Making sense of REITs

A Real Estate Investment Trust (REIT) is a listed property investment vehicle which are publicly traded on the Johannesburg Stock Exchange (JSE) established in 1960 in the USA. Individual investors can buy shares of commercial real estate portfolios from a variety of properties.

Most REITs specialize in a specific real estate sector for example, office, retail or healthcare REITs. Diversified and specialty REITs may hold various types of properties in their portfolios. For example, a diversified REIT may hold a portfolio comprising both office and retail properties. Most REITs have a straightforward business model: The REIT leases space and collects rents on the properties, then distributes that income as dividends to shareholders.

Monthly we publish various REIT company financial results, their property strategies and insights of their future growth plans. It gives the apprentice and more seasoned investor a gauge on how to evaluate these companies for information, education and/or possible investment.

Confident outlook for SA REIT performance in 2019

Andrea Taverna-Turisan

SA REIT Marketing Committee Chairman

The SA REIT sector is set to deliver double-digit total returns to investors next year.Catalyst Fund Managers expects performance from REITs in 2019 to be marked by positive total returns from the REIT sector, largely driven by its current forward income yield and capital returns based on growth in income.

“We expect the REIT sector to deliver total returns in line with the historical annualised 10-year total return of 14%,” reports Mvula Seroto of Catalyst, based on performance from 1 November 2008 to 31 August 2018.

Howard Penny of Capricorn Fund Managers SA holds a similar outlook and believes 2019 will be a better year for SA REIT returns overall.

“In a steady valuation environment in South Africa, SA REIT returns could be in double-digit territory supported by sector distribution yields of approximately 9%, despite lower distribution growth of around 4 to 5%,” says Penny.

Anchor Stockbrokers is of the view that the sector will also continue to perform at attractive levels in future. “We expect listed property to deliver a total return, made up of share price movement plus distributions, of roughly 13% to 14% per year over the long term. Unless South Africa’s economic and political outlook improves substantially in 2019, we expect the total return in 2019 to be marginally lower than the long-term forecast,” notes Wynand Smit, real estate analyst at Anchor Stockbrokers.

Investors and analysts can know with reasonable certainty what to expect from an investment in the REIT sector in 2019 because SA REITs have relatively predictable earnings.

“SA REITs are exposed to the best commercial properties in South Africa and, in some instances, offshore. Their property income is underpinned by lease agreements with tenants in these property assets. Rentals are contracted and most escalate at a predetermined rate annually — around 6.5% to 8% in the current domestic market,” explains Andrea Taverna-Turisan, SA REIT Marketing Committee Chairman.

Besides positive performance prospects for 2019, factors that market commentators believe will make SA REITs appealing investments in the year ahead include improved corporate governance in the sector, its historically high yields and the good value to be found in the share prices of many REITs.

Penny notes, “Despite a rather treacherous rising global interest rate environment, historically high yields remain the greatest supportive force for the sector in 2019 and over the medium term.”

Smit adds: “Most SA REITs de-rated during 2018, and if growth expectations start to improve during 2019, the valuations of SA REITs are compelling.”

SA REITs provide liquid, lower-risk property investment. They are actively managed by companies with robust governance oversight and performance-driven management teams.

A useful diversification tool in an investment portfolio, SA REITs have equity and bond characteristics, offering investors the best of both worlds; a reoccurring cash distribution yield like a bond as well as growth in income like equity.

The SA REIT Association represents South Africa’s R330 billion listed REIT sector. Its members comprise all the country’s listed REITs, which play an essential role in the economy and the lives of South Africans.

Since its inception in 2013, when REIT legislation was introduced in South Africa, one of SA REIT’s goals has been driving transparent, clear and comparable financial reporting for the sector. The SA REIT Best Practice Recommendations (BPR) was first published in 2016. The association is currently updating the document in a move that builds on the sector’s track record of driving best practice for investors. It expects to share its progress with the market early in 2019.

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Accelerate Property Fund – Vacancy focus

Michael Georgiou, Chief Executive

Accelerate Property Fund listed on the main board of the JSE in 2013. Accelerate is a real estate investment trust (REIT) offering investors the opportunity to share in a portfolio of well-established, high-quality properties across South Africa and Central and Eastern Europe.

Accelerate’s portfolio is independently valued at R12.6 billion with a gross lettable area of 621 120 m2. The Fund is strategically focused on the Fourways Precinct, Charles Crescent in Kramerville, Sandton, as well as Foreshore in Cape Town, where it enjoys nodal dominance.

The vacancy rate is 7.8% with a weighted average lease term of 5.4 years across the portfolio. 64.8% of revenue is derived from large national tenants split across retail (67.1%), commercial offices (27.8%) and industrial assets (5.1%).

RESULTS

  • Fourways super regional mall to open on 25 April 2019
  • Fourways area growing at over 3% with super regional mall to dominate northern Johannesburg retail market
  • Unique and large format fashion and entertainment brands introduced including internationally renowned Kidzania
  • 7bn balance sheet optimisation and value extraction initiatives well underway to reduce LTV to below 34%
  • Net asset growth of 8.2% year on year
  • 92% tenant retention despite recessionary environment
  • 96% hedged against increasing interest rates
  • Offshore blue-chip single tenant portfolio predominantly in Austria performing above expectations
  • Distribution per share of 27,26021 cents (2017: 28,77713 cents) in line with guidance

“In these trying economic times, we continue to focus on cost management and value extraction from alternative but sustainable revenue streams,” said Georgiou.

These include renewable energy revenue, non-GLA revenue as well as income from advertising and development returns. To this end, Accelerate has partnered on the development of 500 complimentary residential units adjacent to The Buzz and Waterford shopping centres on Witkoppen Drive in Fourways. Total profits from this project, which is expected to break ground in 2019, is anticipated to be in excess of R100 million.

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Atlantic Leaf Properties – releases a quarterly update

CEO Paul Leaf-Wright

Atlantic Leaf was founded in 2013 and is a Mauritian incorporated real estate company that focuses on high quality commercial property assets that provide suitable hard currency returns to investors through income yields as well as the prospect of capital appreciation. The company is dual listed on the Stock Exchange of Mauritius Limited and on the Main Board of the JSE in South Africa.

Since listing in March 2014, Atlantic Leaf has grown its AUM to £370 million. Atlantic Leaf’s core geographical target is the United Kingdom, while investments in other developed markets may be considered when appropriate.

The company targets industrial and commercial property assets in strategic business areas with sustainable income flows from high occupancy levels, long leases and strong corporate tenants.

Quarterly earnings in line with expectations

  • Total Assets Under Management £370 million, up 6.7% from Q3 2017
  • Total Rental Revenue £20.1 million, up 11.1% from Q3 2017
  • Adjusted EPS of 2.22 pence per share, up 2.3% from Q3 2017

Commenting on the results CEO Paul Leaf-Wright said, “The period under review has been challenging given the volatility currently being experienced in UK property market, especially given Brexit, the pressure on the retail property sector, and generally a difficult market to predict as far as other factors such as interest rates and capitalisation rates on properties are concerned.”

The redomicile of the Company to Jersey and the conversion to a UK REIT, subject to final required approvals, will be affected on 1 March 2019 to coincide with the start of the Company’s 2020 financial year.   A final announcement on the conversion will be made in due course.


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