Holding its head high at home and overseas

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.