Property Flash


This is a guest piece by Keillen Ndlovu, an independent property analyst.

Before the advent of the COVID-19 pandemic, the SA Listed property sector used to pay out all its earnings to investors as distributions or dividends. Distributable income per share was equal to the dividend per share. This was despite the minimum payout ratio of 75%, as stipulated by the REIT legislation. There was a lot of interest in the sector, and it was easy to raise equity to fund business operations, capital expenditure, acquisitions, new developments, or reduce debt. Accelerated bookbuilds were the preferred option, and these were usually oversubscribed within a few hours.

Things have changed. With limited or no capital available to support the sector, we have seen accelerated book builds dry up. Raising debt is not ideal. So, what options does the industry have, then? The first option is to reduce the payout ratio and retain some earnings. Disposal of assets is another option. The other is a Dividend Reinvestment Plan (DRIP) or scrip dividend.

Reits or property companies not paying dividends include Fortress, MAS, Accelerate, and Delta. MAS has been impacted by rising interest rates in Central and Eastern Europe, which will negatively impact the sales of its residential developments. Delta and Accelerate face debt challenges and are working with the banks to reduce their loan-to-value ratios and increase their interest cover ratios. Fortress has lots of cash but faces differences between A and B unit holders on how to value or price the business.

The Reits or companies that pay out of all their earnings to investors have done well operationally and are specialised. These include Resilient, L2D (to be delisted), Exemplar, Safari, Fairvest, and Equites. They all focus on retail (which has recovered strongly since the end of the COVID pandemic) save for Equities, which is industrial-focused. They have not indicated plans to implement a DRIP or scrip dividend option. Before the COVID era, REITs like Growthpoint offered a 100% payout ratio and  offered a DRIP. This was a great way to cater to investors who wanted all the income (like pensioners or in leveraged schemes) and those who wanted to reinvest in the business at a discount.

Things have changed nowadays. Most of the REITs don’t pay out all the distributable income. Reducing payout ratios is easier than offering a DRIP. However, some REITs and companies have implemented both strategies, for example NEPI and Dipula.  85% and 28% of the shareholders chose the scrip dividend instead of cash, respectively. Lighthouse Properties scrip dividend received 55% support. Hyprop will announce its DRIP as soon as it receives regulatory approval. This is despite reducing the payout ratio to the minimum allowed of 75%. Texton indicated that they may offer a DRIP and will advise shareholders soon. Vukile, at their recent pre-close presentation, indicated it is something they are open to, and so is Investec Property Fund (now called Burstone Group). Its shareholders gave the directors authority to issue shares specifically in relation to a DRIP.

Together with reduced payout ratios (or retaining a portion of the earnings), the DRIP or scrip dividend option is likely to be a trend that will pick up and that we could see across several REITs or property companies.

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