Since the UK’s mid-2016 vote to exit the EU, SA investors have shunned most of the JSE’s 12-odd property counters that generate a sizeable chunk or all of their earnings in Britain.
Worst hit are former market darlings Capital & Counties Properties, mall owner Intu Properties, RDI Reit and Tradehold, the offshore property arm of Christo Wiese — all down at least 40% since mid-2016.
Though there is uncertainty about how Brexit will play out, there is a view that UK-focused property stocks have bottomed — so it may be time for value chasers to re-enter the market selectively. Industrial-focused Atlantic Leaf Properties is starting to appear on the radar of investors looking for a smaller-cap real-estate play with solid growth prospects.
Atlantic Leaf was listed on the JSE and Mauritius Stock Exchange in March 2014 by Paul Leaf-Wright, the Cape Town-based founder of corporate advisory group Leaf Capital. Management has since made impressive strides to grow the portfolio — assets under management are up from about £27m at listing to more than £304m. The market cap has ballooned from less than R300m to R3.5bn.
A key deal earlier this year was the acquisition of a 45% stake in a joint venture with LondonMetric Property, which owns 10 retail warehouses across the UK valued at £98m. The deal has taken Atlantic Leaf’s portfolio to 59 properties: mostly warehouses and logistics/distribution centres spread across the UK.
Despite a 12% run in the share price since early August, Atlantic Leaf is still trading at a discount to NAV and an attractive dividend yield of more than 9% (in sterling). The discount is likely to close over the coming months, as analysts expect a re-rating if the company’s proposed conversion later this year into a UK Reit is successful. This should lure more investors. The fact the company is starting to approach a market cap of R4bn should also make it more appealing to a wider audience.
This month, Atlantic Leaf released a solid set of results for the six months ending August. Earnings were up 5.5% and an interim dividend of 4.65p was declared, up 3.3% year-on-year. Leaf-Wright warned that the second half of the 2018 financial year will be more challenging than expected due to the failure of UK retailer Homebase. As a result the rent for one of Atlantic Leaf’s properties fell by 45%.
He is confident a replacement tenant will soon be found. The company’s earnings in the six months ending May will also be affected by a slightly higher cost of debt, up from 3.3% to 3.6% on the back of higher UK interest rates.
Leaf-Wright is projecting full-year growth in earnings of 2%-3%, lower than the 5% target set earlier in the year. However, if Atlantic Leaf successfully converts to a UK Reit in November, the dividend payout for the full year to end-May 2019 will remain close to the forecast of 9.5p. That represents growth of close to 5%, attractive given the UK’s low inflation environment.
Atlantic Leaf is backed by SA-focused Vukile Property Fund, which has a 21% stake in the company. It owns a large portfolio of shopping centres in SA and retail parks in Spain.
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