Will restructuring trigger re-rating?
OM shopping centre deal could boost flagging sentiment
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