Fountainhead retail assets 'offer potential for redevelopment‚ expansion'

Redefine Properties financial director Andrew Konig chats about deal to buy remainder of Fountainhead Property Trust‚ in this interview conducted on July 7.

BUSINESS DAY TV: Redefine Properties has had a rather busy few weeks and an oversubscribed bookbuild among its recent actions … culminating in the news on Friday that the Fountainhead Property Trust has agreed to be bought out by Redefine … which of course already owns Fountainhead’s Property Management … the asset manager that controls Fountainhead’s properties. Joining me now on News Leader is Andrew Konig‚ Redefine’s financial director.

Andrew … so it’s been a rather long and tortuous road to this result‚ but finally it seems you have got what you want in the Fountainhead Property Trust.

ANDREW KONIG: It took a long time … if you recall when I was in the studio on October 1 2012 when we announced the initial attempt to acquire Fountainhead … as you know there was a lot of to-ing and fro-ing between ourselves and Growthpoint during the course of 2013 which culminated in a stalemate situation whereby we withdrew our offer‚ and we acquired just under 66% of Fountainhead over the period since then.

Today‚ as we sit here‚ yes we are very excited … we finally have got what we wanted. We now have an agreement with the independent committee of the Fountainhead Property Trust to now move forward with the transaction to acquire the assets on a swap ratio of 82 Redefine’s for every 100 Fountainhead units that are presented.

BDTV: Can you remind us what the attraction was for you in buying the Fountainhead Property Trust?

AK: Yes‚ the main attraction is the retail asset portfolio that Fountainhead have … they’ve got a number of very well located‚ well established malls of scale. I can just go through them … Centurion Mall being the biggest one just over R3bn … that’s the jewel in the crown. Blue Route Mall in Cape Town‚ there is N1 City… there is Kenilworth … up here‚ there’s the Bryanston Shopping Centre that’s currently undergoing a revamp and there is also The Boulders. All centres with potential for redevelopment and expansion.

BDTV: Given the interest that has been shown in retail companies by various groups on the JSE‚ would you say then that you were right to persist in the route to acquire Fountainhead … by hook or by crook almost…?

AK: There was a lot of tenacious deal-making behind the scenes which got us to where we are now … largely thanks to our CEO Marc Wainer‚ but yes‚ the assets are basically unobtainable in the South African space right now. To get your hands onto such retail assets in one transaction is virtually impossible‚ and that has always been the attraction and‚ yes‚ we are very happy to have got to this stage.

BDTV: And do you think it’s a fair ratio that you’re actually getting in the Fountainhead Property Trust …property has rebounded quite a lot since the lows of earlier in the year … are you happy with the exchange?

AK: There are shifting dynamics all the time and it’s all principally driven through bond yields and cost of capital.

But we’ve been very careful in pricing the transaction. We’ve tried to be as fair to all parties as possible.

In South Africa there is more a focus on yield as opposed to elsewhere in the world with a look at net asset value … but if you look at it on a yield basis we’ve priced the swap ratio … that there’s an uptick for those unit holders that are going to be swapping out their Fountainhead units. If you look at the numbers that we announced … and these were based on interim historic numbers‚ it was roughly just under 77 basis points which is about 0.8 of a cent … if you annualise it‚ it’s just under two cents per share that they would gain as a result of this. For the Redefine unit holder yes‚ there is a small dilution‚ but it is manageable. On an annualised basis it’s about 0.2 of a cent.

BDTV: Getting to the bookbuild … as we said‚ you’ve been very busy … you say you’ve had this on the one hand and then the bookbuild which was an accelerated offering‚ and clearly there was loads of appetite … it was oversubscribed …you raised more than R1.5bn. Given that you’re not paying cash for the Fountainhead Property Trust‚ what are you actually using this money for?

AK: This R1.5bn will basically be paying down a number of acquisitions that are under way. There are two that come to mind … the total of R1bn … the biggest one is R800m for 50% of the Alexander Forbes building opposite the Gautrain station in Sandton‚ and there’s also a further R200m-odd that will be spent in Sandton at one of the Discovery buildings that adjoins our building on the corner of Fredman and West Street … that’s R1bn. We also have a significant number of developments that are under way and they do eat a lot of cash and what we are trying to do is to preserve our loan to value ratio between the 35% to 40% range and through raising this cash we won’t be going to fund any of these outlays through debt‚ but rather through equity‚ which for us right now makes more sense given that the cost of fixing long-term debt is becoming quite expensive‚ relative to the yields that we’ve committed ourselves to for these acquisitions and development projects.

BDTV: Could you potentially go back to the market given that you had such an interest‚ and it’s almost surprising to see the amount of interest which has been expressed in the various bookbuilds … yourselves‚ PSG totally separate industry‚ but same kind of appetite?

AK: I would guess that if you’ve got a compelling investment case‚ there is money out there for you‚ but we’re not just going out for the sake of raising capital. We’ve been very specific because holding cash is unproductive so we first get our investment lined up and then we get some certainty as to when it transfers. In South Africa that is a bit of an unknown … you’re up against the vagaries of many parties outside of your control and it’s a bit of a balancing act. But once we have certainty as to when transfer is likely to occur‚ that’s when we go to market and it’s all a function of the compelling investment argument…

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