There’s a reason many refer to Fairvest as the gift that keeps on giving. Earlier this week, the property stock’s B shares were back at record highs of about R7.60 after dipping briefly in March/April following the start of the war in Iran.
That brings the counter’s 12-month rally to a hefty 44%, and cements its position as one of the JSE’s best-performing South Africa-based property stocks over one, three, five and 10 years. Fairvest is, in fact, the only real estate counter that appears among the sector’s top five in every period. The company’s multiyear track record of chart-topping dividend growth also continues unabated. Earlier this month management hiked dividends (B shares) by 12.3% for the six months to March and raised its growth guidance for the full year to September to 11%-13%, up from an initial 9%-11% forecast. That compares with an average 5%-7% distributable income growth expected for the listed property sector this year.
Fairvest is one of the few real estate investment trusts (Reits) that still pays out 100% of its profits to shareholders. Unlike many of its peers, which have over the past decade expanded their footprints offshore, Fairvest has stuck to its knitting and remains a 100% pure South African play. It is also the JSE’s only remaining Reit with a split A and B share structure to cater for different risk profiles. Fairvest’s A shares receive a set annual dividend increase equivalent to the lesser of CPI or 5%, while the remaining income goes to the Bs.
Its R13.5bn portfolio of 130 directly owned properties comprises mostly small- to mid-sized retail centres, typically ranging from 5,000m² to 20,000m², in rural areas, townships and CBDs, as well as a smattering of office and industrial buildings inherited from its early-2022 merger with Arrowhead.
Pre-pandemic, Fairvest was still widely regarded as a small cap with a market value below R5bn. It has since ballooned to R15.7bn.
About 70% of Fairvest’s income comes from its retail portfolio, which consists mainly of no-frills neighbourhood, convenience and community centres near taxi ranks and commuter routes that cater for essential needs shopping. It also owns a 23.6% stake in Dipula Properties, which owns more than 80 retail centres with a similar focus on low- to mid-income consumers.
In addition, Fairvest holds a 55% stake in fibre group OnePath Investments, which rents its infrastructure to network operators that provide internet access to township residents. It is a relatively new but rapidly growing income stream for Fairvest. In the 12 months to March, the dividend received from OnePath already jumped from R3m to R37.8m.
Fairvest reported a strong operational performance for the interim period, which underscores why the company continues to attract investor interest. Like-for-like net property income increased by 8% for the six months to March year on year, driven by operating cost savings and a 5.7% average rental reversion, up from 4.8% the previous year. That’s impressive growth, given that most other Reits are still seeing negative rental reversions in their mall portfolios when leases come up for renewal. Fairvest also has a strong balance sheet, with a low loan-to-value ratio of 26.6%.
Management continues to pivot towards the retail sector and bulking up Fairvest’s shopping centre portfolio. In the past 12 to 18 months, at least three noncore office and industrial buildings have been sold for about R100m, while seven retail centres have been acquired for amounts to the tune of R1.17bn. Recent acquisitions include Jozini Mall and Tugela Ferry Mall, both large commuter centres in northern KwaZulu-Natal, in line with Fairvest’s strategy to grow exposure to rural and nonmetropolitan retail centres in previously underserved markets. The purchase price of the two malls will be partially settled by a recent book build that raised R900m.
While Fairvest continues to deliver the goods for existing shareholders, have investors who don’t yet own the stock missed the boat?
“Fairvest is not cheap”, says Evan Robins, senior portfolio manager at Old Mutual Investment Group. However, he cites several reasons investors continue to pay up for the stock. “Fairvest is an attractive proposition in that it is a tightly managed company by hands-on property specialists and operates predominantly in the attractive rural and township retail sector.”
Ian Anderson, head of listed property and portfolio manager at Merchant West Investments, has a similar view. He says Fairvest looks “very expensive”, but notes that the picture is somewhat distorted by the Reit’s legacy dual A and B structure, which it inherited from the Arrowhead merger.
He says A shareholders receive dividend payouts first at a set annual growth rate of up to 5% (for the six months to March, A investors received an increase of about 3%, in line with CPI). All the residual growth in distributable income achieved by Fairvest accrues to B shareholders, who received a stellar 12.3% for the same interim period. As a result, dividend growth for B shareholders is amplified during good times as they benefit from geared growth, and vice versa in tougher periods.
Anderson predicts that investors will likely remain willing to pay a premium for Fairvest B shares, provided the company continues to deliver above-market earnings and dividend growth. That’s not an unlikely scenario, he says, given the company’s focus on what is arguably South Africa’s most lucrative retail property segment. “These centres tend to offer stronger foot count and cash flows than urban malls that cater for higher-end consumers. That’s why Shoprite and Boxer are expanding so aggressively into the type of malls that Fairvest and Dipula own.”
Anderson adds that Fairvest and Dipula are essentially the only two JSE-listed Reits that offer investors near-exclusive exposure to rural, township and commuter malls that cater to lower-income shoppers, after Safari Investments was taken over by Heriot Reit last year. While retail-focused Vukile Property Fund also owns several township and rural malls in South Africa, more than 60% of its portfolio value sits in Spain and Portugal.
The question arises whether Fairvest will follow the route of Fortress Real Estate, Delta Property Fund and Dipula, which in recent years collapsed their A and B shares after investor pushback. The split capital structure fell out of favour as the costs, complexities and downside risk to B shareholders began to outweigh the benefits.
Fairvest CEO Darren Wilder tells the FM that there is no plan to abolish Fairvest’s dual structure, given the relatively small number of A shares in issue — only 65-million, vs about 2-billion B shares. He notes that other property stocks with split shares typically had a 50/50 ratio of A and B shares. That created issues for B shareholders during bear markets, as the A shares would still receive their fixed entitlement, effectively draining cash and leaving B shareholders to absorb the downside.
Wilder says that won’t be the case with Fairvest, as the company will not issue any additional A shares, ensuring that B shareholders are not disadvantaged — even during periods of slower earnings growth.