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Polish mega-deal set to be earnings accretive for Redefine Properties

The sector heavyweight lays a platform for sustainable hard currency growth into the future.
Redefine Properties' recent acquisition in Poland will boost its earnings and offshore exposure.

Redefine Properties is one of the most active dealmakers in SA’s listed property sector, with its recent foray into Poland expected to be accretive to the sector heavyweight’s earnings.

The company – which bought an initial 75% stake in real estate company Echo Prime Properties in March for R8 billion to boost its offshore exposure – is yet to realise the benefits of the deal that is expected to be concluded by the end of May. Redefine intends on reducing its shareholding in Echo to approximately 50%.

Although Redefine expects its full year 2016 dividend growth to be 6% to 7% (similar levels to the prior year), CEO Andrew Konig says the company’s dividend payouts will be boosted after the conclusion of its mega-deal.

Konig says the deal will add at least one cent per share to its 6% to 7% dividend growth guidance. Its dividend guidance going forward might be in double-digit territory for the full year 2016 and well into 2017.

“The Poland deal will play out in the second half of this year,” he says.

Redefine investors were rewarded with a 6.9% growth in the dividend payout to 41.7 cents per share for the six months to February 29 2016.

Redefine’s outlook comes at a time when most SA listed property counters are downgrading their dividend growth outlook given the worrying state of the country’s economy. Considering the domestic headwinds, more property counters have been diversifying in offshore markets.

Redefine’s other offshore investments include: a 30.1% stake in London Stock Exchange-listed Redefine International; a 28% stake in Luxembourg Stock Exchange-listed Internal Hotel Group and a 25.9% stake in the Australian Stock Exchange-listed Cromwell Property Group.

Says Konig: “Poland offers us GDP growth that is more than what SA offers. And we believe we have invested in an environment where the tax rules are efficient”.

Poland, a boon

Echo will give Redefine exposure to its property portfolio of office and retail properties in Poland, boosting the value of its property assets from R67.8 billion to more than R70 billion. The counter will increase its offshore property assets from 18% to 24% valued at R14.6 billion.

The deal also gives Redefine a pipeline of property developments in Poland worth about R8.7 billion. Among the developments currently under due diligence is a shopping mall in Poland’s capital of Warsaw with a development cost of R5.5 billion. “The location is a prime spot,” says Konig. There are also opportunities to refurbish existing properties in Echo’s property portfolio, a project earmarked to cost R1 billion.  

Meago Asset Managers director Anas Madhi says based on Redefine’s set of results, its push to offshore markets bodes well for it. “Redefine’s results already reflect an increased reliance on offshore investments to maintain above-inflation growth with international income now accounting for 21% of total income.” 

Unlike its counterparts – whose offshore strategy is driven by the cheap cost of funding as opposed to focusing on property fundamentals, Madhi says Redefine has “seemingly paid an initial premium for quality assets but therein created a strong platform for sustainable hard currency growth into the future”.

Domestically, Redefine is embarking on refurbishments to the tune of R1.3 billion at a yield of 7% on its existing properties. Some of its big-ticket redevelopment projects include the Rosebank Mews in Johannesburg, three industrial properties and R1.2 billion worth of redevelopments to its shopping malls.

Grindrod Asset Management chief investment officer Ian Anderson says Redefine has been actively improving the quality of its property portfolio through a combination of acquisitions, disposals and developments. But an increase in the vacancy rate to 5.7% from 5.3% and positive renewal reversions of 4.6% reflects a difficult operating environment, says Anderson.

Stock valuations

Although Redefine stock has risen by 6.8% in the last six months, Konig says the company’s stock in recent months has seen wide international inflows. International investors held 19% of the stock in November and by March the shareholding rose to 24%. Redefine was included in the FTSE Nareit US Real Estate Index in 2015, raising its profile among international investors. 

At current levels, Anderson says the stock looks fully valued and “the interim results would not have done enough to justify the current valuation”.

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With all the growing risk and uncertainty in Africa, Eastern Europe is the new ‘Africa’ for most investors.

Another example of investors running away from countries that are moving towards socialism and investing in countries that abandoned socialism. At this rate is won’t be long before Luthuli House rules over a country without any taxpayers!

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