South African chartered accountants have an excellent record in building global property companies, Sir Donald Gordon of Liberty International the most obvious example. Paul Leaf-Wright is following in those famous footsteps, and this week his UK-focused property investment company Atlantic Leaf graduated to the main board of the JSE. After spending his early career in banking (NBS, BOE, Nedbank) Leaf-Wright built a R5bn unlisted South African property portfolio that was sold into Redefine. Three years ago he established his new Mauritius headquartered business to offer SA institutions a way into the British commercial property sector. The portfolio of almost 50 properties is now worth £300m having grown tenfold since May 2014 and the founder expects the current rate of expansion to continue. With Sterling at 30-year lows, a solid yield promised and looking vulnerable after a recent run, Atlantic Leaf is sure to have its admirers looking for a JSE-listed Rand Hedge. – Alec Hogg
Alec Hogg is with Paul Leaf-Wright, CEO of UK-focused property investment group Atlantic Leaf. Phil tells us more about the company.
Initially we started more in the advisory field and did a lot of advisory work for mid-sized companies and then decided to launch a property fund, which we did and built it up to around about the R5bn mark. Then in 2014 we made a decision that we needed to give our investors liquidity and decided that actually the best was to sell the portfolio to redefine, which we did because that gave investors the best exit rather than an individual listing.
Let’s just understand this, you leave the banking world, you then start a R5bn business, clearly you must have had quite a lot of support.
Yes, I think that’s what banking does for you, is that you build up many networks, many friends, many contacts and I think you also learn many procedures from the bank, disciplines around governance, around structures and being able to really replicate some of the things you had done in the bank to do it for yourself and I suppose I’d funded through the bank, many asset finance companies or individuals and seen how those were done and said “Well, let’s do this for institutions and hopefully provide them with a good return”.
Donald Gordon, when he turned 70 some years ago said that had he discovered property before insurance he would never have gone into insurance. If you’d discovered property before banking, would you have ever been a banker?
Well, I think there’s no question that the banks make less money out of property than the entrepreneur, so yes. I don’t know if they would have lent me the money had I not gone through the banking route, but definitely, if I discovered property earlier I would have stuck to it and invested in it much earlier than I did get into it.
So you built up this portfolio, sold it off to redefine and then what?
Well, at the time we felt that there was a lot of interest in offshore property. Most of the South African property funds had some interest in an offshore venture and we were actually, through some of the investors who had supported us in the South African one, we approached them and they said they would support us equally in an offshore fund and that really was the start of Atlantic Leaf. We listed that in April 2014, the primary listing was in Mauritius and a second relisting onto the Altech’s of the JSE and earlier this week we migrated the listing from the Altech’s to the main board of the JSE, so it’s been a good journey for us. They’ve grown the assets now to close to £300mn and our focus has been primarily the UK.
Your properties are in the UK, your investors are in South Africa, and your company is based in Mauritius. Let’s start with the Mauritius part because that seems to be a very attractive route now for many South Africans, why is it so?
I think that the Mauritian financial environment is very sound, they work closely with the South African regulators and investors have confidence that their markets work, that there are good disciplines around the listing, around transfers of shares and there’s good transparency, so when you go there and you say you’re listed in Mauritius, people are happy to invest through that market. It’s also an attractive tax regime because there’s limited 3% income tax over there, so there’s not much tax leakage between the property income right through to the investors back on the South African market.
Then using the UK as the place where you make your investments that would surely bring a whole new level of expertise into the business.
Yes, again luckily in the bank I had spent many years looking after some businesses in the UK and had built up a lot of knowledge around that and was able to attract a particular colleague, Sean Fourie who has a lot of experience in property and together we had enough contacts and had studied the market well before launching in 2014 and we knew many players. We like the business environment in the UK, we understand the contracts. Most legal firms you deal with, most banks you deal with, there’s a South African somewhere in the network and we found it a very similar place to South Africa to deal.
There is a unique opportunity in the property market at present in that interest rates are so low and you’re still able to get yields of between six percent and seven percent on the properties and with interest rates, our latest deal we fixed for five years at two and a half percent, you get a very positive carry. It won’t last forever, but we certainly want to take advantage of those characteristics in the UK market.
The negative side, of course is the British Pound, which has been very weak after Brexit. Up until Brexit, your South African investors would have called you or thought you were a genius, after Brexit, perhaps not so much.
Yes, it’s always interesting. When the Rand was weakening towards £22, £23 may people wanted to take more money out, when it’s come back to £16, £17, they’re more circumspect, but I think our challenge and our goal is to provide an attractive yield in Pounds. Many big institutions can naturally hedge the Rand/Pound position and they do, so we still have support. In October we realised another £20mn and there is still much support for foreign property investments and people do take out hedging, but it is an increasing challenge with Brexit. We saw a lot of volatility just this week again with Donald Trump winning the US election and so all we can do is continue to deliver, which our target is an eight percent yield on NAV in Pounds, which we think is very attractive from that perspective.
That £20mn that you raised, presumably it would have been a lot easier to get the money in from South African investors given the way that the exchange rates have gone in the last four months.
Yes, it is. I think everyone still looks at the fundamentals of the properties you’re buying. We bought a DHL warehouse, so DHL is a very recognisable tenant and very solid, so there was support for that. There’s a lot of competition. Virtually all the South African listed Reits, their expansion is into the offshore markets. So when we go out there’s a lot of competition, so we’re taking slow steps or small steps and we’re making sure that we’re fully invested in property. At the moment we £300mn of property, £150mn of gearing and we’re very comfortable to grow slowly and on the back of good, sound property deals.
You focus on the commercial property area i.e. companies, offices, etcetera, has there been a decline in the value or in the pricing of these properties after Brexit given that the Pound has fallen so much?
Not that we have seen at all. Funnily enough the yield is still very attractive even to UK investors, so a UK investor alternative is to put his money on deposit, he might only get one percent or even less. So to be able to buy a quality lease like DHL and earn six and a quarter percent, that market has remained very attractive. There have been sectors which have been more impacted and maybe the more expensive Central London, those prices, they have tended to come off a little bit, but their pricing was already quite expensive, so those have changed a little bit, but in there, in the regional nodes where the tenants are largely servicing the UK economy, we haven’t seen a big impact from Brexit.
What is it about the South African investor’s appetite for UK property? If you look at it you have Capco, you have iNTU, yourselves, other companies also coming into this market, why are South Africans so keen to invest in, and most of them are in regional property centres?
I think a couple of things, first the low interest rate and that gives you the positive yield and it’s not, as I said that’s not something that necessarily will be there forever. In South Africa there’s also been a slowdown of new stock and if you buy a new property, a good property in South Africa, you know you’re buying it at maybe eight and a half, nine percent yield. Your cost of debt is nine to ten or prime at ten and a half percent, so I think the opportunity to diversify earnings and to get growth has been one of the big attractions. People also view that over time, on average; the Rand should depreciate against the major currencies and see that as an opportunity. I also still think it’s still quite a low percentage of the total property exposures that these different companies have, so there’s still room for more growth.
So the timing right now would be, the Pound is weak, the Rand is relatively strong, you would have lost a lot of money if you’d gone into this fund of yours or any other fund pre-Brexit but now you could be buying at a bottom.
Yes, I would think so. All the economists who predict the Pound, I don’t think they ever get it right. I think you’re quite right in your assessment; the Pound is at its weakest. Some people still think it will go slightly weaker, but I think those combinations that you talk about, it is a good time, potentially for South Africans to invest in offshore property and to get a good yield. I mean to get an eight percent yield on a Pound-based property return, we think is very attractive.
Paul, from your own perspective, are you still based in South Africa, running from there?
I am. I still live in South Africa. I am based sort of wherever I need to be because I think we spend a lot of time in the UK looking at properties and managing the properties. We obviously spend time in Mauritius at the corporate head office of the business, but our capital base is still South Africa, so we also need to interact with the institutions back in South Africa, but I think increasingly we spend more time overseas and we have a full team based in London to look after all the properties.
Whey the decision to go to the Altech’s first and only now graduate to the main board?
It’s always more difficult to get onto the main board. You need a three-year track record, you need a profit history, whereas listing on the Altech’s, we were able to list initially with £2mn or $2mn I think we listed, of capital and so it was a lot easier step. To get institutions, pension funds in particular to invest offshore, it must be in a listed entity, so we had to list straight away and I think we always planned that our natural progression would be to move to the JSE main board and I think our other plan would be hopefully one day if we get slightly bigger and a bit more track record, was to move to London, our dual listing would ultimately be London and South Africa.
Well, you bring new meaning to the words ‘exponential growth’ just in the last two and a half years, from a relatively small base you’ve grown ten times. Are you getting to a point now where you’re running out of road or is the appetite from your supporters, your investors strong enough to maybe see another ten time growth in two and a half years?
I think that there is still a lot of road, we’re still so small and actually I would be in some ways disappointed if we didn’t grow, maybe not ten times because it’s off a much higher base, but if we didn’t see fairly substantial growth off these levels. There is appetite; we will do bigger deals as we grow because our balance sheet can absorb bigger deals, so I would be very disappointed if we don’t see significant growth off this base over the next couple of years.
How much appetite? If you just raised £20mn, if you were to go back now, if you could go into a time machine, how much could you have raised at that time?
I think £20mn, in Rands that’s R350mn, that’s actually quite a lot. We raised that because we had assets to invest in that. I think the market, it’s all around timing. I don’t say, we didn’t turn away money last time, but equally we got to what we wanted and we were comfortable. My view is that there is a lot more. It may be £50mn more over the next six months if we get our timing right and if we have the right assets that appeal to the investors. There’s a lot of cash in the system.
Yes, because in your presentation you gave a pipeline of £43mn worth of properties. Simple arithmetic says that you’ve already raised £20mn; you’ve just done this big deal with the DHL property for £30mn, so if you’re going to be buying these additional properties that you’re talking about then you might have to go back to your shareholders for more money and that’s the question, are they happy to kick in?
Certainly we have Vukile as a 30 percent shareholder and they’ve been incredibly supportive of our growth. My understanding and discussions with Laurence Rapp, who’s the CEO, there is appetite to grow and it’s nice to know that as an anchor we have someone who will support our growth and certainly I don’t think they would like to see us stay at this level, they would like to see us to continue to grow and I think that together with that support and now that we’re on the main board and hopefully more investors can come into us because of their mandate, some mandates are restricted and not allowed to invest in Altech’s listed shares, I think if we went back maybe you know, in the first quarter of 2017, I think there will be support.
You issued the shares at net asset value, was that net asset value adjusted after Brexit?
We did some valuations in September, so after Brexit and the independent valuers supported the value we were carrying the assets at. We also sold on asset which we felt was a mature asset in our hands and we actually realised we were carrying it at seven percent yield and we were able to sell it at six and a quarter in the open market, so we feel that we’re very comfortable with our NAV and we didn’t have to make any adjustments post-Brexit.
I looked at that deal; it seemed more of a trade than an asset. You bought it in 2015, sold it in 2016, made a couple of million Pounds out of it, is that the way you’re going to be addressing your investments in the future?
No, I think that was a one-off. We had bought that asset as part of a portfolio and we felt that, that particular asset, the rental was fully priced and the debt we had was one of our first deals. So the margin on the debt was a lot higher than we were getting on new deals. We thought it was opportune to exit that asset because we were able to repay some expensive debt and get a reasonable price, but the rest of the assets, unlikely to trade, we would rather keep them. There are one or two small assets. In our Booker portfolio we have 31 assets. There is one or two that are small; they’re potentially below £2mn. If there was an opportunity we may exit them as the average size of our deals get bigger.
The average size again was about £6mn if I took the number of properties that you had (I might have made a mistake in my calculations), but are you looking north of that for each of the properties that you’d have in the future?
Yes, definitely. The first deal we did was Booker, which was a £90mn acquisition and there were 30 properties. Why we were comfortable with that is there was, it’s one tenant, you get one cheque every quarter and all the leases are the same, so it was very easy to administer, so that’s brought down the average size of our deal, but going forward, like the deal we did with DHL, we’re looking sort of at transactions of £15mn plus, so we would see the average asset value increasing.
You said there’s a lot of competition in South Africa because of many property funds that are doing similar things to what you are doing, but when you go into the UK marketplace and look to acquire commercial properties, is there also a lot of bidding that goes on?
The UK market is extremely competitive and it’s a very quick market. DHL as an example, from start to finish, from the time it comes onto the market till the time it’s on our books, is as little as six weeks, so we don’t have, there’s not major delays in transferring assets. Back in South Africa you’ll wait 12 months for a rates clearance certificate. The process here is very quick, it’s very competitive, we’re building a track record and the people know that if we commit to a deal that we’ll deliver and that’s very positive because then you’re able to position and then say if you negotiate on an asset people will generally go for the person who’s more likely to conclude a deal, so it is very competitive.
What are investors looking at when they’re investing with you?
I think we specialise in the UK, which I think is quite attractive, so we’re not in many markets, we’re exclusively in the UK, and we deliver an eight percent yield. We should be able to grow that by between five and seven percent per annum. Given that UK inflation is only one percent, that’s quite attractive and that’s based on the fact that most of our leases have annual escalations of between one and three percent and with gearing and with a bit of effective asset management we hope to be able to grow our earnings by between five and seven percent per annum, which we think is pretty attractive to get that sort of return in Pound.
