A drama unfolding in the South African real estate sector that has seen four interlinked companies lose around half their value since the start of the year is offering a bargain for investors brave enough to go against the market, according to local analysts.
The share prices of Resilient REIT and companies it helped found — Fortress REIT Ltd., NEPI Rockcastle Plc and Greenbay Properties Ltd. — have all dropped significantly since Feb. 9, when an internal note by hedge fund 36ONE Asset Management questioning the companies' valuations and raising concerns about their governance and accounting practices was leaked to local media. A separate note from investment bank Arqaam Capital published in the days after expressed similar concerns.
Resilient REIT refuted the allegations Feb. 12, stating that the "untested allegations" of share price manipulation would "not stand up to independent scrutiny," and that 36ONE's views were motivated by its large short position against the companies, South Africa-based financial publication Moneyweb reported. Resilient REIT could not be reached for comment.
The controversy added to losses suffered by the Resilient REIT-led stable of companies since the start of the year, just as global markets were recovering from a rocky January and South African shares bounced at the prospect of unpopular President Jacob Zuma leaving office. From Feb. 9 through the Feb. 28 close, the value of Resilient's class B shares had lost 33.6%, Fortress' had fallen 35.5%, NEPI's by 6.1% and Greenbay's by 15.9%. The FTSE/Johannesburg Africa All Share Index rose by 3.7% during the same period.
After recovering slightly in trading earlier in the week, the share prices of the Resilient group of companies struggled again Feb. 28. The fresh slump coincided with news that Investec Ltd.'s wealth unit will no longer accept securities of the companies to back loans from the beginning of this month, Bloomberg reported. This will make it harder for investors in the companies to borrow using the property companies' stocks as collateral. Resilient fell by 3.16%, Fortress was down by 1.3%, NEPI Rockcastle by 5% and Greenbay rose by 0.7%.
But some investors see the plunge in prices as a golden opportunity. Coronation Asset Management boosted its stake in Fortress REIT's A shares, which have fallen by 14.8% since the start of the year, to 25.5% on Feb. 16; it had held a 3.4% stake as of Jan. 26, according to S&P Global Market Intelligence data. Public Investment Corp. upped its stake in Fortress' B shares to 10.1% from 4.2% as of Jan. 26.
"They've seen essentially what I'm seeing: the significant value in these companies," Len Van Niekerk, senior property analyst at South African lender Nedbank, said in an interview. "The share prices have overshot on the downside. The earnings fundamentals are still there. There have been some issues around governance, and there have been a couple of questions which do need to be asked, but the decline in the share prices is all out of proportion to the actual issues that have been raised."
Another local analyst, who did not want to be identified because they were not permitted to speak to the media, said the recent pressure on Fortress' share price is the main driver behind Coronation increasing its stake. However, its holding of class A shares, which have preference in voting rights and in an event of liquidation, rather than class B was "a less risky option," added the analyst, who said they were familiar with Coronation's thinking on the matter.
Blocking and tackling
That mitigation of risk could prove wise as the Resilient stable of companies moves to address the concerns of investors. Resilient and Fortress share prices fell further Feb. 22 when both companies announced in separate statements that they were looking closely at the valuations underpinning their relationship with the Siyakha Education Trust, South African daily newspaper Business Day reported.
The Siyakha Education Trust, a broad-based black economic empowerment partner, or B-BBEE as such initiatives are known in South Africa, was established by Resilient, Fortress and Lodestone REIT Ltd., according to its website. Resilient's and Fortress' financial arrangements with the trust were among the main concerns raised by 36ONE Asset Management and Arqaam Capital in their notes.
36ONE Asset Management said the structure of the Siyakha Education Trust enabled the manipulation of the Resilient companies' share prices and volumes. Resilient and Fortress announced separately Feb. 22 that they would "commence negotiations with the trustees of and other lenders to the Siyakha Education Trust regarding all loans to the trusts and underlying collateral," according to the Business Day report.
Concerns over cross-holdings among the Resilient stable of companies also were raised by 36ONE Asset Management and Arqaam Capital. Resilient REIT owns 15.9% of Fortress, 13.0% of NEPI Rockcastle and 21.0% of Greenbay, while Fortress owns 9.3% of Resilient REIT.
The Johannesburg Stock Exchange announced Feb. 9 that its Market Regulation Division was reviewing trading in Resilient group shares, while a separate investigation by South Africa's Financial Services Board is underway. Resilient REIT announced Feb. 16 that it was launching an independent review of information available to it as it addressed "consistent feedback from its shareholders that cross-shareholding [should be unwound]," Reuters reported.
Resilient's willingness to submit itself to an independent review is a positive step, the unidentified analyst said. "They have identified the main concerns, and they've basically put it in the hands of the board to appoint an independent review now with no limitations on that scope. So net-net, I would say they are going to address all of those concerns," the source said.
