Attacq well-positioned to unlock value with maiden distribution

Gateway West, Waterfall City

Attacq Limited has reported results for the year ended 30th June 2018. The group’s conversion to a REIT in May 2018 has assisted the group to announce a maiden distribution of 74.0 cents per share, exceeding market guidance provided in February 2018.

Attacq reported a 22.2% increase in the net asset value per share to R24.24. The NAVPS on a like-for-like basis, after adjusting for the reversal of the majority of deferred tax liabilities due to the REIT conversion, increased by 8.6%.

“We have successfully completed another milestone in Attacq’s history, successfully converting from a listed property company, which was focused on capital growth, to a listed REIT. This will see us focus on distributable earnings by continuing to recycle capital and rolling out our Waterfall development pipeline. We believe our focus on our four value drivers offers investors an attractive investment proposition, notwithstanding the difficult economic climate in South Africa” commented recently-appointed CEO, Melt Hamman.

The group’s R21.1 billion South African portfolio delivered on the majority of its distributable earnings in the year ended June 2018, followed by the dividends received from MAS, which provides exposure to property in Western Europe, as well as Central and Eastern Europe. Attacq’s investment in MAS increased from R2.7 billion to R3.1 billion during the year (10.8% of total assets) and provided the group with R151 million in dividends.

Attacq follows a precinct-based approach, owning and developing dominant retail and mixed-use assets in strong nodes. The portfolio’s primary gross lettable area increased by 14.1% to 802 256m2 and its rental income increased by 9.4% to R2.0 billion. The full benefit of developments completed during the year will only reflect in the next financial year.

According to COO Jackie van Niekerk:

“An increase in the average annual retail trading densities of 5.3% points to the defensive nature of our portfolio. The Mall of Africa in particular benefits from the densification of the overall Waterfall node, where PwC’s occupation of PwC Tower has resulted in a notable increase in retail activity at the mall. Waterfall is ideally located to benefit from the consolidation of office space by corporates into a precinct offering, modern and green-rated premises. This will also increase demand for residential units close to the workplace, for those who wish to live in a clean, functional, safe and planned city. For this reason, Attacq will soon be launching an attractive two-phase residential development through a 50/50 joint venture. Phase I of the development will comprise two towers of approximately 250 units and will be sold on a sectional title basis.”

Attacq’s portfolio vacancies increased to 7.8% in the year ended June 2018 (2017: 3.0%), mainly as a result of PwC moving into their new head office at Waterfall City and vacating 2 Eglin Road, Sunninghill. Subsequent to year end, progress in filling vacancies reduced the group’s total vacancy ratio to 5.1% and Waterfall’s vacancy ratio to 1.1%.

“With R2.3 billion invested in our Waterfall development pipeline, we are well positioned to deliver future growth in distributable earnings from developments located in a prime area accessible from both Johannesburg and Pretoria. An attractive mix of office, hotel and residential developments is planned, together with a logistics hub for light industrial tenants, which will create a unique live-work-play environment,” CEO Melt Hamman commented. He added, “We do however anticipate the pace of our development roll out to reduce, owing to the current economic climate and will develop to meet demand requirements, ensuring that occupancy levels remain high.”

The company has 957 008m2 of developable bulk available in Waterfall City and the Waterfall Logistics Hub. The remaining bulk has reduced due to the completion of five buildings and one extension during the reporting year, totaling 118 628m2. Current development activity totals 100 000m2 of which 75% is pre-let. Attacq believes the Waterfall roll-out of developments is accelerated by the establishment of joint ventures which provides access to a wider tenant base.

Attacq’s investment into its rest of Africa retail assets reduced to 3.8% of total assets with the disposal of its investment in The Grove Mall of Namibia during the year. Attacq’s remaining rest of Africa retail investments provide it with exposure to a portfolio of six operational malls with a gross asset value of $637.1 million in major African cities including Accra, Lusaka and Lagos. Attacq, together with its co-shareholders, is investigating options to create liquidity in the portfolio.

Attacq’s capital structure has also improved during the current financial year. According to Raj Nana, the CFO appointed in June 2018, “An increase in cash on hand and gross asset values during the past financial year led to an improvement in the gearing ratio from 37.1% to 35.8%. Higher earnings and a reduction in our interest expense resulted in a significantly improved interest cover ratio from 1.1 times to 1.6 times. We will continue to focus on increasing our interest cover ratio by recycling capital from the disposal of low-yielding investments and non-core assets.” Attacq mitigates interest rate risk through a combination of fixed interest rate loans and interest rate swaps. As at 30 June 2018, 95% of total committed facilities were hedged.

The group is targeting distribution growth of between 7.5% and 9.5% for the 2019 financial year and between 13.0% and 15.0% for the 2020 financial year. This guidance, which is not audited, is based on a number of assumptions, such as the achievement of forecasted rental income based on contractual terms and anticipated market-related renewals; the expected roll out of the current and budgeted development portfolio; MAS achieving its revised distribution targets; and no unforeseen circumstances, such as major corporate tenant failures or material macro-economic instability.

Attacq’s downward revision of its prior guidance is as a consequence of the prevailing economic conditions which have negatively impacted on the timing of planned disposals of non-core assets and the roll out of development activity, the lower than expected MAS distributions for 2019 as well as lower than expected cash receipts of interest on shareholder loans from its rest of Africa retail investments.

“As we face the headwinds emanating predominantly from the local economy in coming months, I believe the recent appointments to our executive team ensure the presence of expertise required to steer the future growth of the group to become a premier REIT aimed at delivering sustainable growth.”

“We continue to focus on our four value drivers namely our South African portfolio, Waterfall development pipeline, investment in MAS, and our retail investments in the rest of Africa”, concluded Hamman.