SA Dashboard - 2021 H1 - Page 06 - Catalyst Fund Managers

The global economic recovery continues despite the setbacks imposed by restrictions forced by the third wave of Covid-19 infections as the delta variant becomes dominant in many countries. The US is close to returning to near-normal, but Europe is lagging, although vaccinations are rising at a fast rate. In the local market, the attention is on the fragile economic recovery and the impact that the move to the more restrictive adjusted lockdown level 4 will have. President Cyril Ramaphosa moved the country to lockdown level 4 on Sunday 27 June 2021, placing trading restrictions on the sale of alcohol, all gatherings being prohibited, and restaurants only permitted to sell food for takeaway or delivery. The restrictions on restaurants were partially lifted in a subsequent address; however, the country remains on level 4 restrictions.

We believe the South African listed property sector will benefit considerably from its global diversification, which, arguably, reduces its reliance on the domestic economy’s pedestrian growth. According to our analysis, 53% of the South African listed property sector’s geographic see-through exposure is from CEE, Western Europe, United Kingdom (UK) and Australia. The World Bank expects the CEE region and the UK economy to rebound significantly in 2021. This recovery, post coronavirus lockdowns, should support property companies’ operational performance indicators – footfall, trading density growth rates, rental income, net operating income, distributable earnings, and loan-to-value ratios.

The recovery of earnings of the REIT sector as a whole continued during the first quarter of 2021, but at a slower pace than the rapid recovery during the initial phase of reopening in the second half of last year. The sector’s forward FAD yield of 9.25% remains attractive despite weak property fundamentals weighing on growth over the medium term. Our underlying assumptions remain conservative with no meaningful recovery expected in 2021. Even factoring in a 2022 recovery, we do not foresee getting to 2019 earnings level in the medium term. The ALPI is still trading at a discount to net asset value of 20.4%. It is important to bear in mind that our FAD yield is after allowing for additional capex provisions in our forecasts (circa 10-15% of net operating income), which generally translates into a slightly lower yield relative to the actual dividend paid out by REITs.

We remain cautious of the risks facing the sector in the short-term, including further lockdown restrictions and risks of additional rental relief and concessions to tenants. Short term returns will likely remain volatile given uncertainties related to the level of dividends and pay-out ratios, but we do anticipate a further re-rate in the sector once we get back to a normalised trading environment and a sustainable growth rate closer to inflation. We expected the SA listed property sector to deliver annualised total returns of circa 12%-14% over the long term.

Returns Matrix

wdt_ID	___	7.27%	7.52%	7.77%	8.02%	8.27%
1	-2.00%	12.40%	11.80%	11.20%	10.70%	10.10%
2	-1.00%	13.30%	12.70%	12.10%	11.50%	11.00%
3	0.00%	14.20%	13.50%	13.00%	12.40%	11.90%
4	1.00%	15.00%	14.40%	13.80%	13.30%	12.70%
5	2.00%	15.90%	15.30%	14.70%	14.10%	13.60%

Source: Company data, Catalyst Fund Managers

Our company analysis is based on the long-term total return potential of the real estate owned by the companies we invest in, with consideration given to the portfolio quality, capital structures and the quality of management, amongst other things. We believe our top picks – Nepi Rockcastle, MAS and Equites – have solid fundamentals: strong rebound in the microenvironment in the CEE region, conservative balance sheets and distributable earnings growth prospects. Additionally, we have always favoured sector specialisation and management teams with alignment of interest to shareholders, which the below companies possess.

Nepi Rockcastle is a leading retail focused property investment and development group with exposure to commercial real estate across nine countries in Central and Eastern Europe. The balance sheet is well positioned with last reported loan-to-value of 31.5%, and the average valuation yield on income generating direct property portfolio was 6.70%. NRP was able to maintain a high occupancy rates of 95.7% and collection rates of 95% in the 2020 financial year. The company is currently trading at a 9% discount to last reported net asset value with a forecasted rolled forward FAD yield of 6.9% and 4-year FAD growth of 6.4% ahead of peers and sector, based on Catalyst Fund Managers forecasted distributable income, considering the impact of lockdown restrictions due to Covid-19 imposed in the region.

MAS is a property owner, developer and operator. Its primary focus is on retail assets in Central and Eastern Europe (CEE). The company also invests indirectly into the CEE market through both residential and commercial developments via a joint venture with developer Prime Kapital. MAS has a strong balance sheet, with a loan-to-value of 26% at end-December 2020. This ratio did not factor in the uncompleted Western European asset sales which were contracted but not concluded as at the reporting date. Including these disposals, the loan-to-value would be 12%. As the vaccination rollout accelerates and consumer spending recovers, MAS is well positioned to take advantage of the opportunities available in the CEE region. The company is currently trading at a 11% discount to last reported net asset value with a forecasted rolled forward FAD yield of 6% and 4-year FAD of 8.6% ahead of peers and sector, based on Catalyst Fund Managers forecasted distributable income, considering the impact of lockdown restrictions due to Covid-19 imposed in the region.

Equites is a specialist logistics company with investment properties in South Africa and the UK. The company continues to focus on modern logistics with strong tailwinds and value creation through internal development expertise. The management team has a proven ability to develop modern ‘Big Box’ distribution assets internally, with an underpin of blue-chip tenants on long leases. Equites recently raised R1 billion in an accelerated bookbuild which should reduce their balance sheet loan-to-value and create headroom for further developments. The company is currently trading at an 8.4% discount to last reported net asset value with a forecasted rolled forward FAD yield of 8.15%.