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LONDON — Safari Investments, one of the first property companies to invest heavily in large retail centres in townships, has a growing fan base among investors. The company has expanded out of its core base with a successful R650m complex on the Swakopmund waterfront, and has pulled the trigger, in Soweto, on its first Clinic for Advanced Health. In this interview, CEO Francois Marais unpacks the 2017 financial results and shares news on the continued expansion, bolstered by R760m raised through a private placement of shares. – Alec Hogg
Well, it’s a warm welcome to Francois Marais, the Chief Executive of Safari Investments. A very busy year, and the annual report for the company – just released…
The portfolio doubled in the last three years from R1.3bn when we listed to a new valuation of R2.6bn at the end of this financial year, which was for us, very positive growth. Simultaneously, the company focuses on creating dominance and a competitive advantage in the geographical locations. The other positive thing is that 99% of the portfolio is in the retail sector. We have one outside that, which is the private hospital. The property revenue year-on-year increased by 20%. In 2016, it was R170m. For the past year, it increased to R204m nett income, while the portfolio saw a 22% increase in the total area from 153,000m2 to 186,000m2. It was also extremely positive that we could have achieved that in this time, in that we’re still showing a 20% growth – both on income as well as portfolio growth.
The other interesting thing is that the cost of occupancy at our centres, is 5% where the market average in the other region/median we’re competing in, is 6%. This obviously provides us with a very nice growth rental income increase. The current growth rental average for the portfolio is R135 per m2. Renewals in the market: we’ll obviously aim to reach the 6%, which will then increase to a comfortable level of R165 per m2, which is as you can see is about 30% growth. The national retailers occupy 39% of our portfolio and operating costs were 30% for the past year.
Some interesting numbers there, Francois. If you go back in the story of Safari, the growth rate has been about 20% per year. Is that what you target?
Yes, most assuredly. We are always trying to target 20%. Sometimes, it’s not always that easy but as time went by, in the past years we’ve managed to do that and we certainly did it in the past year.
Also, the focus: you went into the old township areas long before most people. You identified it. Are you able to find new opportunities there? It does seem like an underserviced market, still.
We certainly have (in the pipeline) further investments. We have a new investment in Atteridgeville, which is going to be called Nkomo Village, which will be around 23,000m2. This will enable us to dominate the Atteridgeville regional market in the retail sector. We have some very exciting new tenants coming in. We also aim to expand the portfolio – the item in Mamelodi by a further 50% in the area, which is currently a very successful incentive and it will certainly be just as successful. It was interesting to talk to the likes of Pick n Pay recently, where they have invested in other opportunities in similar markets and they certainly prefer our investments and the quality that we offer them. What we normally do is we also execute and we don’t make promises we can’t keep. Alec, I would like to just maybe, mention to you the retailer’s performance in our portfolio in the past year.
This, in itself, is I think very interesting information. The average trading density across the portfolio is above the national average. It’s below 30. In 2016, the same figure 31,700m2. The other very interesting thing for us is that we managed to bring the vacancy factor down from 4% a year ago, to 2% this year so we only have 2% vacancy in the portfolio across the board. It’s quite interesting. We have trading densities for Mamelodi, which is 43,600. That is almost 50% above the national average. At Heidelberg, which we thought would take a punch with the new centre that has been developed outside the town, the trading density improved from 37 to 42,000. Atteridgeville increased from 28 to 30,000, which was an 8% increase. Sebokeng (Thabong) increased from 23 to 24,000.
The reason why that is relatively small is because we introduced a new hardware store there and also, some changes in the tenancies to improve the mix in the centre very substantially. It’s become very popular. The other interesting thing is that our investment in Namibia (in Swakopmund) has a trading density in the 8 months it’s been trading, of 32,000. I can’t remember when we last had a new centre that performed on the same level of trading densities.
Francois, just overall: what is the trading density for the group overall and how much has that gone up by?
It is 32,500m2. It went up from 31,700.
Is that something you target every year?
That is something where we keep our fingers very much on the pulse of the centres. It’s very important to see what’s happening with that because that affects your success in the area you’re in. Retail in South Africa (as such) has probably had a decrease in trading density, in general.
We’ve managed to actually, maintain the increase.
Leaving Swakopmund out for the moment: is that because of where your centres are located?
We are certainly located in very/critically good areas and the interesting thing also in the past, is that we think that if you take Pretoria in particular – the east of Pretoria has been totally oversupplied in terms of retail space and we’ve actually managed to avoid that by virtue of where we are. We haven’t experienced that at all. It’s not that easy to find new premises/new possibilities of development in the townships if you haven’t been there for a while. This has certainly been to our benefit and most certainly, to the benefit of the shareholders.
So, 19 properties overall and you did mention that R650m Swakopmund project coming online in October last year. How’s the portfolio expansion? Maybe you can just take us through a little bit of that in the past year.
Our expansion over the last year has been primarily in the waterfront development in Swakopmund, which is also very much, a landmark development for Namibia. In total, the development is 29,000 (retail). In total, inclusive of the apartments, it’s 50,000m2. What is nice there is that we had new anchors in the form of Woolworths, Checkers, Dischem, and Edgars as well as some other very useful tenants. We’ve increased the portfolio by 29,000m2 by virtue of the Namibian development as the retail portion of it. Then we also extended in Mamelodi with 800m2. We added hardware in Sebokeng (Thabong) of another 1500m2 and we also made some very nice improvements to one of the smaller centres in Atteridgeville. The nicety was that we also managed to change some of our less popular tenants to more suitable tenants.
In particular, this also increased the number of national tenants. New tenants that we’ve gotten in the past year, which we didn’t have before includes companies like Dischem, News Café, and Hi-Fi Corporation. We were very surprised by the addition of gyms to the centres as to what it brings. In terms of activity to the centre, it’s quite surprising. In general, we are very happy with what has happened in the portfolio.
Interesting developments there as you say, with the gyms maybe another magnet for those sectors. All of this costs money. Have you raised more capital in the last year?
Yes, the other good news is that in fact, it’s taken us altogether 18 months since we started to do a capital raising. We wanted to reach a certain level of capital raising and we managed to raise R756m out of the markets, which includes some of our existing shareholders like Standard, Bridge Fund, and the Woman’s Development Business. Also, what’s very interesting for us and a great advantage is the addition of a BEE partner in the form of Southern Palace Capital with whom we really appreciate becoming partners. I think they will also do some good contributions to the portfolio in the future and we managed to raise R750m from the market. There is a possibility of a further investor – of R150m, which we will get clarity on in the next few days. All told, we managed to reach our goal of which, we’re now going to have a special General Meeting in the next week in order to put this in place.
The Southern Palace Capital: what do you make of their ambitions?
Alec, they’re extremely ambitious as a group. They have a portfolio value of around R1.3bn/R1.4bn already. They are currently (through a deal that they did with PIC – Public Investment Corporation) 6% shareholders and I think also, the biggest single shareholder in GrowthPoint. They’ve done a few very good deals. We did introduce them to all our major shareholders before we made the final decision. This includes Bridge Fund and StanLib, etcetera and they’re all very happy with the type of deal that we could strike with them. Their finance is coming from a loan, given to them by Sanlam. Generally speaking, it’s a group of very aggressive individuals and we believe it will also benefit us as a portfolio. After the share issue, our nett asset value of the share will be around R8.25 and we will be able to reduce our gearing to below 20%.
In fact, probably starting as low as 10%. We would like that. We think that in these times, it’s essential to not have unnecessary debt.
The share price though, is a little disappointing if you think of R8.25 in net assets and the share price around 660 cents. Would you consider buying back any shares at these levels?
We will certainly in the future. Thanks for asking about our share issue. The share issue price is at 7.60 (that we are doing the share placement). That’s what we’ll get for each share and thereafter, we believe we’ll be able to maintain a trading price of probably in the R8 region and even above R8 per share.
So, your major shareholders are happy to put money in at R7.60. You can buy the shares in the market at R6.60. It seems as though a share buyback would be a pretty good idea.
Alec, the funny thing is that the quantity of shares that are available in the market is very small. There’s no real major trading taking place. This is an opportunity for people to obtain more substantial amount of shares. and for certain friends in Southern Palace. The amount of shares that they’re purchasing, is 66-million shares. They’re making a total investment of R500m. The quantity of shares also determines the price. The people are happy with it. They know that they are going to get a certain return on the share investment and we intend to maintain a growth in distribution of 6% in future.
What’s in the pipeline?
As I’ve mentioned to you, we are looking at the new development in Atteridgeville, which will be around 22/23,000m2. It’s an investment of a little over R300m. We currently have a total in the pipeline of around R1.1 to R1.2bn and this also includes the 50% extension to Mamelodi and reaches around 25,000m2. Also, a new office building that we purchased… We purchased a very well-placed office here in Lynwood, of around 10,000m2. We’re also looking at possible purchases in order to expand the portfolio faster but I can’t really talk about that yet. It’s a little early for that but we certainly intend to do that. What we’ve also done, which is very important for the centres, is that we’ve introduced fibre networks to give tenants the normal internet connectivity and also, to provide Wi-Fi at each and every one of the centres.
Obviously, when it comes to communication with shoppers, it’s very important – particularly for your younger shoppers – to know there is Wi-Fi in the centre.
It’s a good news story Francois, and one that is continuing to expand. Just to close off with, though: a year ago, when we were talking through your numbers, you said you’d be looking (potentially) even further afield than Namibia. What’s happened to those plans? Are you, particularly with the strong Rand at the moment, considering opportunities outside of Africa for example?
Alec, we are always looking at other opportunities. To give you an idea, we looked at other/further investment opportunities – probably around the R2bn mark but none of them appeared attractive enough to us. Certainly, it doesn’t matter where an opportunity arises. We are also looking at opportunities outside the borders – overseas as well as in Africa – and if there is an opportunity that is worth our while to explore and pursue, we will certainly go for it. It’s really a question of looking and seeing whether this is going to be a funding opportunity for us.
You do have those two very interesting developments within South Africa. The clinics – one in Soweto with Advanced Health and then of course, your office opportunity in Pretoria.
That’s right. On another matter, altogether… Personally, I think we may expect a small reduction in the Reserve Bank interest rate. We are going through such a dark period in our economy that this will be a nice little bright light. You can also see, in the reaction from other economists, that people are beginning to anticipate this. I believe that that will also give us a little bit of a fresh injection for people to get new excitement about the future. I think that the only people who can really do this presently, is the Reserve Bank so we’re hoping that they will come with a small rent reduction. It’s not as if we’re dependent on it but looking at the picture in general, it could be good for the country if it happened.
Francois Marais is the Chief Executive of Safari Investments.
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