Emira: The South African case study
In my last article I tried to answer a question in relation to a lack of innovation at REITs, at least in SA – given my experiences (note: I will investigate innovation in foreign markets soon, watch this space). This is, in my opinion, due to the way REITs have been set up & structured – distribution growth dictates their next move and thus not a lot of long term thinking is ingrained in their DNA [I would note that I am not here pointing fingers, I was part of this world, I am guilty of this]. While this is the case one could surely find exceptions to the argument?
Yes, one Emira Property Fund. These guys are somewhat of an unsung hero in the South African property sector. Kudos to them and their ballsy approach to innovation.
Yes, innovation happens in different shapes and forms… and so while they have been innovative in their strategy re acquisitions ~ like the rest of the market ~ offering something different to South African investors in their foray overseas into American property (Merica!!!!), this does not deserve the majority of my kudos! I am alluding their attitude and approach to digital transformation and disruption ~ something that has slipped through the cracks and should be awarded with a proclaim of “hallelujah, someone understands (even if it’s a foundation [see what I did there? Property puns, yay])!”
Before we get into their story, lets recap the story of REITs for those who want a background (if not skip the next 2 paragraphs 😊 ).
Simply put, REITs or (“Real Estate Investment Trusts”) are structured to give investors another option at investing in a listed equity with a focus on dividend income linked to property ownership where the base income is derived from rental revenue (leases). REITs give investors the opportunity to take hold of property ownership in an indirect manner, and so long as they are investors in that specific REIT they will get dividends or distributions, why? Well, REITs need to pay out more than 75% of their profits in distributions and, so long as they do this, they are exempt from corporate tax… great stuff! A great way to incentivize property ownership! Yay!
Cool, so, the dividend income described above is backed by lease income that over time escalates… we know this from the various leases tenants sign with their landlords (the REITs). Problem: Rentals escalate every year… and boom, we have created an expectation for an investor base that wants dividend income to increase due to escalations in leases year on. The sector is judged on this… my question is: where does this whole scenario leave innovation? I’d hazard a guess… on the backseat!
Innovation comes in different shapes and forms as Elias has discussed previously. One form of innovation is being nibble in one’s strategy… I would argue that the sector has been very successful in this regard actually. Why? Because it has successfully bought properties in many different jurisdictions around the world, thereby allowing the investor base to have a bigger spread in their piece of the pie & naturally having to de-risk the South African economy. SA REITs have successfully effected transactions in the UK, Europe (both developed [Germany et al] and developing [Spain, Central & Eastern Europe et al] countries) the US, and Rest Of Africa = great. That’s a tick… there is some form of innovation. I would argue however that this form of innovation is driven by the short-term nature of REITs needing to achieve x.xx% growth in distribution year-on-year => short-term goaled.
What I am trying to say is there is not enough innovation or strategy forming that revolves around the long-term future of the sector… but there are exceptions, Emira!
Let’s take a look at their story through a couple of graphs. Hopefully, this will help us tell a story of what they did in the quest for digital transformation.
Graph 1: How have they faired over the last decade?
Well, if you exclude the last year’s (2019/2020) performance on the share (as you would have to consider given such volatile times we are currently facing [thanks Corona ~ Rona]), Emira hasn’t done too badly in fact, given the set of circumstances for Real Estate in South Africa. Yes, you could have invested in Naspers (good for you, seriously, good for you!) but, given the company was in some trouble 6 or so years back (more on this later), it still gave a solid return of 65.9% over 2008 to the beginning of 2019 ~ 6.0% per annum. Thus, if you invested R 1,000 in Emira in 2008 (when it listed) it would have enjoyed a return of R 1,655 ~ thanks to share price increases and dividends being paid out over the period – a key determinant in success for REITs (see above if you need a recap).
I know what you are thinking…. Great, but comparatively how did Emira do vs the market, right? Well, see the graphs below a comparison in its performance vs the SA Listed Property Index & the JSE All Share Index (ALSI) – comments below in (2) & (3).
Graphs 2 & 3: Emira in blue vs comparatives in grey
Emira vs Listed Property Index (2) and Emira vs JSE ALSI (3)
(1) I would say that the two graphs are correlated somewhat – they are both have trend-lines that are similar (aka their prices have gone up and then down). This makes sense as most property in South Africa has been under pressure given the economic outlook over the past 10 years, especially in recent times ~ thus they are correlated (I can do calcs to prove this, should you want). The only period I would question re performance is the period circled in yellow 2015 onward… what happened here? Well, Emira, dropped out of the SA Listed Property Index and Emira took on a new executive team, a key element in their innovative ways… you’ll see.
Therefore, comparatively Emira has more or less followed the performance of the SA listed property sector. Yes, there are calcs I could throw at you, but I want to keep this light-hearted and not a thesis.
(2) These two graphs are correlated, but less so than (1), why? Well, there are comparative periods of under-performance, especially the area in the red circle. This is because the ALSI has been dominated by companies like Anglo, SAB (now AB-inBev) and more recently Naspers (which has over the last 6 years absolutely smashed the lights out). These companies (and other companies like them) have dominated the index and thus have comparatively done better than property shares. Moreover, the fundamentals of these stocks aren’t really related to that of Real Estate, except for one thing… rental of space (not really moving needles re performance of REITs in general). Needless to say if you invested R 1,000 in the JSE ALSI in 2008, you would have enjoyed a return of R 3,189, a 219% return – c.19% per annum.
Right, so lets wrap up the discussion re performance:
- Emira has done okay-ish as it has given returns to its investors and has tracked other property companies (with the exceptions in the years in yellow) over the years.
- It has done worse vs the ALSI, why? Because it was operating in a sector that had its fundamentals under attack with a barrage of negative economic stats being thrown at it.
I would argue that Emira was also tarnished with the same brush as every other property company out there… Not a problem, I mean how can you differentiate yourself when you doing the same thing? You own property collect rent and distribute income…. Buzzer sound…. You can do things a whole lot better.
The above statement is sad as I feel Emira’s different ways of doing things (their innovation) has not been recognized in a better share price. Perhaps this is the markets general view on property, right? what a shame, why? It was innovating during this time… yes, innovating its strategy by re-balancing its portfolio & going overseas (offering the market exposure to US property), but also using digital transformation to get it to the next level ~ a move that has paid off? lets find out.
To do this, a table & graphs!
* GLA = Gross Lettable Area
** WALE = Weighted Average Lease Expiry
Emira has gone through a change of some sort over the last 8 years (see some key dates are depicted in the graph in annexure 1). It has re-balanced (fancy word for selling of non-core properties) its portfolio and has replaced these with properties in the US (offshore expansions were and still are a key trend in the market). The US exposure is something that other South African REITs have not ventured into yet, and has proved to be a good investment (who knows what will happen post Covid re the markets appetite for US property… who knows?). Anyways, the key trends I see above are as follows:
- While their number properties have fallen over the period, their admin expenses continued to increase… excellent move as they were investing in their staff and systems to navigate very harsh times in the SA property industry;
- One thing they did was launch an app in Oct 2016. Now one thing to ask of Emira themselves is how did they fund this? Was it through expenses and hence admin, cause if so, I would say this is money well spent, why? Simple
- Their vacancy rates have decreased in recent years; and
- Their WALE has increased nicely.
Yes one could argue that a big portion of this decrease was driven by the re-balancing mentioned above (we can only assume that this is the case), but perhaps a question to ask them is how much of it was due to them launching an app (which was updated in late 2019 btw).
- The end result, Net Income and hence distribution has increased since the re-balancing… great result. Again, how much of this is due to being innovative wrt to using an app, who knows? But I would bet my bottom on the fact that it at least help the leasing team to sell space (either rental or sale) A HELL OF A LOT BETTER.
To take this discussion forward Elias, Mike & I would really welcome an interview with someone at Emira that can give us insights into how the app they launched helped manage the sale of property.