ADR kings BNY Mellon target SA listed property, local firms grab opportunity to tap US capital
With domestic US opportunities in the Doldrums, New York financial advisors are looking elsewhere for products – and judging by action in the past month, are casting their eyes to the south. BNY Mellon, the world's largest with 1 400 ADRs in its programme, is hunting in Africa, specifically in the listed property sector. On September 6, Marc Wainer's R26bn Redefine Property announced that it is to become available to American investors through the ADR programme. Yesterday R46bn Growthpoint Properties said it would be doing the same. In this wide ranging interview with Growthpoint CEO Norbert Sasse, he provides sound logic on why the company is keen to draw capital from the Big Apple, and offers insight into why ADRs are all the rage among SA executives right now. We also cover Growthpoint's R1.3bn just announced acquisition of the highly geared Abseq Property portfolio and the possible impact on security costs for landlords in the wake of the Kenyan Westgate terrorist attack. – AH
GUGULETHU MFUPHI: Growthpoint Properties has become the second South African listed property company to launch an American Depository Receipt programme, following in Redefine Properties' footsteps. Joining us to explain more about the company's move is Chief Executive, Norbert Sasse. Norbert, why launch an ADR now?
NORBERT SASSE: Obviously as a company, we're always looking at raising sufficient funds to run the business and we need to keep all of our options open, with regards to raising capital. Especially companies such as Growthpoint. We're really capital-hungry and our model in particular is that we pay out pretty much all of our profits every six months, so we don't have the benefit of retained income and big cash reserves that we can build up over time. So, whenever we're acquisitive or wanting to buy new properties, make new investments, or spend capital on refurbishing our buildings, we need to raise new capital; either in the form of taking on more debt – obviously you've got limitations on how much debt you can take on relative to your loan balances/relative to the value of your portfolio etcetera. The other alternative is equity capital and by launching the ADR program, it just gives you greater access to international marketing, in particular the US investment market. This increases our ability to raise equity capital to grow the business going forward.
GUGULETHU MFUPHI: Just how much red tape did you have to go through to launch the ADR compared to a rights issue in South Africa or a listing in another country?
NORBERT SASSE: Funnily enough it's actually not a lot. There are various types of ADR programs. You get some that are very heavy vis-à-vis the regulation and regulatory compliance issues in the US. You can imagine; to be listed on a US stock exchange, there are significant regulatory hurdles that one has to overcome. BNY Mellon runs the program for you, and there are very little costs involved for ourselves. We certainly see a lot of benefit in it.
ALEC HOGG: You didn't just do it on a whim. You must have some reason for it. You're now already at a R46bn rand market cap, so tapping on the South African doors is not going to be that easy. Is that the reason why you're looking at the ADR? Are the Americans telling you that they'd like to have a little slice of the South African action?
NORBERT SASSE: It's a bit of a combination, I would guess. Our total foreign shareholding at the moment, is about 17%, so it's still relatively small. The South African domestic listed property investment market has been very good to us. We've always had great access to capital locally. But yes, I do think that as one grows to the kind of level that we're at today – not only in terms of our debt market and the debt capital markets or being reliant on the South African banking markets – we definitely have to keep all of our options open vis-à-vis the raising of capital, be it equity or debt capital, going forward. You might get to a point where you're starting to even be too big for the domestic banking market. You might start looking at borrowing from international banks. We've got quite a successful and a very nice Australian business which we're supporting, effectively from South Africa. I think the assets there we've grown from about $450m to $1.8bn today and a lot of that capital support has come from the South African entity. So it's a broader strategy, Alec, just to gain access to as many capital markets and avenues to capital as we can.
ALEC HOGG: Gugu and I know Marc Wainer quite well.
GUGULETHU MFUPHI Fairly well.
ALEC HOGG: Marc's done this first, so he beat you to the punch. Gugu, I'm wondering whether Norbert is learning from Mark – in other words, following in his footsteps – or saying "Hang on. This old man who knows property like the back of his hand so let's follow him…"
NORBERT SASSE: No, Alec. I don't think it's got anything to do with what Redefine are doing or have done. The reality is there are products out there. BNY Mellon Bank is punting this particular service and product of theirs. We see the long-term benefits of it. There's no doubt about it. Perhaps it was just a question of who got the board approval first as opposed to who signed the final documentation first.
ALEC HOGG: But it's nice that both of you are there.
NORBERT SASSE: Sure.
ALEC HOGG: Because together it's a substantial amount for an American investor to look at (R70bn market cap).
GUGULETHU MFUPHI: Very true. But looking at that, you mentioned that you're very capital-hungry and you're using that money to obviously find more acquisitions. The recent acquisition was the Abseq Property Group – their portfolio – 17 high-quality office properties based in Johannesburg. Why them?
NORBERT SASSE: We're always on the lookout for quality investment properties and in particular ones that we can structure or fund on accretive basis, so our focus is really the distributions we pay to our shareholders every six months and growing that as best as we can.
GUGULETHU MFUPHI: So is it all about the dividend then, after all?
NORBERT SASSE: Pretty much. We're looking at the yield at which we can buy these properties. You can buy much lower-grade properties at much higher yields, but in the long-term those things catch up with you. They're not even as lettable as the good quality stuff is. So the trick is for us to always's find good quality stuff at affordable prices, being able to buy them and still be accretive to our distributions.
ALEC HOGG: But the gearing here is very high. You're taking on almost R1bn worth of debt.
NORBERT SASSE: Correct. If you look at our balance sheet – at Growthpoint as a group – we're sitting at about 23% gearing as a whole.
ALEC HOGG: Was ABSA a keen seller?
NORBERT SASSE: I don't really know the details of ABSA's strategy, how they became an 85% shareholder probably four, or five years back. The fact of the matter is, I think most of the banks – ABSA also in particular, I would guess – are looking at uses of capital and efficient use of capital and I don't think it's a bank's business to be invested in a property investment portfolio. They should be doing the funding. They should be earning fees, etcetera.
ALEC HOGG: Did they not absorb it because these properties were in trouble?
NORBERT SASSE: No. My understanding of it was that it was not the case. Yes, the debt levels are high, but there has always been pretty decent equity in that portfolio. We're pretty much issuing Growthpoint shares for the equity value in that portfolio.
ALEC HOGG: 28 percent equity, four times gearing – that's high, even for property.
NORBERT SASSE: That is, but at the end of the day the quality of the properties is quite high. If you look at the concentration there are four assets in there – four office parks – that make up about 80 percent of the value and these are very good quality office parks in a great node. We've got in Woodmead, Bryanston, Country Club – so good stuff.
ALEC HOGG: I understand that it's still awaiting the Competition Commission Approval.
NORBERT SASSE: Correct.
GUGULETHU MFUPHI: How strong has the competition been from your competitors?
NORBERT SASSE: Look, my understanding was that the 15% shareholders in this particular investment were looking around the market to find a buyer for a while. We came into the race at quite a late stage, so it certainly was a competitive process. Our cost of funding is slightly lower than that of some of our competitors, given where our share price is trading and given our ability to tap the debt capital markets and the banks. It gave us a slight advantage in that we were able to pay a slightly better price than some of our competitors.
ALEC HOGG: It makes sense, particularly because there was so much debt, that would have wiped a lot of people out of the race.
NORBERT SASSE: Correct.
ALEC HOGG: I'd just like to pick up with the tragedy in Kenya. It was at a shopping centre the terrorists hit. Is it likely to have any impact on development of shopping nodes into the continent?
NORBERT SASSE: I would have thought, on the continent – yes. It's certainly something any investor should be considering. We, as Growthpoint, do not have a definitive strategy to be investing into Africa right now. We're pretty much focused on the South African business, the V & A Waterfront and our Australian business. I would certainly think that it is part of the risk of investing in Africa.
ALEC HOGG: This is extraordinary. You get terrorists coming into a shopping centre. That's my point. Is this perhaps game-changing for property investors into the Continent or were the Israelis – because it was Israeli-owned – perhaps more of a target?
NORBERT SASSE: I really don't know the answer to that.
ALEC HOGG: It's not a problem for you?
NORBERT SASSE: It's not a problem for us. Having said that; shopping centres are public places and where terrorists generally look to make big impact – it involves the public or public spaces, so those risks are inherent in any shopping centres.
ALEC HOGG: Maybe, as a knock-on effect of this: are you going to be having to bolster security in anticipation? It always happens. When there's a tragedy, there's a lot more effort that's put into things like security. Would you be looking at that?
NORBERT SASSE: I think something like this would warrant a security review of the current procedures that we've got at our shopping centres. We haven't rushed to do that in the last week or two. There's always a step-up for us in terms of security at our centres, leading into the festive season. You see bank robberies and robberies at stores, in our shopping centres, cash heists etcetera towards Christmastime. We are a lot more vigilant around this time of year leading into Christmas. Certainly no doubt in my mind – in conjunction with our insurers. It's something we should seriously consider from a risk perspective.