Equites says Shoprite deal is still on

Logistics-focused real estate investment trust (Reit) Equites Property Fund delivered a sector-beating financial performance on Tuesday for its full-year to February 29, 2020, declaring distribution per share of 151.39 cents, up 9.4%.

Although Covid-19 economic uncertainty has forced the group to withdraw its distribution forecast for the current financial year, Equites CEO Andrea Taverna-Turisan remains confident that the Reit’s forte in logistics property positions it to better weather the impact of the pandemic.

“Despite all the uncertainty, Equites is still looking forward to achieving some major milestones for our next financial year,” he told Moneyweb. “This includes finalising our multi-billion rand joint-venture deal with Shoprite to buy a majority stake in a portfolio of its warehouse properties.”

When Shoprite officially announced the deal in February, it said Equites would inject cash of R2.1 billion in exchange for a 50.1% stake in the joint venture. The deal would see Shoprite Checkers contributing a portfolio of its distribution centres and associated undeveloped land in Brackenfell in the Western Cape and Centurion in Gauteng to the joint venture.

“The deal is still on and we hope to finalise it within the first half of our financial year,” says Taverna-Turisan. “We are just awaiting approval from the competition authorities.

“Once finalised, it will be our most significant transaction to date in the South African market.”

Taverna-Turisan’s comments comes as the group announced in a Sens statement on Monday that it will not be proceeding with a R1.3 billion project to develop a massive 122 734m² warehouse logistics facility for Pepkor in Hammarsdale, KwaZulu-Natal. It noted that the decision was “due to the market disruption” as a result of the Covid-19 pandemic.

“The board of directors of Equites has resolved that, despite its strong desire to partner with Pepkor in relation to the development, it would not be prudent at this stage to proceed with the development on the originally envisaged commercial terms, and the agreement will accordingly not become unconditional,” Equites explained.

Door still open

Speaking to Moneyweb on Tuesday, Taverna-Turisan added that “the door remains open” for the group to secure a new deal in the future with Pepkor to develop the warehouse once market conditions improve. He said that Equites does not believe it would be wise, amid the current Covid-19 uncertainty, to invest R1.3 billion in a single, massive development that would take 18 months to develop.

“This does not mean that we are not investing for growth, both in the South African and UK markets. Besides completing seven developments with a capital value of R1.3 billion in the last financial year, we have commenced the development of six state-of-the-art logistics facilities with a capital value of R1.1 billion on completion. This is in addition to the Shoprite deal,” he pointed out.

Despite not committing to a distribution forecast for its next financial year, Taverna-Turisan conceded to Moneyweb that “all things considered”, the group would pay some sort of dividend.

“The reality is that there is so much happening in the market and economy. We don’t know what could happen by the end of our next financial year, so we’re not giving out guidance right now. However, we will communicate guidance once the situation surrounding the Covid-19 pandemic becomes clearer and we are comfortable that the guidance is highly probable,” he said.

Defensive edge

He said the group’s logistics and distribution warehouse focus give it a “defensive edge” in the current market and will continue to be buoyed by the growth in online retail.

“Equites has established itself as a market leader in the logistics property space in South Africa and the UK, with a portfolio of premium logistics properties which has grown from R1 billion at listing in 2014 to R15 billion at February 2020,” said Taverna-Turisan.

“We are happy with our strong performance for the past financial year,” he added. “The 9.4% growth in distributions was largely due to the group’s healthy 6.9% growth in like-for-like net rental income. Equites has a low loan-to-value ratio of 26.1%, while its weighted average lease expiry period now stands at 10.2 years and 94% of its revenue is derived from A-grade tenants. This puts the group in a strong footing.”

Analysts’ views

Craig Smith, head of research and property at Anchor Stockbrokers, tells Moneyweb that the Reit posted a good set of results overall, with distribution growth in line with expectations.

“I think Equites is well positioned, given their strong balance sheet, long WALE [weighted average lease expiry] and the fact that they are invested and focused on the logistics property sector, which has major tailwinds,” he notes.

“For March and April, Equites has collected 92.8% and 100% of the contractual rental due in terms of lease agreements in SA and the UK, which is probably the highest in the sector…. May’s rental collection rate/arrears will also be an important factor influencing its 2021 financial year performance,” says Smith.

“However, there are still macro concerns as the group’s tenant base and business will also be affected by the macro-environment and this will have an impact on sustainable rental levels and growth in rentals going forward.”

Reitway Global chief investment officer Garreth Elston says considering the tough market conditions, Equites delivered a “solid set of results”. However, he notes that the results were to the end of February, and therefore contain “no meaningful readthrough” to the impact of Covid-19 on Equites’ operations.

“That being said, logistics and warehousing remain one of our top global safe harbours to weather the pandemic in,” says Elston.

“Equites’ UK operations should largely avoid any significant negative impacts, but we are concerned that their local operations might be meaningfully affected by the SA economy’s slump.

“We also view the group’s current net asset value as not being reflective of the SA property sector’s new economic reality, which will impact even logistics properties.

“However, we will need to wait to see the concrete impacts filter through in the next reporting release.”

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