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A small cap with big plans

After Tower Property Fund’s investments in Croatia, it now looks to ring fence its property portfolio.

Although Tower Property Fund initially had a slow start when it listed three years ago, with asset managers overlooking the small-cap real estate investment trust (Reit) for larger bellwethers, it’s now garnering a second glance.

Would-be investors were probably sitting on the sidelines to see if Cape-based Tower would deliver on its prelisting targets of delivering sustainable income or if it would be a takeover target.

However, Tower has rapidly built scale as it trebled the value of its property portfolio of retail, office and industrial assets from R1.6 billion in 2013 to R5 billion. With this much afoot, some market watchers now rate Tower, with a market cap of R2.8 billion, as one of the most attractively priced Reits in South Africa. Underscoring this is Tower’s stock, currently trading a 10% discount to its net asset value – positioning it as an attractive play.

Tower share graph

 

The company has big plans, which include potentially embarking on a separate JSE listing of its Croatia-based properties, which make up 28% of its property portfolio. Tower acquired four retail properties in Croatia’s towns of Zagreb, Velika Gorica and Dubrovnik for €66.6 million (R965 million) in 2016 – a year which CEO Marc Edwards calls “transformative”.

Edwards says moving its Croatian assets into a new listed investment vehicle will give investors the option to be invested in its South Africa- or Europe-based property portfolio. “Currently the Croatian assets don’t sit well with South Africa assets, which grow at 7% to 8% in lease escalations while in Europe it is 1% [in line with inflation]. Also raising funds in South Africa for projects in Croatia, at Croatian yields, can be difficult,” he tells Moneyweb.

Investors may already be fatigued by another real estate offering on the JSE – given the tally of listings over the past two years being more than 12 (offshore and local) – raising concerns about the waning pool of investor capital to back new offerings. 

Tower revealed its plans with the release of its results for the six months to November 30, showing that its dividend payouts decreased by 15% to 38.4 cents per share. The decline is attributed to its amended policy of no longer distributing once-off earnings (for example profits from property sales) as dividends but only core earnings (rental income less expenses). Once-off costs usually artificially boost dividend payouts.

Bridge Fund Managers’ chief investment officer Ian Anderson, says there will be more certainty in Tower’s results going forward as a result of the policy change.

Once-off earnings will now be reinvested into the business. Management expects to realise approximately R240 million in once-off profits from the sale of properties in the next 30 months, which will be used to buy back shares, enhance its properties and pay down debt. On the former, it plans to reduce its loan-to-value from 40% to 35% with the proceeds from the sale of seven properties with a value of R450 million.

Tower is also investing in its existing property portfolio locally with the addition of 73 high-end apartments at its flagship and trendy Cape Quarter precinct in Green Point, Cape Town. The one- and two-bedroom apartments, which will fetch up to R65 000/square metre, will be sold upon completion in 2018.

Stanlib’s listed property analyst Chloe Ma, says Tower’s local and offshore property fundamentals continue to improve given that its vacancies are at a low 4% and the average lease expiry has been extended to 4.5 years.

Anderson says Tower, which offers investors an “attractive” initial income yield in excess of 10.5%, is capable of growing dividend payouts by approximately 10% and total returns of 20% per annum over the next two to three years considering its reinvestment and debt reduction initiatives.

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