The Investment Case – Resilient Property Income Fund Ltd
Finding big returns in small townsOver the last five years, the number of shopping malls in South Africa has risen sharply. Yet, for the most part, this rapid increase has not dented growth in rental incomes for the large property companies that own these centres.
This is an indication of the surge in demand there has been for retail space in the country. It is a situation that property group Resilient (JSE:RES) has taken advantage of in an innovative way. Its focus has been on investing in shopping centres outside of the major nodes, in places such as Klerksdorp, Ladysmith and Burgersfort.
“We really like the composition of Resilient's portfolio,” says Portfolio Manager at Sanlam Private Investments (SPI) Dr. Anton von Below. “The ability of the group's management to select good quality buildings and sites has been the primary factor in the success of their strategy.”
Resilient's property portfolio includes a 60% interest in the Highveld Mall in Emalahleni, 60% of the Mall of the North in Polokwane, the Tzaneng Mall in Tzaneen, the Diamond Pavilion in Kimberley, 70% of the I'langa Mall in Nelspruit, the Rustenburg Plaza and 55% of the Jabulani Mall in Soweto. It also holds 12.9% of the Capital Property Fund, 22.0% of the Fortress Income Fund – B and 18.6% of New Europe Property Investments plc. In addition, it owns Property Index Tracker Managers, the company that manages the Proptrax exchange traded funds.
Resilient was listed on the JSE in 2002, with an initial focus on industrial parks in transport nodes and non-metropolitan shopping malls. Over time, it divested from its industrial interests, to concentrate solely on its retail assets.
The group also acquired interests in other listed property funds, including Shops for Africa, Acucap Properties, Pangbourne Properties, Ambit Properties and Capital Property Fund. Pangbourne Properties was merged with Capital Property Fund in 2011, and Resilient's holdings in the other funds have all since been sold.
It promoted the listing of Diversified Property Fund in 2005, into which it placed its portfolio of industrial properties together with smaller rural retail properties. Diversified Property Fund was however re-absorbed into Resilient in 2008.
The group's entry into the Romanian market came in 2007 when it was involved in the establishment of New Europe Property Investments. The new fund was initially listed on the London Stock Exchange, before it obtained a secondary listing on the JSE two years later.
Resilient listed the Fortress Income Fund in 2009, with 103 B-grade properties assembled from within its existing stable.
The total distribution (final plus interim distribution) paid by Resilient to unitholders for the 2011 financial year was 230.71 cents per unit. This followed the 211.83 cents per unit distributed in 2010, 194.13 cents per unit in 2009 and 169.98 cents per unit distributed in 2008.
The fund offers a yield just over 6%.
Which funds hold this stock?
Outside of the leading listed property funds, Resilient is not widely held by the best performing South African unit trusts over the last three to five years. None of the six leading general equity funds include the stock in their portfolios.
It does however feature prominently in all three of the top listed property funds over that period. It is the fourth largest holding in the Stanlib Property Income Fund at 8.4%, while the Prudential Enhanced SA Property Tracker Fund gives it a weighting of 3.6%. The Investec Property Equity Fund has reduced Resilient's weighting from 11.6% two years ago to 6.1%, but it remains a top five holding in the fund.
To see which funds are buying and selling the counter, visit Moneyweb's Unit Trust Portfolio Tool.
Why would an individual consider investing in this company?
Resilient's strategy of managing shopping centres outside of the major centres in South Africa has been a very successful one. By focusing on under-serviced areas, the group has tapped into a growth story that has delivered excellent returns.
This is due to a combination of factors, including the limited competitive landscape in non-metropolitan areas and that consumers in these cities tend to be less indebted than their big city peers. This means that they enjoy healthy levels of disposable income to spend at Resilient's malls. Increased levels of government social spending have also given more buying power to rural dwellers.
“The strength of spending in non-metropolitan areas has been a result of the way the economic cycle has hit South Africa,” SPI's Dr. von Below. “Percentage-wise, there has not been such a draw down on spending in rural areas, due to the social grants. So rural dwellers were not as affected as those in cities who lost their jobs or had to forego pay rises, for instance.”
Although Resilient's portfolio is limited to retail properties, its holdings in the Capital Property Fund and Fortress Income Fund give it access to the commercial and industrial markets. Through its stake in New Europe Property Investments, Resilient also has exposure to the office, retail and industrial property markets in Central and Eastern Europe. The group is also able to use the sale of these holdings to finance new developments and extensions to its directly-held properties.
In addition, Resilient's management has an excellent reputation in the industry for their ability to get the most out of their assets. Every one of the properties in the fund has been a success, and its affiliated funds have also been strong performers.
What risks does this company face?
The rising cost of services in South Africa, particularly electricity and municipal rates and taxes, is pushing up occupancy costs for shopping centre tenants. This is making it more difficult for property owners to extract rental increases when leases come up for renewal and also raises the likelihood of vacancies.
“Resilient really faces the standard risks of any property fund in South Africa,” Dr. von Below believes. “Other than escalating costs, there is the threat of ongoing weakness in the South African economy that will weaken yields.”
Consumer debt in South Africa also remains stubbornly high, and this is likely to continue to impact on consumer spending. Although Resilient's properties are more shielded from this risk than those in metropolitan areas, the group is still dependent on the profitability of its tenants.
Where does this company’s growth potential lie?
Although Resilient believes that building new shopping centres in South Africa may not be as profitable as is has been over the last decade, it still has a strong pipeline of developments in the local market. It is in the process of building new malls in Burgersfort, Secunda and Sterkspruit, and is extending The Grove outside Pretoria, Mvusuludzo Mall in Thohoyandou, Circus Triangle in Mthatha, Village Mall in Kathu, Northam Plaza and the Highveld Mall in Emalahleni.
As Romania's retail property market is still fairly underdeveloped, New Europe Property Investments will also offer an interesting avenue of growth. The group has purchased a number of shopping centres with good potential for redevelopment, and there is still significant scope for it to expand as many international retailers see the country as a key growth market.
In another offshore move, Resilient is planning to enter Nigeria during 2012. The group believes that there is significant potential to develop a portfolio similar to the one it boasts in South Africa, particularly as it will be following local retailers moving into that market. It has already identified sites for ten new malls and has agreed in principle to invest up to R500m. As SPI's Dr. von Below notes, however, entering the Nigerian market is never easy.
“We've seen so many businesses, like retailers and banks, trying to get into that country and finding it difficult,” he notes. “But if anyone can make it work, it's probably the team at Resilient, particularly because they already have experience of getting involved in less-developed regions through what they've done in South Africa.”
For more, visit Moneyweb's click-a-company profile on Resilient Property Income Fund Ltd.