Tower Property CEO Marc Edwards discusses the fund’s full-year results and prospects for its first offshore acquisition in Croatia‚ in this interview conducted on August 26.
BUSINESS DAY TV: Tower Property Fund has reported a 30% rise in revenue increase for the year to May 2015‚ as its portfolio grew strongly. Net earnings for the period totalling R137m and that translates to a total distribution of 86.8c per share.
The fund recently expanded its portfolio with an acquisition in Croatia and that increases Tower’s offshore exposure to 8%. Joining us on News Leader for more is CEO Marc Edwards.
Marc ... so we were discussing before you came through that this is quite a tightly held share‚ so it doesn’t really see the big market movements that we have seen this week‚ when results do come out.
MARC EDWARDS: Yes‚ absolutely‚ that’s the benefit of being a small cap in these crazy markets. We sailed through Monday‚ Tuesday without any volatility but then obviously the negative is you don’t follow the bull market when it runs.
So we’ve grown quite nicely since listing at R1.6bn‚ we’re now at around R4bn in size‚ and with a pipeline of around another R3bn through Croatia and SA. So we should move up in that liquidity margin going forward.
BDTV: Are you increasing your shareholder base at the same time?
ME: Yes‚ absolutely‚ we did a capital raise in June of this year. We raised R500m to deploy out to new assets and we saw a lot of the regulars come in. We’re quite tightly held by Allan Gray‚ Coronation and Stanlib‚ but there were a lot of new guys on the register‚ small asset managers and private people. So it was good for us.
BDTV: The attraction of Croatia‚ so you’ve made an acquisition there? In fact‚ you bought it at an acquisition yield of 8.5%‚ if I’m correct?
ME: Yes.
BDTV: But you’ve bought it with the developer?
ME: Yes‚ that’s right‚ so we bought it from a developer who is one of the most well respected developers in the region‚ a crowd called VMD‚ and they are selling because Croatia is moving to a big hotel residential tourist phase where a lot of the guys who are owning retail and office properties are selling those and moving onto the coast.
Where SA was 15 years ago‚ building golf courses‚ etcetera‚ and we managed to acquire that asset which is the newest and best prime asset in Croatia.
It gives us a very nice rand hedge obviously in these volatile times and we do think that the South African market is going to face considerable headwinds ... in the future. As Leigh (Riley) said earlier‚ the property stocks have had an amazing run for the past 12-15 years‚ that’s got to come to a slowdown at some point.
BDTV: Leigh‚ your thoughts on that Croatian acquisition because it looks like the South African property companies are targeting eastern Europe‚ we have Nepi (New Europe Property Investments) looking at‚ I think‚ Rumania and geographies like that‚ do you think it’s a smart move?
LEIGH RILEY: Yes it was actually ... Marc and I were having a chat earlier and it was actually one of the questions I was going to pose ... the fact that our market has run so hard over the last 12-15 years‚ and we are going to see tenants come under pressure‚ locally we are going to see all these sorts of external pressures now starting to filter into specifically the rental environment‚ was this one of the things that necessitated this move and Marc said‚ yes‚ absolutely‚ it’s one of the things they’ve been looking at for a long time. And I understand you’ve got another R1.5bn that’s earmarked for further acquisitions there as well?
ME: Yes ... from our perspective there (are) two very attractive things‚ one is more of a financial type thing‚ where the cost of capital is very cheap there‚ so debt is about 3.5%‚ you can fix it for five years at 4%‚ whereas South African debt runs at about 8%. So we’ve got a nice margin over our yield of 8.5% on the acquisition.
The second is that it finds itself at a different place to South African property. As you rightly say‚ rentals are high‚ you’re in a Growthpoint building‚ the rentals in Sandton are high and with that comes high property prices and difficulty to enter the market.
Croatia is quite a small market‚ its population is about 4.5-million people‚ so Tower can go over there and be a real dominant player in the market‚ pick up high quality assets which are at 15-year price lows and we can ride that growth phase for the next few years we think.
BDTV: I understand they do have some quite complex ownership laws in Croatia‚ and obviously it’s a different language so does that pose an obstacle to you?
ME: Yes that’s why the partnership with VMD was so crucial for us‚ you don’t want to go in there arrogantly into somebody else’s home turf and stomp around aggressively like some South African companies have done in the past. We’ve gone in very humbly‚ we’ve formed a partnership with them‚ so they can advise us on bank financing‚ on dealing with property brokers‚ etcetera.
The language is obviously a difficulty but fortunately most documents are translated. We’ve got very strong representation from professionals over there‚ and the law is similar to our sectional title law‚ in fact‚ it’s called condominium ownership‚ but quite similar to our sectional title law. So it has been relatively simple to get to understand that part of it.
BDTV: And maybe just in summing up‚ what’s it looking like in the local markets at the moment? Your vacancies came down quite nicely last year‚ down to 4%‚ you have taken on more retail as well‚ with a few Shoprite anchored supermarkets‚ do you think they’ll be defensive in an environment like this?
ME: Yes ... we’ve had to pay our school fees over time. We listed at R1.6bn and we’ve started to recycle some of those assets out more‚ B-grade office properties‚ and we’ve taken on more retail and well located office properties‚ more defensive cash flows. That you can see for us going forward for the next two years.
We’ve got a big green emphasis. The occupancy cost reduction‚ particularly now with Eskom kind of having the ways that it’s having‚ we’re rolling out solar to a number of our properties and trying to lead the market. Growthpoint are doing an excellent job as well from a big-cap side and the headwinds in SA are interest rates increasing‚ despite low growth‚ if any growth‚ and the risks that we’re having from municipalities and from service supply ... those are the risks which could slow the property market down for the next two years but they are clever‚ they’ve gone offshore at the right time. People like Nepi have done amazingly well.
