Attacq: a dividend darling, and cheap

Waterfall developer Attacq, until recently viewed primarily as a capital-growth play, has quietly emerged as the JSE’s top-performing dividend payer.

The company declared a 10.1% increase in income payouts for the year to June 30.

That’s no mean feat. SA’s faltering economy has put an abrupt end to most property companies’ inflation-beating dividend growth.

Year to date, the sector has achieved a measly 2% on average.

But few property companies have an asset like Waterfall, sited between Midrand and Gauteng’s economic heartland, Sandton.

Attacq’s outperformance was supported by stellar trading at Waterfall’s Mall of Africa, its flagship shopping centre, as well as revenue earned from seven newly completed buildings in the precinct. The company’s exposure to Eastern European-focused MAS Real Estate, in which Attacq has a R3.2bn stake, also lifted distributable income.

Apart from Mall of Africa — at 131,000m², the largest single-phase shopping centre built from scratch in SA — Attacq has interests in 10 other SA retail centres. These include Brooklyn Mall in Pretoria, Eikestad Mall in Stellenbosch, MooiRivier Mall in Potchefstroom and Garden Route Mall in George. It also owns stakes in four malls in Ghana, Zambia and Nigeria.

Still, while it has excelled in dividend growth, Attacq has disappointed in terms of share price performance since its conversion to a real estate investment trust (Reit) in May last year.

The stock is down about 18% year to date and 40% below levels of 18 months ago. Though most SA-focused property companies are under pressure and trading below NAV, Attacq’s discount to NAV, at nearly 50%, is larger than that of its peers.

It’s this discount that makes Attacq interesting, says Avior Capital Markets analyst Daniel King.

The large discount can be partially explained by the fact that Attacq generates a relatively low distributable return on equity due to a significant proportion of its asset base still being in the development phase. "This makes Attacq less cash-generative than its Reit peers, with a lower interest cover ratio and more inherent development risk," King notes.

Investec Asset Management portfolio manager Peter Clark believes Attacq offers an attractive value proposition at current levels of about R12. Though the stock trades at a lower initial dividend yield of 7% vs the sector’s average 10% — again, primarily due to its non-income-generating development pipeline — Clark says Attacq’s dividend-growth prospects are well ahead of its peers.

Attacq is expected to deliver 8%-10% for the year to June 2020, while growth for the sector as a whole is forecast at no more than 1%-2%. "The company is also one of the few property stocks that has paid out only sustainable earnings backed by cash flow," says Clark.

King and Clark note that Attacq’s growth prospects will be underpinned by the development potential still to be unlocked at Waterfall. Attacq’s development partner, Atterbury, secured the commercial development rights for the 330ha site in 2008. At the time it was an open stretch of land owned by the Waterfall Islamic Institute. The latter was founded by the Mia family, and the land can’t be sold due to religious restrictions. So a 99-year renewable lease structure is extended to all commercial and residential end users at Waterfall.

Today, the Waterfall precinct is one of SA’s largest mixed-use nodes and makes up nearly 55% (R14.4bn) of Attacq’s total assets of R27bn. Only about half of the close to 1.9-million square metres of Waterfall’s total bulk has been developed (or sold) to date, offering office, industrial, hotel, retail and mixed-use buildings.

Attacq CEO Melt Hamman believes Waterfall’s growing popularity as a shopping and entertainment destination is evident from the double-digit (13.1%) trading density growth achieved by Mall of Africa for the year ended June. Most malls exceeding 100,000m² in SA have recorded low single-digit or negative sales growth this year as consumers continue to tighten their purse strings.

"Mall of Africa’s trading density growth is exceptional for a super-regional that has been operating for only three years," says Hamman.

He cites the mall’s comprehensive retail, food, beverage and entertainment offering as well as its central location in the heart of Gauteng, just off the N1, as key to its success.

Hamman expects the growing number of companies that are moving their offices to Waterfall to further support trade in the mall.

He says Waterfall has benefited from the consolidation trend, which has led to more corporates closing smaller offices and bringing Gauteng staff to one central location.

Corporates that have already relocated (or will soon relocate) to Waterfall include PwC, Cell C, Transnet, Accenture, Sage, Novartis, PSG Wealth and Deloitte. Once Deloitte’s new head office is completed next year, the number of people working in the precinct will swell to more than 4,500.

Hamman believes the recent addition of Ellipse Waterfall, the precinct’s first high-rise sectional-title development — it broke ground in August — will entrench Waterfall’s reputation as a true work, live, play and shop destination. The development will complement the low-density, residential estates and townhouse complexes that have already been developed by Century Property Developments and Balwin at Waterfall.

Ellipse, located on the eastern side of the Mall of Africa, will have four towers, between 10 and 16 storeys high and with a total of 623 apartments. Prices range from R1.5m for one-bedroom apartments to R12m for 700m² penthouses with private pools and terraces. That brings the price per square metre to an average R36,500, which compares well with new apartment developments in Rosebank, for instance.

Hamman says buyer interest has exceeded all expectations. More than 80% of the 272 apartments in the first phase have been sold off-plan, including 12 out of 16 penthouses at R7m-R12m apiece. One buyer bought two adjacent penthouses for a total of R19m. SA cricket players Kagiso Rabada, Quinton de Kock and Lungi Ngidi count among Ellipse’s penthouse fans.

Hamman says the strong sales at Ellipse, in a depressed SA housing market, indicates Waterfall’s desirability as a property investment destination. The fact that Waterfall is controlled by a single landlord (Attacq) is a key incentive for residential buyers, he believes.

"In the uncertain economic and political climate investors want the reassurance that their investment will be safe. They want to know what is going to be built next door and whether the surroundings will be maintained. We can provide those reassurances, given that we are the only party responsible for the planning, development, service delivery and upkeep."