New MD gives SA Corporate Real Estate a lift

South African Corporate Real Estate Fund (SAC) surprised the market on Monday by increasing its distribution for the six months ended June by 5.7% to 15.17 cents per unit‚ indicating it is benefiting from the appointment of former Vukile Property Fund CEO‚ Gerhard van Zyl‚ as its MD in May.

The distribution was increased despite a 15% drop in headline earnings per unit to 13.18 cents. The results showed a fall in retail rental income and an in increase in vacancies saw revenue remain flat while profit fell.

Retail vacancies rose to 11.5% from 10.2%‚ predominantly due to disposals‚ large tenant failures‚ and strategic areas being held for expansion for existing and prospective tenants.

But the fund said in Monday’s results statement refurbishment projects had contributed positively to overall occupancy levels.

The fund’s industrial vacancy also rose‚ growing to 3.7% from 1.7%.

The fund said minimal speculative industrial development and the quality of the portfolio ensured the industrial portfolio nonetheless remained well let‚ outperforming the sector average.

It attributed the increase in the vacancy rate to leases not having been renewed and reported as vacant as at June.

“This space has been largely relet and vacancy levels should remain constant at around 2%-2.5% of the total industrial portfolio‚” the fund said.

But Meago investment analyst Tsana Ramatswi said while the new MD may be injecting some fresh‚ new ideas‚ the sustainability of the results was “questionable” as the industrial vacancies were already close to a structural low.

“This leaves SA Corporate largely dependent on extracting growth from its retail portfolio to continue the momentum. SA Corporate’s retail offering is not exciting‚ as the exposure is bias towards neighbourhood and community centres that are not seeing as much demand for space as seen in the regional and super regional retail space‚” Ramatswi said.

She said investors would await the “tone” of the results presentation to get a feel of how the newly led SA Corporate plans to continue the momentum and sweat the assets.

Ramatswi said with a lack of yield-enhancing quality industrial properties in the market‚ the fund had been a takeover target for Capital Property Fund but this deal had fallen through.

“Should the fund not have a good strategy going forward‚ we could see another offer put on the table to take over these assets‚” she said.

Alternative Real Estate fund manager Maurice Shapiro said Van Zyl had an “impressive” track record and solid experience as the ex-CEO of Vukile.

“Since his appointment as SA Corporate’s MD in May‚ he has managed to turn the company around with an impressive 5.7% distribution growth. Management have focused on the property fundamentals‚ a strategy that has paid off by almost halving their bad debts and achieving an 85% retention ratio and upward reversion across all their property types‚” he said

Shapiro said the company was now back on track with a solid distribution growth.

“This together with a low loan-to-value of only 17.8%‚ SA Corporate is well positioned for yield accretive acquisitions. We would not be surprised to see SA corporate issue corporate bonds and acquire iconic assets over the next 12 months.”