Investec Properties Australia/IAP], UK and Peli. This resulted in further strengthening of the balance sheet, which together with our simplified portfolio, contributed to a resilient performance from the fund,” Wooler explained.

IPF now has 44% of its portfolio offshore in Europe, and 56% invested in South Africa.

In terms of outlook, the fund noted that it is expected to take time for the property sector’s performance and growth to return to pre-Covid levels.

“Risks to the fund persist, particularly in South Africa where the short-term economic outlook remains muted, and the low growth environment is likely to persist for the near term,” it said.

Stanlib listed property analyst Ahmed Motara believes the streamlining of the IPF business (with the exiting of Ingenuity, the UK fund, IAP and the Peli portfolio) has left the fund with “a much more focused portfolio” across the geographies of South Africa and Europe.

“Many of these asset disposals assisted in driving a near 10% LTV reduction to the current 38%. We consider this highly positive, with IPF close to reaching its 30-35% target LTV range,” he tells Moneyweb.

“As a business, the impairment on its South African office portfolio was the largest negative valuation highlight, however, the defensiveness of the European logistics portfolio helped to offset a local performance impacted materially by Covid-19,” he adds.

“While a return to pre-Covid dynamics will take years, the ability of IPF to continue paying dividends and the maintenance of a strong balance sheet and defensive portfolio speaks to the fact that it remains an attractive stock on a multi-year investment timeframe,” says Motara.

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The devaluation on the SA portfolio is probably higher. All the listed property funds are overstating their property portfolio values.

If one rewards the wrong measures one should expect the wrong outcomes

LTV. The one is a cold hard fact, the other is a figment of the imagination of a managerial spreadsheet. Even worse, that spreadsheet also determines management bonuses.

Do a MonteCarlo on the typical valuation spreadsheet and see what pops out if you go a bit less rosy on vacancy, expenses, cap rate. One can probably have a convincing argument with an auditor on the same building with a 60% range in valuation outcomes.

Market value? That 30,000 sqm PWC building in Sunninghill sold for less than R3000 / square meter. Basically what vacant serviced land costs.

It does look like Investec runs this more conservative than most REIT.

The point is what is ‘value’ of ANYTHING tight now?? They pull Cap Rates out of their behinds.

This fixation with LTV ratios is misleading given that they’re based on theoretical capitalisation rates that typically over state the value of the portfolio. These property journalists need to pay more attention to interest cover ratios, current dividend yields and the trend of a property companies vacancy rates and rental increase/ decrease on lease renewals. Now that would be useful property journalism.

End of comments.

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