Redefine Properties’ new CEO Andrew Konig provides a fascinating glimpse into some of the deals going on behind-the-scenes of South Africa’s listed property sector. He explains why Fountainhead is still listed and why Redefine Properties can’t buy more of its shares, even though it wants to take over the entity and believes it can cut out costs when it does. Andrew also explains why Redefine Properties (JSE:RDF) has sold some of its Redefine International (JSE: RPL)shares, yet it is hunting for more international real estate to add to its portfolio of roughly 300 properties. – JC
ALEC HOGG: Well, in the studio today with the release of the financial results to the end of August is Andrew Konig, the Chief Executive of Redefine. Andrew, this is your first year.
ANDREW KONIG: It’s my first set of results. I was appointed about three months ago so for me, it’s not really my results but in my capacity as the Financial Director, it absolutely is. I’ve been the FDR for Redefine for the past four-odd years.
ALEC HOGG: So you’ve worked closely with Marc Wainer, who is a very colourful and real personality in the property sector.
ANDREW KONIG: What you see is what you get with Marc and his candid way is… What you see is what you get.
ALEC HOGG: But a great guy to learn from, I’m sure.
ANDREW KONIG: I’ve learned huge amounts from Marc. What was very interesting is that Marc’s just released a book on his experiences over the past 40 years and I must say, glancing through the book, many of those lessons he’s imparting on paper, he has already taught us at Redefine. He’s not shy to share all those experiences with us and they do stand us in good stead.
ALEC HOGG: We loved him in the media because he never held back. I can remember having a chat with him about your Hammanskraal development.
ANDREW KONIG: That was back in 2011, when we had some frustration out that way. Marc says it as it is. It often gets him into difficult situations, but the desired outcome is always achieved and that is a solution to the situation.
ALEC HOGG: Are you going to be different in the way that you run the business?
ANDREW KONIG: I am very different. Marc is a maverick. He’s a guy who’s very opportunistic and has a very different approach. By training, I’m an accountant so I like to look at things from (almost) a scientific point of view but hopefully, we can achieve even better things with the combination of Marc still being in the background and me making it happen on the ground.
ALEC HOGG: Does he talk to you much?
ANDREW KONIG: All the time. We are within very close proximity to each other (office-wise) and we work very closely together on all aspects of the business.
ALEC HOGG: Andrew with a R51bn portfolio, I guess shareholders will be happy now. You have a safe pair of hands. You have someone who understands exactly where the numbers are. Maybe not going off and doing the kind of deals one would expect from the entrepreneur who’s built this business.
ANDREW KONIG: Yes. Look, there’s a period of consolidation but even whilst we are in that process, we are still looking to grow the asset base. From this huge growth that we are undertaking, we are building a business that is robust in terms of building a platform that can take on portfolios of scale. We are looking at acquiring portfolios where often, there aren’t all the properties that meet our investment criteria but certainly, a number do. Through that size, we are able to do that and with size, comes the ability to (1) have a presence in the funding market – banks like dealing with companies of substance – and (2) there is the element of risk that we can absorb, as well. As you know, in this market, on a daily basis there’s an emerging risk that non-one’s ever considered.
ALEC HOGG: How many properties do you have in the portfolio?
ANDREW KONIG: Well, we directly own approximately 250 properties. Through Fountainhead, there’s approximately another 65-odd properties.
ALEC HOGG: You mentioned Fountainhead. You own about two-thirds of the equity.
ANDREW KONIG: We do.
ALEC HOGG: Why do you keep it listed?
ANDREW KONIG: Well, in short, because we don’t have a choice. Our preference would be to own those assets directly. We have attempted twice now, to acquire the Fountainhead assets but every time we go to the unit holders who are eligible to vote, we’re turned down. They feel our price isn’t where it should be. In our view, we feel that we have priced it appropriately and the difficulty is that Redefine has 66-odd percent of Fountainhead. We’re a related party from a transaction point of view, and for that reason, we can’t vote our shares. You therefore have a very shallow voting pool. In addition, in South Africa, you have quite a strong element of voter apathy so approximately 40-odd percent of your voters don’t pitch. It therefore takes that 34-odd percent who eligible to vote, down to 20-odd percent.
Of that 20, if you have two or three percent and there’s one or two of you together, together you can block any resolution required for a transaction of this nature, which would require 75 percent.
ALEC HOGG: So who’s blocking it?
ANDREW KONIG: Well, a couple of people are blocking it for various reasons and institutional investors who are holding out for a better price. I don’t want to mention their names because they know who they are and I think that out there, people know who they are, too. There is a degree of frustration about those who have been supporting us as well, in this transaction. They feel that they’ve been supportive of Redefine in their endeavour to acquire these assets, but they are stuck. Unfortunately, the liquidity isn’t there so to offload these shares isn’t that easy.
ALEC HOGG: Or to buy more, presumably…
ANDREW KONIG: The difficulty Alec, with buying more is that you take support out of the equation; it makes your voting pool even shallower, and makes your ultimate objective even more difficult to achieve.
ALEC HOGG: But you’ve tried twice. Presumably, at some point you’ll go again. Just wait for the timing of the market.
ANDREW KONIG: Our view is that at some point, the planets and the stars will align and we will be able to acquire those assets but for now, it is a frustration in that we have this property Unit Trust that’s listed. It requires us to have a separate Board of Directors. It requires us to comply with the Financial Services Board from a Collective Investment Schemes Act point of view. It’s managed through Redefine, by Redefine, through wholly owned management companies and it just leads to layers of unnecessary management, which we feel we can remove, if it was all in us – in one company.
ALEC HOGG: You mentioned at the outset that the size gives you the opportunity to do more deals. The Eric Sampson deal was a massive one with Macsteel. Are there any other similar types of deals in the offing?
ANDREW KONIG: Not with individuals. There are one or two opportunities that are coming to market where there were portfolios that were assembled, and that were possibly going to list. Unfortunately, for them the market has changed, given where interest rates are now heading so we will see those kinds of opportunities come along, where there are sizeable portfolios that have been assembled, that could be possible acquisition targets for us and we’re constantly looking at such opportunities.
ALEC HOGG: So where else are you finding investment prospects?
ANDREW KONIG: Elsewhere in the world, we’re looking in Germany. We’re currently looking in Australia as well. We have credible partners in both Redefine International on the European front as well as Cromwell on the ground in Australia. Both are excellent operators and we’ve built up a very close working relationship over the years with both those entities. Germany and Australia are the two principal areas of focus for now – offshore.
ALEC HOGG: In South Africa?
ANDREW KONIG: Absolutely still committed to South Africa. There are opportunities here. They are scarce. In addition, the difficulty with South Africa, given the weight of money chasing a limited number of opportunities, the pricing is very keen relative to our average funding cost. Our weighted average cost of capital is currently round about eight-odd percent so if we are doing deals that are initially yielding less than eight percent, we are looking at an earnings dilution, which we are obviously trying to avoid.
ALEC HOGG: So where do you go?
ANDREW KONIG: Where you go is very difficult, but there are opportunities and we are scouting around to try to conclude a couple.
ALEC HOGG: Andrew, an interesting deal and in fact, today on Biznews we have a story written by Craig Martin, of his top property stock. He says Redefine International is the one, and you guys have diluted down to 30 percent there. What was their strategy – the thinking behind it?
ANDREW KONIG: What we do is we recycle capital. What we did with Redefine International was we sold a small element of our holding (approximately two percent of our 33 percent at the time). We’re currently down to just over 30 percent. What we did was we realised R500m in cash at a yield of about six percent. We took that R500m and we reinvested it in Australia, yielding eight percent. For us, it was a recycling of capital, whereby you sold a stock that was virtually, fully priced and we’ve reinvested it into an opportunity where we see value uplift plus an earnings uplift at the same time.
ALEC HOGG: So the Australian operation…you have that shopping centre (Northpoint) in Sydney, which is a big business, as well.
ANDREW KONIG: It’s actually an office tower.
ALEC HOGG: An office tower.
ANDREW KONIG: It has a small element of retail at the bottom, but in the main, it’s an office tower.
ALEC HOGG: So you do have those offshore entities.
ANDREW KONIG: Yes.
ALEC HOGG: What percentage are they now accounting for – the total Redefine revenues?
ANDREW KONIG: If you just look at the asset base, it’s approximately 15 percent of our asset base, but it’s approaching 20 percent of our income.
ALEC HOGG: Are you expecting that to grow?
ANDREW KONIG: As and when we can grow it – yes. The difficulty we have is that if we just keep things as they are for now, the exchange rate during the course of 2014 was very weak, from a foreign currency point of view. It’s come back a bit, but it’s a bit of a yo-yo. That does pose a bit of a question as to ‘will that 20 percent maintain itself into the new year’.
ALEC HOGG: From an investment perspective, where would you want to put your money right now?
ANDREW KONIG: Well, we are still wedded to South Africa. It’s not that we’re taking all of our opportunities offshore. We’re looking at a blend of the two. We don’t want to become virtually offshore in its entirety but certainly, for now, our initial thought is taking that asset base from about 15 percent up to about 20 percent and we’ll see from there. We are going to revise our strategy going forward from an international/local split point of view but for now, I think that growing up to about 20-odd percent of the asset base is okay for now.
ALEC HOGG: Well, these results for the year-to-end august saw a distribution increase of eight-and-a-half percent and NAV up by 12 percent. Is that the target that you’re setting yourself for the next financial year?
ANDREW KONIG: We’ll tone down the earnings expectation for 2015. We’ll achieve growth of between seven and seven-and-a-half percent. There are a number of challenges on the horizon for us. Interest rates are on the up and that does pose some challenges. For us, from a cost point of view, administered prices are increasing all the time, too (rates and taxes, and electricity etcetera) and generally, a sluggish economy doesn’t generate jobs. Without jobs, there’s no demand for new space. That does pose a lot of difficulty, especially in the offices, for inroads to be made on office vacancies. With the prevailing economy staying the way it is, our growth expectations are probably in the region of seven to seven-and-a-half percent for 2015.
ALEC HOGG: Andrew Konig is the Chief Executive of Redefine.
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