Size is an anchor on growth. Especially in investments. Which is why I’m paying close attention to a small JSE-listed
property stock Vunani Property Investment Fund, a well managed R1.3bn business that has a mandate to expand aggressively – but stayed out of the market during the past year because it felt prices were excessive. My yearend results interview today with CEO Rob Kane on CNBC Africa’s Power Lunch was combative. Perhaps because it’s a new relatively experience for him. He isn’t used to having his decisions questioned by journalists. But once you look past that, it’s obvious Kane runs a good shop. And he has size – lack of it – on his side. For private investors, his company is a far better prospect than the mega property groups. With a low vacancy rate (5.6% v industry average 10.7%), blue chip tenant base and  almost no leases coming up for renewal in the next 12 months, its projected double digit income yield is guaranteed in the year to end June 2014. With the share price having lost more than 15% in the recent re-rating of the sector and almost three quarters of a billion of  buying power brought in via debt facilities and the current rights issue, the stock is attractive around its current R10 price level. – AH Â
Watch the video of my interview with Rob Kane by clicking here. Â
ALEC HOGG: Vunani Property Investments in its full year results, warned that the property market does remain tough. The property fund says it believes that the office sector is at the bottom of a cycle, which could bode well for its future results. Joining us now to unpack the numbers is Company Chief Executive, Rob Kane. Rob, thanks for coming through to the studio.
ROB KANE: It’s a pleasure.
ALEC HOGG: It’s not the biggest of the property companies, 1.2 billion, but you’re probably the most aggressive, I haven’t often seen a company talk about doubling, effectively, the size of its business in a year – you did that last year?
ROB KANE: We almost doubled it last year; we were a bit more conservative in the last 12 month period and primarily, Alec, because we found it really difficult to acquire properties of value. You know there’s an awful lot of property on the market but a lot of it was over-priced. And what we find historically, if you overpay on day one then you struggle from there onwards.
ALEC HOGG: For sure. I think anybody who’s ever owned a share understands. But, this aggressive approach of yours, you’re at 1.2 billion Rand market cap [?]…
ROB KANE: Correct.
ALEC HOGG: You said a year ago you wanted to increase the size of your portfolio by a billion.
ROB KANE: That’s right.
ALEC HOGG: So that’s what I’m getting at, why so aggressive?
ROB KANE: Okay. Well, it’s really a function of our liquidity. There are a lot of small stocks in the market so we had intended to grow by a billion. If you go through our results, we’re actually only grew 84 million which is quite modest really.
ALEC HOGG: You say embarrassingly small?
ROB KANE: Well, I think so. If you look at all of our other indicators and all the guidance. Our distribution growth was up 19.8%, our share price growth 21.7%,  those are good figures and yet we didn’t grow. The sector’s saying – why not? The reason is very simple; we just could not buy value. I think with the re-rating that happened in mid-year, sellers will be a bit more realistic as to what they think their properties are worth. We are seeing opportunities.
ALEC HOGG: I really don’t believe any of the investors would castigate you for not over-paying for properties, on the basis that you’ve explained now.
ROB KANE: Most of them seem to be quite pleased actually.
ALEC HOGG: For sure. But just to go back into that re-rating that you speak about.
ROB KANE: Sure.
ALEC HOGG: Take us through it? How substantial has it been?
ROB KANE: It’s quite substantial for us really; we’re in the middle of a capital raise. On Friday we close our book and we’re intending to raise R455 million. When we were at the start of the capital raise process, our share price was at R11.40, its trading today, I think, at R10 and the clean [?] price we’re offering to the shareholders, the current shareholders, we’re doing a rights [?] offer, is 9.38. It’s 9.87 and there’s some distribution in there that we’ll pay back. So that’s the…
ALEC HOGG: You foxed me because I had R9.87…
ROB KANE: That’s the optical change, yes. So we think that’s a very good price. We fixed that price when there’d been quite a few weeks of real instability in the sector. Its impossible, when you’re at that point, to know whether the sector’s going to continue sliding down or whether it’s going to bottom out or rise. So, as a result, we’ve had to issue more units in this capital race than we originally thought we would. At the same time, I think all of the institutions that backed us on day one, will follow their rights, so we’re very comfortable we will raise the 455 million.
ALEC HOGG: If I was an investor sitting on the side-lines, the one thing that would bother me is that Vunani Limited, from which you get your name, is in fact sold out of the company and will not be following its rights.
ROB KANE: I think what’s important there, is that the management that are involved in the running of the business and have retained their units.
ALEC HOGG: How big a stake do you have?
ROB KANE: It’s a relatively small stake in the bigger scheme of things …
ALEC HOGG: How big a stake?
ROB KANE: It’s not particularly small for me.
ALEC HOGG: How big a stake do you have?
ROB KANE: It’s probably about R7 million worth of units.
ALEC HOGG: For your whole management team?
ROB KANE: For myself personally.
ALEC HOGG: And you’re going to find another R7 million or what 40% of it…?
ROB KANE: Well, we’ll follow our rights. I’ll follow my rights, yes, absolutely. I think to be honest, at the R9.38, its a very good offering to the market and I’d be surprised if it didn’t get fully subscribed.
ALEC HOGG: What is interesting though is this now gives you the capacity to go out there and do what you wanted to do a year ago…
ROB KANE: Correct.
ALEC HOGG: …all the fire power, to expand it. Have you got a lot of opportunities that are now within your price range?
ROB KANE: We have. We’ve been looking quite actively in the last six months and we are beginning to see value. If you look at our strategy now, it’s exactly the strategy we had when we listed. We needed to raise about R360 million in order to list, we raised R622 and took all that money to paid our debt which gave us fire power to make good acquisitions going forward. Post the capital raise, if we get the full R455, we can then go out and acquire about R750 million worth of property and that’s what kicks up our distribution.
ALEC HOGG: Now the smart guys, Donald Gordon, I’m sure you know him as being an insurance and a property …….?
ROB KANE: Not personally, no.
ALEC HOGG: He, incidentally, felt that had he discovered property before he discovered insurance and would never have gone into insurance which is a nice bull point for you. Not such a bull point though, is that he had the biggest rights issue ever before the 1987 meltdown.
ROB KANE: Okay.
ALEC HOGG: He was issued shares at a time when the shares were expensive; you’ve issued shares, presumably from what you’re telling us, at a time when the shares are cheap?
ROB KANE: I think so.
ALEC HOGG: But why did you do that?
ROB KANE: In terms of our performance, if you look at us historically, what we’ve offered to the market in the last financial year our return is 31.2%, that compares with 24% in the sector.
ALEC HOGG: But shareholders surely don’t like being diluted when the prices are down and that’s my question, why are you doing it now?
ROB KANE: Well, we’re not diluting – it’s a rights offer. So we’ve gone back to the institutions and we’ve said to them we believe there’s value here, you guys backed us on day one, would you like to follow your rights? And we suspect almost all of them will follow their rights.
ALEC HOGG: Yes, in theory everybody does follow their rights.
ROB KANE: Yes, correct.
ALEC HOGG: In practice, if I don’t have the R3 million that you’ve got to put into the company, I get diluted…
ROB KANE: Correct.
ALEC HOGG: And that’s the question; the timing of this?
ROB KANE: The timing, Alec, if you look at it historically, when we fixed that price of the R9.38, our markets were tumbling, there was huge amount of uncertainty. So some would say we gave those units away cheaply, and I think there’s some truth in that, but at the same time Alec you’ve got to behave in the market. You’ve got to see what’s in front of you and make your decisions based on that.
ALEC HOGG: No, understood. And it’s good that you didn’t go and overpay last year for properties.
ROB KANE: I think so.
ALEC HOGG: But I guess, on the other hand, some people might be saying, did you have to go into the market at the time that you did? Presumably you’ve found some really good juicy investment opportunities.
ROB KANE: We have.
ALEC HOGG: …and that’s going to overcome those kind of criticisms.
ROB KANE: Correct, yes. We’ve chatted to all the institutions, they would far rather we protect our distribution and we have a slightly more measured growth, rather than go and buy anything in the market, you know there’s a lot of stock available and it’s very easy when you have the capacity  to buy just about anything. But it’s quite difficult thereafter to make money out of those acquisitions.
ALEC HOGG: Isn’t it just?
ROB KANE: Yes.
ALEC HOGG: Rob you’ve mentioned it twice now, once in this interview, once in a commentary in your results, the performance of the unit price. Often when I talk to chief executives, they don’t want to talk about the share price, they steer away from that part of a conversation and yet you almost promote it – why?
ROB KANE: We’re not necessarily promoting but I think for investors and perhaps for new investors, it gives some visibility as to the performance of the underlying stock and I think that is important in the sector. People come into the property sector looking for distribution.
ALEC HOGG: Capital growth?
ROB KANE: Capital growth, yes.
ALEC HOGG: But your capital growth in the past year has not been great. At 12 months to date, you’re down 3.6% .
ROB KANE: No.
ALEC HOGG: …according to Share Net anyway.
ROB KANE: No, my calculation is we are up 21.8% for the financial period. For the reporting period.
ALEC HOGG: No, sure, for the financial year. The financial year’s long gone, end of June is way behind us. If I take today, the 19th August , then year on year… is that something that you’re looking to…
ROB KANE: No, I’d query that because I think on Friday our share price was R10 and we closed the 30th June at 10.05, so I don’t think that’s a material shift. And we opened the year…
ALEC HOGG: No, but you’re taking August last year to August this year, you’re not taking June to August.
ROB KANE: Oh, okay.
ALEC HOGG: So what I’m asking you is, if you have a look from here onwards to June next year, what kind of a…???? because you are looking at appreciation of unit prices, when I get you back in a year’s time, can I hold you to a number?
ROB KANE: I don’t think so because my responsibility is to look downwards, to manage the assets well. What happens above me, I don’t have a lot of control over – in terms of our share price movement. But our philosophy is, provided we manage tightly the assets under our control, that the share price will find its own centre of gravity.
ALEC HOGG: Which is exactly what I was hoping you would say On the distribution though, that’s the important part, because you can’t affect the share price, if you have investors you’ll want them to be with you forever. What kind of distribution increase are you looking for in the next year?
ROB KANE: We’ve given guidance going forwards at the 84 to 86 cents per unit, that’s double digit growth and historically we’ve done above our guidance. So, we’re confident about that.
ALEC HOGG: And it should be pretty solid because you don’t have that many renewals to worry about this year?
ROB KANE: Yes. 2014 is a good year for us because we have very few lease renewals coming up, there are only two material ones, and one of which comprises of about 5.5% of the portfolio and we’re very close to concluding a decent sized lease for that. So once that work is done, we really don’t have exposure to lease expiries and if one looks at our other key performance indicators, particularly our vacancy, we’re at 5.6% which is really where we like to trade. Our weighted average lease expiry 4.75 years. We’ve got 80% of our debt is fixed and also, very importantly, 80% of our tenants are blue chip, so they’re either listed, national or government tenants. So if you put that together, we’re starting from a very stable platform for the next year and I think that’s a good position to be in.
