Two new exciting developments under construction Vukile Property Fund

Posted On Monday, 30 May 2016 22:18 Published by
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Vukile Property Fund CEO Laurence Rapp discusses the fund’s full-year results‚ which show 7% growth in distributions despite a tough environment.


BDTV: Vukile Property Fund CEO Laurence Rapp‚ in an interview with Business Day TV‚ discusses the fund’s full-year results‚ which show 7% growth in distributions despite a tough environment for the property sector.

Business Day TV: Vukile Property Fund has grown its distribution by 7% for the year to March in an environment that it describes as increasingly tough. CEO Laurence Rapp joins me now on News Leader with more detail. a tough environment but also very busy period for you. There have been a lot of deals structuring and deal making and also your first foray offshore during the period.

LAURENCE RAPP: Correct‚ a very busy year‚ as always. One of the key highlights for us in these results is the operational performance that came through in a very difficult environment. But every key metric that we measure in running the business showed an improvement over the period and we’re delighted with that.

If you look at our vacancies‚ they’ve now dropped to 3.9%‚ they’re at levels we last saw in 2010. We achieved positive reversions across the whole portfolio‚ that’s retail‚ industrial and commercial of plus 9% but retail was the star performer where we had reversions of 12.3%.

We beat budget on the retail deals that we did by about 6%. Costs were kept constant so the team really did superbly in managing in a difficult environment‚ even the bad debt which is something that we’ve been concerned about showed an improvement.

And that’s notwithstanding that we are seeing some definite strain in some of the line shops and smaller tenants‚ but a very strong management focus on collections have ensured that the bad debts have remained well controlled.

BDTV: And your lease profile has also been pushed out significantly hasn’t it‚ over the period?

LR: Correct‚ so we’re now sitting with about 33% of the leases expiring in 2020 and beyond. In our core retail portfolio that’s sitting at 37% so we’ve done some very good leasing over the last 12 months and that’s now reflecting in pushing that out. And when we look at it the overall nature of our retail portfolio and the fund in general is very much a high quality‚ low risk portfolio in terms of the key metrics we would look at.

BDTV: Of course you are becoming increasingly retail focused‚ so already 70% of business is in retail and that will go up if the deal you announced with Synergy and Arrowhead back in March does in fact go through this year.

LR: Correct‚ when I joined the fund about five years ago we had retail at about 50% of the fund. We made a very concerted effort and a decision to increase the retail weighting because retail is the most resilient asset class and the market one just has to look historically through all forms of cycles.

So whilst you may be going into a tough cycle and are in a difficult position in retail at the moment‚ it still performs better than office and industrial and that’s why we want to go there because ultimately the retail sector is the most conservative and defensive for our investors.

Now we’ve moved that from 50% up to 70% currently. The deals that you mentioned‚ absolutely if we are able to get the Synergy‚ Arrowhead transaction concluded and also the sale of our Sovereign portfolio‚ that will push our retail portfolio in excess of 90%. We’ve also got two very exciting new developments that are under construction.

A 25% stake in Springs Mall‚ 33% in Thavhani Mall and when you add that in our retail exposure is going to be in the mid-90s and therefore we’ve achieved that goal of turning Vukile into a specialist retail fund and we think that should be very positive for our investors.

It really highlights the quality and the low risk nature‚ and that should drive the re-rating in the stock as well. When you look at where some of the other specialist retail funds are we think that will bring some very good benefits through.

BDTV: Do you think this is what investors are looking for in the South African property market‚ more specialist funds such as Vukile is going to become? We’ve also had residential funds launching‚ so focused specifically on residential. Are South African investors really looking for those pockets?

LR: It’s definitely a theme that we hear often from our investor base saying‚ let us make the call as to how we want to weight a portfolio between retail‚ commercial‚ industrial and residential so you as a fund i.e. Vukile go and decide what you’re specialising on.

There is a counter argument that one gets very good balance by having a diversified fund‚ but when we look at it and we look at the underlying fundamentals of the office and industrial market with quite an increase in supply we think the fundamentals are not as attractive.

And therefore we’re coming up with this detail where we’ll become the specialist retail fund‚ we will look to put our office and industrial into the Synergy portfolio and do a deal with Arrowhead who really are phenomenal in running portfolios of perhaps smaller properties‚ very well diversified and using a highly accretive acquisition model in order to grow earnings in what they do.

And they’ve done this successfully. Gerald Leissner has done this in Apex-Hi‚ he’s done it in Arrowhead A and B and hopefully now if we’re able to conclude this deal‚ Synergy A and B will be the next vehicle. So we will keep some kind of exposure through that‚ but it will be on a very much indirect basis. Our focus will be growing the local business in retail and then putting an effort into the offshore side as well.

BDTV: So you have as we mentioned‚ gone offshore‚ you’ve taken a stake in Atlantic Leaf Properties of just over 26% which is not retail focused. So is your global expansion not limited to the retail sector?

LR: Correct. Our strategy ultimately is to build a high quality and low risk fund and I keep repeating that because that’s what it’s all about. Internationally we have a very open mind as to what the appropriate asset classes are. Some of the retail dynamics internationally are very different to SA.

In SA in our portfolio‚ 81% of our tenants are national tenants. Once you go to the US as an example you don’t have that same kind of national footprint‚ its more regionalised. The UK a similar story there. So we’re not saying that by definition our international exposure has to be retail. We will look at what makes sense in each market.

Atlantic Leaf as an example is very heavily industrial focused. Of their 54 properties 51 of them are industrial and three of them are commercial‚ but all of them are single tenant‚ triple net leases‚ all the tenants are credit rated‚ they’re blue chip tenants so it’s a very low risk portfolio and that’s what we’ve bought into.

You’ve got a lease expiry profile of around 13 years‚ that’s three to four times the South African average with blue chip tenants. So we’re going to take it market by market‚ understand what the best segments are in those markets and try and find the right partners and to make sure we can get into them on a growth type of a basis.

BDTV: The scope for making offshore acquisitions‚ you have gearing just under 30% and you have of course been quite conservative with that and also with your hedging strategy of your borrowings.

LR: Yes‚ that’s another key pillar of our strategy. We think we’re in for tougher times in the economy here and what we need to do is be as defensive as possible‚ and we do that in a few areas. It’s through portfolio competition‚ I’ve spoken a lot about that with the retail side‚ it’s through gearing. Now our gearing is currently sitting at 29%‚ hedging is sitting at 86% and our intention is to really pay down some local debt further.

If the two deals that I mentioned earlier go ahead‚ the Arrowhead and the Sovereign portfolio sale our gearing will probably drop to the mid-20s with hedging going above 90% and that should give our investors a lot of comfort going into a rising interest rate cycle.

It means that we have really immunised them against that increase in cost‚ and also to the extent that we can use gearing on some of the offshore investments. With borrowing rates offshore as low as they are‚ it keeps our average cost of funding down and allows us to push out our hedging. So we are really trying to remove interest rate risk from our investors’ decisions as much as we possibly can‚ and stay conservatively geared on that basis.

BDTV: So it looks like another interesting year ahead for you.


Last modified on Tuesday, 31 May 2016 22:36

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