Redefine’s full-year results unpacked by CE, Andrew Konig

Redefine Properties Limited released full-year results this morning. Andrew Konig, Chief Executive of Redefine Properties, explains how growth through acquisition and diversification added to the bottom line. He also touches on a smorgasbord of property related subjects from anchor tennants and the competition commision to ADR’s and marketing to international investors. Watch this, you’ll learn something. -CP

GUGULETHU MFUPHI: Welcome back to Power Lunch. Real Estate Investment Trust, Redefine Properties Limited released its full-year results this morning, citing an eight-point-five percent increase in distribution and 12.1 percent increase on its nett asset value. Joining us now, in the studio to unpack the numbers, is Andrew Konig, Chief Executive of Redefine. I said it the English way and not the Afrikaans way.

ANDREW KONIG: That’s absolutely right, Gugu. It is as you said it, thank you.

GUGULETHU MFUPHI: Okay, that’s perfect. Now that we’ve got that out of the way, an impressive set of numbers and what stuck out for me was that your asset base exceeded the R50bn mark, so clearly your strategy here has worked quite well for you.

ANDREW KONIG: Yes, look, we’ve been actively pursuing growth through acquisition, and that growth has culminated in about R4.6bn of assets that were added during this financial year. That has pushed our total income earning asset base to just over R51bn, which we are very happy with. The reason why we want to be big is, (1) risk, we want to be able to absorb any shocks that come, but more importantly, what that base gives us is a platform from which we can expand, grow, and execute significant transactions. Acquiring single assets at the moment isn’t that easy. There’s not many around and, generally, you’ll find that portfolios become available. Now, with that platform we are able to execute a platform and then dispose of those properties that don’t meet the investment criteria.

What comes to mind for example, will be the Macsteel deal, which was implemented subsequent to the year-end. In fact, on the 31st October we implemented that deal. That was a R2.7bn deal, which in the past, Redefine wouldn’t have been able to have absorbed on its own. It would have had to have partnered with someone, had it have been smaller. Hence, the platform has been established through this base now.

ALEC HOGG: Andrew, it’s quite interesting the Macsteel deal because there are many, wealthy, private property owners in South Africa, Mr. Samson being an example, with Macsteel because it was in his private capacity, wasn’t it, that he was selling?

ANDREW KONIG: Well Macsteel is a privately owned company, The Samson family own a significant element thereof. There are other investors with them, and Mr. Samson’s ultimate intention is to dispose of his interests and, in this way, he’s leveraging up his existing asset base, to enable him an easier departure.

ALEC HOGG: Are you finding other wealthy South Africans also wanting to cash in their property investments? I say this because (a) property has had a fantastic run in the last ten to 15 years, and (b) if you want to take a long-term investment and a long term view on a country you’ve got to be a property investor but if you’re feeling a little bit dodgy about it, maybe these are the people who are coming to you, and offering and that’s a question. Are they?

ANDREW KONIG: I don’t think they are. What I do believe, Alec, is that everything is for sale at the right price. It is just a matter of the planets aligning themselves more than anything else. We’re not seeing a run on property at the moment – quite the opposite, in fact. Property is one of the few asset classes – although it is long-term – that does still give you a good income yield and capital appreciation, over the long-term. It’s a long and steady asset class to be invested in but, by no means, are we seeing a rush.

ALEC HOGG: That’s a good sign because you can get caught up in the noise very easily, in our country. CEOs sit in your chair and tell us how they are taking their money offshore and they’re investing outside, but if smart individuals who own property, are not coming to you and say ‘please, buy it from us, that, in itself, sends us quite a strong, positive signal about the country, long-term.

ANDREW KONIG: Absolutely, I think we all are judged short-term, and that’s the frustration of being a real estate Investment Trust. Investors have short-term expectations, which in our case for 2014, has been a very pleasing one, but we are in a long-term asset class. We are interest rate sensitive, so cycles are there and what we are looking to do is exploit and maximise our opportunities along the way, so that we sustain our growth for all stakeholders over the long-term.

GUGULETHU MFUPHI: If we can focus on some of the retail segments. Yesterday Alec spoke to one of your colleagues in the property sector, Rebosis Property Fund (a lot smaller) and asked him about the current fight that’s going on regarding anchor tenants. Massmart is taking on some of the players in the industry and, if I’m not mistaken, Sisa did mention that it is good for them.

ALEC HOGG: It’s good for you guys.

GUGULETHU MFUPHI: So is it good for you, too?

ANDREW KONIG: Well, we do believe so. We’ve got a bit of a different view to the rest of the industry, in that the fights are being conducted through the authorities, i.e. the Competition Commission. Our view is to rather approach the retailers on a direct basis, and come up with a commercial solution for both of us. At the end of the day, there’s a contract in place and there has been a recent case where the High Court upheld the lease (on contractual terms), and they’ve been quite clear about it that they don’t have any jurisdiction over The Competition Authorities’ work and so forth. Nonetheless, those are commercial terms that were thrashed out many years ago, and they are in place, so contractually we are bound by that.

Our view is to rather, come with a commercial angle and we are engaging with those retailers where we have been frustrated, and we are working very closely to try and get a win-win situation out if it.

ALEC HOGG: How did it all develop?

ANDREW KONIG: I think it all arose, if I go back in time, when Walmart made the initial bid for Massmart. It got a lot of airtime at the Competition Authorities because part of Massmart’s drive, post the Walmart buy-in, was to grow its food offering. At that time, there was a lot of discussion around these exclusivity clauses, which hampered (especially Walmart) from growing Massmart into that line, and that’s where it kind of started. It has gained a momentum since then. I think Shoprite, Pick ‘n Pay and so forth have all kind of been drawn into this issue now, over time.

ALEC HOGG: But what about the anti-competitive practices when it comes to small tenants? Big tenants, in a case like this, can clearly throw their weight around as they are showing they have exclusive leases. Then you go all the way down and the people who pay the most in your shopping centres are the little guys.


ALEC HOGG: Could this change that whole ballgame?

ANDREW KONIG: It could, potentially, but remember the reason why these Exclusivity Clauses arose, effectively, was on the back of risk. Shopping centres were constructed in areas where it was still a little bit doubtful as to what the feasibilities were, and property owners went on the back of a covenant – being the lease. There was this undertaking for kind of a risk reward, kind of trade-off. In a way we are looking now in hindsight, at these arrangements and trying to pick them apart. To be fair to that retailer though, they did take risk upfront, which is now being challenged, given the fact that it has all worked out okay. The converse would apply and let’s say, it didn’t work out okay… Then what? Are we quite happy to lock them in forevermore? There is a bit of a flipside to this debate, and the opportunity could arise.

Potentially, you could have the opposite, where a retailer then reneges on his long-term commitment, or just says ‘well, if you want to start picking apart aspects of that lease, the whole lease comes up for renegotiation’.

ALEC HOGG: It’s a very rational approach because ask BHP Billiton and Eskom, and we know what’s happened in that case.

ANDREW KONIG: Of course.

ALEC HOGG: Just to close off with, the distribution’s eight-and-a-half percent Rebosis was about that level as well. Is that what we expect, sorry the growth industry

ANDREW KONIG: A lot of challenge around letting, renewals, in terms of what the market can bear, in terms of new pricing. In addition, it’s not that easy in terms of operating in an environment where there’s always pressure on your administered prices. Your electricity, your rates and taxes, and so forth eat away at your margins and one has to be constantly aware of energy efficiency improvements to minimise that impact. Seven to eight percent -in our case we’re giving guidance of seven to seven-point-five percent – we feel is reasonable, but nonetheless challenge to deliver that in this market where there are a number of pressures coming at us.

GUGULETHU MFUPHI: Just to get an update, in September last year, you launched your American Depository Receipt. The take-up to that, a year later…

ANDREW KONIG: It’s not a nice answer I’m going to give you. Our take up has been none whatsoever.


ANDREW KONIG: None whatsoever, through the American Depository Receipts but what we have found when we look at our share register… Unfortunately, we can only look at the custodians that are offshore, so any international investor investing through a local CSDP –  you don’t track that easily from a foreign ownership point of view. If I just look at the international investors, they total just under 18 percent. If we just go back to the start of Redefine, as it is currently constituted back in 2008/2009, that percentage was under two percent. We’ve seen significant growth, in international investments, not through the ADR but directly.

ALEC HOGG: But explain that to us. Why would they come directly rather than the ADR?

ANDREW KONIG: I’m at a loss. I can’t actually answer that Alec. I don’t know why they wouldn’t have chosen the ADR route. We were disappointed. For us it had cost us nothing. Bank of New York paid for the setup of this arrangement but, to be fair, I think we would need to do a lot more marketing, in the States, to try and entice investors through that mechanism because it is a very efficient way of investing, into South Africa, if you are U.S. based.

GUGULETHU MFUPHI: Interesting insights, thank you so much for your time today Andrew. That was Andrew Konig; he’s the Chief Executive of Redefine Properties.

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