Francois Marais: Safari Investments keeps rolling – assessing new growth streams

Safari Investments is developing strongly off its solid base of retail shopping centres in Mamelodi, Atteridgeville and Sebokeng – and CEO Francois Marais is now looking for new revenue streams outside of SA. The R650m project in Swakopmund, Namibia is to open in September with the next big deal is likely to be even further afield. In this update on the fast growing JSE-listed REIT, Marais takes Biznews.com’s Alec Hogg through the latest financials and shares his plans and dreams.

Joining us now from Pretoria is Francois Marais, the Chief Executive of Safari Investments. Well, it’s been an interesting year to the end of March for you, Francois. Nice to be able to get an update.

Yes. Thank you very much Alec, for the opportunity. It has been a good year. We managed to grow the portfolio from R1.8bn to R2.2bn in value, which was a 23 percent increase. We also managed to have a revenue growth of 22 percent over the year-on-year, from R140m to R172m. I know these are small figures but by our standards, these are nice figures. We’re particularly focused in the year on consolidating our assets which, I think under the present economic conditions, it was the sensible thing to do. We also concentrated on making our current centres the dominant centres in the areas where they are.

To get 20 percent growth in any market, it is good. In the existing environment, it’s quite sensational. Have you been able to do anything out of the ordinary to achieve this?

Yes, we certainly have. I’ll come to that in a moment. We have reached rental growth…over the period, it was eight percent. We grew from ± R113.00/m2 in the portfolio, to R122m in the portfolio and we still maintain a high national average of 90 percent retailers, which is also good. Our trading densities for the whole portfolio is R31,000.00/m2 compared to the national average of R29,000.00 which, I think under the circumstances, is also good. Our operating cost is 28 percent. It’s up one percent from last year with the head office cost being four percent of that. The actual operating cost is 24 percent. The [inaudible 0:02:10.6] fee that we did (and that we still agree with) is the Waterfront Development in Swakopmund in Namibia. It also includes a small boat harbour, which is very exciting for us. It’s actually our biggest single investment at one time (until now).

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We will be going operational at the end of September this year and it’s a major development. If you take the parking garages and everything into consideration, it’s 50,000m2 – R650m investment, which includes 31 penthouses, six apartments, and then of course a retail centre and a small boat harbour. We have a very nice tenant mix, which is very exciting and we anticipate that this will become very much a landmark in the Namibian context. Including the politicians, everyone is very excited about the prospect of this coming into operation.

How far are you away from opening in Namibia?

We’ll be opening there on the 22nd of September this year.

Just around the corner.

We’re very close to that. Things are running very fast – very quickly.

Well, R650m for a business of your size is a huge investment. Has the confidence so far, been well placed?

Yes, most certainly. If you take the value of the portfolio to be R2.2bn, the net value (if you consider the bond that we have) is R1.6bn and we are also busy with private placement of shares, which is running well (by all accounts). We will then hopefully, end up upon completion of that in a few months’ time, above the R2bn mark and that will also be very beneficial to the trading and liquidity of our share. The moment you reach R2bn net value on the JSE, there are a lot more possible investors that could partake in the share buying of the company.

Francois, remember when we chatted in 2014 when you first listed. That was also quite a big decision for you to go to the market, but it has given you this access to capital that you’re now continuing to farm. Are you getting close to a point where you’ll be comfortable – that you won’t have to raise any more money, or is growth in your blood?

Alec, yes. We don’t want to grow unnecessarily. We want to grow with quality. That is obviously the aim. We are also looking at other ventures. Incidentally, in our own organic growth pattern, we anticipate growing from the portfolio’s current size of 153,000m2, to 200,000m2 in the next two years. That is in our immediate programming and that includes when Swakopmund gains steam. We’ll hopefully grow via acquisitions offshore/overseas. We are looking at things like that. We’re also looking at other possibilities. It is still our aim to see if we can reach the R4bn to R5bn mark in year or so (maybe a little longer). I think that’s a nice size to be in but we are not anxious about it. If we do it, we do it with quality and obviously, much in the interest of our shareholders. We did warn them. We told them that we will roll over debt as we accumulate debt because we’re a [inaudible 0:06:02.6] listed company.

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We will roll over debt into new shares. We want to keep our bond debt around the 25 percent mark. We don’t really want to go much above that.

You’ve just mentioned something very interesting, which has not been in the overall strategy up to this point in time (as far as outsiders are concerned anyway), and that is ‘expanding overseas’. Clearly, Swakopmund is in Namibia. That’s outside of South Africa, but where else in the world are you now looking?

Alec, what we are going to focus on and what we’ve been focusing on for the last year is the possibility of investing either in Germany or in Eastern Europe (close to Germany). In other words, the States adjacent to Germany. We have made some very careful analyses and these are what we think are the safe areas for investment. Naturally, you also have to consider what’s currently happening with the exchange rate and await your time to make a sensible investment without having to risk an improvement on the value of the Rand. This is a little tricky at the moment, but we are looking at it, yes.

What is it about Eastern Europe that appeals so much to South Africans? For example, we’ve seen the Steinhoff Group. Before them, there was Pepco, which they’ve now merged with. JD Group – getting very aggressive in those countries in the former Eastern Bloc. Why do you like it?

It’s the nature of its economy. Germany has a very strong, well-diversified, and decentralised economy and the countries in Eastern Europe, adjacent to Germany have very much the same pattern. If a country has a strong, decentralised economy then it is sensible to look there. We don’t like too centralised economies. That again, puts other things at risk so that is the reason why we really like to look at that area of the world. We’ve also had some interesting consideration of tenants in South Africa in the past year. Insofar that we know, the EVCOM Group have gone through a period of reshuffling. Similarly, Pepkor has been taken over by the Steinhoff Group and that has caused the JD Group to more or less merge with Pepkor. In the tenant mix we’ve had some decisions being delayed because of that, but we believe it’s all for the benefit of the economy and particularly, for the benefit of our shareholders to know that we’ve got a strengthening of tenant quality in the centres that we have in the portfolio.

It’s always exciting to talk about the future but the base of your business is very much in the townships. Mamelodi, Atteridgeville, and Sebokeng. How have the shopping centres there been trading?

They’re trading well. The densities are very consistent and very stable. There has been some trading density, which has gone down slightly but on average the trading densities shows that in these areas, the economy and the buying power remains very stable. Over the last year, we also consolidated the quality of the tenants insofar that we had changes in the tenants. Each and every time that we’ve made a change, it’s been to the benefit of the centre and to the benefit of the investors.

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What kind of a waiting list do you have in the centres? I ask this because your vacancies are very low. They have historically been low at Safari Investments – around one percent. Do you have a lot of people wanting to get in?

Certainly. We are currently doing a reshuffling at the Mamelodi Centre where we are doing it very much to the benefit of the centre as well as to the benefit of tenants that we like to put in there. What has happened is that the furniture businesses have gone down. The JD Group has gone through a very difficult period and they closed some of their stores with us. Each and every time they close a store, we were in a position to put in a better tenant and generally speaking, most of those were people coming into the fashion business. The same happened with some of the banks. It shrunk a little bit. Some didn’t but some did shrink and each and every time, we managed to put a better tenant in its place. We have a waiting list, which is very much to our benefit. It’s impressive to have it and whenever we have any form of vacancy coming up, we have numerous people who would take them up as tenants.

It’s an exciting story. A good, strong base in South Africa where you have tenants/potential tenants who want to come in, very low vacancies, and the expansion into Namibia plus now into Eastern Europe – perhaps Germany – gets you ‘tap dancing to work’, as Warren Buffett might say.

Yes. We’re trying our best to do whatever we can to improve the quality of the investment in the company with the tenants. The one thing we do know is this: the moment we have our NAV above R2bn, the liquidity of the share will improve very dramatically. We’ve also been told that by some of our bigger investors who are simply limited to the fact that we are currently under R2bn. Hopefully, by September we should reach the point where we would have a net value of above R2bn. We’ll be able to utilise what we’ve grown in the meantime.

You mentioned the shares. The share price has come down a little since listing but then bounced off very strongly in the last few weeks, from a low of R7.25. Do you watch the share price much?

Yes, we watch it. We obviously look at it very carefully but the trading is so small that one can’t really judge and this is really because of what I’ve just told you. Our actually NAV of the share, if you take the latest results, is R8.56 so we are trading well below the NAV of the share and we’re hoping that we’ll get there. I believe that the moment we go above the R2bn net value mark then we will go on to the decent liquidity of the share.

Bring in new investors. Just to close off with, Francois. Has your former Chairman – Dr MH Tsolo retired from your board? Certainly, he’s no longer going to be the Chairman. Have you found a replacement yet?

Yes. Phillip Snyman. He’s been on the board. He’s been with us in business for many years. He’s now the Chairman today and we asked him to act as Chairman for a period until we found another person but he’s a very competent person Chairperson. Unfortunately, Dr Tsolo’s health caught up with him. He first had a wife who had a heart problem and then he had it as well. They are both much better now and I did tell him that if we considered coming back, he’s more than welcome but I think he’s just nursing himself at the moment. It’s only for that reason (and no other reason) that he had to retire. We’re very, very sorry that lost him. He was a very nice and very competent Chairman.

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How long was he your Chairman for?

Since we started, but he was already a Chairman before that. All told, he was a Chairman for four years in the company.

That is always a loss when you lose a leader like that. Is the team generally still very much intact from the time that you listed on the JSE?

Oh, yes. We are, most certainly. The one person who did join us (I think you probably saw her name) is Faith Ganyele who has also been on the board now for a little over a year. She’s also the CEO of the Women’s Development Business and became an investor with us after listing. She was a very nice person to get onto the board. Currently, we have seven active members and two alternatives and we are looking at new things that could happen in the company. We don’t want to fill the vacancies yet. We just want to wait this out. It will just be a few months and then we’ll have a few announcements on the board. That will probably be very exciting.

So, in the past year, you had rights issues. You had a change in Chairman. You had this expansion (or certainly, investigation) of the expansion into Eastern Europe. What about the 12-month to the end of March 2017? What can shareholders look forward to there?

We are busy with a new development in the suburb of Atteridgeville where we already hold around 51,000m2 and we want to extend that to 70,000m2 in total. That would be the third centre. The quality of the tenants that we have there is also above 90 percent nationals. As you know in Swakopmund, we come on steam later in this year so that will be a beautiful (ugly, but very beautiful) operation. We are also looking at expanding Mamelodi from what it is currently – around 42,000m0 to 70,000m2. We are advancing very nicely with the acquisition of the property in order to do that. We should actually expand very comfortably in the next two years with another 50,000m2, if not better than that. It will be focused on what we have at the moment. We did buy a potential office property here in [inaudible0:16:33.1] on a very critical and very nice corner of town, which is a beautiful address where we intend to erect a corporate office building of around 10,000m2/11,000m2.

That is on a property of 1.3ha. It took us a year to accumulate the property but we have bought it and it is now our property and we will develop it in the next two to three years.

Francois Marais is the Chief Executive of Safari Investments.