Equity sales note by SBG Securities (Proprietary) Limited

Greg Brady

30 June 2016

securities@standardbank.co.za

Listed property – June 2016

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

Contents Page

1. SA listed property sector performance 2

2. SA property share value comparisons 3

3. Foreign property share value comparisons 8

4. Conclusion 13

2

SA listed property index delivered a negative return in the last three months Contents

Indexed total returns – last 12 months (Rands) Indexed total returns – last decade (Rands)

Sources: I-Net, SBG Securities (Pty) Ltd Sources: I-Net, SBG Securities (Pty) Ltd

SAPY performance

Property share

value comparisons

Conclusion

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),

100

200

300

400

500

600

Sep-05 Apr-07 Nov-08 Jun-10 Jan-12 Aug-13 Mar-15

SAPY All Share All Bond

90

95

100

105

110

Mar-15 Jun-15 Sep-15 Dec-15

SAPY All Bond All Share

3

SA REITs 2-yr forward distributable EPS yields compared Contents

Sources: Factset, SBG Securities (Pty) Ltd

SAPY performance

Property share

value comparisons

Conclusion

>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

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

- 1 2 3 4 5 6 7 8 9

10 11 12 13 14 15 16 17

DLT

TE

X

HP

A&

B

TW

R

RE

B

AW

A

ILU

EM

I

OC

T

AP

F

SS

S

VK

E

IPF

SA

C

LD

O

RD

F

EQ

U

GR

T

FF

A&

B

HY

P

RE

S

%

4

Price-to-book versus forecast total ROE of SA property stocks Contents

Sources: Company data, SBG Securities (Pty) Ltd estimates

SAPY performance

Property share

value comparisons

Conclusion

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 longer-

term relative growth or quality of underlying physical portfolio

GRT

EMI

HYP

IPF

VKE

RDFLDO

PIV

SAC

RES

SSS

HOSP

FORT

REB

AWA

TEXTWRATT

DLT

ILU

EQU

OCT

APF

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

1.50

5% 10% 15% 20% 25%

Pri

ce t

o b

oo

k ra

tio

12m forward total ROE

5

Mark-to-market NAV’s for significant listed property holdings Contents

Sources: Factset, Company data, SBG Securities (Pty) Ltd estimates

SAPY performance

Property share

value comparisons

Conclusion

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

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%

6

PEG ratios for SA REITs Contents

Sources: SBG Securities (Pty) Ltd estimates

SAPY performance

Property share

value comparisons

Conclusion

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

-

0.50

1.00

1.50

2.00

HP

A&

B

ILU

DLT

LD

O

TE

X

SS

S

AW

A

RE

B

IPF

OC

T

EQ

U

SA

C

TW

R

VK

E

EM

I

FF

A&

B

RD

F

AP

F

HY

P

GR

T

RE

S

7

SBG Securities Research SA REIT coverage and ratings Contents

Sources: Company data, SBG Securities Research

SAPY performance

Property share

value comparisons

Conclusion

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

Vacancy DY P/B CAAG Loan/ Price Target

12m 24m Value price

fwd fwd

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

Implied

total

return Rating

8

Forward clean distributable earnings yields two years out for foreign REITs Contents

Sources: Factset, company reports, SBG Securities (Pty) Ltd

SAPY performance

Property share

value comparisons

Conclusion

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

9.0 8.6 8.3 8.3

7.1 6.9

5.7 5.3

4.8

3.8

-

2

4

6

8

10

SRE RPL STP IAP CRP MSP ITU ROC NEP SCD

%%

9

Price to book value ratios of foreign counters Contents

Sources: Company reports, SBG Securities (Pty) Ltd

SAPY performance

Property share

value comparisons

Conclusion

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

0.68 0.78 0.78 0.81

1.01 1.01 1.05 1.06 1.17

1.48 1.62

1.86

0.00

0.50

1.00

1.50

2.00

2.50

ITU CCO CRP STP MSP SRE RPL SCD IAP ROC TDH NEP

10

Price-to-book versus forecast total ROE of foreign property stocks Contents

Sources: Factset, company reports, SBG Securities (Pty) Ltd

SAPY performance

Property share

value comparisons

Conclusion

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

SRERPL

ITUCCO

NEP

ROC

IAP

TDH

MSP

STPCRP

0.65

0.85

1.05

1.25

1.45

1.65

1.85

2.05

5% 7% 9% 11% 13% 15% 17% 19% 21%

11

Australian REITs have become relatively more attractive versus Europe and SA Contents

Sources: Factset

SAPY performance

Property share

value comparisons

Conclusion

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%

10

12

14

16

18

IPF-JSE IAP-JSE

The tale of two Investec REIT prices in rands– SA versus Australia

12

Tax treatment of listed property securities for SA individuals Contents

Sources: Company data, SBG Securities (Pty) Limited

SAPY performance

Property share

value comparisons

Conclusion

Withholding tax on distributions SA normal

income tax

SA-REIT no yes

UK-REIT (ITU, RPL,

CRP)

20% at UK source, can be rebated to a

net 15% in SA

no

A-REITs

(GOZ, IAP)

15% at Australian source, effectively

reduced to +6% after depreciation

allowance

yes

REIT domiciled in

IOM, Mauritius

(NEPI, ROC)

15% foreign dividend tax payable in SA no

UK and other public

companies (CCO,

TDH, MSP, SRE,

STP, SCD)

15% foreign dividend tax payable in SA no

13

Conclusion Contents

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%

SAPY performance

Property share value

comparisons

Conclusion

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requirements designed to promote independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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