Investec Property Fund delivers total shareholder return of 21%

Nick Riley
Investec Property Fund’s CEO Nick Riley.
  •  8.5% increase in dividend per share year-on-year – 6.1% core dividend growth.
  • Full year distribution of 138.53 cents per share.
  • Total return to shareholders of 21%.
  • 5.7% like-for-like net property income growth.
  • 73% of space expiring in the full financial year renewed or re-let.
  • €74.2 million initial investment into Pan-European logistics platform post year-end.
  • Balance sheet metrics further enhanced – all-in-cost of funding reduced to 8.6%, 84% hedged and swap expiry profile extended to 3.8 years.
  • Diversified balance sheet underpinned by quality local (88.3%) and offshore (11.7%) real estate investments.

Investec Property Fund has announced a final dividend of 70.16 cents per share for the six months ended 31st of March 2018. 

This takes the full year dividend to 138.53 cps. The full year dividend represents year-on-year growth of 8.5%. Included in the interim dividend was a one-off antecedent dividend receive from Investec Australia Property Fund. On a normalised basis, excluding this antecedent dividend, the year-on-year dividend per share growth is 6.1%.

During the year under review the fund focused on four strategic pillars:

  • Revenue security and growth.
  • Client service excellence.
  • Value add asset management and capital allocation.
  • Cost efficiency and system optimisation.

The South African’s economy’s sluggish growth over the past few years has had an adverse effect on the operating performance of companies and consumers alike. Real estate has seen an over supply in its sectors in certain nodes, when combined with anaemic tenant demand. This has led to pressure on occupancy and rental levels. Over the past twelve to twenty-four months, the industry has been characterised by negative pressure on reversions, reduced escalations and increased incentives required to attract and to attain tenants. Despite this challenging environment, the fund’s base property portfolio delivered net property income growth of 5.7% with all three sectors delivering positive like-for-like net property income growth with retail as the strongest performer at 7.8%.

The fund’s cost to income ration deteriorated from 15.2% to 16.8% due to the lower revenue growth and the increase in costs associated with letting activity, municipal rates and other costs focused on client retention. The group’s vacancies have increased from 1.4% in 2017 to 4.8% with 4.0% of space earmarked for redevelopment excluded.

Investec Property Fund continues to focus on providing a relevant and efficient core offering and ensuring capital allocation to maximise long-term risk adjusted asset returns. The fund continues to target an allocation of 10% of its balance sheet into ‘broken core’ opportunities where the risk adjusted returns of these assets remain attractive.

This is a pleasing set of results in light of the prevailing challenging operating environment. This is testament to the quality of the underlying base portfolio which is underpinned by a strong client base and income stream. Our strategy of investing in quality assets, with strong property fundamentals remains core to our business, especially as the upswing in sentiment that we have seen in South Africa since December is likely to take some time to filter through to the property market. As a result, we expect the challenging sector dynamics to continue for the short to medium-term. Against this backdrop, we remain focused on revenue security, delivery of differentiated service to clients and optimising balance sheet metrics, while growing our portfolio through measured expansion both locally and internationally” commented CEO Nick Riley.

The fund continues to grow its offshore exposure in line with its strategic target of 20% income from its offshore assets which represent 6.7% of FY 2018’s total investment income and 11.7% of balance sheet investments post the European logistics transaction concluded on the 4th of May 2018.

Through Investec Property Fund Offshore Investments Proprietary Limited, Investec Property Fund acquired a 42.9% interest in a portfolio of twenty-two logistics properties located across Europe for an initial equity investment, inclusive of all transaction costs, of EUR 74.2m million. The asset value of the entire initial portfolio of properties, inclusive of all transaction costs, is Euro 423 million which equates to an unlevered net income yield of 6.0%. The fund’s initial investment yield equates to approximately 10.5%.

This acquisition represents an investment into a platform providing access into core logistics markets across Europe, with the initial portfolio located across Germany, France, Netherlands, Spain, Italy and Poland.

The fund will be investing alongside funds and other segregated mandates managed by Ares Management, L.P. Ares is a publicly traded, leading global alternative asset manager with approximately USD 106 billion of assets under management.

“The investment not only forms a part of our strategic intent of enhancing our offshore exposure but also brings the first Pan-European logistics property offering to South African investors. The European logistics sector has attractive growth prospects, benefiting from the significant growth in trade as well as the region being less advanced in relation to the future of online than in the UK and US. The asset strategy is also well suited to the current macro environment, whereby the investment returns are generated through income and hands on asset management versus reliance on cap rate compression,” Riley noted.

Balance sheet and treasury management remain a fundamental focus area and the fund continues to adopt a conservative approach to both sources and cost of funding. Maintaining long-term certainty of cost and access to adequate liquidity remains paramount in the current environment. At 31 March 2018, the gearing ratio is marginally down from the prior year of 33.2% to 32.6% and will increase to c. 36% post the European transaction. The percentage of debt hedged is 84% which is well above the targeted minimum of 75%. The weighted average swap expiry was extended from 3.2 years to 3.8 years, with the average swap rate reducing from 7.73% to 7.56%. This led to a reduction in the all in cost of funding to 8.6% from 8.9%.

The growth in core dividend per share for the financial year ending 31 March 2019 is expected to be between 6.5% and 7.5%. While the South African market remains under pressure, the completion of the Ares transaction will contribute to the forecast growth. If the recent improvement in sentiment filters through to the real economy and drivers of real estate earlier than expected, the South African portfolio, which comprises 89% of the fund’s asset base, will stand to benefit.