Property funds agree on transaction

Listed property funds Vukile, Arrowhead and Synergy have achieved broad consensus on proposed transaction that will result in Vukile becoming an almost exclusively retail fund.

Johannesburg - Listed property funds Vukile, Arrowhead and Synergy have achieved broad consensus on a proposed transaction that will result in Vukile becoming an almost exclusively retail fund and Arrowhead using Synergy as a vehicle for implementing its strategy of a separately listed high-yielding, high-growth fund.

The proposed transaction follows Synergy last year becoming a subsidiary of Vukile, which owns 65 percent of the fund.

Asset swop

It aims to create an initial R4 billion fund within the existing entity of Synergy that benefits from Synergy’s A- and B-unit offering and whose new asset base includes properties from both Vukile and Arrowhead. Synergy A units offer more risk-averse investors secure and predictable preferential distributions capped at 5 percent growth a year while the B units receive the balance of the earnings.

In an asset swop, the bulk of Synergy’s retail assets will move into Vukile, while Vukile will inject the majority of its office and industrial assets into Synergy. In addition, Synergy will acquire 100 percent of the shares in Cumulative Properties, a subsidiary of Arrowhead that will house its portfolio of higher-yielding retail, office and industrial properties, in return for the issue of Synergy B shares to Arrowhead.

Arrowhead is expected to hold about 65 percent of Synergy B units and Vukile about 25 percent.

Arrowhead will also have an active management stake in Synergy and provide its expertise in managing portfolios designed for strong growth and higher yields to the fund.

The proposed transaction is intended to revitalise Synergy and result in renewed interest and tradability of its currently illiquid units with its asset management being internalised and staffed by a dedicated management team provided by Arrowhead.

Laurence Rapp, the chief executive of Vukile, said yesterday that the proposed transaction would further their goal of transforming Vukile into a leading retail real estate investment trust.

If the transaction proceeds, more than 90 percent or R11 billion of the R12bn of physical assets in Vukile’s portfolio will be retail assets with Vukile also benefiting from its passive stake in the reconstituted Synergy.

“Retail has been the most defensive property class through the cycle and is investors’ most preferred sector. Four years ago, retail property was 54 percent of Vukile’s overall portfolio. We’ve now grown this to around 70 percent.

“Should the transaction go ahead as envisioned, this will increase to about 92 percent,” he said.

Yield-enhancing

Mark Kaplan, the chief operating officer of Arrowhead, said the proposed transaction worked well for everyone and would realise an important part of Arrowhead’s strategy to move its smaller properties into a separate fund, as originally intended with Cumulative.

“We’ll be able to focus on bigger and better quality properties for Arrowhead while keeping exposure to smaller properties with good strong growth and high yields in an income fund,” he said.

Kaplan added that the vision for Synergy was to be income-focused and to only undertake yield-enhancing transactions that grew sustainable earnings and they still saw huge opportunity in smaller properties valued from about R20 million to R75m.

“Most listed property companies aren’t competing in this niche space where Synergy will look to build its high-growth, high-yield fund,” he said.

The final terms of the potential transaction still need to be negotiated and approved by the boards of the transacting parties and Synergy shareholders.

Shares in Vukile dropped 1.41 percent yesterday to close at R16.06 while Arrowhead shares gained 1.14 percent to close at R7.98. Shares in Synergy’s A shares last traded at R11.80 and the company’s B shares last traded at R7.25.

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