Geoff Jennett’s strategy — to introduce new revenue streams to bolster Emira Property Fund’s mix of SA office, retail and industrial buildings — is starting to pay off.

The company previously lost favour among fund managers due to its overexposure to the struggling office market, which led to a 2% drop in dividend payouts in the 2017 financial year. Jennett, a CA and former investment banker, took the helm at Emira four years ago and has made impressive headway in turning the company around. Dividends are up 3.1% for the year to June 30 — no easy feat given the deteriorating state of the SA economy.

The company’s change of fortunes can largely be credited to Jennett’s aggressive disposal and recycling strategy, which has resulted in the sale of more than R2bn worth of office buildings since mid-2017.

The proceeds have been used to add a residential component to Emira’s portfolio: an office-to-flat conversion development in Johannesburg’s Rosebank and a stake in JSE-listed rental housing fund Transcend.

More intriguing is Jennett’s US investment strategy. He first entered the US two years ago, buying four retail parks for $21.4m (about R290m at the time) through a 49% stake in Dallas-based real estate investment firm Rainier Group. This year, another five retail properties were added to the portfolio, taking Emira’s US exposure to $75.9m (about R1.1bn).

That is more than 7% of total assets. Emira, whose only other offshore investment is a R760m stake in Growthpoint Australia, is the first and only JSE-listed company to offer South Africans exposure to the US real estate market.

Jennett’s surprise entry into the US initially raised eyebrows as it was widely regarded as untested territory for SA property companies. But his contrarian strategy not to follow the rest of his SA peers to Poland, the UK and Australia is starting to pay dividends. For the year to June 30, Emira’s US interests contributed 8% of the company’s income payouts to investors.

Moreover, the US is currently one of the best-performing real estate markets globally, with listed Reits delivering a total return of 26.6% (in US dollars) year to date, according to Anchor Stockbrokers. That compares to the SA listed property index’s measly 2.5% (in rands) total return over the same time.

Jennett is keen to double Emira’s US exposure to about 15% of total assets over the next two years. Speaking last month in Joburg on the investment case for the US, he said Emira’s strategy was to focus solely on open-air convenience centres anchored by grocery stores.

Other tenants typically include “big box” discounted sports apparel, home goods, cosmetics and clothing retailers. He is also targeting a specific geographic area of the US — mostly south and southeast states including Texas, Ohio, Indiana, North Carolina and Florida, which Jennett refers to as strong secondary growth nodes.

These areas typically have a lower cost of living and unemployment rate, coupled to higher wage growth than most other US states. Texas, for instance has a 50-year-low unemployment rate of 3%, he said.

These states also offer better value than prime US cities. Convenience retail centres, typically sized between 15,000m² and 30,000m² in San Antonio, Cleveland and Cincinnati, for instance, can still be acquired at yields of 8.5%-9% against the 5%-7% that one would pay in New York, Chicago or San Francisco.

Jennett emphasised that Emira will grow its exposure to the US only while this sector of the real estate market remains undervalued. “We will only buy the right assets. We are not rushing to build bulk in the US at any cost.”

Nedbank CIB analyst Ridwaan Loonat likes the fact that Emira has entered the US through a partnership with an experienced local player. He says the relationship with Rainier allows Emira to take advantage of “endless opportunities”, considering the size of the US real estate market at a time that SA faces headwinds.

Rainier is a private commercial real estate investor and operator, co-founded in 2003 in Dallas by Texans Tim Nichols and Ken Dunn.

The company is primarily a value investor with a strong retail bias and has concluded real estate deals worth more than $2.5bn. Rainier has $1bn of assets under management.

Jay Padayatchi, director of Meago Asset Managers, agrees that the partnership between Emira and Rainier should pay off.

“The benefits are fairly obvious, given that the outlook for SA growth is lethargic at best over the short term.

“Rainier has a demonstrable track record in various types of property and is key in unlocking the opportunity for Emira.”

However, Padayatchi says grocery-anchored convenience centres in the US, like most other types of retail assets, also face the threat of continued e-commerce disruption.

Earlier this week, Emira was trading at a 30% discount to NAV and an attractive forward dividend yield of 12.5% vs the sector’s average 10%. That suggests the counter still offers plenty of recovery potential.