Still a solid bet

Posted On Thursday, 18 August 2011 02:00 Published by eProp Commercial Property News
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Capital director Andrew Teixeira says ideally about R1,4bn of properties needs to be added to the portfolio every year to refresh the portfolio and improve the gearing ratio from the current 25% to 30%

Andrew Teixeira Capital Property Fund

Capital Property Fund continues to appear on fund managers’ stock pick lists. And understandably so, given that the company has over the past three years never failed to outperform the sector, both in terms of income and capital growth.

 For the six months to June 2011, the first reporting period following the mega-merger with Pangbourne Properties in April, management declared a better than expected 10,58% rise in income payouts. That’s ahead of the 6%-7% sector average and could place Capital, now the sector’s third-largest counter with a market cap around R13,45bn, as one of only two or three funds out of a sector total of 20 likely to achieve double digit distribution growth in 2011.

The fact the Pangbourne merger didn’t cause even the slightest of wobbles in Capital’s stellar performance track record has no doubt put paid to any scepticism that there may initially have been about the deal. Clearly, the merger has led to greater economies of scale and reduced administered costs. It has also provided Capital with a much larger balance sheet, allowing management to further grow the fund.
 
Capital director Andrew Teixeira says ideally about R1,4bn of properties needs to be added to the portfolio every year to refresh the portfolio and improve the gearing ratio from the current 25% to 30%. “But the challenge is to find the right quality stock at the right prices.’’

Teixeira says there’s been no distressed selling of quality assets. Those developers who are offloading are generally selling the bottom 20% of their holdings at inflated prices. It therefore makes better sense for Capital to build its own stock, particularly given the current opportunity to buy vacant land at good prices and sign quality contractors up at competitive building rates.

Says Teixeira: “We can now build new industrial buildings at initial returns of 10% — far more attractive than the 8% that sellers are demanding for existing buildings.’’

Management has already identified a development pipeline of about R500m that can be undertaken over the next 12 months. Currently, Capital’s enlarged portfolio comprises R17,4bn of direct property with 45% exposure to industrial, 31% exposure to offices and 22% exposure to retail. Capital also has a R257m stake in high- growth stable mates, Romanian- focused New Europe Property Investments (Nepi) and Fortress Income Fund (B).

Teixeira says the idea is to gradually reduce the R3,8bn retail portfolio to increase the focus on industrial and offices. Three shopping centres — Willowbridge and N1 Value Centre in Cape Town and Kwa Mashu Shopping Centre — has already been sold in the first half of 2011. In addition, a R1,65bn portfolio of retail properties has been earmarked for disposal to, among others, Fortress.

One concern, though, is Capital’s relatively large office vacancy rate of 11%. That compares to a 6,8% and 3% vacancy rate for the industrial and retail portfolios respectively. However, the flipside of the overhang in Capital’s office portfolio is that it creates potential to markedly boost the fund’s income streams once demand recovers.

The key question is whether Capital still offers value at current share price levels of around 837c. It certainly appears so. Macquarie First South Securities research analyst Leon Allison last week placed a strong buying signal on the stock, singling Capital out as his top pick for the sector. “Capital is currently priced on a par with the sector average at a forward yield of 8,7%, yet investors are receiving higher   income growth for similar risk.’’
Allison forecasts a 20% total return for the stock over the next 12 months against an expected sector average of 13%.

Thabo Ramushu, director at property asset manager Meago, agrees that Capital remains an attractive bet. In fact, Ramushu believes Capital looks cheap relative to its peers. Says Ramushu: “Surely a re-rating upwards is on the cards, given management’s impeccable track record of consistently delivering well above market returns?’’

Last modified on Thursday, 24 April 2014 11:52

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