The plan to rescue Rebosis

Earlier this week, Rebosis B shares tumbled another 10% to a fresh low of 63c. It means that since November, the debt-ridden property stock has shed no less than 90% of its value — wiping nearly R6bn off its market capitalisation.

Unfortunately, the value destruction hasn’t ended there. Investors typically invest in real estate investment trusts (Reits) like Rebosis, in part, for the relatively large dividends they’re paid. Only, Rebosis shareholders have now been told that the interim dividend for the six months to February has been "suspended" — the first time a JSE-listed Reit has postponed a dividend.

Though management still plans to pay a dividend in December for the full year ending August, shareholders are likely to receive 75% less than they got for the last full year to August 2018 — about 23c a share instead of 92.83c.

It’s been a horrific turn of events for Sisa Ngebulana, the lawyer-turned-developer, who founded and listed Rebosis in May 2011. At the time, it was the JSE’s first majority black-owned and managed property company. And, until early 2018, it was one of the JSE’s most reliable and consistent dividend payers too.

Under Ngebulana’s watch, Rebosis’s portfolio ballooned from seven properties worth R3.3bn when it listed to 43 properties valued at R17bn today. This includes some high-profile shopping centres — including Sunnypark in Pretoria, Forest Hill in Centurion, and Baywest Mall in Port Elizabeth — as well as 36 office blocks, most of which are let to the public works department.

But the problem was Rebosis’s unfortunate timing of its entry into the UK in 2015, when it paid R1.26bn for a stake in UK mall owner New Frontier Properties (NFP). Just a year later, UK citizens voted to leave the EU — and everything fell apart. The Brexit vote precipitated an unexpected 30% write-down in the value of NFP’s properties in the UK late last year. This led to Rebosis having to take a R2bn impairment, as well as a R96m loss in income for the six months to February.

While other UK-focused property companies suffered similar devaluations thanks to Brexit (and the UK’s weaker retail spending), Rebosis’s problems were compounded by other issues back home. This included high debt levels in SA, which have become difficult to service, weak retail trading in the malls, and government’s reluctance to sign long-term office leases. It didn’t help that CEO Andile Mazwai quit in April 2018, just seven months into his tenure.

However, Ngebulana, who was asked by the Rebosis board to return to the helm a year ago after Mazwai left, has a plan to rescue Rebosis.

In an interview with the FM, Ngebulana sketched out his plan to mend investor sentiment. It’s a multipronged approach, which entails walking away from the UK entirely, while selling its prime SA shopping centres and using the proceeds to pay down debt.

Ngebulana says the situation is particularly tragic given that the factors that led to the destruction of UK property values were beyond management’s control.

"In the six years since listing, we have never missed our dividend guidance and we produced good, consistent growth every year. When we entered the UK in 2015 no-one could have foreseen a Brexit."

This is why, last week, Rebosis sold its entire 49.35% stake in loss-making NFP to Orion Hotels & Resorts, among others, for just R700.

When you take the impairments into account, it suggests Rebosis spent R2.4bn on its ill-fated UK foray

But Ngebulana believes it was better to cut the company’s losses now, than to hold out for a better offer.

He stresses that Rebosis doesn’t owe UK banks any money. "Rebosis doesn’t share any of NFP’s UK debt obligations. We were merely a shareholder of NFP," he says.

Nor is Ngebulana resting on his laurels at home.

In SA, he says, about R6bn worth of properties have been earmarked for sale, which will bring down the company’s loan-to-value (LTV) ratio from the current 57% to less than 40%.

Nine office buildings have already been sold for about R1.5bn, which should be transferred within the next few weeks.

And earlier this year, Rebosis announced the sale of three of its prized shopping centres to JSE-listed Vukile Property Fund for R1.8bn. All three malls, Mdantsane City in the Eastern Cape, and Pretoria’s Sunnypark and Bloedstreet malls, cater mostly for lower-income shoppers.

Shareholders of both companies still need to approve the transaction, with voting expected to take place within the next few weeks.

Once the Vukile deal is finalised, Ngebulana says, Rebosis’s LTV ratio will drop below 50%. And if he’s able to sell another R3bn of assets within the next six to 12 months, as he hopes, it will cut the LTV ratio to below 40%.

Assets for sale include Rebosis’s two Eastern Cape super-regional shopping centres, Port Elizabeth’s Baywest Mall (90,000m²) and Hemingways Mall (80,000m²) in East London.

"We will sell whatever assets we can get the best price for," he says. But he adds: "We won’t trade our assets at any price. If we were having a fire sale, we would have sold our big malls already."

But judging by the hasty retreat Rebosis shareholders have beaten since November, Ngebulana’s rescue plan will be a hard sell.

Stanlib, one of the company’s major backers since inception with a stake of more than 12% in Rebosis at one stage, sold virtually its entire position in the company earlier this year.

"We lost hope that things could be turned around, especially given the challenging market conditions. So we looked for better opportunities elsewhere," says Stanlib head of listed property funds Keillen Ndlovu.

Others raise similar concerns. Investec Asset Management portfolio manager Peter Clark says: "The market has lost faith in Rebosis in its current form, which is evident from the share price. A sizeable event of sorts is needed to reorganise and reset the company."

The biggest concern among shareholders right now is whether Rebosis will honour its commitment to pay its full-year dividend in December if the Vukile deal stalls or, worse, gets a thumbs-down from investors. If Rebosis skips the year-end dividend, the company could potentially lose its Reit status, which will incur capital gains tax liabilities.

Stanlib’s Ndlovu says there is a view in the market that Vukile may be overpaying for the three Rebosis malls. "The deal equates to an acquisition yield of 9%. Some believe a yield of 9.5%-10% makes more sense. So there is a risk that the deal may not initially be approved by the required Vukile quorum, more so given that there are a number of other conditions precedent," he says.

Ngebulana concedes that the Vukile deal may not be a shoo-in. But he says that Rebosis has other options to consider if the deal doesn’t get the go-ahead — including a proposed buyout by a private equity suitor. There have also been advances from other JSE-listed funds looking to merge with Rebosis. "Given the current tough market conditions, it will be foolhardy not to look at all one’s options," he says.

Another worry is that the banks may start getting jittery if Rebosis breaches its loan covenants, and seek to repossess some of the company’s properties. As Mvula Seroto, portfolio manager at Catalyst Fund Managers, points out: "Rebosis faces potential loan covenant breaches and subsequent cash flow concerns. The business is in a distressed state in its current form and one of a few ways it can reposition its capital structure is by either disposing of assets or a takeover."

But Seroto says a takeover by another listed fund is unlikely, given that most SA Reits are trading at a steep discount to NAV and dealing with their own challenges. Besides, he believes the uncertainty of when Rebosis will resume sustainable dividend payouts reduces the likelihood of a takeover.

Critically though, Ngebulana says that Rebosis hasn’t yet breached its loan covenants. "Besides, the banks understand that the market has changed and that everyone has to act responsibly. We have a long relationship with our bankers and they are supportive of the steps we are taking to lower our LTV levels."

Ngebulana believes the banks also appreciate the fact that Rebosis is still a solid business. "We have R17bn in assets. That’s a huge portfolio. Ultimately, everyone wants to do what is in the best interest of shareholders," he says.

That’s a sentiment shared by Meago Asset Managers director Anas Madhi. He says the intrinsic value of Rebosis far exceeds its market cap. He believes efforts must be directed towards unlocking shareholder value as opposed to just resolving debt breaches.

"As such, it’s imperative that the banks work closely with the Rebosis management team to enable the empowerment vehicle to recover from its UK setback," says Madhi.

He adds: "BEE in the property sector remains elusive and the sector cannot afford the loss of one of its pioneers."