Thursday, 25 February 2016 14:52

Tower Property Fund's wobbly share price not a true reflection of group’s meteoric rise

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Tower’s wobbly share price not a true reflection of group’s meteoric rise.

Marc_Edwards_CEO_Tower_Property

Incorporated in April 2012 and floated on the bourse 14 months later, this REIT boasts 48 properties, a mix of commercial and retail developments (the latter catering for low- and high-income brackets). Last year, Tower raised R500 million through “accelerated book build”. This helped its portfolio to more than double from south of R2 billion in mid-2013.

At the time, co-founder and CEO Marc Edwards told CNBC Africa that their strategy was to find properties priced from R50 million to R200 million until “we reach R3.5 billion in size, which we have to do as soon as possible”. With the top brass’s hunting skills and savvy deal-making skills, among its intrinsic assets, Tower has achieved that milestone. It recently breached the R4-billion mark (in terms of portfolio). Meanwhile, it’s offloaded an office block and motor car showroom at Cape Town’s Foreshore, for a cool R111 million, to the Kia Joy Trust as “the property is no longer core to Tower’s strategy”.

Awake to the reality that concentrated revenue stream is bad business (more so in a case of a South Africa that is arguably over-supplied), and that Europe still holds promise, Tower put its offshore plan in action. In December it set up in Croatia, a nation of about 4 million people, south-west of Hungary. For some, the foray triggered the question: why Croatia? That’s not only because the state is not as well-known as an investment destination like, say, Britain or Spain, but because it was in an extended maelstrom. New Europe Property Investment, a JSE star performer, has assets in Croatia’s neighbours – Romania, Serbia and Slovakia.

According to Edwards, the fund spent a year sizing up overseas opportunities before making its choice. That move was “based on the significant opportunities identified for potential value creation”. The 41-year-old boss and his top brass have every reason to smile. Whereas other players would have been deterred by Croatia’s state of economic affairs, the Cape Town firm saw it as an opportunity and is said to invest at an attractive price.

“Croatia was coming off the back of an (eight) year recession,” Edwards said. “We believed the economy was about to enter a growth phase and we are pleased that 2.5% growth for the next year looks set to be achieved.”

Stanlib's Head of Listed Property Funds, Keillen Ndlovu, notes that a raft of South African companies has diversified offshore particularly to developed markets in the past 12-24 months. Several positives make the strategy look good. Scratch the surface and there are risks. That is “when you consider that property prices in these countries are at peak levels since the recovery from the Global Financial Crisis,” Ndlovu observes.

“Tower… differs in that it is investing in prime assets in the capital of Croatia at an attractive price which would enable the company and its shareholders to benefit from the potential increases in property values going forward,” he explains. “We also like the fact that they have partnered with a reputable Croatian developer as part of their offshore strategy, instead of venturing on their own.”

The first stop was Zagreb, the capital, where it bought a newly built office tower, VMD Kvart Block B. Tower’s leadership feels the buy “has proven to be highly successful, outperforming all expectations”. It describes the €23.7-million VMD block as “a premium-grade office property hosting international and national tenants”.

In contrast Tower’s march to Croatia – a fairly untapped market, which implies more reasonable prices, according to Ndlovu – and bumper first-half numbers, its stock hobbled. That explains a widening gap between the prevailing share price, which puts the market cap at more than R2 billion, and the R10 net asset value. Here, market cap’s growth is due to huge increases in the number of shares in issue.

Despite starting the week with a pronounced 5% plunge, to end at 840c per share on Monday (where it was still stuck Thursday morning), the REIT, as the latest earnings numbers attest, has the makings of a pleaser. With the stock losing its spark in the past few months – drifting from the 870c/share that Fortress, the underwriter, paid for its scrip at listing – this doesn’t seem to be obvious. Indeed, to cite fund manager Catalyst’s figures, the industry is hitting weak notes right now. Still, that is no reason for Tower to be where it is – erasing 13% year-to-date.

A reversing stock isn’t in sync with a solid 72% surge in distributable earnings to R109 million that Tower reported for the first half to end-November when revenues soared 55% to touch R183 million. To put the first half jackpot in context, on an individual basis, the distribution equals 45.2c/share. That an 8% rise in dividend per share. The varying percentages in that and total growth of distributable earnings are due to the number of shares in issue soaring by 60% as the firm reported elsewhere.

Much as the REIT is still concentrated in South Africa’s hubs (Gauteng, KwaZulu-Natal and the Western Cape), economic and political developments in Croatia are worth investors’ attention.

In the wake of late last year’s elections – that ushered in President Kolinda Grabar-Kitarović and Prime Minister Tihomir Orešković’s rule – Reuters reported that local businesses and the central bank urged politicians to take what they deemed to be necessary steps to “rapidly (improve) Croatia’s credibility on international financial markets and remove uncertainty among the local business community”.

Public debt is huge. So is foreign debt (at more than 110% of GDP). Growth was seen around 1% in 2015 after the loss of some 13% of overall output in six consecutive recession years since 2008, the agency reported.

With the VMD transaction closed, Tower is splurging R1.1 billion or €66 million on four Konzum shopping centres in that country.

These include Sub City Centre in Dubrovnik, a tourist drawcard and seaport on the Mediterranean. Valued at €29 million, Sub City’s gross lettable area is 12,250 m² to Evagold’s 12,550 m² that Tower bought for R110 million in far-south Gauteng’s low-income Evaton. The smallest of the Croatian four, a standalone superKonzum, spans 3,200 m² in GLA but is valued €13 million or almost half Sub City’s. The effective date for each acquisition is anticipated around April.

When these acquisitions are effected, retail will account for more than half of Tower’s base. At year-end, retail represented just a third, with office space claiming a huge 55% and industrial property the remainder. At home, its portfolio includes Sandton’s Upper Grayston Drive office park – a five-star green building.

Greening buildings, a focus of Tower’s, not only benefits the planet but makes them comparatively cost-effective by way of maintenance and rent. The group also owns the Cape Quarter Square, an upmarket 20,350m² mixed-used development bought for R557 million, Shoprite centre in low-income Ennerdale, De Ville Shopping Centre (bought from Attacq in earlier days) and the industrial Meadowbrook Distribution Centre.

Recent acquisitions include Parktown’s mixed-use 15 Wellington Road property (R80.5 million) and KwaZulu-Natal’s Links Hill for R217 million. Against that background, South Africa’s economy is sluggish. Instead of moaning the economic climate, as Tower’s “concerned” directorate seems to, the winter should amplify the need to diversify. An example is Vukile, owners of a stake in Atlantic Leaf (and pursuing other opportunities, as the JSE-listed REIT’s boss Laurence Rapp told eProperty News recently).

Pivotal and Delta are also fortifying their presence away from home. Because diversification is a no-brainer, and as long as the Tower keeps a healthy pace, it could do well to consider adding other geographies to Croatia in the medium term. In any event, that country’s return from the rubble is in itself a case study.

Being an industry old hand, Edwards knows just how to keep Tower going. A shareholder of the renowned Spire Property Group, he co-founded Tower with Bruce Kerswill, Keith Craddock – who both serve as executives on the board – and Rodney Squire-Howe. Between them, the co-founders have decades of experience in property.

A lawyer, Andrew Dalling, chairs the Tower board. CFO Joanne Mabin, a CA, is one of only two women in the boardroom. The dearth of the fairer gender in top positions is yet to spur investors to ask why.

In the case of the REIT, and according to its latest annual report, the shareholder base includes Coronation, Stanlib and Nedbank. Allan Gray recently lifted its stake in the JSE-listed group to 15.24% (almost double what it held at year-end). Struggling share price and softening trading volumes aside, as the annual report showed, Tower seems to be headed north.

Last modified on Thursday, 13 April 2017 17:44

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