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Vukile Property Fund’s deliberate strategy was to transform its portfolio before the end of the year. That box has been ticked, the mid-cap JSE-listed real estate investment trust (REIT) delivering on its goal of becoming a specialist retail fund by reshaping its portfolio to comprise mostly low-risk, high-quality retail assets underpinned by strong national tenant leases.
Notwithstanding a difficult macroeconomic environment, Vukile managed to tick all its financial, strategic and operational boxes.
Posting strong operational performance for its half-year to 30 September 2016, Vukile reported 7% growth in dividends per share, maintaining its unbroken growth in dividends since listing. And the company is on track to deliver full-year results in line with half-year performance.
Vukile currently boasts a property asset base of R16bn with a direct retail-focused portfolio in South Africa and an indirect portfolio of REITs.
By mid-December – post approval of Gemgrow (the Synergy/Vukile/Arrowhead transaction) by the Competitions Commission – Vukile will emerge as a specialist retail fund with assets of R14.2bn. Of those assets R12.4bn will be 44 direct property, 90% of which is retail with an average property value of R240m. Add to this an indirect portfolio of R1.8bn made up of three assets; the fund’s R375m stake in Fairvest Property Holdings, R637m investment in UK-focused Atlantic Leaf and R826m investment in Gemgrow.
“We have turned ourselves into a specialist retail fund. We believe that is something that the market will value and rate,” says CEO Laurence Rapp.
In addition to gaining quality retail assets via the Synergy transaction to aid in its retail focus strategy, Vukile also disposed of its sovereign portfolio for R1.18bn, the funds from this reducing the fund’s debt and lowering its gearing ratio to 23.9%. Post the Gemgrow deal gearing is set to drop further to 20%.
Vacancies have been contained at 5% with retail, the core part of the business, posting vacancies of 3.9%. Vukile also achieved positive rental reversion of 6.4%, and signed its new deals at 3.2% above budgeted levels.
The company has worked diligently to push out its lease expiry profile, 43% of the portfolio now expiring in 2020 and beyond, the retail portion higher at 46%.
Conservative and savvy balance sheet management has resulted in optimum gearing with debt fully hedged. Not only does this give the fund a strongly defensive stance, it also insulates it from local interest rate rises and the country’s possible downgrading.
Vukile has created significant balance sheet capacity – a war chest of over R1.5bn in readily available resources of cash and existing debt facilities. It is this war chest that will be the firepower behind Vukile’s offshore expansion goals, the fund not having to tap markets for fresh equity.
“With the advent of the ‘new’ Vukile, we now have a great platform for international expansion in line with our stated strategy,” says Rapp.
International expansion is a key focus says Rapp, confirming an offshore goal of 25% within the next two years.
Vukile launched its international investment strategy with its 26% stake in Atlantic Leaf Properties, securing a foothold in the UK from which it could grow.
Says Rapp: “Atlantic Leaf provides the perfect launchpad to deepen our international exposure while building our high-quality, low-risk portfolio. Vukile’s strategy favours developed markets and we are exploring good buying opportunities internationally. Notwithstanding the uncertainty around Brexit, there are opportunities in the market, made even more attractive by the weakening of the British pound.”
That means greater involvement with Atlantic Leaf, and partnerships with other likeminded entities, says Rapp. But offshore focus does not extend to Eastern Europe, being an area that Rapp believes South Africa has enough exposure to already.
Rapp says they have a healthy pipeline internationally, and are currently looking at three markets but will focus on two where they are further progressed.
“We are looking to build a property strategy rather than buying a property asset,” says Rapp. That means partnering with the right companies, a focus on longevity and the building of an international property company as opposed to simply doing a short-term accretive deal.
Vukile also sees opportunity by investing in its own assets like its recent upgrade and expansion of East Rand Mall, Durban Workshop and Dobsonville Mall in Soweto. The fund is also invested in two new regional mall developments, Springs Mall due to open in March 2017 and Thavhani Mall opening in August 2017.
What the fund won’t be focusing on is residential.
“We don’t see ourselves having 15%-20% of the fund in residential going forward. It is not a key focal area for us going forward,” says Rapp.
“We have picked our strategy as being retail experts and want to continue driving and delivering on that, together with the international side.”
