New MD has a firm hand and fat wallet

Nobody can say how quickly Gerhard van Zyl — SA Corporate Real Estate Fund’s fourth new MD within 3½ years — will be able to turn the perennial underperformer around.

But analysts seem cautiously optimistic that he will do what is needed to put the Old Mutual-managed fund back on a sustainable income growth track. That follows SA Corporate’s recent interim results presentation, Van Zyl’s first public appearance since he took the reins on June 1.

SA Corporate surprised the market with 5,7% growth in income payouts for the six months to June — the first time in five years that the fund has delivered income growth close to the listed property sector average, which varies from year to year.

Though Van Zyl, former CEO of Vukile Property Fund, says he hasn’t been at SA Corporate long enough to take credit for the positive set of interim results, Catalyst Fund Managers investment manager Paul Duncan says Van Zyl’s extensive asset management expertise already appears to be contributing to a cleaner balance sheet.

“There are still problems with the underlying portfolio, particularly vacancies and arrears in the secondary retail centres, which need to be fixed. But Van Zyl no doubt has the skills to address these issues over time.”

Alternative Real Estate fund manager Maurice Shapiro echoes this view: “Van Zyl has an impressive track record, producing double-digit distribution growth for more than 10 years while heading Vukile. His focus on property fundamentals like managing bad debt and achieving upward reversions on lease renewals will help put SA Corporate back on track to deliver solid distribution growth.”

Analysts also welcome Van Zyl’s intention to reinvest the cash from the sale of underperforming properties into income-producing properties. Over the past three years, 46 properties worth R1,3bn have been sold. Before, the approach was to use the proceeds primarily for capital expenditure (upgrades and refurbishments) that didn’t necessarily boost income streams in the short term.

Van Zyl says SA Corporate is now in a healthy position to make acquisitions in a big way, given current low gearing levels of only 18% and a sizeable cash reserve. The fund has built up a war chest of about R1,5bn to bulk up the portfolio with quality industrial and retail acquisitions.

“We are looking for larger properties valued above R50m, preferably multiple building portfolios if we can find them.” While management will spend a lot of time and effort looking for quality acquisitions, Van Zyl stresses that growth will be pursued in a responsible way. “Never at any cost.”

He has also addressed recent rumours of his resignation, dismissing these claims as false. The rumour probably stems from market talk that Van Zyl and Old Mutual Property (OMP), which owns SA Corporate’s management company, may not be seeing eye to eye on how to best effect a turnaround.

Duncan says there is still a concern that OMP won’t allow new management enough independence. “Ideally, we would like to see the asset management function internalised, which is the trend among other property unit trusts.

“The underperformance of SA Corporate over many years is a clear indication that OMP’s asset management expertise is not up to scratch. Shareholders are growing impatient.”

Sesfikile Capital director Evan Jankelowitz agrees that SA Corporate’s external management model is outdated. “The interests of OMP are not necessarily aligned with those of shareholders. But we are confident that Van Zyl won’t be a yes-man. We believe he will fight for what is in the best interests of SA Corporate shareholders.”