Vukile Property Fund Limited (VKPPF) Earnings Call Transcript & Summary

Great. Excellent. So good morning, everybody, and thank you very much for taking the time to join us. There have been a number of announcements from us over the last couple of weeks, and we thought it would be a good opportunity to actually have this investor call to talk through the various transactions and explain what it is that we are doing and how these moves fit together. So really, there are 3 things that I'd like to talk about today. Number one is our capital rotation strategy in Spain, and that's specifically the sale of our retail parks, which you saw announced a few days ago. Then yesterday, we announced the purchase of a new shopping center called Bahia Sur. Then the second thing is I'll talk about our stake that we recently acquired in Pradera, which we see as a very important strategic move for us. I'll give a brief update on some asset rotation work in South Africa as well. I'm not going to be talking about a trading update. We will be issuing a trading update on Thursday this week, covering trade in South Africa, Spain, and Portugal. And just to say that we are very happy with trading in all of those markets, but we'll unpack that in detail in our announcement on Thursday. So please keep a look out for that. So let's start off with our capital rotation strategy in Spain. We decided to sell our portfolio of retail parks. You'll recall that those were the initial assets that we bought when we entered Spain in 2017. And Alfonso and his team have done a tremendous job in growing the NOI in that portfolio by around 23% -- 26%, sorry, over that period. And what we are finding in Spain as in elsewhere in Europe is there is a very strong interest in retail parks or institutional investors, and we think the real reason for it is because the yields on industrial assets are very low. Retail parks generally are sort of much lower intensity to manage. Sorry, if I could ask everybody just to go on to mute. Thank you. Retail parks generally are sort of less intense from a management point of view. And therefore, we're seeing a lot of institutional demand coming in for retail parks where they can buy assets that have got: A -- retail characteristics; but B -- industrial characteristics of not sort of requiring the kind of management expertise that's needed. And as a result, we've seen pricing tighten on the retail park portfolio. And we felt that this was a very good opportunity for us to exit the assets and be able to rotate that capital into what we believe are higher growth opportunities in shopping centers that we feel are sort of really showing a lot of growth potential in the Spanish market, I think being able to leverage off our expertise in Castellana and adding value to assets. And I think many of you are well aware of the value that's been added. So we've been on the lookout for assets that meet those criteria and very good entry price, solid assets trading well, but perhaps where there is upside potential through value-add asset management, which Alfonso and his team are so adept at doing. And therefore, we entered into the transaction. In fact, we were initially looking to sell only 2 or 3 of the retail parks. We got reverse inquiries for the sale of the entire portfolio. And in the end, decided to conclude a deal with Ares, who coincidentally with the party that we bought the assets from in the first place, and they've now bought them back from us. What's very exciting about the deal is, I think, recognizing Castellana's expertise in the local market, they've asked us to continue managing that portfolio, which we will do so. That will obviously bring in some additional fee income for us. Please, that's not to be read as a change in strategy of us now looking to get into third-party asset management for Castellana. That's not the case. But this is to be seen in the context of part of the overall deal of selling. So we've sold the portfolio for EUR 279 million, and that's in line with the most recent values from Colliers. The transaction is on a yield of 7.1%. The effective date of the transaction will be April 1. And therefore, there is no impact on the forecast that we've given out for FY '26. This goes into the new financial year. So from a modeling point of view, don't look to make any changes to your FY '26 forecast because the sale of these assets will not affect them at all. The proceeds from the sale, together with the proceeds from the capital raise that we did in October last year, together with cash resources will then be almost immediately redeployed into new assets. So the first of that is a center called Bahia Sur. I'll just give you the high level and then Alfonso maybe come in later to give you more detail about the center. But it's a center that we bought for EUR 108 million on a yield of 7%. That's in the north of Spain in Logrono, La Rioja. That gives us some exposure to the north of Spain and we felt that, that was also good to get from a geographic diversification point of view in Spain overall. It's an asset coming from Barings. It's one of the stories that you've heard us go through very often before, buying from a private equity seller. The asset, I would say, performs well. It is absolutely dominant in its catchment area. And we've been obviously to see all the various centers around them, none of them can compete. And really, we still feel a very under-managed asset and that with Alfonso and his team's expertise, we'll be able to take that asset to a new and high level. So very, very -- it's a very strong asset. You've got all the key tenants that are there. We've got the key brands of Zara, Primark, MediaMarkt. It does have a Carrefour supermarket, which we don't own. They own that themselves. But we think there's a lot of opportunity to add in food and beverage and more entertainment into the center, and that will sort of really, really strengthen it. So you can see on the one hand, we're selling assets on a yield of 7%. We have recycled into another asset of 7% with higher growth potential. In addition, we get the management fees coming through from the management contracts. So you can see an element of accretion coming through there. And then just to say that there are other transactions that are at a very advanced stage, which will be announced in due course. And all of the next transactions, in other words, again, Berceo plus the next couple that are coming along are already prefunded. So to absolutely stress and be clear, there is no need for further funding. The funding is in place for all of these assets. I think the question often that gets put forward is when it comes to asset rotation, will there be any slippage of income? And I think we can confidently say not only will there not be any slippage, but there will be accretion from the deals that are being done at the moment. So if I just run through it again, the sale of the retail park portfolio effective April 1, so no impact on FY '26. Berceo is effective from the 1st of February. So yes, you should be including your income for the months of February and March in your forecast, and that's a 7% yield on EUR 108 million purchase price. And then the other deals will be announced in due course, and you'll see the announcements there, which will hopefully swell that all out for you. So really, I think this is to be seen in the context of active asset management, asset rotation strategies, which I think has really been the hallmark of Vukile over the years. For those real long-standing Vukile followers, you'll recall many, many years ago, Vukile was a diversified fund with retail, office, and industrial exposure. And really through the natural process of our asset management, the annual underwriting of the assets, we are ready forever buying and selling assets and hopefully taking assets and cash always to its highest and best use, and that is what we've done in Spain. I think what you'll find is that in the not-too-distant future, our portfolio value there is going to start topping EUR 2 billion. So sort of really just further entrenching our dominance and commitment to Spain, which is really one of the hottest markets in Europe at the moment. So that is sort of really the first issue that I wanted to go through is the asset rotation strategy. We are very excited by it. I think it sort of shows the maturity of the Castellana portfolio. Also when it comes to rotation, remember, the proceeds from Lar Espana were redeployed almost immediately into Bonaire. That center is trading very well. So really, what we're demonstrating is our ability not only to recycle assets, but recycle the assets timelessly and ensure accretion and not have any slippage as those deals are taking place. The second deal that I'd like to talk about is our stake in a company called Pradera. That was announced a couple of weeks ago. And this is sort of one that is very, very important for us from a strategic point of view. Financially, it's not a large transaction. A little bit of background around the deal. Pradera is a business that has been in existence for 25-26 years. They are a specialist pan-European retail asset manager. We have a long history going back the Alfonso and his colleagues used to work at Pradera. Alfonso was, I think, for 11 years and then joined us from there to start Castellana. So in a sense, this is sort of the extended family getting back together for a celebratory meal. But Pradera has a tremendous track record in what they do. The founder of the business is a gentleman by the name of Colin Campbell. Colin sold 49% of the business a number of years ago to a business that then merged with an American fund management business. That business got into trouble, I think, is in liquidation. And per Colin's initial shareholders' agreement was able to buy back the 49% stake in that business. Colin wanted to bring in both the management team as shareholders as well as a partner that could bring a bigger balance sheet to potentially one day take him out when he chooses to retire. So we've started off with an initial 35% stake. The senior management team led by the CEO, Rhys Evans; the Chief Investment Officer, Barry Cox; the Head of Europe, Roberto Limetti; and Non-Exec Director, Rob Evans, have bought collectively 14%. Obviously, all of us have come in at the same price. I'm not going to be able to disclose the pricing to you because this is a private deal. All I can say is that our stake is -- cost us well below ZAR 100 million. So not material from a financial point of view there. We do expect a little bit of accretion from it, but I really would not be modeling that if I were you into the numbers. So the question then is why did we buy it? And the answer really is we bought it for strategic optionality and to create capacity for further growth that we may want to explore in other markets in Europe. So Pradera is a business that manages about EUR 5 billion in assets under management. They are managing on behalf of 60 investors. They've got a presence in 10 countries, and they've got -- and this is the most important point, they've got 100 staff members, retail experts operating in country. And that means that if we look at other countries, we look at them on the basis of hopefully having now access to superior knowledge and access to teams on the ground that can then start managing the assets on our behalf. I think what that does is significantly derisk any expansion strategy that we may have going into new markets because where I think we've excelled in our Spanish expansion is by building a team on the ground. And I think we sort of really are big believers that by having locals who know the players, have deep relationships, know the nuances of the markets, you just end up with much better outcomes overall in terms of asset management. And I think our track record in Spain and Portugal speaks volumes to that strategy. What we've done now is buy ourselves the capacity and ability to enter other markets on that basis. Now having said that, I can assure you that we're not looking at multiple markets to enter. We're evaluating multiple markets. At this stage, we still are thinking which are the right ones to enter into. But most importantly, we're doing it now with the team on the ground, and that is tremendous. Also through the Pradera relationship, we think that we'll get deal flow. But when you look at now what Pradera together with Castellana means is that we probably are one of, if not the premium intellectual capital home for retail in Europe. And that's not only in terms of deal flow and what's happening, but in terms of actual on-the-ground asset management capability and expertise. So the ability to drive synergies in terms of thought processes, learnings, understanding of markets, tenant relationships between Pradera and Castellana is now tremendous. So you can see that there's a tremendous amount of enthusiasm from our side around the strategic capabilities and importance of the Pradera deal, which sets us up not only for further growth, but on a derisked basis as we look into other markets in Europe. Then finally, just briefly to touch on some South African asset rotation as well. In December, we bought 50% of Chatsworth Center in KZN. Sanlam owned the remaining 50%. That was on a yield, if I recall, around 8.5% or 8.6%. Very, very strong center, very well known to our management team, and we believe some upside from an asset management point of view there. We also sold the Midrand Ulwazi building, which was one of our last remaining office assets. So that sort of really comes down. We're on the verge of signing another shopping center in South Africa. That will hopefully be signed in the next week or 2. That is an asset that fits perfectly within our portfolio of Township retail. And there equally are a few smaller sales that are currently on the go. So really, what you're seeing is the ongoing rotation of assets within the Vukile Castellana environment is always a part of our strategy. It continues, and it's about redeploying that money into accretive opportunities in South Africa. Often, we can recycle that money into our solar and sustainability strategies, which generally carry mid-teen yields. So I think you'll find that, that money also gets redeployed on an accretive basis. So I think with that, let me perhaps pause for a moment and take questions from the floor. Please just -- if you can put your hand up and Marijke, if I could ask you, please, just to coordinate the questions from who's next, and we'll try and answer them.

Are there any questions? Marijke, I see you still on mute.

No questions so far, Laurence. We've got Luqman; and then after him, Alistair. Luqman, you can go.

Can you hear me, Laurence? Okay. I can't hear you, Laurence. Just on the...

Sorry, I'm off mute now. Sorry, apologies. I was on mute. Luqman, I can hear you.

Thanks for the call and giving us more info on the deal flow. I just want to clarify something. So if I back solve for the 8.6% yield on cash on the Berceo deal, it comes to sort of odd number in terms of the net finance charges in terms of what the implied sort of cost of funding is on that number, closer to 5%, which I'm assuming is incorrect. Maybe you can just give some color on what's happening between the sort of NOI line and the sort of net yield on that investment? Is there some other costs that we're not aware of? Or is the cost of financing potentially higher than the 4%, sort of mid-4% that we've been seeing of late?

No. The cost of finance -- Omar, have you got the exact figure on that one, or Alfonso?

Laurence, it's about 4.7%, if I'm not mistaken. That's the all-in cost, yes. You are on mute Laurence. Laurence, you are on mute.

Yes. Sorry, I'm not sure, Marijke, it keeps muting. I don't know why. I'm not touching anything. Can you just -- I don't know if there's a setting that's doing that. Luqman, can I just go through the question? You're saying if you take the yield of 7% on the purchase price, you then add in the debt at 46% at a cost of, say, 4.7%, you're not getting to the 8.6% cash on cash.

No, I'm obviously getting to a potentially higher sort of yield on cash unless I imply a higher cost of debt. And so I'm just trying to work out the mechanics of that.

You've got some transaction costs in there. I don't know, Alfonso or Omar, if you guys want to comment on that?

Omar, probably you've got the feeling of the final number better.

No, there will be transaction costs definitely, and there will be some corporate costs as well. So it won't be -- it's not just no less cost of debt. There's a little bit of cost in between.

Just sort of year 1 transaction costs that are impacting the lower cash and cash yield in year 1, then.

Probably there is always -- Luqman, there is always an assignment for the possibility of the team growing as well and other expenses related to the assets. So normally, we apply into our models a bit of corporate costs as we call it, something between -- help me here, Omar, because I mean, I think that we have used 50 bps of GAAP on that...

Between 25 and 50 bps. Yes.

25 to 50, yes.

Alistair?

Alistair, you can go.

Yes. I just wanted to ask you, guys, firstly, well done on the deals. How many malls are you expecting to potentially buy, I suppose, locally and in Iberia this year? I mean, is it quite aggressive just from the press release, you said a strong pipeline of deals, just getting some kind of idea of the scope of what's going to happen because I mean the fund is growing quite fast now being the third biggest in...

So Alistair, what's currently in the active pipeline in Spain is another 2 transactions, both at very far advanced stages. So the team are busy on that. In South Africa, there is the one transaction specifically that I just mentioned, which is very close. And then -- and that's sort of what I would call the active pipeline, have another 3 deals: 2 in Spain, 1 in South Africa. Thereafter, we're always active in the market, always looking at opportunities, et cetera. But the current active pipeline is what's funded and what we're busy working on at this stage.

Linda, you can go next.

Quick questions. First one is I just want to clarify the retail park portfolio was 9 retail parks. Is that correct?

Yes. Correct.

Okay. Does the sale have any impact on your offshore exposure?

No, because remember, that money is going to be recycled into the new assets. So I think what you will see is that the amount of cash offshore, in fact, will increase because when we take the other deals that, again, are not yet finalized, but are advanced. So assuming those finalized, the net exposure will increase to that extent. So yes, work on it increasing slightly, but not decreasing.

We have one from Ridwaan.

Laurence, quick question from my side would be around just understanding the size of the deals going forward and where the balance sheet is. So if you're looking at proceeds and then the capital raise, cash resources, is it safe to assume that the 2 potential deals in Spain would be looking at around EUR 100 million each? And then given if you're spending on that in the SA, the size quantum would be between EUR 500 million to EUR 1 billion?

No. I think, Ridwaan, I'd rather not comment at this stage on the deal size. The South African one, I'm happy to comment on. No, it's below EUR 500 million that I will tell you. But I think the Spanish deals are still obviously under confidentiality, et cetera. So I don't think it's appropriate for me to be commenting more on the size of the deals. But it is simply safe to say that we are tremendously excited about the 2 prospects that we're working on and think that they are great centers. More information will come out in due course as and when those deals close. But at the moment, I think don't make assumptions until that information is out to be my best advice. I think, again, if I know that a lot of the sell-side guys, particularly want to build their models. But guys, just wait, there are a lot of moving parts, but I can tell you that the moving parts, in my opinion, all add up positively. I think that's what we've demonstrated here on the sale of the retail parks, the purchase of Berceo, the management fees coming in and maybe let me preempt the question as to how much we're going to earn on the management fees. So we think that the management fees net of costs, okay, because obviously, we're going to hire 1 or 2 more people to handle that, net of costs should bring in about EUR 1.2 million per annum as fee income to Castellana.

So the management fees related to the retail parks or to Pradera?

No, that is to Castellana on the retail parks. And again, my best advice on Pradera is don't factor anything into your models in terms of income from Pradera. Pradera is there to unlock strategic capabilities for us. It will wash its face. It will give us a small little income from it, a bit of accretion. But in the scheme of Vukile, it's not a material number at a profitability level. This is very material in terms of strategic capability and what we do from here on.

Then lastly, the question is regarding, can you comment on potential yields that you're seeing in the SA and Spanish market, not specifically related to these transactions, but what you're seeing on the ground?

So I think that's a very important question. Look, there is definitely a growing interest in retail. Funnily enough, not only in Europe, but around the world. I was listening to a podcast, in fact, just this morning from AEW. And the third -- their top asset picks are senior living, data centers, and retail -- which is really, really interesting. Now what that's telling us is that -- and we are seeing it on the ground, there is more money starting to look at retail assets in Europe, not only in Spain and Portugal, but other markets as well. So we sort of feel that there is still a very good window of opportunity to buy assets at good prices. But that is going to start closing. And I think you're going to see yields coming down. I think in Spain, you already have seen that contraction taking place. We continue to see good interest in the market. So I think yields are sort of starting to trend a bit downwards. Obviously, that has very positive implications for the assets that we bought last year. Last year was -- we call it a bit of a watershed year, a transformational year in terms of the purchase of Bonaire and the 5 assets in Portugal. We think we should start seeing good growth in valuations coming through from those as more transactional evidence has started coming through in the Spanish market. So we have seen yields trading at around 6.4%, center trading at 6.4%. And I think that's probably a good indication at the moment of where demand is. We haven't seen any pricing yet going sub 6%. So I would say your prime assets that are probably sellers expectations around 6% to 6.5% and buyers' expectations are probably 6.5% to 7%. I would say, Omar, in my mind, that probably summarized. I don't know if you'd comment differently on what you're seeing on the ground.

No, Laurence, I think you summed it up quite well.

Then Ridwaan, the South African market, we often get the question of do we have appetite to buy more assets in South Africa. So I'll be very clear and unequivocal. The answer is absolutely yes. We have a very strong appetite to buy more assets here. I think you've seen the excellent work that Itumeleng and his team do in managing those assets. And we'd love to find them if there's a turnaround, for example, like BT Ngebs, that's been a tremendous success story for us. So we've got a strong appetite. The problem we're finding in South Africa is there isn't much stock available for sale. And no, we don't want Hyde Park given that, that sale has now fallen through. It's not a center for us. But we are looking to keep trying to grow in our core market. We have one that's being lined up now, and we are actively thinking of ways to try and find more stocks. So if anybody has ideas, what I'm doing now is putting up the flag saying we're open for business, please bring us opportunity if you would like to grow further in SA as well.

Last question, just regarding on Pradera and potential new markets. Last we talked, we're looking at places in the Sun. Is that still the case?

Ridwaan, I know you're a bit soccer fans. So we really try and look at good football leagues and then we follow...

Either U.K., or Italy?

I would say that there are a number of markets that we are exploring at the moment. I think what it does now -- and that's not a surprise. We've spoken about that for a while. What now happens is that there is a tremendous overlay that we can put on the analysis of what we're doing, which is to say how much on-the-ground knowledge do we have that we can tap into through our Pradera colleagues and where do we have Pradera teams that we feel that we can then go and back and look to drive further growth. So markets where they have good presence, the U.K., Italy, Germany, France, all of those markets is where they have a presence. They're managing assets as well in Poland. They've got one in Turkey. All of that is on the Pradera website, you'll be able to pick that up as well. So a lot of that overlaps in the markets that we've been doing some homework on.

Okay. So you said soccer, so I guess you're going to be selling your -- you're not looking at Madrid or selling assets in Madrid.

Omar, you want to take that question?

Got Four teams in Madrid...

But they didn't make the champions league qualifications.

Great. Any other questions?

Laurence, it looks like we have a last question from Suren.

Suren?

I think Ridwaan asked it about potential markets outside Iberia within the context of the Pradera deal. So yes, I think we covered. Thank you.

Great. Thank you, Suren. Okay. I think that's it then from our side. Maybe just to summarize, asset rotation, always a key part of our strategy. I think what we have demonstrated is an ability not to get emotionally attached to assets. When the time is right to sell assets, we do. I think we've equally demonstrated our ability to redeploy the money. Most recently, I think the Lar Espana to Bonaire example is there. We've now seen retail parks into Berceo and there will be some other deals coming shortly that we are hopefully finalizing. And obviously, to do that on a basis where there is no dilution, but certainly looking for accretion. And I think that we have achieved all of that in what we have on the table at the moment. And then really just to say that in order to fund our existing pipeline, which is the next 2 deals in Spain plus the South African one, there is no need to raise equity. We have all the required equity available for that. And we continue to look for new opportunities to grow. We think this is a very exciting time in the markets. I think we've been well ahead of the curve in terms of our retail exposure. I think we're starting to see more investors getting into that space. So I think that all goes well for our business. And certainly, it feels as though there are now tailwinds behind not only real estate, but retail real estate as well that we can take advantage of because of our track record, because of our presence and so on. So we sort of are looking at markets in a way to try and get that done. Again, happy to take any questions. If we finish on the call now, always feel free to give me a shout directly and happy to try and answer any questions you may have. Great. So I think we are done. Thank you all for your attendance. Really appreciate it and wishing you a great week ahead. All the best.

Thank you very much, Laurence and team. Have a great weekend. Bye.