ATTERBURY ACQUISITIONS (ATTACQ)

Transcription

1 1 October 2013 ATTERBURY ACQUISITIONS (ATTACQ) HIGH QUALITY PROPERTY FUND TO LIST ON 14 OCTOBER 2013 Indicative listing price R15.00 Company update; Peter Armitage One of SA s most successful property companies of the last decade, Atterbury Acquisitions (Attacq; code ATT), is planning to list on the JSE on 14 October The indicative listing price is R15 per share and we estimate a fair value of R We expect there to be a strong appetite for a limited number of Attacq shares (53.3m for R800m) on listing and believe this will be an excellent long-term investment, generating a low-risk and steady 15-20% per annum (aside from an anticipated uplift in value on listing). Attacq will be differentiated from other JSE-listed property companies in that it has a development component in the form of Waterfall (+/-30% of property portfolio), probably SA s most exciting growth node. This will dominate the portfolio in time. It will hence delay conversion to REIT status and will NOT pay out its earnings as a dividend for a number of years. The anticipated 15-20% per annum increase in value will be derived from: What Attacq offers as an investment One of the best property management teams in the country, with an excellent track record. A blue chip rent-generating SA portfolio. Ownership of the Waterfall development, which will see circa R25bn invested over the next 15 years. This is probably SA s biggest growth node. A play on African property development, including Ghana, Zambia, Mauritius and others. A play on the recovery of European property. A 25% stake in the Atterbury property development company, which will provide a further pipeline. Fig 1: Net asset value per share (June year-end) Rental yield of 6-7% on total assets (development assets do not generate rent). Increase in value of rental assets (6-7%). Increase in value of development assets (5-7% p.a.) Attacq will spend an anticipated R25bn over the next years on Waterfall, effectively a new city, whose flagship will be the R3.5bn, 116,000 sqm Mall of Africa. This will be completed in April The company is well diversified and has 16% of its assets in Africa and Europe. Company stats Source: Attacq AFS and Anchor Capital calculations Fig 2: Facts and figures per March 2013 balance sheet Fair value per share: R16.88 Anchor NAV per share: R14.68 Expected market cap: R9.6bn Loan to value: 39.5% Waterfall Mar 2013 BS gross value per share: R4.80 Rental escalations: 8% per annum Vacancies: 7% Anchor Capital (Pty) Ltd, FSP number

2 Valuation of Attacq share Based on market comparables, we estimate a fair value per Attacq share of R This is comprised as follows: The IFRS net asset value at 31 March 2013 was R We add R1.53, which is the deferred tax liability on the balance sheet. This is an accounting entry, the vast majority of which will never be paid. As assets are revalued, so a deferred tax liability is raised. This only becomes an actual liability if the property in question is sold, whereas Attacq is largely developing to hold, rather than sell. In addition, when Attacq eventually converts to a REIT (we expect in 3-5 years), deferred tax tax is no longer payable. We add R0.28, which is an accounting liability created by interest rate swaps. If the debt is held to payment date, this liability eventually reverses. We add R1.33, which is a 10% increase from the nav on 31 March 2013 (our estimate) to the date of listing. We add a 15% premium (R2.20 per share), which is below the average market premium to net asset value (20%). The total of the above is R We cannot predict where the share price will trade with certainty, but based on current market valuations and the quality of the Attacq portfolio, we believe R16.88 is a reasonable valuation for the company in listed form. Another way to assess whether a premium to nav is justified is to take into account the anticipated growth. We explain in this document that we expect the nav per share to increase by 15-20% per annum, with relatively low risk compared to an industrial business. We contend that investors should be prepared to pay a premium in advance for this return. 2

3 Property mix Fig 3: Key Attacq assets based on March 2013 financials Attacq has a very high quality property portfolio and the company has consistently sold properties which it believes are mature, or are not of the required level of quality. Fig 4: Attacq asset mix The main components of Attacq are as follows: A property and investment portfolio of around R10bn (mainly rent generating assets). The biggest assets are Garden Route Mall, Lynwoood Bridge, Mooiriview Mall, Aurecon and a 25% stake in Brooklyn Mall. The Waterfall development (net balance sheet value of R2.7bn), which includes 1.8m square metres of bulk, with over 300,000 of this currently under development. The trophy asset in the mix is The Mall of Africa, a 116,000 sq metre mall which is currently under development. A 25% stake in Atterbury Property Holdings, which is the property development company of the group and will provide a further pipeline of high quality assets. International assets are +/-15% of the property portfolio and this includes a 25% stake in the Attfund International (property development company which focusses on Africa) and various European property investments. The company has an excellent track record, increasing nav per share by a compound 21% per annum over the last eight years. This includes the 2008/9 recession period. The pie chart above shows the major assets on the Attacq balance sheet, with Waterfall the biggest at 29%. The asset 3

4 Property details mix of developed property is 64% A-Grade retail and 36% A- grade office. A description of the major underlying properties is as follows (excludes held for sale): Commercial Lynnwood Bridge m² mixed-use, Lynnwood, Pretoria Brooklyn Bridge m² mixed-use, Brooklyn, Pretoria Retail Garden Route Mall m² retail, George Glenfair Boulevard m² retail, Lynnwood Manor, Pretoria De Ville m² shopping centre, Durbanville, Western Cape In addition, Attacq also has a portfolio of indirectly held assets through investment in other property funds. Through its interest in Abacus and Retail Africa Consolidated Holdings (Reach), Attacq IH holds the Irene Mall in Pretoria, Waterkloof Corner in Brooklyn, Steenberg Village in Cape Town, Weskus Mall in Vredenburg, an 80% undivided share in Eikestad Mall in Stellenbosch, a 25% undivided share in Brooklyn Mall and Mooiriver Mall in Potchefstroom, amongst others. International Attacq s strategy is to have a 40% international exposure of investment assets 20% in other sub-saharan countries (including Mauritius), 10% in the international emerging markets ( Bric countries) and 10% in the developed markets. This balanced has not been achieved yet, but is a strategic objective. Europe A direct holding, Nova Eventis An income yielding fund, MAS PLC A capital growth fund, Attfund International Karoo Investment Fund Edinburgh, Scotland Nova Eventis Attacq IH holds an effective 19.75% holding (8.5% direct, 11.25% indirect) in the Nova Eventis shopping centre near Leipzig, Germany. This 76,000m2 super regional mall has less than 1% vacancy and is trading well in a suppressed market. Income Fund, Mas plc Attacq invested 10 million in MAS plc in September 2011 and we hold 23.7% of the issued share capital. The value of this stake at current market prices is R230m. Capital Growth Fund, Attfund International (50%) The assets consist mainly of investment in Karoo funds (I and II), Nova Eventis and miscellaneous SA assets. Attacq holds 50% of Attfund International. Karoo Investment Fund Karoo is active in the real estate capital markets predominantly in the UK and Europe. Edinburgh, Scotland Cartongate mixed used precinct. Construction scheduled to commence in Africa Mall of Mauritius Atterbury Africa Fund Mall of Mauritius, Port Louis, Mauritius This asset is in a key, strategic location in the heartland of the most economically active region in Mauritius. A key part of the precinct, the m² Bagatelle Mall of Mauritius, was opened on 29 September 2011 and the new mall is a resounding success. Atterbury Africa Fund Accra Mall, Ghana The Grove, Windhoek, Namibia In addition to the above, the following projects are in development: Newtown, a 80,000m2 mixed-used development in the Johannesburg CBD. Nedbank will occupy the 37,000m2 of office space in a new CBD node. Lynwood Bridge Phase III, which comprises two 7,500m2 office blocks. The Mall of Namibia, a 54,000m2 development in Windhoek (one-third owned). The second phase of the Bagatelle Mall in Mauritius (49.9% owned), a 44,000m2 mall. 4

5 Waterfall The Waterfall Estate Development is situated either side of the N1 between Buccleuch and Allendale Interchanges. This is likely to be SA s most exciting growth node for the next 10 years. Attacq has approved development rights of 1.8 million sqm. The city centre infrastructure has already been built and developments are underway for the likes of Cell C, Massmart, Digistics, Altech, Tarsus, Group 5, and Golder & Associates. These are typically year leases. The balance sheet value of the Waterfall development in the March 2013 financials is shown below: The asset value is calculated on the residual land value valuation model using discount rates of 15-22%. The finance lease liability is the present value of the 6% of net rentals that will be paid to the lessor (Waterfall Development Company). There is a material uplift to the calculated net asset value on the practical completion of buildings, many of which will materialise over the next 12 months. Attacq is targeting a ROE in excess of 20% for the project. Of the 1.8m sqm, 116,000 sqm will be absorbed by the Mall of Africa and another +/-180,000 sqm is under development for the tenants mentioned above, all at attractive yields. This excludes transactions under negotiation and several tenders where Attacq is on the shortlist. Attacq expects to develop a further 100,000 to 200,000 sqm per annum, each of which should result in a material uplift to net asset value. The total development expenditure (some of which will be done in joint ventures) will be in the region of R25bn in today s money. Based on a development profit of R3,000 per sq m, there is an additional +/-R5bn or R8.75 per share (in today s money) in value to potentially be realised over the next 10 years. Mall of Africa Construction has begun on the Mall of Africa. According to Attacq, This super-regional shopping centre will form the key development in this urban framework. Offering some m² of retail space, the Mall of Africa will be the largest retail development in Africa to be constructed in a single phase and will act as a hub around which other amenities will be clustered. With its location on this prime site, its sheer scale and its cutting-edge design, the Mall of Africa will change the face of the Johannesburg and Midrand areas and no doubt become a new African landmark. The Mall of Africa will set a new benchmark in mixed-use shopping and entertainment. Larger than Cape Town s V&A Waterfront and almost the size of Sandton City, the mall will form an anchor around which a range of future mixed uses including retail, offices, conference and recreational amenities and residential areas will grow. The mall will be a landmark in the centre of the city whilst forming part of an integrated urban plan. Mall of Africa will be a destination for local shoppers and tourists alike (over 300 shops) and will include speciality, national and international retailers as well as high end restaurants. It is scheduled to open in March, It is estimated that approximately 6.7 million people already live within an hour s drive from the centre and this number will only increase as the precinct develops further. Some of the Waterfall developments are: Waterfall City: represents the focal point of the entire development and R240 million has been spent on Phase one infrastructure. Waterfall Distribution Campus: the 36,000m² distribution centre (DC) for Walmart/Massmart and the 8,000m² DC for Digistics are both completed; Waterfall Landmark Park: the prestigious 44,600m² business campus for Cell C is under construction adjacent to the Buccleuch interchange; Completion of a 4,200m² office block undertaken as a joint venture with the Moolman Group and let to the Allied Technology Group; A 20,000m² new Head Office for Group 5 commenced in late The size of the Waterfall Business Estate development and its roll out over the next decade will provide Attacq with a steady pipeline of fresh property product that is brought to market. 5

6 Valuation of the business Fig 5: Attacq March 2013 financials In the exercise above we have adjusted the last balance sheet for how we think the listed property market will value the Attacq share. This methodology takes account of the recent JSE property index correction of close to 15%, as the rise in the US bond yields had ripples all over the world. A material assumption is the cap rate at which the market will value the rent-generating property portfolio. The capitalisation rate used is 7.5% (7.3% to June 2014). This is conservative based on how good quality property companies are valued at present. We show overleaf that we could even be more aggressive than this. The Waterfall development is also conservatively valued in the balance sheet. As developments progress, so the value is uplifted. In today s terms there is well over R25bn potential capex to be spent in this project over the next 10 years. Management targets a 20% return on funds invested (geared). When the company changes its status to a REIT (probably in 3 to 4 years) the deferred tax liability will be removed from the balance sheet and hence we have excluded this liability from the equation. In other words, the majority of this liability will never be paid. Subsequent to listing there will be 571m shares in issue. 6

7 Comparable listed valuations On the previous page we showed that Attacq s rentgenerating property is valued at a cap rate of 7.5%. In the table below we show that the average of what we would consider comparable companies is 6.5%. To maintain a conservative approach, we have used the 7.5% in our valuation. Fig 6: Clean forward DY of SA property companies Comparable listed companies clean fwd yields Note: 7.5% is based on disclosed 7.3% to June 2014, rolled forward to September 2014 The table on the right shows the entire listed SA property universe. One of the decisions which could influence the valuation of Attacq is the status of dividend payments and conversion to a REIT. The balance of rent-generating assets to development assets will probably reach about 80% in three to five years time and this will be the appropriate time for conversion. In the interim, the company has decided not to pay a dividend, choosing to be a growth stock rather than a dividend stock. This could have a negative impact on the valuation for a time period. The listed property market saw a sharp (11%) drop in recent weeks as bond yields have moved upwards. The market appears to have now found a new level and the SA index total return is up 8% for the year. SA listed property index Cap rate used in ATT AFS valuation of net asset value 7

8 Fig 7: Premium/ discount to NAV (excl def tax) of listed property companies (Attacq in green) Weighted avg premium = 20% Attacq at R16.88 per share = 15% premium Attacq at R14.68 per share = Net asset value Source: Anchor Capital calculations and company announcements NAV discussion As Attacq will not be paying its earnings out as a dividend, the net asset value per share will play a bigger role in the market s valuation of the business than other listed property companies, which tend to be valued on yield more than nav. In the table above we show that the average weighted premium to nav for SA listed property companies is 20%. It is logical for a premium to be achieved, due to the following factors: Net asset value is historical not forward-looking (as dividend yield valuations tend to be). Net asset values do not factor in future growth potential. Balance sheet net asset values tend to be conservative. Listed shares have on average accumulated a dividend. We estimate the net asset value of Attacq to be R14.68 excluding deferred tax. Hence at the share price used in this report (R15), Attacq would be trading at a 2% premium to nav. We have suggested a fair value of R16.88 for Attacq in this report. At R16.88, Attacq will trade at a 15% premium to nav which, as can be seen in the chart above (green bar), is below the premiums currently achieved on the SA listed property market. We could well justify a bigger premium based on: 1) management s track record, 2) the above average growth potential, 3) the conservative yield used in the valuation of property, and 4) the global diversification (and Rand-hedge qualities) of the property portfolio. Global properties tend to trade at lower yields. A further aspect we have not discussed in this report is that as a listed (and bigger) entity Attacq will probably have access the cheaper debt funding than currently achieved. Risks Among the risks we have identified are as follows: Development property is significantly more risky than rental generating assets. For Attacq to complete the Waterfall development to be completed, economic growth in SA will have to be sustained at a reasonable level. The listed property market has been volatile this year and if US bond yields rise further, this could well continue. While we have attempted to be conservative in our valuation of Attacq, if listed property de-rates, this will have an implication for the market value of Attacq. Attacq will be unique in the SA listed property space, with a material development component. The lack of dividends could negatively impact the short term valuation. 8

9 The business of money: Global asset management and stockbroking Disclaimer This report and its contents are confidential, privileged and only for the information of the intended recipient. Anchor Capital (Pty) Ltd makes no representations or warranties in respect of this report or its content and will not be liable for any loss or damage of any nature arising from this report, the content thereof, your reliance thereon its unauthorised use or any electronic viruses associated therewith. This report is proprietary to Anchor Capital (Pty) Ltd and you may not copy or distribute the report without the prior written consent of the authors. 9