Investec Property Fund: Doubling up to beat hard times
Joint CEOs believe their complementary skills will help the company to navigate a tough operating environment
Listed property as an asset class is by no means back in vogue. But there appears to be a tentative rebound in appetite for selected SA-focused stocks, Investec Property Fund (IPF) being one of them.
The value proposition offered by local property counters is no doubt a key incentive. Most SA-focused stocks are trading at historically high dividend yields, with a number of blue chips now at 10% or more.
That compares to yields of below 7% some 12 to 18 months ago.
IPF is one of the sector’s best performers for the year to date. Its share price has recovered around 16% since early January, which is well ahead of the listed property index’s 2% rise over the same time.
The latter shed 30% last year on the back of a massive sell-down of a number of property stocks. IPF is one of the JSE’s larger mid-cap real estate investment trusts (Reits), with total assets of R21bn, of which 85% is exposed to SA real estate.
Flagship assets include Balfour Park shopping centre in the northeast of Joburg, The Firs in Rosebank, Design Quarter in Fourways and Dihlabeng Mall in the Free State, as well as a few Investec offices.
IPF’s offshore investments include a R1.2bn stake in Investec Australia Property Fund, a R200m interest in Investec Argo UK Property Fund and a R1.3bn exposure to a pan-European logistics portfolio.
The market appears to be supportive of last year’s management changes, with former CEO Nick Riley making way for joint CEOs Andrew Wooler and Darryl Mayers.
Both have worked for the Investec group for a number of years. Wooler is a chartered accountant who spent eight years in London before joining IPF’s executive management team in 2012, while Mayers previously headed Investec Property’s trading and development division.
Having two captains trying to steer one ship is often a recipe for a disaster but five months into their tenure, Wooler and Mayers have seemingly convinced the market that the partnership is in the best interest of shareholders.
"Though younger and potentially less experienced than management teams of the more established Reits, the team is solid and introduces new blood, ideas and energy to the company," says Craig Smith, head of research at Anchor Stockbrokers.
Besides, IPF still benefits from having Riley as well as co-founders and industry veterans Sam Hackner and Sam Leon on the board. They have an "almost unrivalled" network in the SA property market, Smith notes.
It’s a sentiment shared by Investec Asset Management portfolio manager Peter Clark. "Though the management is new and untested, the greater team and board provide a solid underpin to the strategy and operations of the company," he says.
It helps that Wooler and Mayers have inherited a company that is in relatively good shape despite SA’s stalling economy and weak tenant demand. The latter has put pressure on vacancies and rentals across most listed property portfolios, which has seen dividend growth of a number of Reits slow to the low single digits or even dip into negative territory.
Clark says given tougher trading conditions, IPF has done well to manage its SA headwinds by diversifying offshore through platform deals that provide a better base than owning individual assets. "The balance sheet has been fairly well managed and the offshore gearing structures seem less aggressive than those of its peer group."
He adds that though the company’s growth is clearly being driven by offshore accretion, management hasn’t neglected its SA portfolio.
"The team has focused on stabilising the local asset base through early lease renewals and higher tenant retention."
Dividend growth also remains within the upper end of its peer group, which is forecast at 5%-5.5% for the year ending March (annual results should be out by mid-May).
"That appears to be a trend that will continue in the near term," says Clark.
Wooler and Mayers, who have worked together in other capacities at Investec, believe their complementary skills make for a stronger management team, particularly in the current tough operating environment. Mayers, who at 54 is nearly two decades older than Wooler, says though they come from different backgrounds, sharing the position of CEO provides an opportunity to exploit synergies.
"My experience was gained in the hard-core property development space while Andrew is the finance guy. Over the past seven years we have often used each other as sounding boards so we knew we could work well together."
Wooler echoes a similar view. He says while the "proof will be in the pudding", bringing different expertise to the table is likely to help rather than hinder management in navigating what he describes as one of the most challenging times faced by the SA property industry.
"We’ve come out of a 10-to 15-year bull market with capital readily available to grow property portfolios. So it has been relatively easy to make money. That’s no longer the case. Now you have to be far more clever in terms of capital allocation and recycling," says Wooler.
Mayers agrees, saying the ability to create value uplift in underlying property portfolios through asset management initiatives will become a key performance differentiator between the sector’s 60-odd property stocks. He says given the widening yield gap between the JSE’s top-and bottom-rated Reits, which ranges between 7% and 20%, there has already been a clear shift towards quality counters that own assets "that have stood the test of time".
Looking ahead, Wooler says the focus will be primarily on bedding down the existing SA portfolio and unlocking value through refurbishing and extension opportunities.
But he doesn’t rule out the possibility of a merger or takeover in the listed sector. "In this environment it doesn’t make sense to have so many funds and we are already starting to see consolidation in the listed space." He adds: "Though we are opportunistic, our approach is always measured. You have to be careful what you buy."
That being said, Wooler believes Western Europe, which he regards as a more liquid and transparent market than Eastern Europe, offers the best acquisition opportunities for IPF.
The company has a remaining commitment another €75m to effectively double its exposure to the European logistics sector in partnership with Ares, which has $131bn of assets under management. "Our European assets have performed unbelievably well," he says.
The pan-European logistics portfolio of 22 properties is spread across key industrial and transport hubs in Europe, including Berlin in Germany, Lyon in France and Rotterdam in the Netherlands.
Though Wooler and Mayers may have a different management style than their predecessor, they stress that the company’s investment strategy hasn’t changed.
"SA is still our home," says Mayers. "This is the market we know best and we are not hunting offshore just to get growth. As always, we will only buy if great deals come along."