After Fountainhead, takeovers are less obvious

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Redefine Properties has finally got its hands on Fountainhead Property Trust, giving the company access to some strong shopping mall assets, reports Ortneil Kutama, SA Commercial Prop News Media Director. Redefine Properties has finally got its hands on Fountainhead Property Trust, giving the company access to some strong shopping mall assets, reports Ortneil Kutama, SA Commercial Prop News Media Director.

Redefine Properties has finally got its hands on Fountainhead Property Trust, giving the company access to some strong shopping mall assets, reports Ortneil Kutama, SA Commercial Prop News Media Director.

In yet another eloquent summary, Redefine's Chairman, Marc Wainer does not chase properties unless they have potential to create a constant return at least for a number of years.

Wainer is an unstoppable dealmaker. He is said to be grooming Redefine's CEO, Andrew Konig, carefully but it remains to be seen if Konig has the same prowess.

Redefine spent nearly three years trying to acquire Fountainhead and its portfolio, which is valued at about R14 billion and contains some key metropolitan shopping centres. During this process it acquired Fountainhead's management company and then about two thirds of the trust's shares. Growthpoint Properties made a competing offer for Fountainhead's assets, but its bid was not accepted. The final third was the toughest to acquire but eventually Redefine got the share swop ratio just right.

"Fountainhead's property portfolio is highly attractive, even if part of it has been neglected over the past few years," Wainer says.

"Last year we made an attempt to buy the shares of Fountainhead we did not already own. We came just short in terms of the shareholder approval needed, but this time we offered a more attractive swap ratio in our agreement and that is why we have been successful," says Wainer.

In terms of the proposed transaction, Fountainhead unit holders would receive 85 Redefine consideration shares, subject to rounding, for every 100 Fountainhead units in issue on the record date, expected to be August 7, directly from Redefine.

Portfolio manager at Investec Asset Management Peter Clark has said that Fountainhead's shareholders voted in favour of the transaction.

He says it is the right move for Redefine as it increases the quality of its portfolio and its exposure to retail. However, short term it may cause some dilution.

Fountainhead's portfolio includes Centurion Mall, Boulders Shopping Centre, Benmore Gardens Shopping Centre, Bryanston Shopping Centre, Blue Route Mall, Kenilworth Centre and a majority share in N1 City. Before Konig, it was run by shrewd one time property analyst, Len van Niekerk.

Fountainhead says it tries to acquire properties that have a competitive advantage, similar to a brand name or differentiated product for consumer goods companies. This is difficult to create in property as one office block or factory is very much like another and one tends to be a captive of the market. In-house research has indicated that large dominant shopping centres have a competitive advantage in that their rentals are linked to the prospects of a portfolio of businesses and these businesses have a goodwill value attached to their specific locations that is reflected in higher rental levels.

Maurice Shapiro, CEO of Ma'a lot Investments says it will be interesting to see how Redefine manages the new portfolio. He was impressed that the fund sold the Brightwater Commons. This shopping mall was once the Randburg Waterfront, a desirable asset. But it has not performed up to standard.

Fountainhead, under Mr Konig's stewardship, sold the shopping centre but only for less than R200m to a private buyer.

"It takes guts to sell off assets which may have been seen as trophies in the past. In general, property funds do not sell enough assets that do not add much to their portfolios. They do not want to be seen making losses off of poorly performing assets," Shapiro says.

Konig may sell Kenilworth Centre next. This centre has struggled to attract major tenants in Cape Town. One also wonders what Redefine will do with the non-retail assets. Fountainhead's portfolio includes some office parks such as underperformer, Strijdom Industrial Park.

Redefine is trying to bulk up to compete with its rivals, such as Growthpoint Properties. There are not many obvious targets left to buy. It is harder for these two funds because they are relatively so big already so any takeover really has to have some benefit. From here on out, expect Redefine to pursue offshore targets. There are not many private companies around willing to let go of their assets at current prices.

In fact, there is unlikely to be much more merger and acquisition activity between SA's listed property funds this year, aside from one massive deal – the takeover of Capital Property Fund by Fortress Income Fund. This is a really interesting deal.

This is set to be the biggest property transaction of the year and the fund will be worth R44.5bn, making it the third-biggest SA-based fund by market capitalisation in the sector.

Led by renowned real estate dealmaker Norbert Sasse, Growthpoint is the JSE South African property index's largest company with a market capitalisation of around R75bn, followed by Redefine with a market cap of R46bn, with New Europe Property third at R42bn.

Fortress is focused on retail centre assets situated near transport nodes, like taxi ranks and bus and railway terminals, targeting the growth in these markets.

Fortress has an A and B unit structure, catering for different risk appetites. Investors in the A units have a preferential claim to earnings and receive a 5% increase in distributions from earnings. The remainder of distributions are attributable to B-unit investors.

Fortress, whose CEO is Mark Stevens, was the best-performing property stock last year.

The B unit achieved a total return of 100% last year. Capital owns a large portfolio of industrial and office properties. It will spin-off its office portfolio into a separate fund called Newreit.

Fortress will the take over the remaining Capital group. Capital's industrial portfolio is a strong group of properties. It includes a large number of warehouses. Many analysts believe warehousing has a strong future in SA. More and more people will place their possessions in storage as there will be limited space in their houses. People are also set to shop online and goods will need to be stored somewhere.

It will be interesting to see who leads Newreit and who stays on at Capital, within Fortress. Mark Stevens will continue as CEO of the overall Fortress Group, nonetheless. Barry Stuhler is MD of Capital. He has been in the industry for decades. He may choose to build up Newreit or take a less-hands on approach to within Capital under Fortress.


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