Acucap was an underdog when it listed in early 2002. With a market cap of R380m, it was small, yet CEO Paul Theodosiou focused on growth in the prime retail property space, an area where Acucap found itself up against far more financially powerful market heavyweights.
Confounding the sceptics, Theodosiou was more than up to the task. Today, Acucap's more than R3bn market cap makes it the 12th biggest property loan stock in SA, and its income-distribution record ranks it in the top quartile. Based on its interim results to September 2006, in which distribution rose 15,5%, Acucap has grown distributions at an annualised 9,7%/ year, and appears to be well within reach of a promised 10%-12%/year average growth rate between its 2006 and 2009 financial years.
Distribution growth sustainability - often termed quality of earnings - should be a key factor when considering property investment and, says Theodosiou, is uppermost in Acucap's strategy. However, he questions whether this view is shared by some other industry members. For instance, a growth-kicker for some funds is the distribution of share trading profits, or the use of such profits to retire debt. "This lowers the cost of capital, but only produces a one-off shift in the growth rate," says Theodosiou.
Another important impetus for income growth in many portfolios has been declining vacancy levels. Acucap has not enjoyed this advantage, as vacancy levels in its portfolio have always averaged about 2% in terms of rental income since listing.
A permanent feature that enhances Acucap's distributable income is a policy of internal asset management which, says Theodosiou, costs about half that of external management. In the year to March 2006, for instance, Acucap estimated cost savings at about 6c/unit, or 3,6% of its income distribution.
Acucap is also seeking ways to reduce the cost of capital, says Theodosiou. Securitisation is a possible but quite costly route, and other options are being pursued.
The quality of Acucap's earnings derive from a high-quality portfolio. Its flagship property is Festival Mall, a regional shopping centre of almost 79 000 m² in Kempton Park, which is valued at R793m and is one of SA's top 10. Second in line is the 48 000 m² Keywest Shopping Centre in Krugersdorp, valued at R492m.
"I would like five retail properties like these," says Theodosiou, "but availability of suitable stock is limited."
To some extent, Acucap countered this problem with the acquisition of 33% of Cape Town-based Atlas Properties in October 2006 for R331m. Atlas brought with it exposure to a number of top shopping centres and an ambitious grassroots development strategy.
But though Acucap's focus is on retail, which produces about 70% of rental income, diversity is also paramount, says Theodosiou. "At present, we are concentrating especially on growing our distribution-focused industrial property holdings."
A small portion of Acucap's portfolio, industrial properties, produces about 9% of total gross rental income. This appears set to grow as two major projects being undertaken in partnership with developer Improvon come on stream.
The first, in which Acucap holds 20%, is being developed on 38 ha in Midrand bought for R98m. When completed, it is expected to be valued at R700m-R800m. The first tenant has been signed up, with a second due to follow, says Theodosiou.
Of the second project, a 61 ha site in Cape Town bought for R260m, he says: "We have big plans that include retail space." Acucap has a 25% stake in the venture, which he says will probably be valued at more than R1,5bn on completion.
A major attraction of the site, which is situated in Milnerton, is that it is zoned and fully serviced, says Theodosiou. The alternative, a "green-fields" development, faces significant delays in acquiring zoning approval and installing services. "We have already been offered significantly more than we paid for the property," he adds.
Though Theodosiou does not set a target for Acucap's ideal size, he gives some indication: "To be a relevant player, a market cap of R4bn is the minimum." Could Atlas be a buy-out target for Acucap? He's not saying, but it would be a great fit, bringing together two very similar management styles.
Theodosiou remains upbeat about the prospects for the property industry, and sees it as vulnerable primarily to outside shocks such as last year's emerging market sell-off. But the industry does face challenges stemming from SA's stretched infrastructure.
Building costs are, for example, rising at up to 25%/ year, and big delays are experienced in getting approval for new developments. But, he says, there is an upside to this: "It pushes up the value of our properties".
