Johannesburg Stock Exchange (JSE) listed loan stock company Investec Property Fund posted solid maiden financial results for the year ended 31 March.
The Investec Property Fund debuted on the JSE in April 2011 and at the time of listing, it had 29 properties and the portfolio was valued at R1.7 billion.
Sam Leon, chief executive officer of Investec Property Fund, says the results were thanks to strategic acquisitions and a strong focus on tenant retention.
The fund’s final distribution is 49.29 cents (interim distribution of 43.73) and total distribution 93.02 cents per unit and total return of nearly 28 percent, factoring in the increase in the unit price since listing and the interim distribution paid.
Speaking to Property24, Leon says the distributions exceeded their initial estimate by 3.5 percent and this is because the fund acquired good quality properties, focus was on tenant retention, they worked on reducing vacancies across the portfolio and the fact that the base portfolio is a defensive quality of single-tenanted properties.
“The fund’s portfolio comprises approximately 55 percent (by income) of single tenanted properties with high quality tenants.”
The Investec Property Fund debuted on the JSE in April 2011, and at the time of listing, it had 29 properties and the portfolio was valued at R1.7 billion.
As at the end of its financial year on 31 March 2012, the fund had 32 properties in the South African office, retail and industrial sectors comprising a gross lettable area of 406 706 square metres.
With acquisitions of five properties post the financial year, the fund’s portfolio now has 34 properties.
The portfolio as at year end is valued at R2.1 billion, an increase of 21.7 percent and when including pending acquisitions, the portfolio value is R2.3 billion, an increase of 37.3 percent.
Leon explains that the portfolio’s properties are primarily located in Gauteng and have exposure in the Western Cape and have just added a new retail property in the Limpopo Province.
General Electric Building located at 130 Gazelle Street, Northworld Corporate Park in Midrand. The total purchase consideration includes redevelopment costs of approximately R119 million at a 9.0 percent initial forward yield.
He emphasises the fact that it is important for the team to focus on the property fundamentals and because they are real estate people, they do not buy properties to balance numbers, rather, they grow the fund through acquiring quality properties.
Leon states that they are committed to growing the fund by acquiring good real estate rather than balancing the portfolio by sector or geography.
He says in property, it is important to manage the balance sheet, the physical bricks and mortar (maintenance of the property) and making good acquisitions.
“We continue to emphasise that we are real estate focussed and may make acquisitions that may be initially dilutive if we believe they will provide long-term benefits to the fund.”
He notes that there has been an improvement of vacancies from 3.4 percent a year ago to 2.7 percent across the portfolio.
The fund’s office properties are all fully let and also single tenanted buildings, while the industrial properties have a low percentage of vacancies.
Leon points to the fact that the industrial sector has been resilient for the fund.
It’s all about location, a lot of industrial space tenants seek good quality overhead properties, which the fund has and is slowly starting to build on, he says.
“We have been successful at letting vacant space as well as re-negotiating expired leases for renewal, while also achieving positive rental reversions,” Leon says.
Property acquisitions
Leon says although not all acquisitions are included in the final results due to the timing of their transfer, the total acquisitions of R490 million represent a total 28.9 percent increase in asset value from the acquired cost of the initial portfolio – equivalent to a R490 million increase in the property portfolio.
With three of the acquisitions totalling R225.9 million effective in the year under review, the year-end valuation of 32 properties represents a total GLA of 406 706 square metres with a value of R2.1 billion.
The remaining two acquisitions totalling R264.1 million are expected to be finalised in the first quarter of the next financial year.
All of the acquisitions are expected to contribute positively to the results and distributions of the fund in the forthcoming year, he says.
“We remain committed to growing the fund by the acquisition of good real estate rather than balancing the portfolio by sector or geography.”
Leon says the acquisitions have enhanced the portfolio financially and bolstered the retail portfolio, which was underweight at listing.
“Our philosophy around growth is to get to a competitive fighting weight and to decrease risk.”
Speaking to Property24, Leon says the distributions exceeded their initial estimate by 3.5 percent and this is because the fund acquired good quality properties, focus was on tenant retention, reducing vacancies across the portfolio and the fact that the base portfolio is a defensive quality of single-tenanted properties.
Some of the fund’s newly acquired properties include:
1. The Innovation Group building for R151 million at a 9.75 percent forward yield, situated at 192 Bram Fischer Drive in Randburg, Gauteng.
It was refurbished by Investec Property in accordance with the client's specifications and provides 15 500 square metres of quality IR-grade office accommodation over nine floors and two basements, providing 516 parking bays and storage space.
2. The Scientific Building for R34.9 million at a 10 percent forward yield situated in the new Cosmo Business Park, just north of Kya Sands in Gauteng.
It provides 5 733 square metres of industrial and auxiliary office space and is fully let to the Scientific Group on a seven-year lease with an 8.0 percent annual escalation.
3. Great North Road Plaza in Musina situated in the Limpopo Province for R145 million providing 13 561 square metres of retail space, 88.0 percent of which is let to national tenants.
4. General Electric Building located at 130 Gazelle Street, Northworld Corporate Park in Midrand.
The total purchase consideration includes redevelopment costs of approximately R119 million at a 9.0 percent initial forward yield.
Investec Property will undertake the refurbishment of the building on behalf of the fund to provide 11 180 square metres of office and industrial space, fully let under an eight-year lease with an 8.5 percent escalation to General Electric South Africa.
Transfer of this property is anticipated in the first quarter of the next financial year.
5. Mirth American Tobacco (BAT) Building located at 285 Maggs Street, Waltloo in Pretoria for R40 million at a 10.25 percent forward yield.
It is an industrial warehouse facility providing 13 170 square metres of GLA comprising 87 percent warehouse space and 13 percent of office space.
The property was specifically redeveloped for BAT South Attica who is the sole tenant. The lease is for five years escalating at 8 percent, with the option to renew for a further five years thereafter.
Financing
Leon says the fund was ungeared at listing to provide a strong platform for acquisition.
Great North Road Plaza in Musina situated in the Limpopo Province was bought for R145 million providing 13 561 square metres of retail space, 88.0 percent of which is let to national tenants.
With this advantage, there was an ability to finance the acquisitions by raising a bridge loan of R500 million and a working capital facility of R20 million to fund capital expenditure items, he says.
Both facilities have been provided by Investec Bank Limited at a margin of 225 basis points above Jibar.
Total borrowings for the year were R132.1 million, including the fair value adjustment of R1.2 million on the fixed for variable interest swap derivative instrument.
After all acquisitions have been concluded the loan to value ratio of the Fund will be approximately 20.4 percent.
After year-end, the fund registered a R1 billion domestic medium-term note programme and successfully placed R450 million of secured notes.
The proceeds will be used to repay the outstanding borrowings and the balance of the acquisitions, other than BAT, he says.
On the listed property sector, Leon says the sector has come of age as an asset class.
He notes that it is professionally run, has credibility in the investor market and its prospects are reasonably stable, which should enhance its good performance further.
On the Investec Property Fund, Leon says it is well poised for growth and they are looking to grow the fund so they can compete effectively in the market and deal with risk better.
“Sustainable growth and tenant retention remain the key imperatives with renewals of tenancies expected to be challenging in the year ahead.”
Despite this, the board of directors is confident the fund will deliver growth in distributions for the next financial year in the region of 8 percent, he says. – Denise Mhlanga
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