Redefine acquires Leaf Property fund for 3.7bn

REDEFINE Properties plans to acquire Leaf Capital and its Western Cape-dominated office portfolio for about R4.1bn in what could be interpreted as a vote of confidence in South African premium offices. Redefine has struggled to find sizable acquisition targets over the past year, often competing with rival Growthpoint Properties and having to focus its attention on offshore deals. Redefine chairman Marc Wainer said yesterday Leaf Capital’s portfolio was desirable given its long leases with strong tenants. He was “ecstatic” about clinching the deal. “A while back Leaf Capital and Melrose Arch listing together became a possibility,” Mr Wainer said. “That fell through but we always liked what Leaf had achieved, so I am happy we (pulled) this off.” The R4.1bn deal equated to an initial income yield of 8%. Redefine will pay the purchase consideration through assumed third party debt of about R1.9bn, with 80% of the balance being settled through a placement of shares and 20% funded from existing cash. Leaf Capital is an unlisted company with nine properties in Gauteng and the Western Cape. The properties are in major metropoles and benefit from bluechip tenants including Amazon, Medscheme, Kumba Iron Ore, Dimension Data and the Green Building Council of SA. Mr Wainer said it was ideal to have blue-chip tenants in office properties during hard economic times such as it was the case in SA at the moment. “The transaction includes a number of significant properties such as Black River Park and the Wembley Square development. “These assets change the face of our Western Cape portfolio, which will now include the top 5% of quality office blocks in Cape Town.” Strong lease covenants with 37% of the portfolio expiring in more than five years underpinned the portfolio, which has a tenant retention ratio of 82% and 94% excluding buildings earmarked for refurbishment. In addition, the portfolio delivered growth in lease renewals of 1.51% at a weighted average escalation rate of 8.1%. Mr Wainer said Redefine would be active in terms of acquisitions this year and would make another announcement in the next few days. Investec Asset Management’s sector head for property, Peter Clark, said the deal would benefit Redefine in the short term. However, the acquired portfolio would require active management, which would test the group. “The portfolio includes some good quality office properties; however, we remain concerned on the muted demand and increasing supply in the broader office market,” Mr Clark said. “Office assets need to be actively managed for them to retain relevance over time. “Financially the transaction should be accretive for Redefine over the short term due to their low cost of funding, however, the real test will be how they can continue to extract top quartile returns from the assets on an ongoing basis.”
23 Feb 2015
Author SA Property Market.