The proposed acquisition, announced earlier in May, would be another important step in SA Corporate’s expansion strategy said fund CEO, Craig Ewin.  We are aiming for a R10bn portfolio in the short to medium term and to remain within the top 3 in the sector in market capitalisation value, added Ewin.  This will ensure that the fund remains relevant amongst investors in terms of size, entrenching the various benefits of critical mass.

Peter Sparks, executive director of SA Corporate negotiating the transaction, said a due diligence investigation of the Buffcol portfolio had been completed.  “It is an excellent portfolio of well located properties, predominantly industrial, let to well known South African corporates on long leases.”

The transaction would reduce SA Corporate’s retail weighting to just under 60% and increase the industrial weighting component of the portfolio to 33% from 28%. Management were more than comfortable with this overweight industrial weighting given the excellent rental growth prospects being evidenced in this sector, says Sparks. He added that the fund would be looking to add to the office component where the fund is underweight and where management generally expects good rental growth to be found.

Sparks said the acquisition would not materially affect the geographic profile.  Gauteng properties in a consolidated portfolio would account for 40% of income, KwaZulu-Natal properties for 47%, Cape properties for 13%, with a small balance from Mpumalanga investments.

He said the ten largest properties in the Buffcol portfolio by value accounted for about 45% of the portfolio value at R462 million.  The portfolio’s top 10 tenants are Chep SA, Bosch, Afrox Healthcare, Shell SA, MSA, Unitrans Motors, Tiger Wheel and Tyre, Supply Chain Services, the SA Police Service and BDO Spencer Stewart.

“The lease expiry profile is favourable with most leases expiring between 2012 and 2015 and 77% of the leases expiring after 2011. Lease expiries are staggered and don’t present a risk profile in any particular period.

“The vacancy factor in the Buffcol portfolio is zero.  This demonstrates the quality of the portfolio and the lease profile and fits neatly with the existing SA Corporate portfolio where the current vacancy factor is 1.5% Sparks said the initial yield of the acquisition portfolio of 8.15% was commensurate with the quality of the portfolio and offered good value in the current property investment market where such portfolio opportunities are hard to come by.
 
With rentals within the portfolio being at current market related levels and with the demand for superior industrial property and consequent rental growth which is currently being experienced, this portfolio is expected to offer good reversionary growth as leases expire” says Sparks.

Sparks said the acquisition is still subject to regulatory and statutory approvals and the procurement of the necessary funding.

Ewin says management intends to fund the transaction through a combination of new equity and debt. SA Corporate’s current debt levels are at a low 13% and there is merit to increasing this to benefit from the advantages that debt leverage offers. This will be managed so as to mitigate against earnings dilution in the short term.