Francois Marais: Safari Investments rolls in to Namibia, next stop Croatia. Innovative partnerships key.

Safari Investments has developed strongly off its solid base of retail shopping centres in Mamelodi, Atteridgeville and Sebokeng. In the last six months the group opened its R640m project in Swakopmund, Namibia. A key development strategy is the partnerships the property group is creating with health centres like Advanced Health, expanding on the retail offering. CEO Francois Marais is also looking for new revenue streams outside of Africa, with Croatia on the map. In this update on the JSE-listed REIT, Marais takes Biznews.com’s Alec Hogg through the group’s six month earnings to the end of September.

Francois Marais, Safari Investments
Francois Marais, CEO, Safari Investments

This special podcast is brought to you by Safari, who’s Chief Executive; Francois Marais joins us now from South Africa. Francois, you’ve had an interesting period in the six months at the end of September. The headline is of course that your headline earnings per share are down from 28 cents to 16 cents because of higher financing costs, so the banks are happy but are your shareholders going to feel okay?

We are busy with that Alec to do a capital raising for R800mn and we are nearly subscribed. We are in fact so far subscribed, we’re I think at R780mn of what our aim is, and the view of this is particularly to up the earnings per share again. This is of course more a results thing than an actual thing. In December we are distributing 32 cents per share. We did that, I think last June and hereafter we will be raising our share earning six percent every year and that is conservative. We are very comfortable with what’s happening and also the capital raising will of course increase our shared liquidity substantially.

We will then be above a net asset value of R2bn, we will be around R2.2bn and that was one of the restraints that we had in the share trading and of course making our share not very liquid, but thereafter the liquidity of the share will become good, but we are in the distribution business with the Reit Company and it’s so interesting, we are in the upper six percent of Reit’s distributions worldwide, so we have maintained a very good distribution in this, where our existing shareholders are quite happy with the results.

It’s a unique story, Safari, given that you’re focused in the old township areas plus with some very interesting innovations in both private hospitals and in Namibia, but just to start with the trading operations in the Mamelodi, Atteridgeville and the Sebokeng businesses, two of them seem to be flying, Mamelodi and Atteridgeville, but Sebokeng seems to be struggling a little. Is that the correct perception?

Not really. We have in the last – year, extended Sebokeng quite substantially. We moved some of the tenants around the centre but we also added a very nice new hardware store in the form of Builder’s Warehouse, a superstore and they’re open, so they’re running. We are now in fact, 99 percent full in Sebokeng and with the results from Pick ‘n Pay and basically all the nationals are very satisfactory, so it has recovered very nicely. It’s interesting, our trading densities in general at each centre has improved between ten and twenty percent. We keep a very close watch on trading densities that is for us a barometer to see that the centre’s trading well and the improvement at Sebokeng was almost 20 percent, so that in itself tells a nice story and we’re happy with what his happening there, but this is all over the portfolio.

That’s a very good indication (up by 20 percent), but just explain for the uninitiated what trading densities means.

Trading densities in short is a reflection of the success of the tenants within the centre and if you have a good trading density it means you have a good centre. By example, Mamelodi has a trading density of R40 000/m², that is almost 50 percent above the national average and wherever we are, we are above the national averages of trading densities. This is something, if you talk to a tenant, that’s for them the easiest language to understand and to persuade them to be in the centre and it is because of that, that we have between a one and two percent vacancy factor in the portfolio of which 90 percent of the tenants are national tenants. So we are still very happy. We now have seven properties, one of them is now the new investment in Namibia. That’s the waterfront and presumably it has been quite a strenuous task if you look at it up to date, but it’s very successful.

The opening of the Waterfront has been quite beautiful and the one disappointment was that all the restaurants were not open when we opened the centre, but they will be opening before the end of this month. That is a month late, but you know what it is like when you’re in the… call it semi in the bush, but it’s a beautiful investment and it’s a lovely waterfront development. The interesting thing about the waterfront is that we pitted up 150 000 tons of rock into the sea to create the small boat harbour. It’s a proper small boat harbour which will be functioning nicely.

It’s stood the test of weather thus far and it’ll be primarily used for the purposes of advancing tourism. It’s almost completed. The completion of the residential apartments will be March next year, that is the luxury penthouse apartments, but the shopping centre is functioning and operating nicely. We are currently 86 percent let [with a few office vacancies still] and we know that after this coming festive season we will probably be fully let.

Francois, just on the penthouses that you mentioned there, when will those revenues start flowing through, because presumably they’re going to be quite a significant part of the whole project?

Sure, we are using that again to improve our gearing, but we will simply put it back into the company for further developments. So with the capital raising that we receive, it’s obtaining R800mn in capital raising and then also the income from the penthouses next year we’ll be in a fairly cash flush situation until probably August/September next year, even with the new developments that we’re going to fund. We want to try and get away, because it’s a REIT company, you know when you’re fresh in the business like we are, you learn fortunately, quickly enough, but the one thing you realise very quickly is that a REIT is essentially a cash business. You don’t want to have too much debt as such. You know immediately how you perform and we want to keep our gearing below 20 percent.

That’ll also improve the liquidity of the company’s share price, so in that way it’s very nice. Can I just mention to you one thing? We did get an award. Do you know the company, a group called CFI, Capital Finance International? They’re a London-based company, I don’t know if you’ve heard about them, but they approached us a year ago to find out whether we will be interested to partake in this thing and we did. We won the award as the best retail property investment management team of South Africa for 2016, so that is nice for us, it’s refreshing to our shareholders, that hopefully they think they should also believe that we know what we do, but that’s been very nice.

Very nice indeed and awards are, I suppose nice things to put onto the wall, but it’s the way you manage the business and you really have been growing this business at a terrific clip. Once you pull in the next R800mn and as you say, that’s pretty much secured now, what are you going to do with first of all, the extra cash that you’ll have available and then secondly the fact that you will still have quite a capacity on gearing, have you got anything earmarked?

Yes, we’re looking at another development in Atteridgeville, it’s something that’s been coming over a period already and we also purchased some properties here in Linwood that we earmarked for a small, well around 10 000/11 000 square metre office development, but it’ll be more aimed at a medical centre and then securing tenants that will be complementary to each other. When we do that it’ll be good. We have prospected a possible investment overseas in Croatia, which we will look at seriously now. We don’t like to do that if we can’t literally budget on the price or rather bargain the price, so now that we have the cash available we will be able to do things. Interesting enough though, we have a year-on-year growth again on capital from R2bn a year ago to R2.4bn in gross value. It will have a net value after the capital raised of R2.2bn and then the increase in total built area [total portfolio] went from 150 000m² to 182 000m².

This will in the next year reach 200 000m², so we’ve sort of managed a 20 percent year-on-year growth, both in the income as well as in portfolio growth, so it’s not too fast. Other people manage to grow faster, but I think considering the times that we are in it’s not been too bad. Average rental has gone, interestingly enough from R122/m² average at the end of last financial year to currently R132/m² (gross rental), which is also nice. It’s a ten percent increase in six months, so that is also in line with our intended growth. The share issue will make the NAV of the share R7.60 and that’s understandable because we now have substantially more shares but that will not affect the distribution that’ll be going to the shareholders. In fact, it will just secure a much more forecast of income to the shareholders and we will maintain that with no problem.

Francois, just the partnership that you have with Advanced Health, with your day clinic in Soweto, you mentioned a minute ago that you’re looking to do something in the medical field in Lynnwood. Is this an expansion of that partnership?

Yes, I think one of the key tenants will [hopefully] be a day hospital from Advanced Health. We like Carl Grillenberger and his team at Advanced Health, he knows exactly what he is doing, they’ve been in the medical business for many, many years and we like them, we like the concept of a day hospital and in fact, it’s our intention to settle at least one at all of our centres, I think it’s something that’s very complementary to the centres in particular where they are, so that works very nicely.

Does that mean that you could have an Advanced Health Day Hospital in Mamelodi at the Denlyn Centre and in Atteridgeville at the Atlyn Centre and so on?

This is our intention and in fact, we’re very near the point that we will be able to extend the Mamelodi Denlyn Centre by about approximately 30 percent. We will be able to increase it from what it is currently, a 45 000m² centre to around 70 000m² and in that we will then endeavour to incorporate a day hospital. We managed, after five years of negotiations, to secure the property adjacent to our Denlyn Centre.

70 000, that’s a huge shopping centre. How would that compare with say a Sandton City or an Eastgate?

It’s half of that.

It’s half the size?

Yes, one can’t really compare the two markets; the one is very different from the other one.

It still gives you a sense of the scale, which half the size of Sandton City, that is pretty big stuff.

It is, yes.

Are you looking at other townships given that you have these three very strong foundation stones now?

We will if the opportunity arises. We don’t have anything really on the horizon but yes if there’s an opportunity we will certainly look at that. We also want to diversify our investment a little bit into other areas, the same industry you know, remain in retail, but also to diversify, we are looking at other prospects and these will be more precious prospects, not so much development prospects, but if we have an opportunity and it’s a good one we will do it.

Our investors, you know Grindrod is one of our bigger investors and so a Stanlib, the one thing they all warned us against is not to be too aggressive, to expand, but to expand on the same basis as we are currently. Rather do it slower and conservatively, but do it well, so there’s a lot of that. We have been successful insofar that current centres are dominant centres where they are and the tenants appreciate it as such, so we keep that very carefully and very closely managed, but we will do something if it’s a good proposition and I think with the view of the cash implications that it can have the newer group property, we can secure a few buys at that and I think the market is right for that.

So the market is now bringing bargains to the fore?

Yes, it’s a buyer’s market, yes sure, it is. It can only be beneficial.

Just to look at your Croatian prospect, you mentioned that the Swakopmund is very different to the ones that you have in South Africa. Is Croatia similar to the Swakopmund project in that it’ll be a resort type development or is it too early to tell?

Croatia
Croatia

No, what we’re looking at in Croatia is a simple, small scale retail development, small centres and then there might be a group of these available, so no it’s very different, it’s in local small towns. Croatia is a small community of around 3 or 4-million people, so it’s a small-town type of community that you have there, but solid, conservative, well-built, well-managed, and it will be an offering for us that we will be looking at and analysing very carefully. Swakopmund is different, you know for Swakopmund town, since we’ve been busy there in the past four years has grown from 50 000 inhabitants to over 60 000. It has a very surprising growth and there is nothing like that in Swakopmund and of course being a seafront, a waterfront with a small boat harbour, it’s a landmark development for Namibia, so in that way in itself it’s very unique and very surprising, very special.

The activity level at the centre has surprised all of us. In fact, the opening, you know Shoe City is one of the shoe stores in South Africa from the Pepkor Group, their opening was the best ever in Southern Africa of all their stores. It gives you an idea of the success and then Cape Union Mart in the last month, in October, that store in Swakopmund won the prize for the best performing store in Southern Africa. That shows you just how well things actually started regardless of the fact that the major restaurants were not opened yet. No, we are all very excited about it. It’s a quality investment, it’s well-built, it’s beautifully finished. It’s a very special place and we’ll make sure that it stays like that.

Francois, you’ve got a knack for finding opportunities before anybody else, are there any clouds on the horizon? In other words, in the areas where your properties are situated, are you seeing competitors considering coming to grab some of the footfalls?

You always have that and if you don’t manage that you’re not looking at your assets in a proper fashion. No, we have that and we obviously control and we manage it. Yes, I can’t really let you in, we have one like that at the moment, not bothering us, but that we are managing. Interestingly enough in Swakopmund we had a case like that. Somebody else realised that there’s an opportunity and we managed to stop that permanently. No, you have to manage and you have to look at it very carefully, and we really do.

So with this latest capital raise offer, what kind of story are you telling investors?

We have a good company, good quality assets. They needn’t be for one moment concerned. In fact, our major investors, we saw them all recently with the capital raising process and the one is as happy as the other one. No, it’ll be a good investment with a steady growth, it’s not fireworks, but it’s a good, solid investment with a steady growth and the one thing people must realise is that a REIT investment is not a speculative investment; it’s not a speculative share. If you look at what your earnings are on the share, that is an important thing and we are managing just that. We are now in a position where we are issuing a distribution of nine percent in the following year and thereafter it’ll be growing at around 9.3 percent, so the earnings per share will always be good and that is a fact.

Francois, as a result of this capital raising issue you’re bringing in a big new shareholder.

Yes, Alec, it’s very exciting; it’s a company by the name of Southern Palace. They are big BEE roleplayer and they will be a 20 percent shareholder. For starters the intention is to see if they can grow shareholding, but they’re buying in 20 percent of our company and for us that’s very good news, it actually settles basically our BEE ownership requirement in the company completely, so for us that’s very exciting.

It’s a substantial investment, who are behind the Southern Palace?

The head of Southern Palace is a person by the name of Sello Mahlangu and the CEO is Lukas Tseki and they are very nice people to work with and they have a few prospects of their own that they will be bringing for us to look at. So in that way it’s also very good, yes and a very exciting partnership, there’s no doubt about it, yes.

Francois Marais, the Chief Executive of Safari and this special podcast was brought to you by Safari.