Attacqing a recovery

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Attacqing a recovery

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Published Date: 2021-09-15 | Source: INCE|Community | Author: The Finance Ghost

Attacqing a recovery

I prefer to get my disclaimers out the way early, especially when I like a company. Attacq is the only REIT that I hold in my portfolio. That's not to say that there aren't other good choices; I just like Attacq's Waterfall strategy and where the share price has been sitting.

The company has released its results for the year to June 2021, so naturally I had a proper look.

Attacq has clearly felt inspired by Facebook's use of terminology like the Metaverse, with retail spaces now called "retail-experience hubs" and office spaces referred to as "collaboration hubs" - the creativity ran out for the logistics properties though, simply called "urban logistics hubs."

Unfortunately, distributable income from MAS also ran out. Attacq's investment in the Eastern European property fund had a nasty impact on distributable income this year, which dropped 35.9% to 46.8 cents.

Importantly, Attacq has reduced its shareholding in MAS from 20.7% to 6.5% and used the proceeds to reduce debt (gearing has decreased from 45.7% to 43.3%). MAS has declared a dividend subsequent to Attacq's year-end, which will be paid in September 2021.

I'm enjoying the trend on the JSE of companies focusing on their core competencies. Diversification vs. diworsification is an important debate at the moment.

The jewel in the crown is Waterfall City, which they can call a Waterfall Hub or a Hubbly Waterfall or whatever else the management team decides. I couldn't care less, because distributable income grew 30.6% to 33.3 cents per share. The other South African investments delivered 16.8 cents per share, with South Africa up 22.5% overall.

The loss of 3.3 cents from MAS and the Rest of Africa was the downer at the party. Attacq intends to exit the remaining investments in Rest of Africa (which aligns with the strategy of its co-investor Hyprop) and I'll be happy to see them go.

Attacq provided rental relief of just under R80m in this financial year, down from nearly R114m in the comparable period. The relief has been focused on restaurants, entertainment clients and gyms. You know, all the stuff that helps us have fun.

Including vacancies filled after year-end, the portfolio occupancy rate is 96.0% vs. 94.2% a year ago. Impressively, the office portfolio (I mean the "collaboration hubs") was 91.7% occupied at 30 June.

Rental reversions have been the problem in property funds, with expired leases being renewed at hefty discounts. The impact is particularly scary in the office portfolio (I've decided to ignore the silly name), with a 57.8% client retention rate (ouch) and reversions of -26.6%. Those who did stay have signed much cheaper leases.

In my view, the reversion rate is where to focus over the next year. If demand picks up for property, the reversion rate should improve considerably.

Attacq still has sizable land available for development in Waterfall City (1,069,106sqm of the stuff) and can tweak it to meet post-pandemic trends. For example, there will be further investment in light industrial properties which are in vogue. Residential property sales are going well, which doesn't surprise me in the context of the overall attractiveness of the district.

One of the completed developments in the past year was a Courtyard Hotel for City Lodge. The hotel company noted in its recent results that the property is performing well.

The balance sheet value of investment property is just under R17bn, of which only R1.4bn relates to developments under construction or leasehold land. A negative fair value adjustment of R1.5bn has been recognised on the properties, which doesn't surprise me based on the reversion rates. This is a major contributor to net asset value per share dropping 4.3%.

Attacq has not declared a distribution to shareholders for the 2021 financial year. A distribution will need to be paid by no later than 31 October 2022 for Attacq to retain its REIT status (which the directors will almost certainly protect).

The NAV per share is R16.28. The share price is now R7.00.

After two years of pain, I'm quite happy holding this company at a 57% discount to NAV. Year-to-date, the share price is up over 34%.

Disclaimer in case you skimmed the first paragraph: I hold shares in Attacq.





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