BUSINESS DAY TV: Retail most resilient asset class in SA’s property environment
Laurence Rapp, CEO of Vukile Property Fund, talks through full-year results, with distribution growth for the year to March growing by 7.1%
BUSINESS DAY TV: Vukile Property Fund has delivered 7.1% full-year distribution growth for the year to March and says its results reflect the continued good metrics in its retail property portfolio, its sharp strategic delivery, strong balance sheet, deal-making dexterity and a solid platform for further international expansion. CEO Laurence Rapp joins us in the studio now.
Laurence, so those are all the right things to be saying and I’m sure what every investor wants to hear in the current environment, but right at the top — to what extent does that retail property exposure that you have right now, start to bring some risk into the sustainability of earnings like the ones you are boasting [of] at this stage?
LAURENCE RAPP: It’s a very important question. We made a call in Vukile about five years ago that we wanted to focus on the retail sector and that was driven by the overall fundamentals of, not only the retail sector, but also what we saw in the other sectors of office and industrial.
And being a lot less confident about those sectors, particularly office, because of the excess of supply coming onto the market, the lack of economic growth and, therefore, tenants moving from one building to the next is not necessarily having new space taken up.
So we made a call that if we wanted to move the fund from about a 53% retail exposure in 2011 to where we are today sitting at 91% and therefore fully focused on retail. And if you have a look historically, retail has always been the most resilient asset class in the South African property environment through the cycle. So at a point in time, it may not be the best performing, but through the cycle it’s been the most resilient, least standard deviation of returns and giving the best returns to shareholders overall.
So that was one of the key criteria that we took in order to look at. Also, when you have a look at the tenant mix, we talk about being a low-risk, high-quality fund. The low risk for us really is a combination of multiple factors but one of them is the quality of underlying tenants coming through and how certain you are as an investor in Vukile that your rent is going to be paid and, therefore, your dividend is going to be paid.
And when you look at that, our top 10 tenants, they are approximately 46% of the rent in the fund. Our top 10 tenants are the great knowns in the South African economy. It’s Steinhoff, it’s Shoprite, it’s the Edcon group, it’s Foschini, Pick n Pay, Spar, etc, so we’ve really got a blue-chip tenant profile. They are accounting for over half, or almost 46% of the rent, but our national tenant component is sitting at 80%. So we’ve got a very stable, low-risk tenant mix, and then when you look at a whole lot of other metrics that we can talk through, you can just see that they’re trading very well in our portfolio, and that’s what gives us the confidence to make that assertion.
BDTV: Is that risk becoming harder to gauge, though, in this environment because for one you’ve got a player like Stuttafords, a legacy in the South African retail space catering to the high-income bracket and still potentially facing liquidation?
LR: Sure, that’s a very important point. If you look at our malls they are generally aimed at the LSM 7 and below. So we’re not facing the sort of very high discretionary spend in the economy which is something like Stuttafords would be exposed to. We don’t have any exposure to Stuttafords, but what has really come through is that we’ve got this national tenant component. We’re seeing good quality, good trading coming through overall, so we’re less concerned about it because we’re really a more resilient type of fund where people are buying more necessities than luxury goods in the disposable income.
BDTV: How do you mitigate against potential risk, though, because part of your repositioning in the market has seen the sale of your R1.2bn sovereign property portfolio and many would ask why. Why not keep something in the portfolio that brings an element of diversification with it?
LR: Unfortunately, the sovereign portfolio doesn’t bring that diversification. With government as your tenant that should be the lowest risk profile; they’re a very difficult tenant to work with and we felt that it would be better to focus the fund on retail. The diversification comes across the number of properties. So when you’re buying into Vukile you’re buying exposure to 45 properties in every province, in Namibia as well; multiple tenants, multiple locations, so you’ve got no single tenant risk exposure, you’ve got no single property risk exposure, and the diversification comes from within the retail sector as opposed to having other asset classes next to retail.
BDTV: And to fulfil that you’ve been very acquisitive over the period, you’ve acquired Synergy income fund’s R2.5bn, a portfolio of a 25% stake in Springs Mall in Gauteng, the remaining 50% of Pine Crest in KwaZulu-Natal, as well. So how has the bedding down of those assets within the Vukile portfolio stable been going?
LR: All exceptionally well. The Synergy asset, remember, was part of a subsidiary of Vukile and we’ve managed those assets for the last number of years, so it was really a seamless integration. Pine Crest we owned 50% with another REIT so we’ve managed that asset as well. Both of those are very low risk acquisitions because it really is just taking over ownership of assets we’ve been managing anyway. Springs Mall is a new mall, we’re working with great partners in Flanagan & Gerard, who developed it and it opened very successfully in the middle of March and we’re very happy with the trading.
We have another development with them which we’re opening in August in Thohoyandou and expect great things from that asset. It’s a very vibrant market there.
BDTV: Let’s put the spotlight on international diversification because you’re sitting with a R1.5bn war chest and you say that this creates a springboard for increased international exposure; where exactly are you seeing opportunity right now and what kind of valuations are those opportunities coming at?
LR: We said that what we wanted to do was focus SA on retail: we’ve done that. We said, at the same time, we would de-gear our balance sheet in SA in order to create capacity for offshore expansion, and that’s where the R1.5bn comes from. We’ve decided that we want to try and expand into developed markets and the logic being that, coming as an emerging market company and country, it makes sense to diversify into a developed economy to get a more real macro-level diversification.
We’re focusing on two markets, the first is the UK which we’re accessing through Atlantic Leaf of which we own 30%, just under 30%; we have a very active role in that business and we’ll look at the UK through Atlantic Leaf. But the new market we’re putting a lot of effort into is Spain and we’re very excited about the economic recovery taking place there. We’ve seen some really positive trends in most of the economic indicators coming through, and on the rental side we think base rentals have got room to move up there. So that’s where we’re putting our time and effort. There’s definitely been a yield compression in those markets, but we think this is more about an income growth story than a capital growth story through yield compression.
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