Fairvest - A 100% domestic focussed REIT
Fairvest (FTA/FTB) is an internally managed South African REIT that is focused on retail assets in non-metropolitan areas servicing the middle to lower LSM market. The recent merger with Arrowhead has diversified the group's portfolio, and the company is currently in the process of recycling out of several non-core assets (industrial, office and residential) to strengthen its exposure to the retail sector. The company has a dual-share structure with a combined market cap of R5.8 billion and a free float of ~R4.4 billion.
The current portfolio is made up of 137 retail, office and industrial properties valued at R11.9 billion, with the average value per property held as of 31 March 2023 being around R87.2 million. In addition, Fairvest also has a 5.1% interest (2022: 5.1%) in Dipula Income Fund, which owns a portfolio of defensive urban, township, and rural community retail centres, industrial and logistics mid-sized properties, office properties in urban areas and affordable residential rental assets in economically active locations.
The retail portfolio (currently 66.6% of total Gross Leasable Area (GLA); 49.8% of total revenue) is made up of smaller convenience retail centres, with an average GLA just above 7 000m ² per centre, located in non-metropolitan and rural areas (close to commuter nodes), which service the lower LSM market. The average gross monthly rental per m ² per sector was R151.80 for retail, R114.00 for office, and R48.02 for industrial.
The emphasis is on retail assets, post-merger, with ongoing plans to dispose of several office and industrial properties. These proceeds will be used to fund further opportunities in the retail sector with enhanced growth/yield prospects.
The group is focused on its disposal strategy which will recycle out of industrial, office and residential assets and into retail. Management will also place further emphasis on strengthening its existing platform to support the group's solid track record of delivering sustainable income. This will be underpinned by internal value extraction opportunities. Management has also made note of the following key targets for FY23:
The group recently sold its 61% stake in Indluplace Properties to SA Corporate, with the expected proceeds of R651.4 million being earmarked for debt reduction which will result in a ~5% reduction in the loan- to-value ratio (LTV) and improve the group's interest cover ratio. The disposal was in line with the group's communicated strategy of refocussing the portfolio towards lower LSM and convenience retail.
Despite a very challenging economic environment, the group has experienced positive letting activity and a strong underlying portfolio performance. Like-for-like net property income grew 5% with vacancies increasing slightly from 5.93% at 30 September 2022 (retail: 4.3%, office: 13.6%, industrial: 1%) to 5.96% (retail: 4.3%, office: 13.9%, industrial: 1.5%).
GLA of 103 545m ² came up for renewal, of which 81 505m ² (~79%) was renewed or re-let, therefore aggregate retention was 90.7% of GLA. Rental reversions were positive at 1.8% overall (retail: +2.3%, office: -1.3%, industrial: +4.3%). New deals in respect of 49 430m ² were concluded for the period. The weighted average lease escalation across the portfolio was 6.6%, with retail at 6.5%, office at 6.9% and industrial at 6.8%. The weighted average lease expiry was 26.3 months.
Group loans of R4.8 billion, net of cash and cash equivalents, translated to a LTV ratio of 38.4% (FY22: 38.1%), which is well within covenants limits. The weighted average cost of funding came in at 9.2% and the interest cover ratio (ICR) was 2.5 times.The near-term focus was to remain on targeted disposal, further reducing vacancies, to implement additional operational efficiencies and realising further synergies from the Arrowhead merger. Management expects net property income growth from all sectors on a like-for-like basis for FY23 to be achieved and maintained full-year guidance for distributable earnings per B share to come in between 40.50 and 42 cents (FY22: 43.29 cents).
Summary Investment Case
Risks
Outlook and valuation (FTB)
Fairvest has a relatively defensive core portfolio (high exposure to non-discretionary tenants) with the ongoing move towards a retail focused fund, by recycling out of non-core assets, expected to provide further upside potential. Operationally, management will also focus on strengthening the existing platform by further reducing vacancies and implementing additional strategic initiatives to enhance efficiencies, while utilising synergies from the merger. Trading metrics remain strong, despite a tough operating environment, with the group remaining on track to achieve internal targets.
The disposal programme is also anticipated to reduce LTV levels, decrease exposure to underperforming assets, and lower risk across the portfolio. The management team also has the ability to unlock further value through improvements in the operational performance and efficient capital allocation.
Fairvest B is trading on a forward distribution yield of ~13% and a 32% discount to net asset value (NAV), which appears attractive. We like the quality of the portfolio (particularly the core retail assets), management, and operations, as well as its accretive asset recycling programme.
Based on internal valuations for FTB, the fair value comes in at 405.33 ZAR cents which is reflective of 24.7% upside potential.
