The cracks in Sisa Ngebulana’s property empire

Sisa Ngebulana is vexed. He feels the company he founded, Rebosis — the first black property fund to list on the JSE — is being unfairly picked on. During an extensive interview with the FM, Ngebulana, 54, says he is not happy with the way the company has been portrayed by certain journalists (me in particular).

"We know we’re in tough times, and we’re not alone. The whole sector has been decimated … but [the reporting] is just one-way," he says. Just four years ago, he adds, no-one could have predicted the meltdown in the property sector.

He’s right that the market is in meltdown. Over the past year, even blue-chip property funds have been battered, including Growthpoint (-25.3%), Redefine (-41%) and Hyprop (-39%).

But the market has really savaged Rebosis, with its B shares down 81%. If you’d splashed out R10,000 buying its shares this time last year, you’d only have R1,881 left today.

Investors fled as Rebosis’s NAV nearly halved during 2019, its loss deepened to R3.3bn from R924m the year before, and it suspended its dividend.

Unlike its peers, Rebosis isn’t just battling a stagnant SA economy — it’s also fighting to reduce debt after a disastrous foray into UK malls ended on the rocks, thanks to Brexit.

It’s surprising, given that context, that Ngebulana is blaming the media for his company’s share price plunge, rather than its deepening losses, or even a new tussle with its auditor, BDO.

So, what percentage of that share price plunge in the past three years is due to media articles (and specifically those written by this journalist)?

Ngebulana doesn’t skip a beat: "The impact [was] possibly 60%."

Really? Does he believe that the more than R8bn fall in Rebosis’s market value, from about R9bn to about R300m today, is due to journalists writing articles with no factual basis?

"Yeah, it’s unbelievable, but perception is more important in this space. I tell you now, if you have bad media coming, whether it’s factual or not, you’d be in the same position — whether you declared a dividend or not."

To hear Ngebulana tell it, "our SA properties are performing excellently", the company is keeping its head above water in a brutal market, and it’s just the "negative" media that has sunk the share price.

Were that true, it would imply that those investors who sold their Rebosis shares weren’t particularly smart for failing to sift fact from fiction.

But Ngebulana says it’s the smaller retail investors who have been selling. "All our major investors are still investors in this business," he says. (Well, not all. Stanlib, for one, sold out recently.)

Does Ngebulana’s attempt to blame journalists for Rebosis’s performance not speak to a paranoia — one that often affects company founders, as they’re so close to the business?

"Not really — I focus on the facts," he says. "Everything I do, in my 25 years of being in the property space, I’ve had lots of criticism … I’m not going to take anything personally. But, factually, when you see something being driven deliberately in an incorrect way, such as in this case when we saw [specific] headlines and nuances … it becomes a problem."

One can understand why Ngebulana might be taking things personally. He built Rebosis from scratch — so the recent crash has seriously dented his own wealth. Because he holds 5.8% of the company his personal investment has plunged by more than R450m, to R14.3m today.

"I’m the largest individual shareholder, so I’ve lost more than anyone else," he says.

After qualifying as a lawyer in the 1980s, Ngebulana worked as Eskom’s legal counsel for seven years before he began dabbling in upmarket cluster-home developments.

From there, he began converting derelict buildings in downtown Joburg into A-grade offices. This was to form the basis of his property development group, Billion, which opened its doors in 1997. In 2007, Billion beat rivals, including Investec and Zenprop, for the fiercely contested right to develop East London’s first regional mall.

When Rebosis finally listed on the JSE in 2011 at a value of R3.3bn, having bought a parcel of properties from Ngebulana’s Billion, he was just 45 years old.

Today, Ngebulana remains a role model for aspiring businesspeople — not least because he is one of the few black CEOs running a property company, which makes his trajectory important beyond just the handful of Rebosis investors.

Ngebulana is acutely aware of this.

"It’s important as an inspiration for the majority of people in this country, over 40-million people living in some rural area or some township or squatter camp, [who can say]: ‘If this guy can do it, it means I can do it too,’" he says.

This is especially so in a country "where there’s a feeling that there’s no transformation and things are still the same old [way]".

Eloquent, smart and smooth, Ngebulana has always been a leader, taking after his grandfather, Tandi "BT" Ngebulana, who represented Border and Western Province at rugby in the 1940s.

"I have fond memories of my own rugby-playing days at St John’s in Umtata, where I grew up, and later at the then University of Natal (Pietermaritzburg), where I captained the first team while completing my honours degree in law," he says.

But tackling the problem now faced by Rebosis will be his greatest challenge yet.

Shareholder discontent

As much as Ngebulana might think Rebosis’s largest investors are sanguine, recent evidence suggests they’re far from happy.

At last month’s AGM, a remarkable 76% of shareholders voted against Rebosis’s remuneration policy. It’s an almost unprecedented "no" vote since shareholders got a nonbinding vote on pay.

Rebosis downplays it. "The main issue these investors had was around the lack of detail on key performance areas, especially since no long-term incentives are in place," says Nomfundo Qangule, who chairs the company’s remuneration committee.

But, says Qangule, Rebosis felt "given the company’s short-term focus, it did not need to have a long-term incentive [plan] in place".

At last year’s AGM, 52% voted against the remuneration policy, 58% against its implementation. Among the "no" votes were some of SA’s largest institutions: the Public Investment Corp (PIC), Coronation, Investec Asset Management and Sanlam Investment Management.

The PIC said the policy was "inconsistent with best practice" and fell short on disclosures that "aim to foster enhanced accountability on remuneration".

So is Rebosis fooling itself about just how upbeat its largest investors really are?

Qangule says the company "continues to enjoy support" for its strategy from its largest shareholders. She says of the resolutions passed (eight of the 12 ordinary resolutions got more than 50% of the vote), some were "by a considerable majority".

But Asief Mohamed, chief investment officer at Aeon Investment Management, says investors are well aware that Rebosis has severe problems.

"There is risk around [whether] Rebosis is a going concern any more. The banks seem to have overextended themselves when lending to Rebosis, and it now sits with a high amount of debt [in excess of R10bn]," he says.

Daniel King, an analyst at Avior Capital Markets, agrees that it’s particularly fragile right now. "The productivity of Rebosis’s asset base has deteriorated to the point which makes it very difficult for the business to service debt … We believe that, using adjusted property valuations, an investment in Rebosis equity is potentially speculative at this point," he says.

Ngebulana doesn’t agree that the business is frail, however. Instead, he points to the fact that in its last set of results, Rebosis produced a "healthy NAV of R5.2bn", its SA assets performed well, showing 0.4% net income growth, and 100% of its leases were renewed.

Audit angst

Unfortunately there are other ways in which Rebosis is setting disturbing precedents, with deep implications for SA’s frail property sector. In December Rebosis released its annual report, which revealed that its auditor, BDO, had "qualified" its results — arguing that the directors’ valuations of their properties were overstated by R2.3bn.

The story is this: at the end of August, Ngebulana’s management team valued the properties at R15.6bn. But BDO said because of the "significant risk associated with the judgments and estimates applied in the inputs and assumptions used in valuing a property", it took the unprecedented step of hiring its own valuer, Quadrant Properties.

Yet Quadrant’s Peter Parfitt put the value of those properties at R13.3bn. In other words, as BDO put it, there was "a material difference" of R2.3bn between Rebosis’s valuations and the auditor’s valuation.

It’s a remarkable dispute. Neither Ngebulana, nor any analysts, have seen an auditor publicly dispute the valuations of the company it audits like this.

"It’s unheard of, and it’s a first," says Ngebulana. "Everyone is questioning valuations in the market. We may be the first, but we certainly aren’t going to be the last — and that’s the reality."

Ngebulana says the auditors "came to shoot — and they shot".

Rebosis CFO Isabeau King attributes BDO’s decision to do its own valuation partly to wider anxiety in the auditing profession, after the R106bn fraud at Steinhoff and other recent corporate disasters.

"That, plus what’s happening to the industry as a whole has made [BDO] nervous," she says.

It all happened in a crazy few weeks in December, a month after Rebosis had issued its unaudited results for the year to end-August. Two weeks before BDO was meant to sign off the audit, it told Rebosis it had done its own valuation — and that its results were different.

Ngebulana was, "as you can imagine", furious. He demanded meetings with BDO, saying Parfitt’s valuation was too rushed.

"We don’t think he visited those properties," says Ngebulana. "Usually, a valuation process takes two months — a valuer visits every property … they talk to the tenants, they look at everything at the building, per building. Instead, [Parfitt] took a week."

Ngebulana says he even warned Parfitt.

"I actually said to him: ‘Peter, be very careful about involving yourself in this sort of thing.’ Because … if auditors are concerned about valuations in general, this is going to happen often. I wouldn’t do it if I was in his shoes — where you’ve got no time to do something."

Rebosis has numerous gripes with the valuation. For example, even though it got 100% renewal of all its leases last year, with no requirements for extra capital spending, Parfitt’s valuation included large capital spending allocations.

Ngebulana says he told Parfitt: "It’s clear you don’t know these properties."

After a long session, "we agreed to disagree", says Rebosis chief investment officer Rob Becker. "The easy thing to do would be to accept the auditor’s opinion and go with it, and take whatever the implications are. But we fundamentally disagree."

But does this standoff not worsen Rebosis’s credibility issues?

Becker bristles. "Maybe the credibility issues should be on the auditor’s side. Maybe the auditor’s process wasn’t robust enough."

In an interview with the FM, Parfitt, who has 25 years’ experience, defends his valuation of Rebosis’s properties. He says it wasn’t a thumb-suck, and he knows those properties well, having valued the portfolio for Nedbank at the time of the listing in 2011.

"I valued it for four more years after that. I was also appointed by Investec to value Rebosis when it wanted to merge with Texton Property Fund, so I did the whole portfolio again in 2018," he says.

Parfitt was also hired by Vukile to value three of Rebosis’s retail centres when they were put up for sale in July 2019.

Vukile ended up buying Mdantsane Mall in the Eastern Cape at 6% below his valuation figure, suggesting that Rebosis hasn’t found it easy to offload its assets in the current environment.

"My valuations were not overnight attempts to get a number," says Parfitt. "I know the whole process that the buildings have followed over the past 12 years."

If anything, Parfitt says, his valuations may have been "too kind".

He says Ngebulana "pressured" him to "be more lenient" and change his valuation — which is why he shifted his original valuation up from R12.8bn to R13.3bn.

In reality, Parfitt says, Rebosis should value its malls at what it could sell them for — and it’s highly unlikely you’d be able to get the sort of values Rebosis is pricing in.

Now, after this high-stakes standoff, there seems likely to be a "settlement" of sorts.

Earlier this month, Rebosis said it had "initiated discussions with its auditors to appoint a mutually acceptable independent valuer" to conduct yet another valuation of the properties. They’ll need to do this quickly. For any investor, a standoff with your auditors is a big red flag — it’s more so when you’re a property company and your valuations are in dispute.

The SA Property Owners Association (Sapoa), of which Rebosis is a member, says the qualified audit opinion doesn’t make Rebosis "uninvestable".

"Yes, it may be a concern," says Sapoa CEO Neil Gopal. "However, some investors may view this as a good buying opportunity, hence investable."

Ian Anderson, the chief investment officer at Bridge Fund Managers — a shareholder of Rebosis — says investors aren’t particularly worried about the qualified audit opinion.

"Given the subjective nature of property valuations and the lack of deal flow in the types of assets owned by Rebosis in SA, it’s not surprising the valuations are different," he says. "Our own valuations, used to model the company’s NAV, are actually lower than BDO’s number, by way of example."

Anderson says most analysts have already reduced their valuations for Rebosis anyway, "hence the sharp fall in the share prices". Which isn’t encouraging.

Brexit bump

If the audit battle is a big test of Rebosis’s credibility, it is the unexpected factor of Brexit that has done the most to wipe out the company’s profits in recent years.

In March 2015, Rebosis announced it was buying 62% of British mall owner New Frontier for R1.18bn. At the time it seemed a smart deal: scepticism over the rand meant that hard-currency assets producing pounds were seen as something of a holy grail, and the UK economy was growing at 3.5% — the fastest in the developed world.

Back then, as Ngebulana points out, there was "no political instability, nor Brexit talk" in the UK.

Then the June 2016 vote happened — and British retail fell out of bed entirely. British property investors, wary that malls would lose blue-chip tenants, headed for the hills.

Initially, New Frontier weathered the storm. In 2018, it clocked up a £4.3m (R82.5m) profit. But last year, it all became too much. In 2019, New Frontier made a £60.1m (R1.1bn) loss for the nine months to May.

In July 2019, Rebosis said it would write down the New Frontier investment to zero, and sell its stake for a mere R700.

How did it all go so spectacularly wrong?

Says Ngebulana: "The problem with the investment in New Frontier was Brexit — likewise with any investment in any UK shopping centre owner like Intu [Properties], Hammerson [and] Capital & Regional."

The share price of Intu, also listed on the JSE, has plunged 87% over the past year as investors digest the fact that its £4.68bn debt is now 19 times its market value.

Retail chains came under intense pressure, with chains including Thomas Cook and Mothercare collapsing. Last year, according to the British Retail Consortium, was the worst year for retailers in 25 years.

Valuations of malls took a beating, dropping by half, according to some estimates.

New Frontier warned in 2018 that some of its tenants had entered into company voluntary agreements, an insolvency procedure to help them restructure leases. So the British company stopped paying its dividend.

Rebosis chair Anna Mokgokong wrote a letter in the annual report saying this meant Rebosis didn’t get R28.3m in expected dividend income.

It was a brutal hit, constributing to the fact that Rebosis’s income fell 18.8%. Cash on hand, which was R179.9m in 2018, fell to R72.1m in 2019. So it was hardly a surprise when Rebosis suspended the dividend.

Bridge’s Anderson says Rebosis took a greater hit from Brexit than its rivals did.

"Unfortunately Rebosis, through New Frontier Properties, owned second-tier assets in second-tier locations where the value declines were steepest — as much as 30% of the value of these shopping centres was wiped out in 2018/2019," he says.

Evan Robins, an analyst at Old Mutual Investment Group, says Rebosis was doing too much at the same time: investing in malls in SA, as well as in New Frontier. "For a fund of their size, they tried to take on a lot at once," he says.

Dividend hit

Brexit may have made things worse, but Rebosis’s frailty is part of the fall of SA’s once high-flying property sector.

Between 2011 and 2016, 33 new property companies listed on the JSE. Investors couldn’t get enough. Then the dam burst.

In 2018, sharp questions arose over whether the largest JSE-listed property group, Resilient, and its stablemates weren’t behaving entirely ethically in how they made their money.

The regulator, the Financial Sector Conduct Authority, has since largely cleared the Resilient group, but scepticism has lingered.

In 2018, the JSE’s property index tumbled 25.2% — wiping out R120bn in value.

The next year wasn’t much better: the property index eked out growth of just 1.9%.

Now, projections for a total return for 2020 are bleak. Analysts expect no dividend growth, on average. Property funds with a local focus are projected to see their income fall 5%, while those with an offshore bias are set to rise 5%.

It’s a blow to SA investors, who got used to plump, inflation-beating dividends from property companies during the good times.

Becker says that, in the past, fund managers who bought property shares used dividend growth as the yardstick to compare property companies.

"SA Reits [real estate investment trusts] have to pay out 75% of their distributable income, but many have paid out 100%. Funds should have been holding back 25%. But we saw Resilient creating dividend growth in double digits, and other funds did whatever they could to keep up. You now see funds changing their payout ratios in a weak economy," he says.

It led to a race to the bottom. It might have been better, for example, for property companies to base their dividends on cash flow — "funds from operations" rather than "distributable earnings per share".

Right now, investors are jittery over Rebosis’s debt level too. Its loan-to-value (LTV) ratio is at 64.5%, the sector’s highest.

But Ngebulana says this is only temporary, and due to the company having to impair New Frontier. The target, he says, is to keep this ratio below 40%.

And he still has a few rabbits he can pull out of the hat to reduce Rebosis’s debt — like selling properties.

Last year Rebosis sold premium office space — including an office portfolio to Boxwood Property Investment Fund for R888m — and a group of secondary malls, including Mdantsane Mall, to Vukile for R516m.

Another option is for Rebosis to merge with rival Delta Property Fund. The companies have been in talks since August, planning to create a R30bn giant with a strong position in government offices, malls and industrial properties.

Delta, headed by Sandile Nomvete, earns more than three-quarters of its revenue from state tenants.

Becker says a circular from Rebosis, detailing the specifics, should be finished soon. If not, the tie-up will be ditched.

Anderson believes, at this point, that there’s a less than 50% chance of a merger.

"The quantum of funding they were talking about would not be easy to secure, given current market conditions and the track records of both businesses over the past two or three years," he says.

Delta CEO Nomvete says his fund doesn’t have to merge with Rebosis — but it should consider the idea.

"We have options. We could buy the whole company or its properties separately," he says.

"We are looking at what could work. We had a prospective merger structure set up. The qualified opinion around Rebosis’s valuations has delayed that a bit."

But Rebosis has other options.

For example, it could ask shareholders for more cash through a rights issue; it could sell more assets; or it could agree to be sold to a private equity buyer who appreciates its assets and can support it.

Ngebulana, who feels Rebosis isn’t appreciated enough, says investors have approached him numerous times about buying the company and taking it private.

On paper, anyone who wanted to buy Rebosis outright would get a great deal: its share price is less than R300m, compared with its last reported NAV of R5bn. But the problem is the debt, now R10,1bn.

Avior’s King argues the best way to ease pressure on its balance sheet is for it to sell assets — even if it’s at a large discount to the book value.

"The liquidity requirement appears urgent within the business. However, without backing from Rebosis’s primary bankers, management may not be afforded sufficient time to ease liquidity pressures," he says.

Still, Keillen Ndlovu, head of listed property funds at Stanlib, believes it makes sense for Rebosis to go private at these levels.

"The shares are so heavily discounted there’s potentially more value if they sell all their physical assets or properties, pay off the debt with the banks, then pay the remaining cash to shareholders," he says.

For Bridge’s Anderson, the biggest question is whether Ngebulana’s team can "execute on their disposal programme".

If they do, it would deliver far more value than is in the share price.

A year later ...

Clearly, with a share price that’s been beaten into the floor, some investors see value in Rebosis.

One of them is Zunaid Moti, a colourful entrepreneur who has clashed with Investec and was on Interpol’s red notice list until 2018. He’s been buying shares recently.

"We are very speculative on this one," he says. "We invest in a lot of companies so I am not sure exactly how much we hold, but we aren’t heavily invested. We have between R12m and R30m worth of shares."

Rebosis founder remains full of optimism despite a disastrous fall in share price and a quarrel with its auditors over valuations

—  What it means:

Moti’s speculation has been paying off. "I started buying at 28c a share. The average price has been 38c or so for the past few weeks. I think the NAV is good and we should profit from the investment. If we can get a 10%-15% upside on it in two to three months then we have done well," he says.

If that happens, Moti says, "we can sell and move on".

Ngebulana would no doubt say there’s far more upside in Rebosis. But then, perhaps as he is the founder, you could forgive an inherent bias towards optimism. Given his implicit faith in the business, he finds it baffling that others don’t see the same blue sky.

Even after a brutal 2019, he points excitedly towards the momentum in 2020 — Rebosis’s B shares were at one point up 29%.

"We are proving we can come back from this difficult period, as seen by the recovery in our share price in 2020," he says.

Just give it a year, says Ngebulana.

By then, Rebosis will be a larger fund with a relatively low LTV of below 40%, and it would have enjoyed a rerating of its share price.

If that happens, investors who ditched it would be falling over themselves to buy back in. But it’s a big "if".