In a deal which catapults the fund onto a entirely new level, Tower Property Fund has purchased four retail centres in Croatia from Agrokor - the largest company in the Adriatic region. Tower now has an asset value of R5,2bn. When listing on the Johannesburg Stock Exchange in July 2013the fund had an asset value of R1,6bn.
This Euro 66m deal (R1,1bn at the current exchange rate), Tower’s largest acquisition to date, has increased the funds’ offshore asset exposure to 31%, whilst restructuring its debt exposure - with 70% of Towers debt now being held in Euro with a fixed interst rate for five years. This results in Tower moving a large percentage of its debt exposure away from South Africa’s macro-economic conditions where growing interest rates are anticipated along with increased market volatility.
The portfolio comprises of four quality shopping centres all anchored by Agrokor’s affiliate, Konzum d.d. - which is similar to South Africa’s Pick n Pay in being the largest retailer in the region with the dominant market share in Croatia, Serbia, Slovenia, Bosnia, Herzegovina and Montenegro. Two of the properties are known as Super Konzum’s, which are similar to the South African Hypermarkets and the other two are convenience shopping centres with strong line shops including H&M, New Yorker, DM, Mueller and others.
Marc Edwards, CEO of Tower, advises that the retail centres have been purchased on a sale and lease back agreement under a triple net head lease, meaning that Konzum (guaranteed by Agrokor) will be paying the full rentals for the properties, including line shop tenants, and covering all property related costs.
“Konzum has a 12 year head lease over the properties (guaranteed by Agrokor) which dramatically reduces Tower’s risks and aligns the fund with the strongest company in the region, which certainly has its benefits. The lease escalates with inflation and has a turnover clause built in, meaning that if Konzum grows its turnover, Tower grows its rental -which is important in a country where low inflation prevails. Should Konzum achieve the turnover they have historically done in these properties, Tower’s head lease should escalate at between 4% and 5% per annum.”
A number of South African Real Estate Investment Trust’s have announced their intention of acquiring properties in Eastern Europe of late. Some analysts are skeptical of this approach as management teams find themselves thinly spread with no particular expertise in a new jurisdiction. Edwards is confident in Tower’s approach saying that Tower has been on the ground in Croatia since the beginning of 2015 and has built up entrenched in-country contacts.
“Most importantly we have formed a partnership with the VMD group, a well-respected local developer who we met through the acquisition of our first Croatian property, the premium grade office building, VMD Kvart, Block B. Tower has an equity and management partnership with VMD on this property which has proved invaluable in our introductions to the market participants in the country”.
“Coupled with this large acquisition, Tower has also internalised its management company – a move which is in line with the international best practice of having management and share holders completely aligned – preventing any possible conflicts of interest,” says Edwards, who further explains that Tower’s management team stays consistent and that the company believe that this change can allow them to continue to grow sustainably.
“Tower remains a South African focused fund but will continue to focus on Croatia and the Balkan region for the foreseeable future given our strong partnerships in the country and the greater area.”