Investors get behind new-look MAS Real Estate

MAS Real Estate was pivoting long before the pandemic hit. And despite the obvious challenges of Covid, Martin Slabbert is making good on his promise to transform MAS into a Central and Eastern European (CEE) force.

The ex-South African, who was also the driving force behind the phenomenal growth of Eastern European mall owner Nepi (now Nepi Rockcastle), took over the reins as CEO after a stormy period during which MAS gained and lost three CEOs in short succession.

Former Nepi chief operating officer Victor Semionov was simultaneously appointed as CFO.

The duo, who started Romanian-based development company Prime Kapital in 2015 after they left Nepi, have a three-year mandate to manage MAS’s transition. But Slabbert has surprised the market by how quickly he’s managed to exit Western Europe, especially as MAS also had to deal with the fallout from lockdown restrictions imposed in the CEE region.

Within 18 months, most of the company’s assets in the UK, Germany and Switzerland have been sold at or above book value, taking the initial Western European portfolio from more than €450m to less than €150m. Negotiations for the sale of the remainder of these assets are under way.

The thinking was that Eastern European countries offer much better growth potential, and the barrage of sales means that MAS now boasts one of the lowest loan-to-value ratios in SA’s listed property sector.

In fact, as Slabbert puts it: "We are in the unique position where we have more cash on our balance sheet than debt, so we actually have a negative gearing."

This has allowed Slabbert to pour money into the CEE development pipeline.

So it pushed ahead with construction on two new malls last year, which were completed in August and March respectively: the Dambovita Mall (31,200m²), which opened in Romania’s Targoviste with a high 92% occupancy, and the 17,000m² Sepsi Value Centre in Sfantu Gheorghe, the capital of Romania’s Hungarian-dominated Covasna county.

The new additions bring MAS’s interest in completed retail properties across Romania, Bulgaria and Poland to 19. Construction on another two retail developments resumed in April.

Slabbert says the CEE retail portfolio is fully operational, with sales and foot count already close to pre-Covid levels. In fact, trading density (sales per m²) at the company’s 14 open-air and strip malls are well above 2019 levels.

Open-air centres range in size from 17,000m² to 28,000m² and are typically anchored by a large hypermarket adjoined by a small-format mall.

Slabbert says the open-air model has proved hugely successful as 80% of the tenant base comprises national anchors, including fast food restaurants, convenience retailers and a large leisure component.

"Open-air malls offer easy access to stores straight from the car park. And they’re not dependent on office workers like their city centre counterparts, which are taking longer to recover." He adds: "As soon as you build bigger than 30,000m², the open-air format becomes too cumbersome for shoppers to navigate. Given that larger, enclosed malls are typically more reliant on smaller tenants than open-air malls, they are the first to suffer in a downturn."

In 2019, MAS also entered the residential development sector and now has two residential projects under way in the Romanian capital of Bucharest. Slabbert says MAS is the only real estate developer to offer First World standards at midmarket prices. Until now, Romanians had little choice other than high rise, drab blocks of flats that were built pre-1989 during the communist era.

Slabbert has also streamlined operations by bringing previously outsourced functions in-house: from architecture, engineering and construction to leasing, property management and marketing. "When we accepted the mandate to turn the company into a CEE-focused business, MAS had about 30 employees and everything was outsourced. So there was no real platform for growth. We now have more than 200 employees and can integrate all our earnings into one business," he says.

Slabbert is confident that MAS will be able to double its assets from the current €900m to €1.8bn over the next four years, and he is banking on strong retail sales growth in the region. He refers to recent economists’ forecasts that consumption will grow by 80% in Romania over the next 10 years. "It will be difficult to find another country that offers that sort of growth potential," says Slabbert.

What’s more, the region is still relatively undersupplied in terms of retail space.

For example, a mature Western European market like France has 380m² of retail space per 1,000 people, while Romania and Bulgaria are only at 182m² and 134m² per 1,000 people respectively. Poland on the other hand is closing the gap, at 320m² per 1,000 people.

Slabbert and Semionov’s progress hasn’t gone unnoticed among cash-flush investors looking for high-growth opportunities.

Earlier this year, SA’s ultra-wealthy Oppenheimer family bought R500m worth of shares in MAS in an off-market trade.

Rafael Eliasov, a director of Joburg-based private investment fund Stockdale Street, which guided the MAS share purchase, says they see "huge" value in MAS, driven by the company’s strategy to benefit from Romania’s high consumption growth story.

He also likes the fact that management is a large shareholder in MAS and has continued to buy its shares during the pandemic.

Fund managers, including Prudential, Meago and Sesfikile Capital also recently increased their weighting to MAS by snapping up shares from SA-based developer Attacq, which cut its stake in a bid to lower debt and fund its core Waterfall City development.

Others are equally bullish about MAS’s prospects. Garreth Elston, chief investment officer at Reitway Global, says: "With Slabbert taking over as CEO in 2019, MAS finally got an aligned, motivated leader. The focus on Eastern Europe, where Slabbert has deep experience, is arguably a better strategy than the previous pan-European scattershot one." He adds: "The Oppenheimer purchase earlier this year was done at a price that will likely look like an incredible bargain in a few years’ time."

Brendon Hubbard, portfolio manager at ClucasGray, cites MAS as one of the investment firm’s top three property stock picks. "We like that management is backing itself by continuously increasing its shareholding."

He refers to directors buying more than 80-million shares — for a cool R1bn — over the past 12 months. "That talks to the conviction that management has in the MAS growth story. I don’t know of any other company on the JSE where management is showing that level of commitment." Hubbard says the Oppenheimer purchase should also provide comfort to would-be investors, as such a large acquisition wouldn’t have been made without proper due diligence.

Nedbank NIB equity analyst Ridwaan Loonat has an overweight recommendation on MAS. He says management has a proven track record of generating shareholder returns in the CEE region.

The company’s property valuations have also held up well. MAS’s portfolio yield of 7.6% is 80 basis points above prime retail yields in Romania. "We believe the current differential is sufficient not to warrant further write-downs in valuations, which will support NAV growth."

Loonat says the company’s low gearing levels means it is well placed to capitalise on value enhancing acquisitions. The only uncertainty is when MAS will resume dividend payments. The company is not a Reit so isn’t obliged to pay out its profits to shareholders.

However, Slabbert tells the FM that SA investors’ "obsession" with dividends doesn’t make sense. "It should be irrelevant whether you pay dividends or not. What should matter more is that you create long-term value for shareholders," he says. Still, he’s floated the option of a payout come August, when MAS releases its results.

But, says Slabbert, who prefers to keep a low public profile, his focus is on maximising total returns and growing like-for-like rentals. "I’m not one for a ‘hard sell’. We’re not looking to raise capital or offload our shares so I’m not here to talk up the MAS story."