Exemplar gives family business the muscle to grow

Jason McCormick, CEO of Exemplar Reit, the listed group formed out of his family business, McCormick Property Development (MPD), is managing to soar amid a recession and while the coronavirus pandemic ravages the country. The property development business was founded in 1983 by his father, John McCormick. Exemplar owns a portfolio of retail centres worth R5.8bn.

Why did Exemplar Reit list?

Quite simply, to implement a cheaper and more flexible capital structure more suited to the scale of the business.

In 2008, we started building a pipeline of development opportunities within MPD, tapping that knowledge base on the areas to target. Despite MPD developing at a rate of about two to three new malls a year —

five in 2013 is our record to date — we eventually realised that our pipeline was growing much faster than we could develop it.

By 2017, the business had become too big for the complex, restrictive “ring-fenced” financing structures that we historically had in place. From that the listing was born.

Do all of Exemplar’s assets come from McCormick or do you get assets from other property developers?

One of our biggest strengths is the understanding of the markets within which we operate. Currently 100% of the 22 assets within Exemplar were developed and managed by MPD. Knowing and working with a community on a shared dream of developing an underdeveloped area creates bonds with that community for decades after the doors have opened and the dream has been realised.

One of the biggest drawcards of the listing was the ability to make acquisitions of assets not developed by MPD. We could never previously look at buying assets at a 9% yield with our historic funding structures, especially when we were developing “greenfields” schemes at 13% and 14% return on investment, including land and capitalised interest.

One of our biggest challenges in making acquisitions from other parties is in achieving the hurdle rate required to justify the allocation of capital there rather than to the MPD pipeline.

Is McCormick the biggest owner of rural and township retail?

“Biggest” in this instance can be viewed as subjective. We are proud of what we have accomplished and we have the strength and expertise to become the biggest. Our core focus remains the quality of our portfolio, the support of our communities and the trading strength of our tenants.

I would, however, comfortably say that MPD has historically been the largest developer of township and rural retail, with well over 60 retail developments successfully completed in SA to date. The MPD arm is well poised to continue feeding incredibly exciting developments into the Exemplar portfolio when the time is right for Exemplar. With well over 30 developments secured in the pipeline, I have no doubt that there are exciting times ahead.

How strongly positioned is Exemplar to manage the Covid-19 pandemic?

I cannot think of a stronger team to be managing what we are going through at the moment. The challenges that we are facing on the ground are unlike those of our urban compatriots. Throughout this pandemic, we have been working round the clock managing the deluge of people at our malls and rural centres.

While “quiet weeks” meant dissuading the “amaNikNaks” shopper — those coming to the mall every day to buy small things like a packet of chips as an excuse to be out of the house — the social grant payouts and paydays caused sleepless nights for myself and our operations teams on the front lines. We had to adapt protocols and procedures multiple times a day during the early lockdown as the situations escalated or subsided, finding new and innovative solutions to keep the tens of thousands of people moving safely through our malls each day.

The Exemplar property portfolio, particularly in comparison to the retail Reit sector in SA, is very defensive. This is due to location and the substantial barriers to entry this creates for potential competitors as well as the tenant mix, which is predominantly grocers, clothing, fast food, hardware and liquor.

Rentals and rent-to-turnover ratios are also such that they are sustainable with contractual increases at or above inflation. Exemplar’s balance sheet is also strong with an LTV (loan-tovalue) of less than 35%.

Have any of your tenants applied for rental relief?

We have had many requests from tenants who did not have a basis for such requests, even before Covid. We are incredibly focused on the analysis of trading figures of our tenants and their “cost of occupation”.

We found that the vast majority of tenants have been trading well within acceptable norms, but [they were] “simply operating under instructions from management” to reduce rental charges. That said, the increasing cost of government charges such as rates and taxes, electricity and other utilities remains a huge concern for us. As an example, the City of Tshwane has just doubled rates and taxes for each one of our properties in their region — during lockdown.

How large will your asset base be in 2025?

I’ll come back to you after I’ve consulted my gypsy! Seriously, though, it’s impossible to predict anything accurately that far distant. Pre-Covid, I’d have said R20bn of assets in today’s money, based mostly on the strength of the MPD development pipeline. But, given that we don’t know if we can’t sell an open-toe shoe or a Tshirt as an “essential insulating item”, who knows just how far this centralist control agenda will curtail further economic growth?

THE MPD ARM IS WELL POISED TO CONTINUE FEEDING INCREDIBLY EXCITING DEVELOPMENTS INTO THE EXEMPLAR PORTFOLIO