SA Corporate rises on good leadership

Rory Mackey has reshaped SA Corporate Real Estate Fund from a struggling company into a well-run property fund.

Since internalising its management company and rationalising its portfolio under Mackey, the company’s focus has improved. It was the thirdbest performing property stock on the JSE in 2016 with a total return of 32.55%.

Recently, the diversified property owner increased its full-year distribution 8.7% to 43.02c per share for its 2016 financial year, in tandem with the better listed performers in the sector. Its board said last week that it was expecting distribution growth of between 6% and 8% for the 2017 financial year to December.

The company has an exciting investment pipeline, especially related to residential property. In 2016, SA Corporate and developer Calgro M3 formed a joint initiative through Afhco, a wholly owned subsidiary of SA Corporate, and Hizoscape, a wholly owned subsidiary of Calgro M3, renamed Calgro Real Estate.

Calgro M3 MD Wikus Lategan sees Calgro Real Estate growing to be worth about R15bn in the next five years.

He put the housing shortfall in metropolitan areas at 2-million units in September 2016. “Despite government’s commitment to closing the gap, spending on infrastructure for housing development is under pressure and this joint initiative will assist the government in improving living conditions for ordinary South Africans.”

GEOGRAPHIC SPREAD

Mackey says the Afhco brand has entrenched itself as a “dominant, trusted residential rental brand of choice providing quality and affordable accommodation” in the Johannesburg inner city.

“This established residential rental platform is now well poised to diversify its geographic spread into high demand nodes through strategic partnerships with the largest developers of residential property in the country,” he says.

Over the past five years, under Mackey’s stewardship, SA Corporate’s share price has risen 74.22%.

Its dividend yield is an attractive 7.67% compared with the FTSE-JSE South African Listed Property index’s 8.72%.

At the end of December 2016, SA Corporate’s portfolio was worth R15bn, meaning it had grown R2.6bn, or 21%, in a year.

Ian Anderson, the chief investment officer at Bridge Fund Managers, says SA Corporate’s portfolio has been delivering strong performances especially compared with other property groups operating within SA.

“SA Corporate’s guidance for next year is disappointing, but not unexpected under the circumstances,” he says.

“Companies are battling with an increase in vacancies, which puts pressure on rentals. SA Corporate has a strong retention rate which is very positive and the retail portfolio is very active, which should bring growth,” says Anderson.

Stanlib listed property analyst Lawrence Koikoi says SA Corporate’s operational metrics remain robust with limited exposure to offices, which have generally been struggling with vacancies in the country.

He says its industrial portfolio is almost fully let and its rejuvenated retail assets are performing well.

“Growth in future seems to emanate from residential opportunities through their Afhco business, which appears to have the right platform to cope with the increasing scale of opportunities.

“It also makes sense that growth is coming from the residential part of the business, seeing that they are able to achieve yields in excess of 10% while their funding costs are lower than that and this makes them one of the few South African listed property players to be able to do yield enhancing deals in SA,” Koikoi says. “In the South African listed property environment, it is very hard to execute yield accretive deals and that’s why a lot of SA Corporate’s peers have ventured offshore.”

Koikoi admits that the company’s 2017 dividend guidance is lower than market expectations, but says that SA Corporate’s management may have been erring on the side of caution.

“With the strong pipeline and a strong property portfolio they seem to have ammunition to deliver superior returns in the long run,” he says.

WITH THE STRONG PIPELINE AND A STRONG PROPERTY PORTFOLIO THEY SEEM TO HAVE AMMUNITION TO DELIVER SUPERIOR RETURNS