Loan stock aims to get fatter

Posted On Thursday, 03 November 2005 02:00 Published by
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A search for yields and alternatives to conventional equity investments has helped stimulate investor interest in listed property in recent years
By Andrew McNulty
A search for yields and alternatives to conventional equity investments has helped stimulate investor interest in listed property in recent years. But the sector remains limited in size and liquidity, so this week's listing of CBS Property is a positive development, even though it starts as a small-cap counter.

Investors looking for quick capital gains may consider this flotation to be rather late in the cycle. The sector index has risen by 50% since the beginning of last year, and market capitalisation has soared by 80% to R74bn.

As rates seem to have bottomed, further strong capital gains for the sector may be limited. But it has seen improved liquidity and bullish sentiment.

CBS has a solid portfolio of 28 properties, with a market value of R987m. The three largest properties are Brait Place in Gauteng, valued at R80m; The Wedge (R79m), in Sandton; and Centre Point (R74m), in Cape Town. Total vacancies are 4,4% of rental income.

Most of the portfolio was built up since the early 1990s, starting with assets drawn from property syndications in the Western Cape.

More recently, it was expanded and gained greater geographical diversity by acquiring Yieldgro, a portfolio of mainly Gauteng-based properties, for R186m. These were assembled by former Growthpoint directors Martin Ettin and Derek Greenberg, both now CBS executive directors.

CBS, a property loan stock with linked units, issued units in a private placing at 675c/unit. Based on the forecast 2006 distribution, the forward yield is 10,25%, well above yields of blue chips in the sector. The issue price is also below the 702c/unit NAV. That could be seen as an opportunity - or a reflection of relative quality.

Based on the issue price, the initial market cap would be about R550m. CE Gary Fisher says the plan is to move the counter into the mid-cap range as soon as possible. Growth would be achieved through acquisitions and internal investments. FD Sean Mackay says management concentrates on "sustainable long-term income".

Worth noting is the "asset management" arrangement and associated remuneration of executive directors.

Asset management, which includes strategic management and overseeing the operational management, has been delegated to a joint venture company, whose executives are also the four CBS executive directors.

For three years, the monthly fee paid to the asset manager is linked to CBS's market cap plus its outstanding debt. After that period, the fee will be performance-based. The asset manager will also get a fee of 1,5%, of the total purchase price, plus costs, on all new acquisitions.

Financial Mail
Publisher: I-Net Bridge
Source: I-Net Bridge

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