Will re­struc­tur­ing trig­ger re-rat­ing?

OM shop­ping cen­tre deal could boost flag­ging sen­ti­ment

Finweek English Edition - - Companies & Markets - JOAN MULLER joanm@fin­week.co.za

AF­TER A QUIET YEAR on the merger and ac­qui­si­tion front for the listed prop­erty sec­tor, SA Cor­po­rate Real Es­tate Fund last week an­nounced a po­ten­tial deal worth R1,25bn that would al­low in­vestors to share in the spoils of some of South Africa’s big­gest shop­ping cen­tres.

The pro­posed deal will see SA Cor­po­rate ac­quire a 12,5% stake in each of six re­gional shop­ping cen­tres owned by the Old Mu­tual Prop­erty Group. They in­clude pre­vi­ously un­listed mega-malls such as Gate­way The­atre of Shop­ping (Umh­langa), Men­lyn Park (Pre­to­ria) and Cavendish Square (Cape Town).

The mar­ket’s been ea­gerly await­ing a move by Old Mu­tual to leak some of its prime prop­erty as­sets into the listed sec­tor via SA Cor­po­rate ever since the life in­surer ac­quired the lat­ter in its for­mer Mart­prop guise in mid-2006. The op­por­tu­nity to buy a stake in Old Mu­tual’s shop­ping cen­tre port­fo­lio is part of a ma­jor re­struc­tur­ing ex­er­cise that SA Cor­po­rate’s man­age­ment hopes will help place the fund back on in­vestors’ buy­ing lists.

SA Cor­po­rate has been out of favour with the mar­ket of late due to a dis­ap­point­ing earn­ings per­for­mance. Its share price has plum­meted 45% since its Novem­ber 2007 high and the fund’s been one of the sec­tor’s worst per­form­ers in the year to date – both in terms of in­come and cap­i­tal growth.

SA Cor­po­rate’s man­age­ment also plans to strip the ex­ist­ing R9bn prop­erty port­fo­lio from 64 un­der­per­form­ing prop­er­ties, mostly smaller shop­ping cen­tres strug­gling in SA’s cur­rent de­pressed con­sumer spending en­vi­ron­ment. If those prop­er­ties are all off­loaded – al­most a third of ex­ist­ing as­sets – the port­fo­lio’s size will drop to 150 prop­er­ties. A 10% share buy­back is also on the cards.

Prop­erty an­a­lysts have wel­comed SA Cor­po­rate’s in­ten­tion to dis­pose of un­der­per­form­ing prop­er­ties. Bring­ing qual­ity shop­ping cen­tres such as those owned by Old Mu­tual to the JSE is also seen as a ma­jor coup for the listed prop­erty sec­tor as a whole.

Corona­tion Fund Man­agers prop­erty port­fo­lio man­ager An­ton de Goede says: “It’s en­cour­ag­ing that a large in­sti­tu­tional prop­erty owner like Old Mu­tual is pre­pared to ex­pose a por­tion of its tro­phy as­sets to the listed prop­erty sec­tor to give re­tail in­vestors di­rect ex­po­sure to it. There’s no doubt the ac­qui­si­tion will im­prove SA Cor­po­rate’s port­fo­lio qual­ity.”

How­ever, an­a­lysts be­lieve that rais­ing the nec­es­sary funds in the cur­rent tight cred­itlend­ing en­vi­ron­ment to buy the 12,5% stake in the Old Mu­tual port­fo­lio could prove eas­ier said than done. Kun­dayi Mun­zara, head of In­vestec Prop­erty’s re­search team, says rais­ing cash from prop­erty dis­pos­als in the cur­rent mar­ket is likely to be dif­fi­cult, be­cause banks have de­creased loan to value ra­tios and tight­ened credit terms, there­fore re­quir­ing more eq­uity to make a deal work.

Says Mun­zara: “The cost of fund­ing has risen sub­stan­tially, with rel­a­tively mod­est move­ment in cap rates or yields. That im­me­di­ately re­duces the amount of buy­ers able to par­tic­i­pate in trans­ac­tions.”

Mun­zara says there’s also con­cern the Old Mu­tual deal will ini­tially be di­lu­tive, which could place con­tin­ued pres­sure on dis­tri­bu­tion growth over the short term.

De Goede has a sim­i­lar view. He says even though the in­tended dis­posal of 64 as­sets should be able to fund the Old Mu­tual ac­qui­si­tion, it’s likely the deal will ini­tially be yield di­lu­tive, as it may need to use some debt fund­ing due to trans­ac­tion tim­ing dif­fer­ences. “And that doesn’t bode well for medium-term dis­tri­bu­tion growth.”

De Goede also raises con­cerns about SA Cor­po­rate again in­creas­ing its port­fo­lio weight­ing to re­tail prop­erty – al­beit a shift to larger re­gional malls. “Not all the in­tended dis­pos­als are re­tail prop­er­ties and a size­able stake in Old Mu­tual’s shop­ping cen­tre port­fo­lio will fur­ther di­lute the pos­i­tive im­pact of above-av­er­age in­dus­trial rental rev­er­sions on over­all dis­tri­bu­tion growth.”

De Goede notes SA Cor­po­rate’s ex­po­sure to the ro­bust in­dus­trial prop­erty sec­tor has al­ready been eroded by the pre­vi­ous shift in fo­cus when it in­her­ited a large port­fo­lio of smaller con­ve­nience and com­mu­nity shop­ping cen­tres from its tie-up with sis­ter fund SA Re­tail in 2006.

Says De Goede: “In­vestors may need to be pa­tient be­fore the value un­lock will ma­te­ri­alise through dis­tri­bu­tion growth, al­though it may oc­cur sooner on a yield rel­a­tive ba­sis with the im­prove­ment in port­fo­lio qual­ity.”

OM deal could ini­tially be di­lu­tive. Kun­dayi Mun­zara

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