Tower gets solid capital support

With its shares listing at the start at R8.70 and at a forward yield of 9%, Tower is the first new property listing under the JSE's recently launched real estate investment trust (Reit) structure.

Tower raised R300m in its private placement, which it considered the optimal amount for it to reduce debt to a suitable level.

Edwards said Tower "felt it would be prudent to bring debt below 40%", and that the fund's gearing had reduced from 57% to 39% as a result of the capital raise.

Tower, which has an experienced management team in the listed and unlisted property sectors, aims to differentiate itself with a focus on "greening" its properties to save costs and make its buildings more competitive.

At listing, the fund has a portfolio of 27 properties valued at R1.65bn - 13 of which are transferring at listing or within a few weeks of it.

The portfolio includes two green-rated buildings.

Attractive prospects

"The pipeline we've got coming in over the next 12 months is worth just over R1bn and that's mainly properties for paper and cash, so we don't need to come back to the market to try and raise cash to buy properties for at least the next 12 months," Edwards said.

JSE-listed Fortress Income Fund is a substantial Tower shareholder with holding about R300m of Tower's R1bn market capitalisation. However, Fortress's holding would be diluted fairly quickly as new properties come into the portfolio.

Edwards said Fortress was "a very nice partner" for Tower to have, given that the two funds were targeting different parts of the market. "There are opportunities that can potentially come across both of our desks which we can pass each other's way on a friendly basis."

Tower was targeting a diversified fund with 50% retail assets, 30% office and 20% industrial.

Edwards said Tower's capital raising had been unfortunately timed against the backdrop of one of the listed property sector's biggest corrections, during May and June.

"Fortunately, we were underwritten by Fortress,for half the capital," he said. In addition, large investors had shown interest, with Stanlib Asset Management having committed R73m, while Grindrod Asset Management and Prescient Investment Management had each committed R50m.

"It was fairly well supported - we couldn't have hoped for anything better under the circumstances. I think raising capital at the moment is going to be very tough for the next few months," Edwards said.

He said that many planned capital raises in the sector may be delayed. However, this was not because listed property sector fundamentals had changed, but rather because of the volatility in the market.

Edwards said Tower was targeting properties near major metropoles valued between R50m and R200m. "We will be looking to sweat those assets through occupancy cost reduction - that's our number one issue."

Tower said it had identified a major gap in the small-capitalisation sector of the market for greening initiatives and the fund would focus largely on reducing the operating costs of its existing buildings, which would mitigate pressure on headline rentals.

Source: Business Day via I-Net Bridge