Investing in township shopping malls gives Fairvest the edge

Chief Executive Officer, Darren Wilder said: “Fairvest’s focus on a differentiated sector of the market and its unrelenting drive to excel at property fundamentals, have allowed investors to reap the rewards of consistency.

The latest results from Fairvest Property Holdings (JSE: FVT) confirm that shopping malls aimed at the lower Living Standards Measure (LSM) are delivering better returns than their suburban counterparts.

Investors may well be tempted to stash their cash elsewhere in light of the disappointing income and share price performances delivered by JSE-listed property stocks last year.

Few South African based real estate investment trusts (Reits) have bucked the general trend. Fairvest Property Holdings is a notable exception.

The company, which owns a R3.14 billion portfolio of 45 retail centres that cater mostly for lower-income shoppers in townships and rural areas close to commuter networks, last week reported dividend grew 8.3% to 10.616c in the six months to December 2018.

Chief Executive Officer, Darren Wilder said: “Fairvest’s focus on a differentiated sector of the market and its unrelenting drive to excel at property fundamentals, have allowed investors to reap the rewards of consistency.“

A consistently strong performance has led to increasing returns for the company. Fairvest’s latest return to shareholders was 25.7% over one year, relative to its compound annual returns of 21.3%, 20.1% and 18.2% over three, five and ten years, respectively. 

These returns have secured Fairvest a spot in the top two performing REITs for all measurement periods, over one, three, five and ten-years. 

The company’s net asset value increased 2.3% to 232.98c per share while vacancies were contained at 3.5% of total lettable area. Like-for-like annualised net property income increased 6.4%. Wilder said tenant retention was at 79.8% at the end of the reporting period.

Portfolio growth

The value of the property portfolio increased by 5.1% to R3.14 billion in the past six months. During the period, Fairvest incurred capital expenditure of R47.7 million to improve existing properties and acquired a 55% share of Libode Shopping Centre for R49.0 million. 

The historic portfolio increased by 3.2% from 30 June 2018. The Middestad Mall’s R31.3 million first floor retail re-development was completed during the period. 

Distribution growth

Revenue increased by 28.1% to R239.4 million, as a result of income growth in the historic portfolio, as well as acquisitions during the period. A focus on arrears management reduced arrears to 1.8%, the lowest level in the past six years.

Cost containment and efficient recoveries of municipal charges remains a strategic focus, which has led to steadily improving cost ratios over recent years. The net property expense ratio (expenses net of utility recoveries) again improved to 12.8% from 13.0% in the previous financial year. 

Prospects

The company said that the retail trading environment in South Africa remains under pressure however, retail assets servicing and trading in the lower LSM sector continue to show more resilience than the balance of the retail sector. 

Fairvest’s exposure to Edcon is low, with its only exposure being to Jet Stores, comprising 0.8% of the total gross lettable area. Fairvest’s high national tenant component and conservative gearing levels positions the company well for sustainable growth in distributions and with the ability to take advantage of opportunities, should they arise.

"We also remain confident that distribution growth of between 8% and 10% for the full year remains achievable,” Wilder said.