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

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%