May 8 2023
Redefine Properties is entering the Polish storage market while it tries to manage a challenging environment in South Africa.
The second largest SA led real estate investment trust (Reit) by asset size in SA, Redefine Properties, has completed the rationalisation of its asset portfolio and is ready to expand deeper into eastern Europe’s largest economy, Poland.
But investors are concerned that the fund’a latest financial results were disappointing.
CEO Andrew König said at a results presentation for the six months to end-February 2023, that the group had sold its non-core assets in the past few years and was ready to redeploy capital.
But shareholders were not entirely impressed with the group’s results and its share price closed 6.56% lower at R3.56 on Monday.
König said Redefine would invest €50m (R1bn) initially to acquire equity in a new vehicle which was buying Stokado. Stokado is Poland’s second largest self storage operator. Redefine and Griffin Capital Partners have set up the venture to acquire Stokado. They want to establish a platform to fast-track investment through development activity within this sector. Poland’s personal storage sector is in its infancy and Redefine wants to capitalise on the growth potential for the reason. The Polish middle class is enjoying strong employment and wage growth which is driving retail growth in the country. Even though Poland is seeing inflation growth for the first time in decades and interest rates climb as a result, the economy has been tenacious.
Since Russia invaded Ukraine in February 2022, around 2-million people have fled the country for Poland. Many of these people are skilled and have been employed, be it in sectors like construction and hospitality services or in professional jobs. The refugees are also fuelling retail spending growth which is cushioning the inflation blow for Poles.
Stokado stores goods belonging to private and business to business (B2B) customers in around 3,000 units in its dedicated self-storage facilities located in Wrocław, Poznań, Bydgoszcz, Szczecin, Kalisz, Legnica, Zabrze and Zielona Góra. Redefine and Griffin have worked together in Poland on other projects with Redefine having first entered the market in 2016. The newly-formed venture plans to expand Stokado’s operations through developing a country-wide network of purpose-built self-storage facilities. Griffin Capital Partners will act as co-owner and asset manager of the platform.
“This deal leverages the strengths of all parties and opens the door to expansion, diversity and growth in line with Redefine’s focus on strategically allocating capital into areas with upside at low risk. The lack of institutional-grade storage space in the expanding Polish market makes this a particularly attractive proposition. We are convinced that this sector in Poland has many years of stable growth ahead of it,” said Konig.
Poland has less than 4,000 square metres of self-storage space per million residents, compared with roughly 8,500 square metres in Germany.
Storage space has grown by 4.8% in Europe over the past 12 months. The Polish self-storage market is still in its infancy, with penetration 2.5 times lower than in Germany and 6.7 times lower than the European average, according to Redefine.
Some 50 new self-storage buildings will be developed by Stokado over the next five years, in which time Redefine will invest another €50m (R1bn). The group will also look to raise €100m (R2bn) from a separate investor or investors.
“The initial acquisition of 51% of Stokado has been concluded, which we expect to implement by the end of May. An attractive development pipeline is under consideration, which will effectively increase our equity holding to 75% in three to five years,” said König.
Griffin and Redefine partners were advised by Osborne & Clarke, MDDP, and Olesiński i Wspólnicy.
CFO Ntobeko Nyawo said “a very healthy cash position has supported a pay-out ratio of 85%, which equates to an interim dividend of 20.32 cents per share”.
As a Reit, Redefine is required to pay out a minimum of 75% of its distributable income as a dividend each financial year.
But there were concerns over Redefine’s cash flow management. The group’s net cash inflow from operating activities was R1.213bn but its dividends paid were R1.301bn, meaning the company paid out more money than it made from operating cash.
Further, Redefine announced a deal with Talis Holdings, a black owned investment group with interests in groups operating in African property, ICT, finance, media, agriculture and infrastructure development.
Redefine owns a portfolio of 11 government-tenanted office buildings and 92% of this portfolio was running on month-to-month leases which was not sustainable according to the group. Redefine needed not long term leases on these assets and therefore needed a black ownership partner in order to meet the country’s procurement rules. Financial institutions are reluctant to take on increased exposure to the government office asset class when leases are short and tenant behaviour is unpredictable as a result.
“To preserve the value of these assets, a deal with Talis Property Fund has been concluded,” the group said.
A new joint venture structure would be created where Talis would own 51% and Redefine 49% of the portfolio. The portfolio would be sold at a hefty carrying value of R1.1bn on loan. Redefine would fund capital expenditure up to R175m. Redefine will provide property management services and Talis will provide asset management services for a fee of 1% of gross asset value.
Redefine’s five year loan would attract a variable interest rate equal to the net operating income less fees. The group said that Talis would benefit from any further upside arising on disposal of the portfolio.
Talis has secured long-term leases for 10 of the properties should the deal be accepted by the Competition Commission.
However, the income earned from the leases will be swept to Redefine. Some investors are questioning if this deal will ultimately empower Talis further. Talis is already a successful empowerment vehicle and other black owned investment firms perhaps should have been considered.
König said at the presentation that the group continued “to harness a well-diversified asset base and healthy balance sheet to deliver sustainable value”. The group owned a diversified property asset platform now valued at R94.1bn, up from R88.9bn in 2022 and with an offshore component in Poland now worth R34.7bn. Redefine lifted its distributable income for the reporting period by 7.2% to R1.6bn.
The consolidation of EPP, the largest asset manager of retail real estate located in Poland in terms of gross leasable area, contributed R272m to distributable income as the business was stabilised and resumed paying dividends.
“We are pleased with the way the integration of EPP into the Redefine family has taken place and remain confident about the potential in the Polish market. For instance, vacancies in the EPP stable remain less than 3%, indicating healthy demand despite the ongoing negative news coming out of Europe,” said König.
A corporate reorganisation of EPP in March 2022 saw Redefine take a 95.5% shareholding in line with its strategy to increase exposure to the Polish retail sector.
Redefine also restructured the ownership of the group’s 11 remaining government-tenanted office properties, and continued expansion in the growing logistics market in Poland.
“Good organic growth in our active portfolio, consistent cash collections, diversified funding, maintaining our loan to value within our medium-term range of 38% to 41% and the hedge against the weak Rand provided by our offshore exposure have all combined to help us navigate the current volatile external conditions,” König said.
Redefine’s green investing strategy has seen R3.2bn coming on stream through use-of-proceeds green bond issuances, which were supported by large institutional investors and the IFC.
Nyawo said Redefine now has R6bn in committed undrawn facilities and cash on hand. An improvement in net asset value to 750.8c a share, or 4.3% growth, was achieved in the reporting period.
The tenant retention rate by gross monthly rental was reported at 96.6% from 95.2% before and a further 160 076m² was let across the portfolio.
“Our office portfolio, for instance, is seeing very good activity and vacancies are stabilising at lower levels. This speaks to the work we started many years ago: Through active asset management 87% of our portfolio is now A-grade and premium-grade buildings and tenants are spoilt for choice across prime nodes at attractive rentals,” said chief operating officer Leon Kok.
A solar PV rollout of 13MW this year would to the group’s success.
“The doomsday scenarios predicted by many people at the height of Covid certainly has not materialised, though we need to remain astute and vigilant in the face of persistent challenges,” said Kok.
König said the fund was operating at the lower end of a commercial property cycle.
Redefine’s net diesel cost was R24m, after the realisable portion passed onto tenants was taken into account.