Hold­ing its head high at home and over­seas

Financial Mail - Investors Monthly - - Analysis - Alis­tair An­der­son

Tower Prop­erty Fund has care­fully po­si­tioned it­self as a well-man­aged prop­erty group with at­trac­tive off­shore and lo­cal com­po­nents.

Ini­tially, when it en­tered Croa­tia, it faced heavy crit­i­cism, as there were con­cerns that it would be un­able to suc­ceed in a mar­ket about which it had lim­ited knowl­edge.

Many SA prop­erty com­pa­nies have taken a chance in Cen­tral and Eastern Europe in the past two years. They are able to bor­row at about 2% and buy prop­er­ties at an 8% yield. In SA, bor­row­ing costs are about 10.5% for a sim­i­lar yield.

The SA as­sets are in big ci­ties, pri­mar­ily Jo­han­nes­burg and Cape Town. For now, Tower’s off­shore as­sets will be solely in Croa­tia. Tower’s CEO Marc Ed­wards says these as­sets will be ring fenced. This could be as a sub­sidiary or a separately listed en­tity.

“The risk on our Croa­t­ian prop­er­ties is low as we have se­cured long-term head leases from the sell­ers,” he says.

In its re­sults for the half year to Novem­ber Tower said it had ac­quired a R1bn re­tail prop­erty port­fo­lio in Croa­tia. This in­creased the fund’s to­tal port­fo­lio value to more than R5bn, and its Croa­t­ian ex­po­sure to about 28% of the port­fo­lio by value.

Ed­wards says 2016 was a wa­ter­shed year for Tower. “Its SA port­fo­lio is per­form­ing well, with ad­di­tional prof­its ex­pected from re­fur­bish­ments and other ini­tia­tives fore­seen in the medium term. These prof­its will be rein­vested and used to boost core earn­ings.”

Tower’s de­vel­op­ment of more than 70 res­i­den­tial units at the Cape Quar­ter is ex­pected to come on stream from De­cem­ber 2017 through to mid 2019. Since there is a high de­mand for res­i­den­tial prop­erty in the area, Tower says it will dis­pose of all the units and rein­vest the prof­its in the busi­ness. Port­fo­lio va­can­cies have dropped to 4%, with va­can­cies of 4.6% in SA and zero in Croa­tia. The weighted av­er­age lease ex­piry of the fund is 4½ years, with the do­mes­tic port­fo­lio at 3½ years.

Tower has in­ter­nalised the man­age­ment com­pany, Spire.

Bridge Fund Man­agers chief in­vest­ment of­fi­cer Ian An­der­son says Tower has taken steps to cre­ate cer­tainty in its num­bers and an over­all bet­ter in­vest­ment case.

Man­age­ment has opted to no longer dis­trib­ute once-off prof­its from the sale of prop­er­ties and, as a re­sult, this in­terim dis­tri­bu­tion per share was 15% lower than a year ago, which in­cluded some once-off prof­its. “As a re­sult of this change in pol­icy, there is far more cer­tainty in Tower’s [fu­ture] num­bers. Man­age­ment ex­pects net prop­erty in­come to grow by be­tween 6% and 8%/year over the medium term,” An­der­son says.

“The com­pany ex­pects to re­alise about R240m in on­ce­off prof­its, which will be used to pay down debt, buy back shares or en­hance the ex­ist­ing port­fo­lio and build on the cur­rent plat­form,” he says.

“As a re­sult, we be­lieve Tower is ca­pa­ble of grow­ing dis­tri­bu­tions by about 10%/year off the lower base it will cre­ate in the 2017 fi­nan­cial year.

“Even with the lower dis­tri­bu­tion forecast for that [pe­riod], Tower of­fers in­vestors an ex­tremely at­trac­tive ini­tial in­come yield of more than 10.5%.” An­der­son says the ini­tial yield, plus dou­ble-digit growth in dis­tri­bu­tions over the medium term, make Tower one of the most at­trac­tively priced listed prop­erty com­pa­nies in SA, ca­pa­ble of pro­duc­ing 20%/year in to­tal re­turns for share­hold­ers over the next two to three years.

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