BI-ANNUAL DASHBOARD

Source: Bloomberg, Catalyst Fund Managers, 2022 YTD: As of 31 December 2022

Persistently high inflation in key markets has kept central banks on a rate hiking path. In a turbulent year for global markets, the SA listed property sector started the year down but fought back in the second half of 2022 and ended the year relatively flat. The strong performance for the SAPY and the ALPI in the last quarter of 2022 can be attributed to a re-rating in bond yields and positive earnings revisions by the likes of Nepi Rockcastle (NRP). NRP’s expected distributable earnings per share for 2022 was revised up in the quarter and is now expected to be 48% higher than in 2021 due to strong operational performance and favourable impact of the settlement agreement on the Serenada dispute. The Medium-Term Budget Policy Statement in October was positively received by the market, and in December, President Cyril Ramaphosa secured a second term as ANC president in the Electoral Conference, beating Zweli Mkize by 579 votes. This victory clears the way for him to overhaul his cabinet and intensify reforms needed to reinvigorate the weakening economy. The SA listed property (SAPY) and the All-Property Index (ALPI) delivered returns of 0.49% and -1.90% respectively for year ended 31 December 2022 losing ground to the other traditional asset classes cash (5.19%), equities (4.41%) and bonds (4.23%), after a remarkable recovery in the previous year (SAPY return of 37% in 2021).

Source: Company data, Bloomberg, Catalyst Fund Managers, as at 31 December 2022. Black highlight = Index returns, Grey highlight = offshore companies listed on the JSE

Notable outperformers in 2022 were Fortress B, Octodec and Emira.

• Fortress B (FFB)- In July 2022, Fortress posted a circular for shareholders to vote on a share merger between the A and B shares in which Fortress would repurchase all of the Fortress A shares for a ratio of 3.01 Fortress B shares. The proposed scheme was voted down by shareholders on the 17^th of August resulting in a possible de-reiting scenario for Fortress as the MOI prevents the company from paying out a distribution if the A distribution benchmark is not met. The uncertainty around the company’s future capital structure explains the divergence in returns between the FFA and FFB returns for the year.
• Octodec (OCT)- Octodec saw a significant recovery in operational performance in 2022. Residential vacancies improved from 15.9% during FY2021 to 7.0% at the end of August 2022, with the return of university students to in person classes. The neighbourhood convenience shopping centres had a strong performance with high occupancies and rental income growth. Dividend per share increased from R50 in FY2021 to R130 resulting in the outperformance of Octodec in 2022. Despite the re-rate in 2022 Octodec remains an attractive investment in our view, currently trading at a forward earnings yield of c.15% with a conservative balance sheet relative to peers and trades at a discount to net asset value of 57%.
• Emira (EMI)- Castleview Property Fund announced a R5 billion deal with the acquisition of several real estate assets including 50% of the issued shares in Emira Property Fund. Furthermore, Emira has co-invested together with its USA-based partner, The Rainier Companies, in 12 grocery-anchored dominant value-oriented power centres in the USA. The distributable income from the US investments surprised to the upside in the company’s FY2022 results resulting in the outperformance of the company. We remain concerned about the group capital structure and elevated see-through gearing of the company, particularly investments in associates and the continued use of Cross currency interest rate swaps, especially in the current environment of rising rates.

A majority of the offshore focused property companies with exposure to Europe and/or UK were the notable underperformers during the year. The underperformance can largely be attributable to the risks of a recession, high inflation and increasing interest rates across that region. The notable exceptions are Mas, which reported strong results in a difficult macro-economic environment, with distributable income per share up 14% and Nepi Rockcastle, Nepi settled an arbitration in connection with the discontinued acquisition of two shopping centres, resulting in the company reversing a provision raised in the previous financial year.