The curse of the new HQ
The market was aghast at Balwin’s decision to spend about 7% of its market cap — R125.8m — on a new head office in Melrose Arch, Joburg, next to the M1 highway. Shares in the property developer were already under pressure and stumbled further, taking Balwin stock down 13% year to date. The FM spoke to CEO Steve Brookes.
How do you defend this purchase?
SB: First of all, I must apologise to all our shareholders because I believe we could have done a much better job of presenting it. As an entrepreneur, when you’re caught in the moment you forget that what you know is not what others know. We did inform shareholders on a few occasions that we were doing this — we’ve been chasing it for five years. The building was part-owned by the Buffet group and because of our relationship with the Buffet guys we did get what I believe was a very good deal.
Our existing office in Bedfordview has terrible corporate exposure and we’ve completely outgrown it. The most important thing is that Balwin sells 300 apartments a month, every month, and we need advertising. That building is an advertising delight. We’re putting up the biggest digital screen in Africa and the amount of money we earn out of that digital sign will almost cover the mortgage.
So even if we have no income from tenants, the digital sign is massive. The opportunity for marketing is insane. And we’re only taking 2,500m² of the office, and we’ve already rented out to our attorneys — 1,200m² — and we’ve only got 1,000m² to go before we’re fully tenanted. But the signage is the major play.
Shareholders have called this bad capital allocation and a waste of money.
SB: We have spoken to a few in the last day or two. We are going to be starting a share buyback and we need to get board approval for that. And [as for] our capital allocation, we’ll relook it — we constantly look at it.
There was no capital allocated in the acquisition of this building. Through Investec we managed to get the full amount of debt and at a very good rate because of our six-star [green certification] grading. This acquisition has not hindered us buying a piece of land or doing anything else. Oh, and we’ve got a buyer for our old head office.
But what does the mortgage do to your debt profile?
SB: It’s 6% of our debt but it’s ringfenced in a separate proprietary company, in Balwin Commercial (which will hold our office in Umhlanga, the Cape and Joburg).
You must be aware of the curse of the new flashy HQ. The minute companies go large on a head office, things go pear-shaped.
SB: First of all, I own 33% of the business and I’m not going to let that happen. It isn’t a flashy office. It’s been cost-engineered to death. Considering the signage and the ability to earn money out of it, I don’t think it’ sa pretentious [purchase]. We’re builders, we don’t do flashy.
You say you need better corporate exposure — why?
SB: Maybe that’s the wrong word. We need better exposure of the brand. Despite our extensive marketing, Balwin is still not that well known. I think you need the constant Coca-Cola effect to make sure the brand keeps growing.
Back to capital allocation, why the share buyback?
SB: The share should not be R3, it shouldn’t. It’s ridiculous. So we will go on a campaign to buy stock. Carefully, not irrationally.
Does that leave you enough money for your developments?
SB: We’ve listened to our shareholders and we’re changing our whole capital structure. We’re going for long-term debt rather than shortterm development debt; we’re in the middle of a massive transition. We’ve had tremendous support from the DEG [German Investment Corp], Sanlam, Stanlib and Ninety One.
The short-term debt is typical development finance; in the old days you took out a loan and you rolled it, and you paid one raising fee at the beginning. Now the banks want a raising fee every time you roll it. So if you take the fee over the duration of the money lent, it’s a very expensive loan.
What’s the debt-to-equity ratio at the moment?
SB: About 45%.
Is that problematic for you if interest rates start rising?
SB: No.