At the time of writing, MAS Real Estate – also known as MAS – was trading at R21.88 on a yield of 3.34%. MAS is currently trading at a ~13% premium to its net asset value per share (NAVPS) of 118.5 euro cents (~R19.35 if converted at spot). An interim distribution of 2.27 euro cents was announced recently. Future growth is expected due to the completion of hotels and retail units at New Waverly, continued acquisitions of accretive income producing assets and the presence of a positive spread between cost of funding and yields of properties acquired.
When analysing the investment case, it’s important to note that MAS is in a ramp-up phase due to the nature of its business activities, as it manages both income-producing properties and development properties. The income-producing properties provide contractual cash flows while the property developments offer additional return, albeit quite lumpy in nature.
MAS’ inclusion into the JSE SAPY index has boosted liquidity and diversified the shareholder base. MAS’ loan-to-value ratio (LTV) is currently low at 4.6% relative to the sector average of between 35-40%, which provides scope for management to expand the portfolio. Management has also been successful at concluding favourable deals with banks to secure low funding at an average cost of 2.5%. Management has proven that they are more than capable of not only sourcing but also concluding deals efficiently in a competitive environment. MAS recently concluded a €56m acquisition in Germany for a portfolio of 20 buildings with strong tenant covenants and attractive yields.
The direct property portfolio, which includes properties in the UK, Switzerland and Germany, has performed impressively Average gross rental yields of 7.5% with a weighted average lease to expiry (WALE) of 9.3 years across the portfolio. MAS’ listed investments in Karoo and Sirius have both performed well. Karoo Investments was fully redeemed as expected in January 2016, giving €2.6m in cash and 64.5m in-specie Sirius shares. This increased the stake in Sirius to 12.1%. Development activity continues as scheduled with the following notable milestones: New Waverly, Edinburgh (Phase 1) is close to completion and will begin phase 2 thereafter; planning for North St Quarter, Lewes, England, has concluded; planning for Langley Park, Chippenham, due to begin in 2016; planned development pipeline of €210m (~€120m for New Waverley phase 2 and the remainder to planned German assets).
Management recently announced a joint venture (JV) with Prime Kapital (previous management team of New Europe Property Investments) to explore developments and acquisitions in Central and Eastern Europe. The JV will increase MAS’ property exposure across the wider European market. Prime Kapital, as the general partner, has committed to invest an initial €30 million for ordinary equity in the JV, for a 60% equity interest. MAS has committed to invest an initial €20 million for ordinary equity in the JV, for a 40% equity interest, and has committed to invest an additional €100m in the JV, with an option to invest a further €100m. The additional funding will be by way of subscription for preference shares to be drawn down by the JV over a four-year period. We have a high regard for Prime Kapital’s management team, who are experienced and knowledgeable within the targeted geography.
In summary, management continues to deliver on their stated strategy by bedding down developments and deploying raised capital efficiently. The recent acquisitions going into Germany are accretive to the company’s bottom line and highlight that management are taking full advantage of the positive yield spread present in selected markets. As mentioned earlier, the new JV set up with Prime Kapital has great potential. Placing MAS on a calculated exit yield of 3.16%, we calculate a target value of R25.67.