SA Corporate Real Estate Fund, one of the oldest JSE-listed property counters, is continuing its exit from the office sector of the market, choosing instead to double-down on better performing convenience retail and industrial properties.
Speaking during the group’s annual results presentation for the year ended December 31, 2020 on Monday, CEO Rory Mackey reiterated the fund’s plan to “sell-out” from the office property sector altogether.
“We are on track to exit the office sector, with only around 3% of our portfolio now made up of commercial offices. Last year we sold our last three remaining office properties in KwaZulu-Natal, as well as the 21 Fricker Road office property in Illovo Johannesburg,” he said.
Mackey expressed concern about the office property market, which is the worst performing property sector currently with vacancies countrywide in the double digits.
He expects more pain for the commercial office market in the face of the Covid-19 economic fallout.
SA Corporate’s own office vacancies for 2020 peaked at a record 16.9% – higher than the national average of around 13.3%.
The group has “contracted and executed” disposals totalling R1.6 billion since the beginning of January 2020 (to March 25, 2021).
Just below R480 million of these disposals has transferred during this time, however, Mackey is confident most of the balance of the transfers will be finalised in the current 2021 financial year.
This will contribute to the group lowering its loan-to-value (LTV) ratio, which stood at 38.6% at its 2020 year-end, two percentage points weaker than in 2019. However, including derivatives, the fund’s LTV came in at 41.2%, compared with 37% in 2019.
On the retail property side, which makes up 43.7% of SA Corporate’s R17 billion portfolio, the group’s vacancies were up marginally in 2020, to 4.6% (2019: 4.4%).
Surprisingly, trading densities at its shopping centres were up 3.2% overall for 2020. The fact that most of its malls are convenience or community centres will have contributed to this, as these malls are trading better than the larger regional and super-regional shopping centres due to Covid-19.
Nevertheless, the group took a major knock financially on the retail side too, with like-for-like Net Property Income (NPI) plunging 18.8% in its retail portfolio for the year. This was on the back of over R80 million in Covid-19 rental relief for tenants, largely its retail property tenants.
Like-for-like NPI declined 15.9% in SA Corporate’s commercial office portfolio, while industrial property (which makes up 24.6% of its portfolio) saw a decline of 7.9%.
The group’s investment in inner-city residential property-focused Afhco took the worst NPI hit, which plunged 24.8% on a like-for-like basis for the year.
This came in the wake of residential vacancies at Afhco almost doubling to 15.4% due to Covid-19 pressure on inner city residential accommodation.
Afhco made up 28.8% of SA Corporate’s overall property portfolio at the end of 2020. The group also has plans to sell some of its poor-performing and lower-quality residential assets.
Despite the Covid-19 impact on the group overall, SA Corporate declared a full-year dividend of 17.92 cents per share.
The group’s overall distributable income for the year plunged 37.4%, to 23.9 cents per share, compared with 38.04 cents per share in 2019. However, the fund opted for a 75% pay-out ratio, which translated into a total dividend of 17.92 cents per share for the year.
SA Corporate’s overall portfolio was devalued by over R1.4 billion in 2020, inline with several other JSE-listed property funds.
Stanlib listed property analyst Ahmed Motara believes the biggest feature in SA Corporate’s latest results is around the fund’s disposals and “asset recycling” activity.
“The key focus is on improving portfolio quality across its retail, residential and industrial property assets,” he said.
“Clearly the structural concerns on certain segments of the office market are not unfounded, with SA Corporate looking to fully exit its office sector exposure,” Motara added.
“The -8% impairment of the fund’s South African property portfolio is appropriate, but we remain cautious that aggregate disposals and asset recycling will be at pricing similar to carrying value on the balance sheet,” he noted.
“Reducing its [overall] LTV below 40% will be important, as is managing potential covenant breaches. The reduction of its pay-out ratio to 75% was an appropriate step,” he said.
“Overall, the focus of investors will remain on disposals of non-core assets and asset recycling, as investors assess the evolving operational quality of the portfolio and the timeframe over which it substantially improves,” he stressed.
SA Corporate’s share price was up more than 4% on Monday, following the release of its latest full-year results. It closed at R1.98 per share, which is over 12% up for this year to date.
Listen: Rory Mackey discusses the group’s full year results on SAFM Market Update