Emira Property Fund feels the pinch
Emira Property Fund has joined its listed property peers by offering a sober outlook on SA’s worrying state of the economy, with negative implications for its dividend.
On Monday, the mid-cap company (R7.8 billion) forecast a negative growth in its dividend per share of about 2% for the year to June 30 2017. Dividend payouts are one of the key metrics investors typically use to judge a property company’s performance and investment case on.
Emira’s bearish dividend outlook is due to property fundamentals that are under strain – with an increase in vacancies for its office properties, negative rental reversions on expiring leases, the inability to sell its underperforming properties and ballooning funding costs.
“Economic conditions have deteriorated throughout the last six months, with the decline accelerating over recent months, and materially increasing pressure on the fund’s tenants,” it explains.
SA’s rising interest rate cycle has made funding deals more expensive, resulting in more property companies concluding deals in offshore markets – where there is low cost of debt and higher yields on properties. This cocktail of low debt cost and high yields on properties in offshore markets instantly boosts dividend payouts.
Emira’s sentiments have been echoed by sector heavyweight Growthpoint Properties, which pegged its full-year 2016 dividend guidance at about 6% – much lower than its 8% to 9% historic guidance.
Counters like Redefine Properties, Hyprop Investments and Vukile Property Fund also recently highlighted the difficulties of consistently delivering inflation-beating dividend payouts to income-chasing investors, implying that lower dividends might soon be the new normal.
Grindrod Asset Management’s chief investment officer Ian Anderson describes Emira’s headwinds as a “perfect storm”, as “this is the first negative news out of the SA listed property sector this year and it is likely to take most of the market by surprise”.
Anderson says a slowdown in dividend growth has long been anticipated in the market, but not negative growth in dividends in 2017. “No other listed property company in SA has guided for negative dividend growth in the short-term, with most still confident they can produce real growth in the dividend over the next 12 to 18 months,” he tells Moneyweb.
Emira’s turnaround
The company’s office properties appear to be the real pressure point. In recent years, office properties have underperformed other asset classes due to the glut of new office space across SA and faltering demand for older buildings.
Emira owns retail and industrial properties collectively worth about R13 billion and has offshore investments through its 4.9% holding of Australian Securities Exchange-listed Growthpoint Properties Australia.
Under former CEO James Templeton, Emira has successfully turned its property portfolio over the past three years by reducing its exposure to struggling B-grade (typically older) office properties and shifted its focus to prime office and retail properties. At one point, Emira’s office vacancies were close to 15% but have since declined to 9.3% (for the six months to December 2015). Using proceeds from the sale of its struggling office properties, Emira improved the quality of its existing properties through refurbishments.
Turning the ship
Management, led by current CEO Geoff Jennett, believes that pressures in the office sector are not likely to re-occur to this sort of extent in the foreseeable future. “Management is very focused on filling the fund’s vacancies through the increased use of tenant incentive and marketing programmes, as well as re-evaluating all alternatives to improve the quality and let-ability of the portfolio,” the company says.
Meago Asset Managers executive director Anas Madhi says although Emira’s announcement is unexpected and surprising, management has been proactive in announcing the dividend update, as the company has not yet released its full year 2016 results. “Management will urgently need to convince the market that they have developed a strategy to address these headwinds, as their peers continue to positively perform in a similar trading environment. Alternatively, we see Emira’s share price under strain in months to come,” says Madhi.
Its share price has not shot the lights out so far this year, as it has been down by 3.27% at the time of writing.
Emira Property Fund
Emira expects tough conditions to continue well into 2017, but thereafter it sees stability. It expects real dividend growth (exceeding inflation) to be in 2018. The listed property manager of Old Mutual Investment Group’s MacroSolutions boutique Evan Robins says hopefully Emira’s negative guidance rebases the company and “in a sense ‘de-risks’ the balance sheet so it can grow dividends from these new levels”.
