Logistics property fund Equites has released results for the year ended February 2022. With a total return (change in net asset value per share plus dividends) of 17.3% for the year, it’s been a solid period for the company that targets double-digit returns in any given year.

The loan-to-value (LTV) ratio was 31.5% at period end (up by 30bps), which puts it squarely in the ballpark for where listed property funds should be. You need debt to make the returns to shareholders work but too much debt can kill you. Equities executed two accelerated bookbuilds in this period (equity capital raises) for a total of R2 billion. Those helped fund developments and acquisitions in both South Africa and the UK, avoiding a large increase in the LTV.

The net asset value growth mainly came from the UK, as property valuations were flat in South Africa. In contrast, the UK valuations increased by 13% in sterling.

Although local valuations may not have increased, the portfolio is fully occupied. This is another reminder of how well the logistics property sector has been doing. With incredible disruptions to supply chains and high levels of growth in online retail, logistics remains the most attractive property class in this market. Shareholders will be pleased to learn that the company believes that “demand for prime logistics space showed no signs of abating” in this period.

Interestingly, the fund hasn’t seen growth in online retail as a major factor in South Africa yet. My view is that online shopping still has a long runway in this country, so that tailwind is still coming.

In South Africa, construction inflation for a warehouse was between 10% and 15% in 2021, so the fund expects to see rental growth coming through (and this implies asset value growth as well).
Distributable earnings grew by 29.9% in the period and the dividend per share grew by 5.2%, so the fund has been retaining earnings for growth.

Separately, Equites announced that its UK subsidiary (Equites Newlands Group) has agreed to sell land for around R969 million to Promontoria Logistics UK. As part of the deal, Equites Newlands will then develop two distribution centres on a turnkey basis at a cost of R955 million. This is expected to generate a profit of R212 million.

The Equites Newlands business has a development pipeline of around R20 billion and is entering into these types of deals to help fund that pipeline. I think it’s a clever model, with the land sold at approximately fair value and the development profits helping to achieve a return for shareholders.

All proceeds are being reinvested in the pipeline rather than being distributed by Equites. This deal would also brings the loan-to-value (LTV) ratio down by 140bps.

The net asset value per share is R18.61 and Equites is trading at around R20.80, a premium to book of around 12%. The share price has been trading between around R20.30 and R23.50 since September 2021.

This is a great example of an investment thesis that needed to catch up to the share price. I like what Equites is doing strategically, but I’m always nervous of a property company trading at a premium to book value.