Listed property June 2016 Equity sales note by SBG Securities (Proprietary) Limited Greg Brady 30 June 2016 securities@standardbank.co.za Please refer to the disclaimer at the end of this document This document is not investment research. It therefore constitutes a marketing communication as those terms are defined by the UK FCA Handbook as it has not been prepared in accordance with the EU legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Neither should this document be considered a Research Report under SEC rules. NOT FOR DISTRIBUTION IN THE UNITED STATES, CANADA, AUSTRALIA, BANGLADESH, INDIA, INDONESIA, JAPAN, KOREA, PHILIPPINES, SINGAPORE OR TAIWAN OR IN ANY OTHER JURISDICTION WHERE TO DO SO WOULD BE UNLAWFUL.
1 Page 1. SA listed property sector performance 2 2. SA property share 3 3. Foreign property share 8 4. 13
2 SA listed property index delivered a negative return in the last three months Indexed total returns last 12 months (Rands) 110 105 100 95 Indexed total returns last decade (Rands) 600 500 400 300 200 90 Mar-15 Jun-15 Sep-15 Dec-15 SAPY All Bond All Share Sources: I-Net, SBG Securities (Pty) Ltd 100 Sep-05 Apr-07 Nov-08 Jun-10 Jan-12 Aug-13 Mar-15 SAPY All Share All Bond Sources: I-Net, SBG Securities (Pty) Ltd SAPY return was -3.3% over last 3 months versus -2.3% for ALSI and -5.7% for financial equities Long-term property sector performance lead over ALSI has maintained Biggest positive 3m total returns (%) of local shares: EQU (18.0), HPA (10.0), PIV (6.4), SSS (5.4), HYP (4.3), LDO (3.9), DLT (3.7), SAC (2.6), VKE (2.6) Negative 3m returns: EMI (-10.6), REB (-9.2), OCT (-6.6), TEX (-6.6), TWR (-5.0), ATT (-4.7) Foreign/dual-listed 3-month rand returns: SRE (21.4), IAP (2.4), SCD (-2.0), TDH (-4.0), ROC (-5.8), MSP (-10.8), NEP (-11.3), STP (-12.1), RPL (-12.8), CRP (-18.7), ITU (-19.6), CCO (-19.7),
DLT TEX HPA&B TWR REB AWA ILU EMI OCT APF SSS VKE IPF SAC LDO RDF EQU GRT FFA&B HYP RES 3 SA REITs 2-yr forward distributable EPS yields compared % 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1-16.5 15.5 15.2 14.4 13.3 12.1 11.9 11.9 11.4 11.1 10.6 10.5 10.3 10.0 9.6 9.0 8.8 8.5 6.9 6.4 4.9 Sources: Factset, SBG Securities (Pty) Ltd >12% 2-yr clean forward yields forecast for DLT, TEX, Hospitality, TWR, REB and AWA. Lowest 2-yr yield is RES, followed by HYP, then Fortress Resilient and Fortress have highest estimated net foreign exposure of roughly 35% and 50% Corresponding 2-yr yields for NEP and ROC average at circa 5.0% Redefine and Growthpoint also benefit from effective foreign exposure near 20% level
Price to book ratio 4 Price-to-book versus forecast total ROE of SA property stocks 1.50 1.40 RES HYP 1.30 SAC FORT 1.20 RDF 1.10 EQU LDO 1.00 SSS GRT ILU VKE 0.90 AWA 0.80 ATT IPF APF TWR TEX EMI PIV OCT 0.70 REB 0.60 DLT HOSP 5% 10% 15% 20% 25% 12m forward total ROE Sources: Company data, SBG Securities (Pty) Ltd estimates Average SAPY P/B ratio still below parity - e.g. GRT adjusted P/B at 0.94 Our ROE measure includes expected 12m increases in NAV in addition to cash ROE our proxy for forecast equity capital gains of REITs is 24m forward average annualised EPS growth Counters that lie furthest under the value-line remain Hospitality and Delta Most expensive is RES followed by HYP but the chart would not fully take account of longerterm relative growth or quality of underlying physical portfolio
5 Mark-to-market NAV s for significant listed property holdings Investor Listed investees Curr. equity Prop. of NAV NAV NAV value Rm mark. cap. last adj. MTM change Investec Property Investec Australia Property (12.3%) 534 5.6% 1549 1550 0.0% Attacq MAS Real Estate (48.6%) 3411 26.4% 2172 2213 1.9% MAS (EUR) Sirius (12.1%) 48 11.4% 119 119 0.0% Resilient FFA (2.8%), FFB (15.8%), NEPI (9.3%), ROC (20.1%), Hammerson (2.3%) 18884 37.7% 7596 8766 15.4% Lodestone Greenbay (21.4%) 175 11.1% 610 621 1.7% Fortress NEPI (17.3%), Resilient (9.9%), ROC (36.5%), Hammerson (2.0%) 26720 51.1% 3566 3927 10.1% Growthpoint Growthpoint Australia (65.0%) 13350 19.5% 2550 2634 3.3% Emira Growthpoint Australia (4.9%) 982 14.6% 1731 1738 0.4% Vukile Fairvest (31.2%), Atlantic Leaf (20.5%) 1001 9.1% 1802 1789-0.7% Arrowhead Dipula B (23%), Rebosis (11.3%) 979 12.5% 856 857 0.1% Delta Delta International (26.34%) 421 9.3% 963 968 0.6% Redefine RPL (30.1%), IHL (27.9%), Cromwell (25.5%), EMI (11.5%), AWA (12.3%) 11033 22.2% 1023 980-4.2% Sources: Factset, Company data, SBG Securities (Pty) Ltd estimates We have updated NAV s in previous chart for value movements in underlying listed assets since the companies last reports Highest value contributions from listed property assets ( > 20% of equity value) for: Attacq, Resilient, Fortress, Growthpoint and Redefine We do not track holdings of SA listed subsidiaries Ascension, Synergy, Indluplace Market value movements of listed investments have been highly positive for Resilient and Fortress but moderately negative for Redefine since last reports
HPA&B ILU DLT LDO TEX SSS AWA REB IPF OCT EQU SAC TWR VKE EMI FFA&B RDF APF HYP GRT RES 6 PEG ratios for SA REITs 2.00 1.50 1.00 0.50 - Sources: SBG Securities (Pty) Ltd estimates Our PEG ratio uses forecast EPS growth in second rolling year as proxy for long-term sustainable growth. LT growth and 12m forward yield are effectively weighted equally Best value REITs by this measure (lowest PEG): HPA&B, ILU, DLT, LDO, TEX, SSS Most expensive PEGs are Resilient, followed by Growthpoint then Hyprop
7 SBG Securities Research SA REIT coverage and ratings Vacancy DY P/B CAAG Loan/ Price Target 12m 24m Value price fwd fwd Implied total return Rating Growthpoint 4.9% 8.0% 0.97 5.9% 32.4% 24.80 24.00 4.8% Hold Redefine 5.7% 8.5% 1.07 6.4% 43.0% 10.95 10.00-0.2% Hold Hyprop 1.5% 5.9% 1.32 8.3% 28.5% 122.46 120.00 3.9% Hold Resilient 1.7% 4.5% 1.68 9.0% 21.0% 127.26 116.00-4.4% Sell Emira 4.7% 11.3% 0.76 5.1% 33.7% 13.22 13.20 11.1% Sell SA Corporate 2.3% 9.2% 1.21 8.4% 28.9% 5.02 4.80 4.9% Buy Rebosis 2.4% 12.4% 0.68 6.9% 33.7% 9.82 10.00 14.3% Hold Accelerate 7.1% 10.6% 0.88 5.1% 35.6% 6.34 6.00 5.2% Hold Sources: Company data, SBG Securities Research SBG Securities Research downgraded Rebosis to Hold in the last quarter after reducing forecast EPS for the expected dilutive effects in FY17 from its proposed acquisition of recently developed shopping centres Emira was also downgraded to Sell owing to doubts about its ability to bounce back from its guided 2% decline in FY17 distributable EPS SBG Securities Research currently favours SA Corporate and Hyprop
8 Forward clean distributable earnings yields two years out for foreign REITs 10 8 % 9.0 8.6 8.3 8.3 7.1 6.9 6 5.7 5.3 4.8 4 3.8 2 - SRE RPL STP IAP CRP MSP ITU ROC NEP SCD Sources: Factset, company reports, SBG Securities (Pty) Ltd The highest 2-yr forward distributable earnings yields are measured for Sirius Real Estate (SRE) at 9.0%, Redefine International (RPL) at 8.6%, followed by Investec Australia (IAP) and Stenprop (STP) both at 8.3% We continue to believe that RPL has potential to re-rate towards Capital & Regional (CRP) s lower yield, especially in view of its 36% exposure to UK hotels plus Germany
9 Price to book value ratios of foreign counters 2.50 2.00 1.86 1.50 1.48 1.62 1.00 0.68 0.78 0.78 0.81 1.01 1.01 1.05 1.06 1.17 0.50 0.00 ITU CCO CRP STP MSP SRE RPL SCD IAP ROC TDH NEP Sources: Company reports, SBG Securities (Pty) Ltd The vote for Brexit has pushed share price discounts to NAV to new lows for pure UK or high UK exposure property companies Future reported NAV per share measures for pure UK companies like CCO, CRP and ITU are likely to fall if the UK falls into recession
10 Price-to-book versus forecast total ROE of foreign property stocks 2.05 1.85 NEP 1.65 1.45 TDH ROC 1.25 IAP 1.05 MSPRPL SRE 0.85 ITU CCO STP CRP 0.65 5% 7% 9% 11% 13% 15% 17% 19% 21% Sources: Factset, company reports, SBG Securities (Pty) Ltd Best value according to this chart are Sirius and Investec Australia (IAP) Priciest by these measures are NEPI and Tradehold (TDH) The Brexit effect makes current NAV measures and forecast ROE for UK companies less reliable
11 Australian REITs have become relatively more attractive versus Europe and SA The tale of two Investec REIT prices in rands SA versus Australia 18 16 14 12 10 IPF-JSE IAP-JSE Sources: Factset Investec Australia Property (IAP) listed at a price far below Investec Property Fund (IPF) but has now caught its stable-mate s price, as Australia s economy and currency outperforms SA Estimated clean 12m forward yield of IAP is 7.9% in AUD versus 9.4% for IPF in ZAR, but Australian CPI was last reported at just 1.3% versus 6.1% in SA IAP s 12m forward yield of 7.9% also compares favourably to Growthpoint Australia s (GOZ) corresponding yield estimated at 6.7%
12 Tax treatment of listed property securities for SA individuals Withholding tax on distributions SA normal income tax SA-REIT no yes UK-REIT (ITU, RPL, CRP) A-REITs (GOZ, IAP) REIT domiciled in IOM, Mauritius (NEPI, ROC) UK and other public companies (CCO, TDH, MSP, SRE, STP, SCD) Sources: Company data, SBG Securities (Pty) Limited 20% at UK source, can be rebated to a net 15% in SA 15% at Australian source, effectively reduced to +6% after depreciation allowance no yes 15% foreign dividend tax payable in SA no 15% foreign dividend tax payable in SA no
13 value comparisons Developed market interest rate expectations are dramatically lower post-brexit, braking the initial rise in the USD, allowing the R186 SA government bond yield to fall to 8.7% and the SAPY sector to bounce back Our estimated clean 12m forward yield of 8.0% for Growthpoint (as a proxy for SA REITs) is little higher than the 6.7% of its GOZ Australian subsidiary, although Australia has much lower inflation and interest rates. Growthpoint currently trades at a 6% discount to its adjusted book value, reflective of likely SA property value stagnation We favour SA Corporate and Hyprop as solid bets among the large SA REITs. While undeniably cheap, we are wary of the secondary office exposure within Delta and Tower as well as the 40% UK content within Texton. An important mitigation of SA REIT asset exposure to UK is that a large portion is effectively hedged through funding Hospitality (assuming proposed Tsogo Sun deal goes through), Lodestone, Stor-age and Arrowhead look most attractive of the smaller SA REITs Of the foreign / dual-listed counters, German industrial and mixed-use property specialist Sirius still screens surprisingly well, despite its strong recent price rise. We forecast both strong dividend and capital (NAV) growth for Sirius which operates solely in the most robust of the EU economies. We avoid companies with high UK exposure at present, although RPL may have the best re-rating potential within this set Australian REITs have become relatively more attractive, being more distant from the troubles in Europe and SA. Notwithstanding its commodities-dependence, the economy has been one of the best performers in the G10. Investec Australia (IAP) offers an attractive yield of 7.9% with comparatively low gearing of 29%
Disclaimer 14 This material is non-independent research. Non-independent research is a "marketing communication". This material is "non-independent research". Non-independent research is a "marketing communication" as defined in the UK FCA Handbook. It has not been prepared in accordance with the full legal requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Additional information with respect to any security referred to herein may be made available on request. This material is for the general information of institutional and market professionals clients of Standard Bank Group (SBG) only. Recipients who are not market professionals or institutional investor customers of SBG should seek advice of their independent financial advisor prior to taking any investment decision based on this communication or for any necessary explanation of its content. It does not take into account the particular investment objectives, financial situation or needs of individual clients. Before acting on any advice or recommendations in this material, clients should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The information, tools and material presented in this marketing communication are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action. This material is based on information that we consider reliable, but SBG does not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. The information and opinions contained in this document were produced by SBG as per the date stated and may be subject to change without prior notification Opinions expressed are our current opinions as of the date appearing on this material only. We endeavour to update the material in this report on a timely basis, but regulatory compliance or other reasons may prevent us from doing so. SBG or its employees may from time to time have long or short positions in securities, warrants, futures, options, derivatives or other financial instruments referred to in this material. Where SBG designates NON- INDEPENDENT Research to be a marketing communication, that term is used in SBG s Research Policy. This policy is available from the Research Compliance Office at SBG. SBG does and seeks to do business with companies covered in its non-independent research reports including Marketing Communications. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. SBG has published a Conflicts of Interest Policy that is available upon request which describes the organisational and administrative arrangements for the prevention and avoidance of conflicts of interest. Further disclosures required under the FCA Conduct of Business Sourcebook and other regulatory bodies are available on request from the Research Compliance Department and or Global Conflicts Control Room, unless otherwise stated, share prices provided within this material are as at the close of business on the day prior to the date of the material. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of SBG. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of SBG or its affiliates. SBG believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections of this communication were obtained or derived from sources SBG believes are reliable, but SBG makes no representations as to their accuracy or completeness. Additional information is available upon request. SBG accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to SBG. The services, securities and investments discussed in this material may not be available to nor suitable for all investors. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss. Past performance is no guide to future performance. In relation to securities denominated in foreign currency, movements in exchange rates will have an effect on the value, either favourable or unfavourable. Some investments discussed in this marketing communication have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make them investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realize those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed.
Disclaimer (continued) 15 This report is issued and distributed in Europe by Standard Advisory London Limited 20 Gresham Street, London EC2V 7JE which is authorised by the Financial Conduct Authority ( FCA ). This report is being distributed in Kenya by CfC Stanbic Bank Limited; in Nigeria by Stanbic IBTC; in Angola by Standard Bank de Angola S.A.; in China by Standard Bank Limited; in Botswana by Stanbic Bank Botswana Limited; in Democratic Republic of Congo by Stanbic Bank Congo s.a.r.l.; in Ghana by Stanbic Bank Ghana Limited; in Hong Kong by Standard Advisory Asia Limited; in Isle of Man by Standard Bank Isle of Man Limited; in Jersey by Standard Bank Jersey Limited; in Madagascar by Union Commercial Bank S.A.; in Mozambique by Standard Bank s.a.r.l.; in Malawi by Standard Bank Limited; in Namibia by Standard Bank Namibia Limited; in Mauritius by Standard Bank (Mauritius) Limited; in Tanzania by Stanbic Bank Tanzania Limited; in Swaziland by Standard Bank Swaziland Limited; in Zambia by Stanbic Bank Zambia Limited; in Zimbabwe by Stanbic Bank Zimbabwe Limited; in UAE by The Standard Bank of South Africa Limited, Dubai branch. In respect of the United States, this report is solely intended for distribution to US institutional investors that qualify as Major US Institutional Investors under Securities Exchange of 1934 Rule 15a-6. Recipients who no longer wish to receive such research reports should call +27 (11) 415 4272 or email SBGSEquityResearchSupport@sbgsecurities.com. In jurisdictions where Standard Bank Group is not already registered or licensed to trade in securities, transactions will only be effected in accordance with the applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in accordance with applicable exemptions from registration or licensing requirements. Standard Bank Group Ltd Reg.No.1969/017128/06) is listed on the JSE Limited. SBSA is an Authorised Financial Services Provider and it also regulated by the South African Reserve Bank. Copyright 2016 SBG. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Standard Bank Group Ltd.