Rural and township retail still seems to be thriving in South Africa’s commercial property scene, if you just look at the likes of Exemplar’s results recently, in addition to other players that operate in this space, like Vukile Property Fund and Dipula Property Fund.
On this episode of The Property Pod, I am joined by Jason McCormick, CEO of JSE-listed Exemplar REITail, which is a market-leading developer, owner and manager of township and rural shopping centres across South Africa.
The retail-focused real estate investment trust (Reit) effectively came out of the McCormick Property Development [MPD] Group stable and, as a listed fund, Exemplar currently has a portfolio of around 23 assets valued at over R7 billion.
McCormick has been CEO of the fund since it listed on the JSE in 2018. While Exemplar is one of the smaller (market cap around R3.2 billion) and youngest SA Reits, the group has boasted sector-topping results. McCormick gives us insight into the company, its future plans and tells us why the group’s township and rural retail property strategy has paid off for the fund.
Highlights of his interview appear below the gallery. You can also listen to the full podcast above or download it from iono, Spotify or Apple Podcasts.
“[Township and rural retail property] is the only landscape that I’ve ever known. We’ve been doing this for 40 years and so for us it’s kind of just business as usual. I think people are saying it’s thriving relative to more urbanised retail development or resi[dential] or commercial or whatever else there is. So it’s obviously relative to how other sub-sectors are doing. For us, as I say, it’s business as usual.”
“Yes, sure, we’ve proven to be a bit more resilient, but we’ve been doing this for 40 years …
“I think our differentiating factor is our ability to have put together a business that is good at what we do in terms of focusing on this specific niche – and it’s all we’ve ever done.”
“With that level of specialisation I think it’s our understanding of the market that has really played a big part in the results we just posted.
“As much as it is that the township and rural retail [centres are] a lot more buoyant, there’s no doubt there is a lot more happening that isn’t getting captured by the statistician-general and a lot of the economists because there is this informal market that is cash-driven and we’re operating on the sides of that.
“So there is a lot of truth to be said that it is doing well. But as I say, it’s all I’ve ever known …”
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“To be honest, I haven’t looked at how anyone else has really done. We’ve been too focused. Obviously last year was a bad one for us in terms of the July riots. In Exemplar five of our properties were looted and damaged. Four out of the five have been rebuilt, so we’ve been focusing on getting the business up and running again.”
“Despite the backdrop of all of that, our growth in distributions of 38% is without a doubt the highlight of the results.”
“Our LTV [loan to value] is just over 35% and the business is in good shape. We’ve got strong growth in our turnovers, our anchor tenants, our line shops – everyone is trading well. Our vacancies are significantly down from a year before that.”
“So there are very few metrics that one can look at when one looks at the business as it sounds at the moment that we can say, well, we’d like to be doing better in this or that aspect. I think where the business stands at the moment, and kind of where we [are] poised to be taking it, we are on a very good foundation. I’m certainly excited for where we are now. We have had good results behind us.
“When we listed [four] years ago, we were the new kids on the block – although next year March, the [broader] business will be 40 years old. McCormick Property Development [MPD] is kind of the mother company that gave birth to Exemplar four years ago.”
“I’m certainly excited with the wind under the wings that we’ve been given through the listing of Exemplar, and our ability to really roll out the pipeline that McCormick’s got, as well as leveraging on the institutional knowledge that we’ve got as a team in terms of our asset management.
“I’m certainly looking forward to leveraging that a lot more as well, going forward as we keep on looking for acquisitions and alternate ways to grow the portfolio beyond just what MPD can provide in terms of its development pipeline.”
Where is Exemplar investing, and what are the drivers behind these developments, because you still have perhaps the more urban shopping-centre funds saying ‘We are overdeveloped, we have too many malls, there are no more opportunities’ – but clearly you don’t see that?
“Clearly I don’t, otherwise I’d be doing something else. Certainly we’ve been seeing how our areas have been developing over a long period of time. We’ve seen the impact that our developments have on communities that we developed 30-plus years ago. So it always pulls us back to do more in areas that need the kind of developmental interventions that we bring when we bring our developments.”
“So certainly the pipeline is very long. It’s something that I’ve worked on extensively and personally very closely over my time. I’ve been at the company [MPD] 20 years now and we’ve put a lot of time into developing that pipeline.”
“You quite rightly said Mall of Tembisa is our biggest-ever development in a single phase of 45 000 square metres in Clayville, Tembisa, and was opened in 2020. We then did Flagstaff [Square] as McCormick Property in the Eastern Cape.
“We’ve got a big focus on the Eastern Cape. There’s no doubt about that. We’ve got a number of schemes in the pipeline there …”
“About 10 years ago [we were] strategically focused on the Gauteng townships, given the rural-urban migration that was happening and the growth rates that we’ve seen. That led to developments like we’ve got in Mamelodi coming up now, [and] in Tembisa that you’ve just mentioned. Mamelodi will open on October 27 this year. It’s the development with Putprop. It’s has almost 17 000 square metres of leasable area.”
“Then, the very next day, we open [an] almost nineteen-and-some-change thousand square metres GLA [gross lettable area] centre in KwaBhaca, which is the old Mount Frere in the Eastern Cape. And then in another three weeks after that we’ll open Bizana Walk, also in the Eastern Cape.”
“So both Bizana Walk and KwaBhaca Mall are the first two developments being done within Exemplar.”
“It’s a bit of a change of tack from our stated intentional listing, where the guys said they didn’t want us to take development risk and I say the guys, the analysts and the business community at large didn’t want us to put too much development risk into the business.”
“Now the guys that are on the sidelines are saying ‘Well, we want to get our interests, I’d like to see you guys doing more developments in Exemplar itself’ because we’ve certainly got the ability to kind of add that development deal to add a bit more cream to the fund.”
“We’ve [MPD] got 28 secured projects. It’s always [been] said that we’ve got over 30 where we develop and we’ll open three of those this year [under Exemplar]. So I’ve taken them out of that list. [MPD has] got 28 secured developments with 536 000 square metres worth of rights for those. Those are all rural and township retail schemes.”
“So that’s all secured in MPD, in McCormick Property Development … Exemplar has the rights to take over any of those, first right.”
Impact of the July riots
“As we mentioned in our annual report, we were fully insured and we did reach settlement with Sasria [South African Special Risks Insurance Association]. It wasn’t the full amount that we wanted. But anyway we were willing to settle on the lesser amounts that we could get paid out, in full, once and for all, and then just literally be masters of our own destiny and finish as quickly as we could the building programme.”
“The Greater Edendale Mall is the only development that hasn’t fully reopened. It hasn’t opened at all. It was well over R231 million worth of damage, to be precise.”
“The first phase will open in August this year; it’ll be about 11 000 square metres, with Boxer and Clicks anchoring that phase. The second phase will be open before Christmas, but we are aiming for the week before Black Friday. That’ll be about another 12 000 square metres.
“The main aim is to bring all the food, the groceries – that’ll bring Shoprite and a lot of the financial services – and the final phase will be completed by April next year, which will bring almost 30 000 square metres GLA back on line. That’s the main fashion runs.”
“So we are kind of bringing the essential goods and services back first, and leaving the, let’s call it, non-essentials, the more clothing-related stuff. That will all open early next year. Then we’ll be up and running 100% in terms of the damage that was caused because, as you rightly said it was five developments …”
“24.4% of our portfolio was damaged or destroyed in basically three days in July. It was a helluva stressful time for all of us but, I tell you, the team pulled together incredibly well.”
“We opened Flagstaff last year with all the difficulty with supply chain and everything else, opening [45 000 square metres] under lockdown. We’ve been through a hellavu lot.”
“I’m really excited for what’s to come, because we’ve got really an incredible time on our development timeline coming up over the next couple of years – some really amazing developments that we’ve taken 10 years, five years, seven years, to put together that are all now ready for development. So it’s nice.
“We’ve gone to school and university and done our doctorate in unforeseen events over the past two-and-a-half years, so I’m looking forward to what we can do going forward. I think if we speak again next year it should hopefully be more of the same – God willing we don’t have any of these shocks to the system.”
Exemplar is listed on the JSE, but it’s a tightly held fund. Are there any plans for capital raises or to broaden its investor base?
“100% … it was something that a financial analyst warned me of years ago – they said eventually it’ll be like bees around the honeypot. We’ve certainly started to hear the humming. There are a lot of people asking us when we are going to do something with this.”
“Obviously with financials, with an LTV of 35% at this time, there are no pressing issues; but in the same breath obviously we are going to want to start doing more with the fund. We didn’t list just because we enjoy governance.
“Upon listing I spoke to all the banks and everyone, and I said, listen, this question came up. I said from our side we wanted to get a couple of years of good, solid results behind our name to prove that we can play in this space as well.”
“We certainly knew we could play in the developmental space, and we’ve been managing our own stuff for the past 40 years anyway, but [are] obviously having to step up to the levels of governance required of the listed entities in the JSE.”
“Yes, we’ve got that behind us. At the moment there’s no need for us to be raising capital. Certainly we’d like to broaden the shareholder base; no doubt about it. I don’t even think there’ve been a hundred shares traded in the past financial year – if that. I’m not sure.”
“All the free float that exists in Exemplar is all partners of ours in developments that have swapped up. So they know the family, they know the business ethos, they know the track record, the history, and they know a lot of the future. So they understand where we are going and they don’t want to be offloading their stocks.”
“We’ve got over half a million square metres in our development pipeline [through MPD]. Just organically there’s going to come a time where we’re going to have to tap the market if we’re going to bring those into Exemplar, and we’re going to have to bring them into Exemplar or offload them out of MPD, because MPD in itself can’t develop that size of a pipeline without churn in its development stock.”
“We are looking at some acquisitions, and if those acquisitions come off then there’s no doubt that that would be a moment that would allow us then to go and tap the markets – obviously at the right price. We certainly are not going to go to the markets when we need the money, because otherwise you’ll know what happens with the pricing. So yes, at the right time at the right price, certainly we’d like to get in a pool of retail investors so that there is a genuine free float, plus one or two institutional investors who have a slightly longer-term view and are willing to come along for the ride with us.”
“But, as I say, there’s no need for us to be chasing equity at the moment with a 35%-odd LTV. But that can all change with one acquisition. So we will have to wait and see.”