Texton Property Fund’s share price was up 9% on Monday, despite the company announcing recently that it is expecting to report as much as a 26.21% decline in dividends per share (DPS) for the full year to June 30.
In a Sens posted just before market close on Friday, the small cap real estate investment trust advised shareholders that it anticipates DPS for its 2019 full-year will be between 65.9 cents and 72.8 cents, representing a decrease of between 18.49% and 26.21%.
This is compared with DPS of 89.31 cents for the full year ended June 30, 2018. The fund blames macroeconomic factors in its two key markets: South Africa and the Brexit-hit UK.
Texton CEO Marius Muller could not comment directly, as the company is set to release its full-year results on Tuesday morning, however he referred Moneyweb to the company’s trading update from Friday.
Evan Robins, portfolio manager at Old Mutual Investment Group, says that when a share trades as cheaply as Texton does, the market is anticipating results to be extremely poor. “The market may have been afraid of an even worse outcome than Texton had indicated in the update, which could explain why the share price was up on Monday after the update.”
Texton, which has a market capitalisation of R1.16 billion, noted in its trading update that the weak local macroeconomic climate continues unabated and is exacerbated by the sustained pressure on South Africa’s sovereign credit rating. “The difficult economic climate has placed businesses under greater pressure with more companies contracting, consolidating space and even closing and has worsened the already unfavourable property fundamentals,” it said.
“It is a highly competitive market distinguished by no demand and a general oversupply of space,” it added. “The challenges in the property sector include loss of investor confidence, increasing occupancy costs, higher vacancy levels that are expected to continue into the foreseeable future, an oversupply of space and negative rental reversions. The recent spate of public violence is a clear consequence of the difficult economic times we are in.”
On the UK, the fund said the economy had stalled in the second quarter of 2019, following growth of 0.5% in the first quarter. “This is mainly due to the boost in the first quarter from Brexit stockpiling and the unwinding of this impact in the second quarter. The GDP outlook for 2020 has been revised downwards to 1.3% due to continued Brexit uncertainty and political upheaval.”
UK inflation uptick likely
Texton highlighted that inflation forecasts for the UK have been revised upwards. It also said that uncertainty around Brexit is likely to further devalue the British pound and drive inflation through higher import costs.
The fund noted that the impact of the macroeconomic factors in SA and the UK have had a “significant negative impact” on the dividend to be declared. “The dividend per share has decreased due to lower net property income as a result of significant rental reversions, continuing vacancies at a number of properties, slower than budgeted take up of vacant space, increased net finance costs and lower realised foreign exchange gains.”
It is a year since Muller took over as CEO – he was acting in the position from September 2018 until December, when he was formally appointed to the post. Muller, who became Texton’s fourth CEO in three years, has been working to steady the ship and bring down the company’s debt.
In July, post its year-end, Texton finalised the disposal of the Tesco building in Newcastle in the UK, in a deal worth £12 million (around R217 million). When it first announced the deal in May, Texton said the sale was in line with the property’s valuation and that the proceeds would be used to assist in refinancing and deleveraging its UK portfolio.