Subscribe

Stor-Age is continuing its expansion in the UK, a market that the company first entered in November 2017. Over that time, the UK brand Storage King has grown from 13 properties to 30.

This time, there’s a deal on the same terms as the existing joint venture arrangement between Stor-Age and Moorfield, which means that the latter will take a 75.1% interest and Stor-Age will take a 24.9% interest in the latest acquisition.

That acquisition is a group of four properties, collectively called Storagebase, for GBP59 million. The properties will be branded and managed by Storage King.

The three mature properties in the portfolio boast an occupancy of more than 90%. They are larger than most properties of this type, which is good for operating margins. These three properties represent a forward yield of around 6.3% and an equity yield of around 13.2%.

The fourth property is only scheduled to open in April 2022. This property is even bigger than the others, so there is significant valuation upside if a mature occupancy level can be achieved.

With this property included, the forward equity yield is 11.6%.

Importantly, Stor-Age has a right of first refusal over any of the properties in case Moorfield wants to exit.

Stor-Age needs to contribute GBP7.5 million in equity to this transaction for its share of the deal. Loan funding will come from Aviva Investors and will be sustainability-linked, so meeting “green” metrics is part of the deal. The debt is for a five-year term and only interest is payable until the eventual maturity date. The loan to value is 55% (so the loan is worth GBP30.8 million) and the cost of a debt is a 225bps margin above the five-year UK gilt rate.

This implies a cost of funding of around 3.53%, which is how a forward yield of 6.3% for the mature properties translates into a much higher equity yield.

This deal is too small to require a shareholder vote or even a detailed terms announcement, so this was a voluntary update to shareholders.

Attacq is best known for its strategy in the Waterfall precinct between Johannesburg and Pretoria. I think the node makes sense in terms of its location, so I bought shares in Attacq towards the end of last year based on that view and the substantial discount to net asset value per share. So far, so good for my return.

The fund has now released results for the six months ended December 2021. After distributable income per share fell by 57.5% in the same period in 2020, it increased by 33.6% in this period. You don’t need to get the calculator out to figure out that it hasn’t returned to pre-pandemic levels.

Of concern is that the distributable income growth came from the “Other Investments” segment and reflects a dividend received from MAS Real Estate. The Waterfall City distributable income fell by 6% and rest of South Africa fell by 13.5%. The core business is still struggling.

It’s a similar story for the net asset value (NAV) per share, down 26.6% in the prior period and up 7.1% in this period, so it is well below pre-Covid levels. The NAV per share is R16.83, so yesterday’s closing price of R7.37 is a 56% discount to the NAV. One should always treat that NAV with scepticism and assess the underlying assumptions for reasonability, but a large margin for error (i.e. discount) certainly helps and that’s part of why I bought shares in Attacq last year.

Vacancies are important here and Waterfall City has headed firmly in the wrong direction in the past six months. Occupancy in the Collaboration hubs (office properties) was 93.8% at the end of June 2021 and this dropped sharply to 81.6% by the end of the year. The Retail-experience hubs improved slightly, the Logistics hubs remained fully-let and the same is true for the Hotel segment.

Just 9.9% of clients with expired leases were retained in the Collaboration hubs with a rental reversion of -10.1%, which means that the clients who stuck around scored cheaper leases. On the retail side, the retention rate was 79.8% but the rental reversion was -8.1%.

The problem child is clearly the office portfolio, which represents 36.7% of the total portfolio. There’s more space under construction, which isn’t ideal. The longer-term pipeline focuses on residential and logistics properties and is clearly more in line with what the market wants.

Having said that, companies are pushing staff to return to the office and a well-located, mixed-use precinct like Waterfall offers an attractive environment for staff – in my opinion at least!

The gearing has improved considerably, down from 46.3% to 38.0%. A reduction in debt is a good thing in this environment. This was made possible by the sale of the Deloitte head office (R850 million) and the and sale of 50% in various distribution centres to Equites for R444.5 million.

As the property market recovers from Covid, it is encouraging to note a decrease in Covid-related rental discounts of 84.3%. Weighted average trading density has increased by 8.7% after dropping 6.5% in the comparable period, so it has increased to slightly above pre-Covid levels.

The portfolio in Rest of Africa is held with co-shareholder Hyprop Investments and both funds want to sell the portfolio and get the cash back to South Africa.

Despite the substantial increase in distributable income per share, there’s still no interim dividend. Attacq continues to take a conservative approach to its balance sheet. This remains a rather speculative play and I’m holding on.

Disclaimer: the author holds shares in Attacq.

Texton has released financial results for the six months to December 2021. The company has walked a difficult strategic road over the years and is now pursuing a strategy of investing in the US market via property funds.

The direct portfolio is valued at R3.3 billion as at 31 December 2021 and the indirect investments amount to R189.2 million. The company describes its strategy as “reinvesting heavily into direct property investments” (in SA and the UK) and investing in high-quality property investments in developed markets with “best-in-class partners” (the US strategy).

Property revenue fell by 29.3% and distributable earnings fell by 56.9% in this period. Headline earnings per share (HEPS) increased by 39.9% though to 15.43 cents. A dividend per share of 10 cents has been declared.

A critical metric in any property fund is net asset value (NAV) per share. This decreased by 1% since December 2020, now at R6.03 per share. The closing price on Friday of R3.75 (up 16.8% on the day) reflects a discount to NAV of 38%.

The vacancies in the SA portfolio increased to 16.6% from 10.5% at 30 June 2021, primarily due to the Transnet Ports Authority not renewing the lease at 30 Wellington Road. Collections in the SA portfolio were 93% and the UK portfolio achieved 100% collections.

I’m personally not convinced by Texton’s US strategy of investing in other funds, as the alternative would be to buy back Texton shares at a deep discount to NAV. Instead, Texton has invested USD4.4 million in the Blackstone Real Estate Income Trust iCapital Offshore Access Fund SPC (and breathe…) and USD7.0 million was invested in Starwood Real Estate Income Trust Offshore Fund SPC.

Texton has also made a GBP2.5 million commitment to an ESG-focused last mile logistics fund in the UK and Western Europe. The key differentiator is that the fund focuses on environmentally friendly solutions for the e-commerce sector.

Texton has identified two further funds to invest in and hopes to conclude the investments by 30 June 2022.

There were some buybacks at least, with just over 3 million shares repurchased at an average of R3.14 per share during the period. That’s tiny compared to the offshore investments, so my comment stands re: buybacks vs. investments in offshore funds.

Over the period, the company sold and transferred four of the eight properties held for sale, realising R398.4 million in cash in the process. Long-term debt was reduced by R127.8 million but only R26.5 million is a permanent decrease. The loan-to-value ratio has improved to 31.2%.

Texton has R342 million cash on hand, which I suspect will mostly find its way into other offshore property funds.

The share price is up around 58% in the past 12 months. The discount to NAV remains substantial and returning cash to shareholders would probably go a long way towards closing it. Texton has other plans, so we will have to see how that pans out.