Sharemax legacy lingers

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When will SA Corporate begin delivering sector-average income growth again? That’s the million dollar question that long-suffering shareholders are no doubt pondering after another below par performance from the Old Mutual-managed property fund.

SA Corporate delivered growth in income payouts of only 0,8% in first-half 2011 against a sector average for the June reporting period of around 7%. 

The fund has been hamstrung by its sizeable exposure to smaller community and neighbourhood shopping centres, some of which are in less than prime areas. Though this sector of the property market has been hardest hit by the slump in consumer spending, performance has also been hurt by dodgy acquisitions made around the time Old Mutual’s property arm acquired the management company of SA Corporate from Marriott in 2006. 

The portfolio of 10 Sharemax-owned shopping centres acquired in a deal worth R1bn is a particular case in point. These centres, which include Northpark Mall and Montana Crossing in Pretoria North, as well as Comaro Crossing south of Johannesburg, were bought at the top of the market at what many believed were highly inflated values. Some of the former Sharemax centres are now sitting with vacancies north of 30%.

The general view is that Old Mutual focused too much on size and too little on quality. “The Old Mutual-controlled management company was so set on bulking up SA Corporate’s portfolio that a number of poor acquisitions were made that are still hurting the fund,” says Meago director Jay Padayatchi. 

Though MD Len van Niekerk embarked on an extensive disposal strategy when he took over the reins in July 2009 after the replacement of SA Corporate’s entire Durban-based executive team, Padayatchi believes the clean-up has not been aggressive enough. 

“More pain should have been taken over a shorter period , even if it meant selling underperforming buildings at a discount. SA Corporate has disappointed for so long that the market would have forgiven it if it had taken drastic steps to create a base off which sustainable market-related distribution growth could have been generated sooner rather than later,” says Padayatchi. 

But Van Niekerk is hopeful that his turnaround strategy will begin to deliver tangible results within the next 12-18 months. He notes that the portfolio has been trimmed significantly since mid- 2009, with 35 properties sold for R757m. Over the same period, the fund has acquired only one property — a high- quality industrial warehouse in Jet Park on the East Rand for R209m. That brings the portfolio to 159 properties worth R8,78bn.

Van Niekerk says the focus remains firmly on improving the quality of the portfolio. Ideally, he would like to dispose of another third of the portfolio (in terms of value) over the next three years. “That will not only help improve the quality of SA Corporate’s income streams but also enable a shift to fewer but higher-value properties.” 

However, Van Niekerk doesn’t believe a fire-sale approach is the way to go. He points out that the properties sold to date have fetched an overall 3,5% premium to book value. “We are not a desperate seller and won’t offload at deep discounts. We will only do deals that make sense.”

Besides, says Van Niekerk, it’s not that easy to find willing and able buyers given how picky banks have become on who they lend to and what type of properties they will finance. Management also plans to improve existing assets through refurbishments and extensions. 

For instance, a R150m refurbishment of the Musgrave Centre in Glenwood, Durban, is nearing completion while a combined R48m has been earmarked for upgrades to Davenport Centre (also in Durban) and Hayfields Mall in Pietermaritzburg. 

Van Niekerk says it’s not only the retail portfolio that’s being revamped but also the industrial portfolio — a R60m extension and upgrade was recently completed to a warehouse in Centurion. Income growth will be further supported by plans to access the debt capital market, which Van Niekerk says has the potential benefit of a cheaper, more flexible funding structure. 

There’s also the possibility that Old Mutual could bring some of its prime, unlisted properties to the JSE via SA Corporate now that the listing of Old Mutual’s R12bn Triangle Real Estate Core Fund has been unexpectedly canned. The listing would have given JSE investors access to lucrative regional shopping centres like Menlyn Park in Pretoria and Gateway in Umhlanga. 

Says Van Niekerk: “We look at Old Mutual Property’s unlisted properties as and when they come up for disposal and independently consider the investment merits.” 

While much depends on how quickly the fund can offload more of its underperforming buildings, Van Niekerk expects the fund to begin achieving sustainable distribution growth in line with the rest of the sector by end-2012. 

If that materialises, there’s potential for substantial share price upside for investors who get in at current levels of around 330c. SA Corporate is trading at a historic yield of 8,9% against the sector average of 7,8%, making it one of the JSE’s cheapest property stocks. 

But for the time being, Macquarie First South Securities property analyst Leon Allison believes the discount is justified, given SA Corporate’s lower earnings visibility, higher forecast risk and lower near-term growth.

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