Against the odds
Investors reap rewards from inner-city bet
WHEN MOST PROPERTY owners began fleeing the Johannesburg and Pretoria CBDs in the mid-to-late Nineties, many were understandably sceptical about former Anglo American Properties stalwart Gerald Leissner’s strategy to hold on to his inner city stock.
But 10 years on, Leissner’s decision not to follow the crowd to trendy suburban locations has paid off handsomely. ApexHi Properties, the loan stock company Leissner helped assemble six years ago out of the former Apex and Amaprop funds in Anglo’s property stable, has managed to consistently outperform many of its higher-rated counterparts since listing in March 2001.
Investors who bought ApexHi units when the company first listed its innovative A and B splitunit structure have seen the value of their investments grow nearly fourfold. The units realised a combined total return of 386% from 1 March 2001 to end-December 2006, comprising 264% capital growth and 122% income return.
It’s interesting that many investors initially expected the A units to fare better as they were regarded as a far safer play than the “high-risk” B units. But the B units proved the better bet, delivering a hefty 560% since listing (399% capital growth and 161% income return). The B units, originally issued at R4 each in 2001, were trading at an all-time high of around R18 last week.
ApexHi’s C units have also had an exceptional run since listing in October 2006, touching highs of around R5,25 last week, up from R2,80 at the close of the first trading day three months ago. The C units in fact recorded the highest return of all listed property counters in 2006, according to Catalyst Fund Managers’ latest monthly overview of the listed property sector.
The strong rally in the C unit prices recently pushed ApexHi’s combined market cap (A, B and C units) to more than R9bn – up from R2bn four years ago – making ApexHi the JSE’s secondlargest listed loan stock company after Growthpoint Properties (R13bn).
Although ApexHi has aggressively streamlined its portfolio over the past 12 months, the bulk of its properties are still located in so-called secondary areas. Says Leissner: “ Rather than focusing on location, ApexHi focuses on quality A-grade tenants and sustainable income streams.”
Leissner says that with a portfolio of more than 440 buildings, the asset-manage- ment component of the business is crucial to ensure all buildings are adding value to the portfolio. The aim is to invest in highyielding, revenue-enhancing properties with sound tenant profiles. Leissner says buildings that no longer fit these investment criteria are sold.
The fund’s most recent disposal was its iconic diamond building in downtown Johannesburg – 11 Diagonal Street – sold to Absa for R104m. That brings the number of properties sold to 53 over the past six months alone, netting a total of R440m.
A number of acquisitions have also been made in recent months. Last month, three industrial properties were bought from Investec for R245m, bringing the number of industrial properties acquired since 1 July 2006 to 10.
Leissner says these acquisitions have seen a shift in the fund’s sectoral spread, with industrials now accounting for 21% of the fund (up from 17% in July 2006). Offices, which have decreased significantly over the past three years, represent 36% and retail 43%.
Given the strong share-price run that ApexHi units have already enjoyed, the question inevitably arises as to whether there’s any upside left. Macquarie First South Securities property analyst Leon Allison says that while ApexHi’s A and B units are still trading at fair value, the C units are looking a tad expensive, with the latter’s share price possibly coming under pressure over the next few months, particularly if interest rates are increased by more than the expected 0,5% this year.
Allison says although ApexHi is fully priced compared with the sector, it remains a decent bet for income-seeking investors. The fund offers a large, well-diversified portfolio on a forward yield of 9%, compared with a sector average of 7,8%.
Allison expects ApexHi to post a 16% growth in distribution for the 12 months to end-June 2007 on the back of strong rental growth and lower vacancies, once again outperforming the industry average of around 11%.
Location not everything. Gerald Leissner