Promis­ing value chaser for off­shore in­vest­ment

Financial Mail - Investors Monthly - - Analysis - Joan Muller

It’s no se­cret that the JSE’s rand hedge prop­erty coun­ters have been all the rage in re­cent years, with some stocks de­liv­er­ing stag­ger­ing re­turns for pun­ters who got in early. Think Ro­ma­nian retail play New Europe Prop­erty In­vest­ments, sis­ter fund Rock­cas­tle and Lon­don-cen­tred Cap­i­tal & Coun­ties Prop­er­ties. The share prices of all three have more than dou­bled over the past two years alone. But off­shore-fo­cused prop­erty coun­ters are start­ing to look ex­pen­sive. Not only have many of them al­ready run hard, but there is also the view that the rand may be over­sold, which will limit fur­ther up­side from cur­rency weak­ness. That means in­vestors who are still keen to in­crease their ex­po­sure to off­shore real es­tate mar­kets should pro­ceed with cau­tion.

One off­shore list­ing that hasn’t yet shot the lights out and is now ap­pear­ing in­creas­ingly on the radars of value chasers is In­vestec Aus­tralia Prop­erty Fund (IAPF). It is one of the top picks for 2016 of bou­tique prop­erty as­set man­ager Ses­fik­ile Cap­i­tal.

The counter de­liv­ered a to­tal re­turn of 19% last year, not too shabby if one com­pares it with the listed prop­erty sec­tor’s over­all 8%, but below the 30%-50% achieved by most other for­eign list­ings. Ses­fik­ile di­rec­tor Mo­hamed Kalla says: “The stock is now trad­ing at a for­ward div­i­dend yield of more than 8% in Aus­tralian dol­lars, which is good value com­pared with yields of less than 5% for most of its UK and Euro­pean-fo­cused coun­ter­parts.”

The com­pany is still achiev­ing dou­ble-digit div­i­dend growth, with man­age­ment guid­ing 10%-12% in Aus­tralian dol­lars for the full year to the end of March.

Af­ter tak­ing the rand’s de­pre­ci­a­tion against that cur­rency into ac­count, the com­pany’s in­terim div­i­dend for the six months to the end of Septem­ber last year was up a sub­stan­tial 22% in rand. Kalla also likes the com­pany’s very sim­ple and fo­cused man­date. “You know ex­actly what you are in­vest­ing in and what man­age­ment’s strat­egy is.”

IAPF, which is the In­vestec group’s first listed off­shore-fo­cused prop­erty play, owns 19 in­dus­trial and of­fice prop­er­ties, worth AU$461m (R5.2bn). The port­fo­lio is spread across most key Aus­tralian cities, in­clud­ing Syd­ney, Bris­bane, Mel­bourne and Perth.

Man­age­ment, with for­mer South African Graeme Katz at the helm, has grown the port­fo­lio nearly four­fold since Oc­to­ber 2013, when the fund was listed on the JSE with the back­ing of South African prop­erty veter­ans Sam Leon and Sam Hack­ner. At the time, IAPF owned eight prop­er­ties, worth AU$130m.

Katz is likely to clinch more yield-en­hanc­ing deals this year fol­low­ing an R690m rights is­sue which opened ear­lier this month. It is the first time the com­pany is tap­ping cap­i­tal from the mar­ket since Oc­to­ber 2014. Pro­ceeds from the rights of­fer will be used to re­duce the fund’s gear­ing and to pur­sue fur­ther growth op­por­tu­ni­ties.

Says Katz: “IAPF has had a very suc­cess­ful two years from an ac­qui­si­tion per­spec­tive. We have taken ad­van­tage of at­trac­tive op­por­tu­ni­ties through the In­vestec net­work, and the rights is­sue will al­low us to re­tain this ca­pac­ity in a very com­pet­i­tive

mar­ket.’’ Katz be­lieves Aus­tralia is still at­trac­tive from a real es­tate in­vest­ment point of view given that qual­ity prop­er­ties can be bought at yields ex­ceed­ing 8% while debt fund­ing costs sit below 5%. “That rep­re­sents a sig­nif­i­cant yield spread above other de­vel­oped mar­kets that are cur­rently ex-growth.’’

An­a­lysts say man­age­ment was clever to go the rights is­sue route in­stead of un­der­tak­ing an ac­cel­er­ated book build, which un­til re­cently was the favoured way for prop­erty com­pa­nies to raise fresh cap­i­tal. In the year to date, at least five off­shore-fo­cused real es­tate coun­ters have em­barked on plans to col­lec­tively raise more than R5bn to fund their var­i­ous growth am­bi­tions.

Evan Robins, port­fo­lio man­ager at Old Mu­tual In­vest­ment Group’s MacroSo­lu­tions bou­tique, says cur­rent mar­ket un­cer­tainty will no doubt make it harder for com­pa­nies to raise cash. How­ever, those such as IAPF that go the rights is­sue route can price it at a deep dis­count to en­sure take-up among ex­ist­ing share­hold­ers. In con­trast, an ac­cel­er­ated book build of­ten im­poses a lim­i­ta­tion on the dis­count at which a com­pany can is­sue new shares. “Also, a book build al­lows new share­hold­ers to come in, so the lower the price of a book build the worse it is for ex­ist­ing share­hold­ers who haven’t par­tic­i­pated,” says Robins.

IAPF’s rights of­fer price was set at R11.58/share, which rep­re­sented a 7.4% dis­count to the 30-day av­er­age trad­ing price at the close of busi­ness on Jan­uary 14 and a 15% dis­count to the R13.60 at which the stock peaked at the end of Jan­uary.

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