The three-year long consolidation of South Africa’s listed property sector is steaming ahead, this time with Fortress Income Fund’s (Fortress) move to take over Capital Property Fund (Capital).
The deal is set to create a sizable Fortress, which largely owns commuter-orientated retail properties, as its market capitalisation will more than double from R20.3 billion to about R46 billion.
The transaction will see Fortress’s clout boosted to become the third largest property company by market capitalisation listed on the JSE’s more than R400 billion real estate sector.
Growthpoint Properties is the biggest counter with a market capitalisation of R75.3 billion followed by Redefine Properties (R48 billion).
On the rationale of the deal, Fortress CEO Mark Stevens says: “The two funds [Fortress and Capital] are mid-size and there are a lot of synergies between the funds. Putting them together will create a bigger fund that will be involved in bigger projects.”
Fortress will acquire all Capital units it does not own. The capital structure of Fortress is set through A-and B-linked units for investors who have different risk profiles. These units trade independently on the JSE.
To settle the takeover, Fortress will exchange A and B shares, by scheme of arrangement, at a swap ratio of 0.31750 Fortress A and 0.31750 Fortress B shares for each Capital share, based on 1.7 billion Capital shares in issue.
Fortress A and B shares are trading at R15.91 and R27.80 respectively, relative to Capital’s R14.69.
Listed property manager for Old Mutual Investment Group’s MacroSolutions boutique Evan Robins says Fortress wants to buy Capital with its own shares which are very expensive. “This makes the transaction less attractive,” Robins explains.
The deal is subject to approval from Fortress and Capital shareholders and the Competition Commission.
After approval, Capital will be Fortress’s subsidiary and the counter’s office properties will subsequently be incorporated into a new listing called NewReit. Fortress does not have the expertise in managing office properties, hence the spin-off of Capital’s office portfolio, says Stevens.
Fortress currently manages properties worth R6.5 billion and the deal will see it grow the value of its portfolio to R25 billion.
The deal will also allow Fortress to bulk up its offshore exposure; largely its shareholding in Romania-focused New Europe Property Investments (NEPI), Rockcastle Global Real Estate (Rockcastle) and UK-based Hammerson.
The company’s offshore holdings represent 50% of its assets worth about R7 billion. Stevens says the company might look to invest in direct offshore properties but stressed that it’s still investigating opportunities.
Being bullish on offshore opportunities means that fortress will benefit from a currency perspective, as it already amasses earnings in euros and dollars. This is in line with listed property counters like Growthpoint, Redefine, Delta Property Fund, Emira Property Fund and others are growing their offshore exposure, as South Africa’s growth prospects look increasingly dim.
A value play
Given that Fortress is associated with sister fund and mall owner Resilient Property Income Fund (Resilient); most industry players rate it as a value play. In fact, Fortress Income Fund B units were the best performer on the JSE’s real estate sector in 2014, returning 100% to shareholders.
The Fortress-Capital transaction has largely been welcome as it will also create a more liquid Fortress.
“We like the transaction in general. It simplifies the group structure and helps to reduce cross-holdings within the Resilient group of companies (which includes Capital, Fortress, Rockcastle, NEPI). It creates a bigger and more liquid Fortress Income Fund,” says Stanlib’s head of listed property funds Keillen Ndlovu.
Meago Asset Managers director Anas Madhi agrees with Ndlovu saying that Fortress has a strong management team that is capable of turning around Capital, as it has been stuck in a value trap.
“Fortress looks poised for accelerated distribution growth in any event, and the deal is likely to be further enhancing. Further, Fortress becomes a well-diversified property player with both direct South Africa property and indirect International property exposure,” Madhi explains.
However, there are concerns about the size of NewReits’ listing as a value proposition to investors. “But the company is positioned to grow with a healthy balance sheet. Shareholders need some guidance on whom will manage the NewReits vehicle,” Madhi adds.