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Cape Town - The creation of GemGrow Properties, a listed fund focusing on smaller properties, was announced on Monday.
The deal to create the fund was concluded between the Vukile Property Fund, Arrowhead Properties and the Synergy Income Fund. The new fund will be created within the existing entity of Synergy and renamed GemGrow Properties. The goal is to establish a high-yield, high-growth listed niche property fund.
The implementation date is set for October 1 2016. Arrowhead will hold around 62% of Synergy B shares (55.22% of Synergy’s share capital), while Vukile will hold just over 29% of Synergy B shares (26.38% of Synergy’s share capital).
Gerald Leissner will be the CEO of GemGrow. He is described as someone with vast experience in optimising A and B share structures and higher-yielding funds.
“The transaction addresses various strategic objectives of three separate entities, in turn creating a vehicle that offers shareholders exposure to a unique dual-class share structure with a focus on acquiring assets at attractive yields that will enhance earnings and growth prospects for the company,” explained Leissner.
According to Vukile CEO Laurence Rapp, the goal has been for some time to craft Vukile’s direct South African assets into a specialist retail property fund.
"With this transaction, Vukile will achieve our goal, placing over 90% of our assets in the most defensive and preferred property sector. At the same time, it reduces Vukile’s gearing and achieves our objectives for Synergy only 18 months after successfully acquiring it,” said Rapp.
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Mark Kaplan, COO of Arrowhead Properties, said transferring its high-yielding properties into a separate listed subsidiary that is positioned for yield-enhancing growth is a strategic objective.
"Although this kind of fund is not a first for South Africa, it will still be a niche operator focusing on existing opportunities in the property market, Mark Kaplan, chief operating officer of Arrowhead Properties, told Fin24.
He explained that most listed property companies evolve and end up mainly buying bigger properties.
"GemGrow will buy smaller properties. Currently the listed property companies don't really focus on properties below 76m and we think that means there is an opportunity for us to explore," said Kaplan.
"Because these smaller properties are not in the focus of the bigger listed property companies, they are usually also attractively prices, yet normally out of reach of individual buyers. It creates a kind of no man's land."
Kaplan said GemGrow has the potential to grow quite rapidly.
The transaction is expected to increase Synergy’s market capitalisation to R3.4bn, with a property portfolio valued at around R4.4bn.
"The GemGrow vehicle will re-energise and differentiate Synergy and give it a new platform for growth with yield-enhancing acquisitions," according to a statement released on behalf of Vukile and Arrowhead.
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Portfolio reconstituted
To establish GemGrow, Synergy’s portfolio will be reconstituted with properties from both Vukile and Arrowhead for its asset base.
In the case of Vukile, a R2.45bn asset swap will see Synergy exchange its entire portfolio of 14 retail shopping centres in return for 29 of Vukile’s higher-yielding office, retail and industrial properties. This will transform Vukile into a specialised retail property fund in South Africa with over 90% of its portfolio comprising high-quality retail assets, according to the statement. Vukile is also expected to benefit from its passive stake in the high-growth new GemGrow.
In the case of Arrowhead, its subsidiary, Cumulative, which holds 100 high-yielding office, retail and industrial properties valued at R1.9bn, will be acquired by Synergy in return for the issue of Synergy B shares to Arrowhead. This will realise Arrowhead’s strategy of placing its high-yielding properties in a separate JSE-listed subsidiary. Arrowhead property portfolio will consist of large quality properties.
Synergy’s asset and property management will be internalised. To achieve this, Synergy will acquire its asset manager, Vukile Asset Management, in return for the issue of Synergy B shares to Vukile.
With Synergy’s A and B share structure, each share offers investors a different risk and reward profile. Synergy A shares offer more risk-averse investors preferential dividends capped at 5% growth per annum, representing secure, predictable earnings. Its B shares make it the ideal structure for investors looking for a higher-growth proposition. After paying dividends to A shareholders, remaining distributable earnings accrue to B shareholders.
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