Listed property, watch the V (#406)

Simon Shares

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• Day 98 of lockdown and Covid-19 cases are spiking in South Africa.
• Local GDP for the first quarter came in at -2%, helped by agriculture +27.8%
• For the first time since July 2019, PMI respondents expect conditions to improve in six months' time. The index tracking expected business conditions rose to 51.2 in June. Overall PMI for June was 53.9 but remember this index records monthly changes in expectations so it is expected to improve as lockdown levels improve.
• Barloworld (JSE code: BAW) results were a horror even as they were for the period ending March. The stock lost 11.5% on Tuesday and the headline news was Tweeted by Hilton Tarrant;

Avis and Budget Rent a Car Southern Africa (owned by Barloworld):
🚗 Will retrench 50-60% of staff.
🚗 Close at least 26 of its 90 branches (1 in 3). Already down from 150.
🚗 Rental fleet already cut from 27,000 to 22,000. Will remove another 10,000 vehicles by February.

— Hilton Tarrant (@hiltontarrant) July 1, 2020

• New Exchange Traded Fund (ETF) coming from Satrix and it covers China. It'll be the first China ETF for the JSE (there was a Deutsche Bank ETN that closed in January). The TER is pricy (0.63%), but that's often the case with an ETF like this and it is in IPO until 14 July and thereafter will trade on the JSE and will be eligible for tax-free accounts.
• An update from the JSE (JSE code: JSE) was maybe a little lighter than I would have thought. But it is seeing improved revenue due to increased trade on the market and this does mostly drop to the bottom line, except for some increases in executive pay that took off some of the shine.
• Intu (JSE code: ITU) finally it the wall as they couldn't get a standstill on debt last Friday. The stock is suspended with a market cap under R400million and some R100billion of debt. Shareholders are likely to get nothing from the ruins.
• ADP was a slight miss, 2,369million new jobs vs expected 3million. Crunching the data, the US has lost 14million jobs during the pandemic and only 27% of the March-April job losses have returned. This translates to an unemployment rate of around 13%.

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Listed property, watch the V

Redefine (JSE code: RDF) has sold assets worth R7.7billion to pay down debt. This improves their LTV (loan-to-value) to around 40.6%, but the risk remains as the V part of LTV is also a moving target and will likely be moving lower when their yearend comes around in August.

LTV is a very important data point in listed property and bank loan covenants will be based on this figure.

Listed property revalues their assets on a rolling three-year review. Every year a third of properties have a full revaluation. Somebody checks the lifts etc. Also important is occupancy levels and rental payment rates and increases in rentals.

The other two-thirds of the properties are adjusted in the year they're not having a hard revaluation.

Helping is that lower rates will boost valuations and debt may also in part be floating.

But we can expect valuations to be 10%-20% lower and this will spike the LTV levels really hurting the LTVs.

That said, bankers are not likely to be calling in the loans as they don't want to be landlords but remember my podcast of earlier in the year about maintaining REIT status, this is a sector under serious pressure. https://justonelap.com/podcast-property-losing-reit-status/

Lastly, adding to the woes is that the debt is often debt notes that will need to be rolled, who's going to be buying listed property debt in this market?

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