The much talked about merger of rand hedge plays Rockcastle Global Real Estate Company and sister fund New Europe Property Investments (Nepi) is likely to be a done deal by June.
The merger is bound to be the most significant deal concluded by the R480bn listed property sector this year.
The new entity, to be known as NewCo, will become the JSE’s largest real estate counter, with a market cap exceeding R80bn that should propel the company straight into the top 40 index. NewCo will simultaneously become one of the biggest shopping centre owners in Eastern and Central Europe.
Nepi already owns more than 30 shopping centres across Romania, Slovakia and Croatia, among others, while Rockcastle owns 10 malls in Poland and one in the Czech Republic.
Nepi’s market cap is R49.3bn, exceeding Rockcastle’s R32bn.
We [Meago Asset Managers] believe that Nepi provides superior quality, so even if the merger doesn’t occur, the company remains strongly positioned for sustained growth into the medium term
— Anas Madhi
Both companies were co-founded by SA’s Resilient group, which also has JSE-listed Fortress Income Fund and Resilient Reit in its stable, and was co-founded in the early 2000s by SA real estate heavyweights Des de Beer, Jeff Zeidel and Barry Stuhler.
Last week, Rockcastle and Nepi issued an update on the proposed merger to coincide with the release of the companies’ December results. The merger will be implemented on the basis of an effective share swap ratio of 4.5 Rockcastle shares for one Nepi share. NewCo’s prospectus will be sent to shareholders before April 30 and it is set to list on the JSE by the end of June. That is likely to be followed by a listing on pan-European stock exchange Euronext Amsterdam.
Both Rockcastle and Nepi delivered pleasing performances for the December reporting periods, with dividend payouts up an impressive 12% (in US dollars) and 15% (in euros) respectively. That’s way ahead of the average 8%-9% dividend growth that the SA listed property sector as a whole is expected to report this year. Both companies expected to continue to deliver double-digit growth over the next 12 months.
The share prices of Nepi and, to a lesser extent, Rockcastle have come under pressure over the past year on the back of a stronger rand, in line with other offshore property stocks. But their declines are nowhere near those of UK-focused counterparts such as Capital & Counties, Intu Properties and Stenprop, which tumbled 30%-35% over the past 12 months after the UK’s decision to exit the EU.
Click on image to zoom in
Over three years, Rockcastle and Nepi are among the JSE’s best-performing property stocks, with share price growth of 137% and 85% respectively (excluding dividends).
Rockcastle CEO Spiro Noussis said at last week’s results presentation that the merger with Nepi makes sense, as it will not only
provide an opportunity to expand Rockcastle’s Polish-focused portfolio to Romania, the second-largest and fastest-growing region in Central and Eastern Europe, but to do so through the country’s foremost retail developer.
“A merger will also lead to improved liquidity and tradability. It will also give us the ability to target strategic acquisitions more effectively as the enlarged, new entity will have a far bigger balance sheet,” he said.
Nepi CEO Alex Morar echoed this, saying a merger will allow Nepi to pursue much larger deals and further expand its portfolio into the Czech Republic, Serbia, Slovakia and Croatia.
He said Nepi’s cost of funding is also likely to fall as the company’s credit rating improves, given the addition of Rockcastle’s high-quality Polish assets to its portfolio.
Analysts are in favour of the deal as the merged entity will no doubt appear more regularly on global fund managers’ buying lists. Previously they may not have been interested in either counter because of a lack of size and liquidity.
“NewCo will become the third-largest listed retail property company in Europe after Unibail-Rodamco and Klépierre, and the largest in Eastern Europe,” says Catalyst Fund Managers property analyst Zayd Sulaiman.
He notes that the likely inclusion of NewCo on the JSE’s top 40 index, as well as on other global and European real estate indices, will further enhance liquidity.
However, some would have liked to see a more favourable share swap ratio offered to Nepi shareholders.
Meago Asset Managers director Anas Madhi says Nepi shareholders deserve a higher premium due to the company’s stellar, long-standing performance track record and dominance in its region. Nepi last year ranked as the eighth-best performing company on the JSE over five years, according to the Business Times Top 100 Companies annual survey.
Says Madhi: “Nepi’s development pipeline is also significantly better than that of Rockcastle, which is more reliant on acquisitive growth in a more mature Polish real estate market. Moreover, Nepi currently has no exposure to a highly volatile listed portfolio even though Rockcastle is planning to sell virtually its entire listed portfolio by [the] year-end.”
Listed property shares still represent 48% of Rockcastle’s US$2.5bn investment assets (see table), with 52% being directly held shopping centres. But that’s already sharply down from 83% in December 2015 following a sell-down of the listed portfolio and Rockcastle’s acquisition last year of five shopping centres — four in Poland and one in the Czech Republic — to the tune of $812m.
Investors looking for exposure to NewCo prior to the merger should consider Nepi their entry point, says Madhi. Both counters are currently trading at a similar forward yield — Rockcastle at 4.4% and Nepi at 4.3% — so, as share prices stand, there is no arbitrage.
“That implies no benefit [in] choosing one over the other on the basis of the ratio offered to shareholders. However, we believe that Nepi provides superior quality, so even if the merger doesn’t occur, the company remains strongly positioned for sustained growth into the medium term.”
Alternatively, says Madhi, it may be a good idea for would-be investors to first see how NewCo fares after its Euronext listing before making a commitment.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.