Bet between two largest real estate investment trusts

Posted On Wednesday, 21 May 2014 19:37 Published by
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Growthpoint and Redefine are the two largest real estate investment trusts, with a diversified exposure to commercial properties in the retail, office, and industrial sectors.

Marc Wainer vs Norbert Sasse

For investors, which is a better bet? Both are involved in deals to buy medium-sized listed property companies that have a large exposure to the retail sector. Once these deals are done, both will also have a smattering of healthcare and hotel assets.

The management teams of these two REITs are experienced property-asset managers and seasoned deal makers, and both companies have exposure to offshore assets in Australia, although Redefine has further interests in Western Europe.

Let’s consider pros and cons. First: what would give Growthpoint the edge over Redefine? For a start, Growthpoint has a comparatively lower exposure to interest-rates risk because it has hedged a greater proportion of its interest-bearing debt against changes in interest rates.

Overall, Growthpoint has hedged more than 90% of its debt, while Redefine has hedged 80% and Growthpoint’s debt is hedged for longer. Another important point of comparison is debt.

Growthpoint’s debt is lower than Redefine’s, with a debt-to-asset ratio of 31%, versus 37%. This is important because property investors want returns while accepting exposure to commensurate property risk. But what they do not want is to get any undue exposure to the interest rate risk.

When it comes to management, Growthpoint has a deep bench of experienced property managers, which makes investors sleep better at night without having qualms about succession planning. Thanks to its recent Tiber acquisition, Growthpoint also has new property development skills.

Growthpoint also takes “responsible investing” seriously, and considers ESG (environment, social, governance) factors. Its portfolio includes highly rated green buildings in Cape Town (the Allan Gray building) and Durban (the Investec building), and has added a “green addendum” to its leases.

Growthpoint has also been voted one of the most blackempowered property companies in South Africa. So what would make Redefine better than Growthpoint?

For a start, the numbers. According to Avior Research, Redefine is trading at a forward yield of 8% while the SA listed property benchmark and Growthpoint are trading at forward yields of 7.6% and 7.1%, respectively. All things being equal, the higher the yield the more attractive the stock.

Yet the portfolio quality of both is not that different. Redefine’s portfolio (after its merger with Fountainhead) will be tilted towards the retail sector (51%), which tends to be less cyclical than the office and the industrial property sectors. By contrast, Growthpoint (assuming the merger with Acucap succeeds) will only have a 45% exposure to the retail sector.

The quality of Growthpoint’s buildings in the retail and office sectors is not inferior to that of Redefine. Growthpoint owns a 50% stake in the V&A Waterfront and prime office properties in Sandton, Umhlanga, and Century City.

When it comes to distributions per share, the expected growth between Growthpoint and Redefine is also similar. Given all these factors, there seems no justification for such a wide spread between the forward yields of the companies.

In my opinion, Growthpoint is a great company but is not as undervalued as Redefine. The opportunity for Redefine to rerate from its current 8% forward yield to just less than the 7.6% yield for the overall property sector makes Redefine the stock to buy. Mkhize is deputy chief investment officer at the Eskom Pension & Provident Fund

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