Emira Property Fund, which launched a bid for SA Corporate Real Estate last week, could potentially be buying some problem assets, some of which have high vacancies, analysts say.
Consolidation is starting to take hold in the listed property sector and the proposed tie-up will cause two mid-sized counters to merge into a R15.5bn group. Fund managers have been calling for small and mid-cap funds to consolidate as they want to invest in larger, more liquid companies which are able to attract more institutional investors.
Emira made an offer last week to buy out SA Corporate in a share swap deal. Analysts have said while the deal will add scale to Emira, the company will still need to sell a number of properties and this could be challenging in a weak economy.
SA Corporate’s executive and board have also undergone sudden changes recently that have placed downward pressure on its share price.
“SA Corporate has been through a lot of turmoil recently so it’s not surprising that funds want to take advantage of its position and buy it on the cheap,” Evan Robins, a portfolio manager at Old Mutual Investment Group, said.
‘Surprise move’
“However, I think it is a bit surprising that Emira is the one making a move. Emira has done a lot of work to fix past mistakes and to deal with its domestic challenges, including selling its weaker offices. So they want to buy SA Corporate to gain scale, but they are buying some problems too,” Robins said.
While Emira has spent the past two years getting its house in order, selling its old offices and expanding into the US shopping centre market, SA Corporate has unravelled.
SA Corporate expanded into Zambia but struggled to gain momentum in the country.
It also tried to create a partnership with affordable housing developer Calgro M3. It aimed to acquire housing stock from Calgro and rent it out. The idea was to enhance its residential portfolio, which is considered one of the best in the listed property sector. But Calgro ran into problems on its construction sites, including an inability to electrify its one property, and land invasions. The joint venture was abandoned.
Emira, meanwhile, has been building a base in the US, the world’s largest commercial property market. While the jury is still out about if it has made the right decision co-investing in small American shopping centres, CEO Geoff Jennett said he is happy with the performance of the assets so far.
He said the co-investment with the Dallas-based Rainier group in “power centres” is a long-term play. Power centres are unenclosed shopping centres typically 23,000m² to 56,000m² in size.
‘Perplexed investors’
But Paul Duncan of Catalyst Fund Managers said both Emira and SA Corporate have had to tackle challenges recently and that neither is that much more attractive than the other.
“Prior to 18 months ago, SA Corporate had for the previous decade mostly traded at a premium rating relative to Emira. Each has had its periods of market-like performance but both have recently made capital allocation decisions that have perplexed their investors,” he said.
Duncan said SA Corporate’s residential strategy and investments in Zambia were poorly received by investors whereas Emira’s US power shopping centres and investment in Transcend, an SA residential fund, have not convinced the investment community yet. SA Corporate owns 6% of Transcend.
SA Corporate has also been hit by several changes at executive level with both MD Rory Mackey and financial director Antoinette Basson resigning in May amid clashes with the company’s board. Basson has since rescinded her resignation. Arthur Moloto has been appointed as chair to replace Jeff Molobela, who died about three weeks ago. Mackey is serving out his three-month notice period while the company looks for a replacement.
Over the past two years, SA Corporate’s share price has materially underperformed Emira’s. SA Corporate’s share price is down 39% from R5.60 to R3.40 at the end of trade on Tuesday while Emira’s is down 1.5% from R13.95 two years ago to about R13.74.
There would be benefits to a SA Corporate and Emira merger, including synergies and cost savings as well as better economies of scale, Duncan said.
SA Corporate shareholders could choose to either lock in the current weak share price by taking Emira shares at the proposed swap ratio or support an improvement in the SA Corporate board and the appointment of a strong CEO, he said.
Nesi Chetty, a senior portfolio manager at Stanlib, said SA Corporate’s portfolio includes a wide range of property types that is sizable at nearly R17bn.
SA Corporate’s residential portfolio, worth about R3.6bn that includes assets owned by its subsidiary Afhco, and its retail portfolio, which is valued at R3.5bn and includes mid-sized malls, are likely to stay largely intact. Jennett said Emira wants to expand its exposure to residential property, and SA Corporate will help it to achieve this goal.
“Some of the properties have high vacancies, which Emira will have to manage,” Chetty said.
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