Episode Transcript
The Finance Ghost: Welcome to episode 283 of Magic Markets. It's great to be here with you. We are recording this episode a week ahead of when it will go out, which is most unusual for us.
But that's because Moe needs to be somewhere else next week, where I can't pin him down with a microphone and a set of headphones. So, double stacking this week: makes it quite fun, and it means that perhaps a couple of the prices we'll mention on specific shares might be a week out of date by the time you listen to this, but certainly the underlying principles will not be.
And Moe, we decided to do something on property. I should mention here that we actually did a show on property a few months ago, but it's just such an important sector and so active on the market that it is something we need to revisit probably every quarter, if not more often, because there's always a lot going on.
So, thanks for doing this as always, and I'm excited to talk property with you.
Mohammed Nalla: Indeed, Ghost. Property is a very important asset class for me specifically because I've always been quite heavily invested in property, more and more in the listed space rather than in the buy-to-let space or “buy-toilet” space, as you've called it in the past.
The reason for this is that property can be treated as a bit of a bond proxy for me, and I'm not actively investing in bonds because of various considerations, but I do invest in property.
You get some of the yield, you get this asset class that kind of behaves as a bit of a bond proxy. But what's quite nice underlying that is if you invest in the right property names, you should also get earnings growth coming through, as well as growth in your cash flows, in your dividends. And so that's what makes this an attractive asset class.
I know you're going to look at this from a JSE perspective. I want to actually just touch on a couple of names up here in North America because I want to contrast just how different the market actually is. And we've done this a couple of times.
But this week I'm going to have a quick look at Simon Property Group because that's really the apex player when you're looking at consumer real estate, very high-end malls in the United States, in North America in general. Then I'm going to look at two other names, and one is Equinix and the other is Digital Realty.
As the names might suggest, these are more plays on data centres. It's effectively the property part of the value chain of this entire AI mega theme. And the reason why I'm looking at those stocks specifically, is that they're telling us slightly different stories. So that's a little bit of the run-through in terms of what I'm going to get into.
The Finance Ghost: Yeah, I've got a couple of recent capital raises to talk about. One is Hyprop, one is Supermarket Income REIT, and I will have a look at some of the elements of those raises and what they tell us about where we are in the cycle, and then just a quick look at how the broader sector has done as an ETF.
So Moe, I'll let you go first. Give us the “Simon Says” from the property sector and a couple of other names, as you say.
Mohammed Nalla: I'll also touch on some of the capital raise or capital behaviour. Let's just call it that up here in North America.
Let's kick off with Simon Property Group because this is a good example of why retail property is not dead, right? It's got the best quality retail properties in North America.
And if you have a quick helicopter view of the results, occupancies are high, tenant sales are strong. You can correlate this against some of the big metrics. Consumer retail has done quite well in the US. It's that US exceptionalism coming through. An interesting data point is the Redbook that's out there, that tells you the underlying performance in the retail sector effectively.
But in aggregate, if you're looking at Simon, rents are rising, consumer still spending. This translates into a pretty decent set of results. If you look at funds from operations, that was up around 7.5% on a year-on-year basis.
That's not really the exciting story. What's exciting here is if you look at just how sustainable this is. That's really the core story that I want to get into.
If you look at the occupancy rates, up at 96%. So, despite these concerns around, hey, you know, is the US consumer actually slowing down? Are we going to see that pressure come through in terms of the retailers? Occupancy at 96%, that's pretty strong.
And then if you translate that into rentals, base minimum rent is up 5.2% on a year-on-year basis. Remember, this is in hard-currency terms. It might sound pedestrian, but that's pretty decent considering the economic backdrop.
Retailer sales: this is what's really moving the needle, because remember some of those leases will obviously have a share that goes through in terms of retailer sales, up 11.8% on a year-on-year basis. So that's telling you that the underlying performance is still pretty strong.
Now, if we look at the capital allocation side of things, Simon's interesting because they are returning capital to shareholders. You mentioned capital raises down in South Africa. That's not the story with Simon at the moment. They've actually increased their dividend. Their quarterly dividend was up to $2.25 a share. It's around 7% up on a year-on-year basis.
And at the same time, they're still buying back shares. Now, you can say, “Should they be buying back shares if the share price has actually ratcheted up?” But they continue to buy back shares. Not massive, around $175 million in the first quarter.
And then when you look at the debt markets, it's really just been refinancing. So, they've been refinancing their debt at a pretty decent weighted average rate at around 5.25%. So, no big concerns coming through there.
Bear in mind, the US ten-year effectively is sitting at north of 4%. So that's quite a nice little compressed spread for a player like Simon. It's not an equity raise story; it's really a return in terms of investor appetite and what's actually happened in that retail sector.
On a 12-month basis that stock is up around 41%. So, you can see a lot of that appetite has come through and is backed up by some of that underlying performance.
Now let's change tack a little bit because I want to now cover the data centre, the AI theme, because we always say, be sensitive of where you are in that value chain. So, let's start off with the stronger of those two names, Equinix.
This is really an AI infrastructure story here. And they're not just a landlord because they also have this global digital infrastructure and interconnection platform that goes into the business. So, you've got to keep that in mind. It's not really a pure look-through in terms of, “Hey, how is the real estate sector doing in this space?”
But if we look at the underlying numbers here on revenue guidance, they're expecting it up around 10% to 11% on a year-on-year basis. You can see it’s stronger than you're seeing in the retail sector. And again, that makes sense. It is a sector that is still quite hot.
If you look at funds from operations, they're expecting those up between 12% to 14% on a year-on-year basis. So again, you can see in the teens there versus a very different story that's come through in terms of retail.
And then when you're looking at the capex story (because as you would expect in this particular segment of the market, capex is going to be a big feature point) you see that total capex in 2026 is expected to be around $4.1 billion.
And what's been interesting here is that this company has been paying their shareholders (you know, yes, they are distributions and so forth), but they've also been investing quite heavily. So again, on the capital raise side, it's not really doing any emergency equity.
But what you're seeing, and I quite like this, they're doing some very clever deals. So, there are two examples here where, for example, they've gone into a $15 billion deal. It's a JV with Canada CPP Investments, effectively the government's pension fund there, and that's looking to add around 1.5 gigawatts worth of new hyperscale capacity.
So how they're actually scaling as a business is, they're finding strategic investors, and they're actually partnering with them to go and build out the book. I think that's a very clever approach to this.
That was one deal. There's another deal where they went and acquired a company called atNorth, again with CPP Investments, very active in this space. That's a deal valued at around $4 billion. It does give CPP a controlling stake, but guess what, Equinix gets to ride those coattails.
CPP is an absolute monster. I mean, they've got, I think it's $500, $600 billion worth of assets under management. It's one of the largest pension funds in the world. And so Equinix partnering with that as a strategic shareholder in a lot of these ventures, makes a lot of sense in terms of scaling the business.
Lastly, in terms of dividends here, like I said, they are still paying investors. That's up around 10% on a year-on-year basis. So again, if you're looking at quality in this data centre and AI space, Equinix is one that certainly cracks the nod for me.
And then, Ghost, lastly and probably the lowest quality in terms of the ones that we're looking at, Digital Realty. The reason I want to flag this is that you can think you're buying a theme like AI, but you can still get a much tougher backdrop in terms of a specific company's operations and strategy.
Their revenue is growing by 16% on a year-on-year basis. So that's pretty strong there. And so why is this the bad news story? If we go and have a look at the share price performance over the last 12 months, I mentioned Simon up around 40%. Equinix, I didn't mention, that's up around 32%.
But Digital Realty, despite the fact that they're growing revenues quite aggressively, that's actually been flat over the course of the last 12 months. And that's going to surprise a lot of people.
So, what's actually happening beneath the hood there? First and foremost, they still pay the dividends. A lot of these REITs have got to maintain that dividend to their shareholders. It's a large part of the investment thesis.
But if you're actually looking at the capital side of things, this is where the difference comes through because they are out there quite aggressively trying to make acquisitions. They actually recently went to go and acquire a greater stake in three Northern Virginia data centres from Blackstone.
And what is interesting is that this was a $3.5 billion stock and cash transaction. But how they eventually went about funding this, is that they effectively went and issued shares to Blackstone. So as a result, they're raising the capital, but they're doing so in a dilutive manner.
And then what's very interesting is Blackstone goes on and actually issues that out in the secondary market. And remember, when it comes to a stock like Digital Realty, they're not getting any of the proceeds in the secondary market.
So, Blackstone's underwriting this. They get the stock. They then go and sell that out via products and funds and so forth. That creates a bit of a dilution overhang in the stock. So that's one of the issues in terms of the underlying nuance, why the market might not be that happy. This company does have a balance sheet that's maybe not as attractive as what you're seeing in a player like Equinix.
I know that's been a bit of a whirlwind trip through this. There's a lot to cover in the sector but it’s showing you a very stark difference in terms of not just sectors, consumer versus the AI theme, but also within the AI theme, how these companies are approaching their growth strategies makes a material difference to the outcome when you're looking at the share price performance.
The Finance Ghost: Thanks, Moe. Lots of cool stuff there to consider. Let me give you the overlay of South Africa now.
Satrix Property ETF is probably a good place to start. Been a wild ride year to date. Started the year at around R14.20, got up to nearly R15. Then everything went wrong with Iran in late Feb and March. Fell to just above R13. Now back at R14.43. So, a bit of a yo-yo.
It is up year to date, not by much, but it does pay you dividends along the way. So that is the one cool thing with property, is that you do get paid to hang around.
And I think one area that makes property quite interesting is that it is so linked to the macro story because it is such a yield-focused instrument. It sits somewhere between debt and equity. And obviously what's going on from a macro perspective affects both debt and equity very differently and very significantly.
So, property is kind of the ham in the sandwich there and a lot happens to it. If yields go up, for example, inflation expectations maybe go up, then what tends to happen is property values come down.
And remember, the share prices are moving all of the time, whereas for the underlying property values, we only get an update every quarter or every six months. In truth, the underlying value is also changing all the time. You just can't see it because it doesn't get marked to market every day like a share price does.
What happens is the share prices move in anticipation of, number one, a change in the values, and number two, the potential impact on the dividend yield of whatever is going on in the world. So that's why you're seeing that yo-yo effect in the Satrix Property ETF.
We did a show a few months ago, as I mentioned at the beginning, and we highlighted that you need to keep an eye on the capital raising activity as a potential sign of the top or a sign that things are maybe fully priced at the very least.
So, I'm going to run through a couple of examples and maybe talk about the elements of those capital raises that are interesting.
The one point is that capital raises, particularly equity raises, tend to be upsized in a hot market. That's because - obviously a management team, their incentive is always to get more capital to play with at the best possible share price. That's the baseline incentive when you are raising equity capital.
So, if you are seeing lots of raises, it's because management feels like they'll get a good price. If you are seeing an upsize in the raise, then it's because management did get a good price. In fact, they got such a good price that they want to raise even more.
Hyprop is a very good example. They recently announced a raise of R500 million. Then they increased it to R739 million in the end based on market demand. It's a very weird number, and the reason it's that number is because they literally issued the maximum number of shares they were allowed to under their authority from shareholders. So that's how much demand there was.
The Hyprop trailing dividend yield is only 5.2%, so investors are queuing up for a yield that is around 300 basis points off the SA 10-year yield, and you can decide for yourself if that's reasonable or not.
It's not quite that simple because Hyprop does also have assets in Eastern Europe. So I had a look at Poland. There's a good proxy there, 10-year yield there is 5.5%. You'd have to do the math to really get the blended exposure, etcetera. But I would say that a yield of 5.2% and a price to book at the moment of 0.9% is not exactly a screaming buy.
I still hold my Hyprop shares because it's a solid long-term play. I'm just not adding at these levels. It's been on a very strong run. Property has done very nicely over the past year, especially a stock like Hyprop.
Another sign that maybe the market is getting a bit overheated is when you see capital raises for relatively vague reasons.
Hyprop's raise did include some reference to local capital projects, and they were quite specific on a few things, solar, etc. But they always put in that beautiful catch-all, “general acquisition opportunities in Eastern Europe”. Giving themselves the flexibility here, and the market said, “Sure, take our money”.
Now here's a good example that I'm going to do next as a bit of a balancing figure. So yes, the Hyprop one, if you look at that, you'd say, “Oh, the market's too hot”. But we also had Supermarket Income REIT (literally this week) raising money.
Now, as the name suggests, and Moe, you've probably never heard of it in your life, these guys are out there buying supermarket properties.
They operate primarily but not exclusively in the UK, so their tenants would be the likes of Tesco, Sainsbury's and similar. And this week they announced three assets that they want to go off and buy, all of which are grocery tenanted supermarkets.
But their bigger pipeline, and they haven't given much in the way of detail on the other assets, is actually nine assets. They've got three where they've given lots of detail, and there's another six that they just want to kind of loosely buy, five of which are shopping centres, one is a distribution centre.
And to go and do this and to actually get this pipeline locked in, they wanted to raise £100 million. So that is well north of R2 billion. That's quite a big number. And SA institutions, UK institutions and UK retail investors were all invited to this party.
No invite for South African retail investors, unfortunately. I guess the juice is just not worth the squeeze for them from a regulatory hurdle perspective to actually be able to do that raise in South Africa.
But interestingly, they said in their announcement that they might upsize it, but they didn't, from what I saw. And it came out literally today (again, we're recording this a bit ahead of time). They stuck to their initial £100 million.
Also, they issued at 83p per share. I had a look in the London market because that's really where the liquidity is on this thing, and that's obviously where you're going to get a pounds-denominated price. They came into Wednesday around 89p a share. They raised at 83p a share.
So that is quite a discount actually to where they were before this raise. And they didn't upsize it. So that's quite different to what we've seen now at Hyprop.
Now, is this just because of general UK market jitters? Maybe. I don't think the UK comes up too often at the moment as a very exciting market to be in.
Is the South African market a better place to allocate capital now? Is Eastern Europe still so hot that Hyprop can go and upsize their raise?
I just can't help but look at how things change, because a decade ago in South Africa, if you wanted to raise money in the property sector, you just had to say “UK”. That's all you had to say. And investors were throwing money at you, literally queuing up around the block.
Then along came Brexit and everything else, and the shine came off the UK market. And now it seems like actually most South African investors are looking for either local exposure or regions that have got a great track record of success for South African funds, like Eastern Europe.
Very interesting. You can learn a lot by just following the property sector, let alone everything else. And that's part of why I enjoy it so much.
Mohammed Nalla: Yeah, Ghost, I think those are fascinating insights.
There is potentially another thing, which is that maybe the sectoral exposure. UK retail, maybe the supermarket segment, I've had some investments in that particular sector and they haven't been fantastic.
So, I think on that basis, maybe that comes into play. The other thing I want to touch on as well is you mentioned the dividend yields. I may have omitted those when I discussed Simon, Digital Realty and Equinix.
If you're talking about the yields you're talking about on Hyprop, Simon's coming through with a dollar yield at north of 4%, maybe 4.5%. When you're comparing that, I think dollar earnings and so forth, Simon pretty attractive.
The data centre trades though, those are a lot more compressed because they're obviously using a lot of capital, as we've indicated. So there your dividend yields are a lot lower at around the 2% mark.
Just putting that out there because it's just good to draw that comparison for our listeners. Property, fantastic asset class. You’ve just got to be very sensitive to those macro cycles.
If we go into a higher-for-longer, or maybe even a rate-hike scenario in the US, what does that actually mean for property? Well, you might actually see some pressure come through on a sector that has been relatively strong over the course of the last quarter specifically (and then in selected names over the course of the last 12 months).
So just watch that macro story pretty closely.
Unfortunately, that's all we have time for this week. Let us know what you thought of the show. Hit us up on social media.
It’s @MagicMarketsPod, @FinanceGhost and @MohammedNalla, all on X. Or you can find us on LinkedIn. Pop us a note on there.
We hope you’ve enjoyed this. Until next week, same time, same place. Thanks, and cheers.
The Finance Ghost: Ciao.
