Happy to stay out of Lon­don, At­lantic Leaf hopes to list on the LSE within two years

Business Day - - COMPANIES & MARKETS - ALIS­TAIR AN­DER­SON

While many SA prop­erty com­pa­nies are try­ing to ex­pand abroad to hedge their bets and di­ver­sify earn­ings, At­lantic Leaf Prop­er­ties is qui­etly build­ing its in­ter­na­tional pro­file and of­fer­ing in­vestors pound­based re­turns.

CEO Paul Leaf-Wright says the group is on track to be­come a SA real es­tate in­vest­ment trust (Reit) in the next few months and to list on the Lon­don Stock Ex­change in the next two years. Its as­sets have grown more than ten­fold since it listed in April 2014, from £27m (R521m) to £374m (R7.2bn). SA Reits distribute a min­i­mum of 75% of their in­come as div­i­dends.

A Reit can deduct for in­come-tax pur­poses all qual­i­fy­ing dis­tri­bu­tions to share­hold­ers, which de­duc­tion may re­sult in the en­tity not be­ing sub­ject to tax.

At­lantic Leaf al­ready has list­ings on the JSE and the stock ex­change of Mau­ri­tius. Its fo­cus has shifted to in­dus­trial prop­erty, which now ac­counts for 70% of its port­fo­lio. It re­cently posted fi­nan­cial re­sults for the six months to Au­gust with earn­ings growth of 5.5%, again beat­ing UK in­fla­tion of about 2.7%.

Busi­ness Day asked CEO Paul Leaf-Wright why he’s so ex­cited about multi-let in­dus­trial prop­erty.

We see many in­ter­est­ing op­por­tu­ni­ties in in­dus­trial prop­er­ties which ac­com­mo­date many ten­ants. These are of­ten last-mile dis­tri­bu­tion cen­tres which are lo­cated out­side Lon­don. With so many goods be­ing sold on­line nowa­days, peo­ple liv­ing all over the UK can ben­e­fit from these cen­tres, which speed up the pace at which they re­ceive their goods.

Nearly three-quar­ters of your port­fo­lio is in­dus­trial prop­erty. Would you like that num­ber to be closer to 100%?

Well, 10% of our as­sets are re­tail and 20% are of­fice so we have a clear bias to­wards in­dus­trial as­sets. We re­ally like that part of the mar­ket. We are in the process of sell­ing some of our older as­sets in or­der to im­prove the aver­age qual­ity of our port­fo­lio.

Some of these as­sets for sale are in­dus­trial, but they tend to be older in­dus­trial.

We will only buy in­dus­trial as­sets at the mo­ment and we are look­ing at many of the UK’s sec­ondary cities.

Why not buy in Lon­don? Surely the largest re­tail mar­ket in the UK is still there?

Lon­don still of­fers high prices. You can buy as­sets of the same qual­ity in places like Liver­pool and Manch­ester at yields of 6% that you would pay more for in Lon­don at yields of 4%. I think some in­vestors fail to look be­yond Lon­don. There are op­por­tu­ni­ties across the UK.

So are you happy with what At­lantic Leaf achieved in this six months to Au­gust?

Over this past six months we have fo­cused on de­liv­er­ing our earn­ings tar­get while also re­fi­nanc­ing a ma­jor por­tion of our long-term debt. We are pleased to have been able to con­tinue to grow our dis­tri­bu­tion to share­hold­ers. The prop­erty mar­ket in the UK con­tin­ues to per­form well, es­pe­cially in the in­dus­trial sec­tor, where the ma­jor­ity of our as­sets are ex­posed.

And what’s the out­look like for At­lantic Leaf?

The sec­ond half of the fi­nan­cial year will be chal­leng­ing for us due to the lower in­come from our Bre­con as­set as well as the slightly higher cost of our new debt pack­age, which has in­creased our cost of debt from 3.3% to 3.6%. This is as UK in­ter­est rates have in­creased slightly over the last few months. The re­fi­nance re­moves the risk of pos­si­ble dis­rup­tion in the fi­nance mar­ket that could be caused by Brexit in 2019 and 2020.

What will your earn­ings growth be like?

We are still pro­ject­ing ful­lyear growth in earn­ings of be­tween 2% and 3%, al­beit lower than the 5% growth tar­get we had pro­jected ear­lier in the year. How­ever, if we con­vert to a Reit in Novem­ber our full-year dis­tri­bu­tion would be nearer to 9.5p and thus closer to the full 5% growth tar­get that we pre­vi­ously com­mu­ni­cated.

Our cur­rent share price, which is trad­ing at a dis­count to our net as­set value and a pro­jected for­ward dis­tri­bu­tion yield of close to 10%, makes it unattrac­tive to con­sider rais­ing eq­uity to in­vest fur­ther in qual­ity as­sets in the UK where the cost of new as­sets will not pro­vide us with suf­fi­cient up­side. In­stead, we will fo­cus on sell­ing some of our older, smaller as­sets where we be­lieve they can achieve prices above book value and look to rein­vest the cap­i­tal into newer as­sets with bet­ter prospects for longer-term up­side.

YOU CAN BUY AS­SETS IN LIVER­POOL AND MANCH­ESTER AT YIELDS OF 6% THAT YOU WOULD PAY MORE FOR IN LON­DON AT YIELDS OF 4%

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