Value proposition
Tower Property Fund CEO, Marc Edwards says more than R7bn worth of potential deals have been introduced to Tower but the fund has to date spent only R329m on properties. “We are very selective and will only buy at the right price.”
Alhough small cap Tower Property Fund was on a few fund managers’ stock-pick lists for 2014, the counter hasn’t exactly shot the lights out since listing in July last year.
But Tower’s share price jumped 4% this past week after the announcement of better than expected maiden results. The fund’s income payout of 74,6c for the 11 months to May comfortably exceeded the 71,7c forecast.
Would-be buyers were no doubt sitting on the sidelines until management proved it could deliver on its prelisting promises. The market may have also wanted to wait to see if Tower would become a takeover target, one of the few smaller and newer property listings that has not yet been swallowed by a bigger player.
It seems that fund managers have become increasingly wary of takeovers. Says Grindrod Asset management portfolio manager Geoff Noble: “We wouldn’t necessarily view a takeover of Tower as positive as it shrinks the opportunity to invest in smaller, more attractive property companies.”
Despite last week’s mini rally, Tower is still looking relatively cheap at a forward yield of just more than 9% versus the sector’s average 7,5%. Meago Asset Managers director Thabo Ramushu says there is potential for a further rerating if management succeeds in its intention to bulk up the portfolio with quality acquisitions.
Tower CE Marc Edwards says the fund is negotiating a pipeline of potential acquisitions valued around R1bn. If all these deals, mostly Western Cape-based offices and smaller retail buildings, are concluded, the fund’s asset value will swell by 50%, to R3bn.
Tower’s existing portfolio, which includes its flagship property, the trendy mixed-use Cape Quarter building in Cape Town’s Green Point, already has a Western Cape bias (51% by value).
Edwards says more than R7bn worth of potential deals have been introduced to Tower but the fund has to date spent only R329m on properties. “We are very selective and will only buy at the right price.”
But it seems that asking prices are starting to soften on the back of rising interest rates. “Sellers who wanted to sell at yields of 8% six months ago are now prepared to take 9%. So we are starting to see better value.”
As far as the sector’s consolidation trend is concerned, Edwards says they have chatted to one or two potential suitors, but no deals were concluded. “If a takeover or merger deal is in the interest of shareholders, we won’t stand in their way. But we believe the market is starting to get a bit of indigestion from the recent spate of consolidation attempts.”
Edwards hopes to focus instead on growing Tower’s portfolio. “In a year we may be one of only a handful of smallcap stocks left that offer investors a great quality, diversified portfolio.”
