fountainhead
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Bidding
war
for Fountainhead continues
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Fountainhead Property Trust is the subject of a bidding war between Growthpoint, the JSE’s biggest property company, and Redefine, the JSE’s second biggest. Fountainhead CEO Alex Phakathi talks exclusively to South Africa Magazine.
By Ian Armitage
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s we’ve seen many times within the pages of South Africa Magazine over the last few months, South African property funds are actively looking to add to their retail portfolio. Fund managers want good returns. And Retail is delivering - retail sales in the country rose more than expected last month, perhaps underlining why fund managers are actively targeting that sector. The increasing need and want for retail assets has seen JSE listed property company Fountainhead Property Trust, which owns or has stakes in several shopping malls in South Africa, find itself at the centre of what would be the biggest property transaction in the continent’s largest economy. “As indicated in a number of SENS announcements on 30 January both Redefine and Growthpoint have submitted bids for the portfolio,” says Fountainhead CEO Alex Phakathi. Mr Phakathi was appointed to the role in September 2012, a few months after Redefine acquired the Fountainhead Management Company - a third party type property asset management company, which takes care of the management of Fountainhead’s underlying assets for about R660 million. Fountainhead boasts a property portfolio valued around R10.3 billion and its underlying assets include Centurion Mall, Westgate, The Boulders, Blue Route Mall, Kenilworth Centre and N1 City Mall. “I’m perhaps best known for being the CEO of Pareto, an unlisted property loan stock company,” Phakathi says. “In 2011 I was www.southafricamag.com
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appointed Redefine Properties’ acquisitions and disposal executive and after Redefine Properties acquired the Fountainhead Management Company I was seconded to Fountainhead as CEO.” Redefine, the JSE’s second biggest property company with a market capitalisation of about R29 billion, concluded the acquisition with the intention of gobbling up Fountainhead’s underlying assets. An initial offer was made. “When I was appointed here, in September, I had to step down from all my activities at Redefine to act as a CEO of Fountainhead. Since then I’m not doing any Redefine function, I’m dedicated to Fountainhead work amongst other things, to avoid potential conflict of interests.” In October 2012, Growthpoint, the JSE’s biggest property company with a market capitalisation of about R44 billion, entered the picture, offering Fountainhead unitholders 35 Growthpoint units for every 4
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100 Fountainhead units held, beating Redefine’s existing offer of three Hyprop units and 62.5 Redefine units for every 100 Fountainhead units held. Growthpoint said in a statement that the portfolio would complement its own existing retail portfolio, and would provide it with an opportunity to increase its geographic diversification. “Fountainhead has a high-quality portfolio that is predominantly retail focused, which will enhance the portfolio of any bidder,” says Phakathi. Following Growthpoint’s bid Redefine raised its offer in December and in a statement released in January said talks about its proposed acquisition were “materially complete”. The two companies entered into exclusive talks and they were extended until Feb. 22. But, shortly before a decision was taken (we’re writing this piece on Feb 21), Growthpoint announced it would increase its
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As indicated in a number of SENS announcements on 30 January both Redefine and Growthpoint have submitted bids for the portfolio
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offer from 35 to 37 Growthpoint linked units per 100 Fountainhead units. Growthpoint said Fountainhead unitholders should consider the offers from both Redefine and Growthpoint and choose which offer to pursue. “Fountainhead is a PUT - Property Unit Trust, a collective investment scheme in property which invests in a portfolio of investment grade properties that is held for its rental income and capital appreciation - so our main function is to manage the portfolio so as to grow the distribution to the unitholders, grow the asset value of the property and show sustainable growth going forward,” says Phakathi. “That is really what we intend doing. How do you achieve the sustainable growth in the long-term? You do that by improving the tenant mix, negotiating sustainable rentals, controlling the operating costs, looking at acquisition opportunities, refurbishments and decreasing operating costs, which is a bit of a challenge but that is what we are hoping to achieve. Of course, we’ve had the bidding war, which is most interesting. I started my time as CEO with two big players wanting to acquire the assets. On one hand your mandate is to run the portfolio and it is business as usual and on the other hand you have corporate action that you need to deal with. It has been quite an interesting journey in the last few months. The bidding has been complex, controversial and intellectually challenging!” It has required focus, he says. “That’s vital. I had to make sure that we focused on managing the portfolio. Also the board at Fountainhead have given good direction during this process. It has been quite exciting and informative and I think corporate action like this, it will be the first of its kind in size in the South African property market. “This will be trend-setting for the listed property sector. Everybody is watching to see which way this will go. But, I think, whichever 6
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way it goes, it will set a precedent in the longterm. Fortunately for us, the board of Fountainhead appointed a committee of independent directors and they are dealing with this particular corporate activity so the rest of us are left to run the business without being sidetracked by it.” This focus has seen Fountainhead continue with several major projects, notably the redevelopment of Blue Route Mall. The shopping centre, which is located in the leafy suburb of Tokai, Cape Town, opened in March 2012, but construction continued on the new multi-storey parkade and other minor elements. Phakathi called the redevelopment a “major transformation”. It was an evolution from the ground up, says Asset Manager, Trevor Matthews. “We decided to build a new mall and moved from the old one - which was built in the 1970s - in March 2012,” he explains. “A key part of that was floor area, which we’ve increased considerably, and it is home now to over a hundred of the country’s leading retail and entertainment outlets. It was also about the design, the layout and we’ve focused on those elements. It has been a steady considered process, with extreme attention to detail.” It’s paid off. “I think we’ve not only met the original vision of the project, but exceeded it,” Matthews says.
Since joining there are a few things I’ve focused on, particularly the completion of the big projects that were already underway, such as the Blue Route mall, Bryanston shopping centre and Centurion mall
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Designed by the renowned local architects Louis Karol, the mall may resemble an airport to some but it means the building is naturally lit (owing to the amount of glass used), and a glass viewing deck has been built into the food court section offering uninterrupted views of the Constantia Mountains. The retail line-ups at the mall includes a 9,660m² Checkers/Hyper, a 6,351m² double volume Woolworths, and a 4,093m² Edgars store. “We agreed on the double-level design because of the constraints of the land itself. We’re flanked by residential properties on two sides and a CBD and a main road on the other two sides, so we couldn’t go left or right, backwards or forwards; we could only go up. Because we went two-tiers the idea was to have wider malls, higher shopfronts and obviously lots of natural light - it is based on the Westfield shopping centre in London. It worked out exactly as the architects anticipated.” The additional open parkade area with be completed over the next few weeks. “The response from the public, tenants and the industry has been wonderful. People are excited and amazed by what we have produced here. “Come end of March, we will be a year of trading and as we speak the final touches are being made to the parking which means by April the project will be completely finished.” Phakathi is understandably enjoying his role. “As you know, property is a longterm business which means it is something you cannot turnaround quickly,” he says. “Since joining 8
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there are a few things I’ve focused on, particularly the completion of the big projects that were already underway, such as the Blue Route mall, Bryanston shopping centre and Centurion mall; and ensuring a smooth transition from the previous to the new asset management team. It was important to manage the portfolio properly and maximise what we have. “Also, the new set of asset managers that Redefine has brought on board since buying the management company have introduced a new novel and entrepreneurial way of looking at shopping centres and the letting of the shopping centres. I think through the relationship that Redefine has with big retailers, we’ve been able to assist in
Fountainhead focus property
Because we went twotiers the idea was to have wider malls, higher shopfronts and obviously lots of natural light - it is based on the Westfield shopping centre in London
the negotiation of the leases and we’ve been able to convince some retailers, for example, that they need to expand or refurbish and I think going forward we’ll capitalise on that advantage that relationship that we have with the retailers. To be able to add value to the shopping centres and obviously add value to the retailers stores and create a sustainable shopping centre with a pleasurable environment for the shoppers. Hopefully at the end of the day the unit holders will be seeing the benefit and increasing their property income. “To sum up, if you look at the time that we have had, it’s about five months, the concentration was closing off last year and we managed to achieve the distribution and the income that was promised to the unitholders at the beginning of last year. Also we wanted to be able to complete the projects that had already been started and
lastly, we are currently in the planning stages of different projects in each shopping centre. They range from what I called Defensive projects - refurbishments because if you don’t, you’ll start losing income - and income generating refurbishments and extensions to produce an upgraded environment.” Phakathi must be doing something right – otherwise the JSE’s biggest and best wouldn’t want to buy the trust. “Well, look at it this way, it’s a good portfolio, especially the shopping centres they are some of the best in the country,” he says. “It is undecided how the bidding will go, whoever buys it will have a good portfolio.. It is likely the process may drag out a little bit longer, but whatever the result, if it happens, it will be South Africa’s biggest property transaction. END To learn more visit www.fountainheadproperty.co.za. www.southafricamag.com
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