Emira’s US push gains transaction
Instead of following the crowd to Eastern Europe, Emira is spreading its wings to the land of the brave, writes Alistair Anderson
While most other South African property players have in recent years targeted countries such as Poland, Bulgaria, Romania, Germany, the UK and Australia for their offshore expansion trails, Emira Property Fund is the first local real estate investment trust (Reit) to venture into the US – the world’s largest commercial real estate market.
Emira CEO Geoff Jennett spent a couple of years trying to find the right jurisdiction for its off shore strategy before choosing the US, where it has made an initial investment of R300m.
The company felt that Eastern Europe, where a number of its peers have entered over the past three years, as well as Western Europe, Germany and the UK, was too competitive.
Jennett also considered raising Emira’s exposure to Australia, as it already owned a portion of Growth point Australia, which is listed on the Australian Stock Exchange.
But he realised that the US was the one place where other South African property companies had not entered, probably because of the extra administrative costs involved when investing in a country so far away and the sheer scale of competition.
Because the American property sector is hugely diverse, Emira decided to focus its US expansion on convenience retail centres that cater mainly to middle income Americans in southern and south eastern states such as Texas, Ohio, Indiana and Georgia.
ennett says one can still buy quality properties in these states at yields of at least 8% and the region offers far better growth prospects than more mature retail markets typically found on America’s east and west coasts.
Emira’s focus is on buying stakes in grocery anchored convenience shopping centres, often located in or close to residential suburbs. Jennett says there is an abundance of investment opportunities available in this sector, with scope to substantially grow Emira’s exposure to the US over the next few years.
Time zone differences and the size of and competition within the US market means you need to have an established partner in the country, Jennett notes.
“You cannot just open an office of your own in America. You need to have a fully fledged strategy and a partner on the ground. It took use quite a while to find partners and take the initial steps in our strategy,” says Jennett.
As such, Emira is co-investing with Rainier Companies, an investment and real estate business in Dallas,Texas, headed by J Kenneth Dunn, who is its co-founder and principal. Rainier has more than $1.5bn of property assets under management.
Emira will hold its American investments through a US-based subsidiary managed by in-country fund manager Continuum Investments LLC, which is headed by CEO Rick Makin. He is a US-based, SA-born entrepreneur. Jennett says Emira is confident its co-investment strategy decreases the risks of entry into the US.
In terms of the initial investment, Emira has acquired 44%of a grocery anchored convenience shopping centre in North Canton, Ohio, 49% of a centre in Cincinnati, Ohio and 49% of a centre in Corpus Christi, Texas.The centre in North Canton is called Belden Park Crossings and was acquire data yield of 8.1%.It offers a cash-on cash return of 12% in US dollars and has a gross lettable area of 44,829m?.
The centre in Cincinnati was acquire dat an 8.4% yield, also offers a cash-on cash return of 12%in US dollars and has a gross lettable area of 17,550m?
The third centre, Moore Plaza, is located in Corpus Christi and has a gross lettable area of 35,358m? It was acquired at a yield of 8.1%,offering a US dollar cash-on-cash return of 12.14%. Emira’s interest in these three assets represents an investment of $25.8m (R332m) and was funded with proceeds from offices that Emira has disposed of.
Currently the US investment accounts for only 2.6% of Emira’s R12.6bn portfolio. Emira’s American exposure could likely grow to 10%or even 20% of the fund’s assets within a few years and surpass Emira’s Australian exposure.
Craig Smith, head of research at Anchor Stockbrokers, says Emira has seemingly adopted the right approach with respect to its US investment strategy by starting off with a relatively small exposure.
“This prudent approach allows them to first prove themselves in this market before taking a big bet in an illiquid asset class such as direct property. The retail sector in the US broadly speaking is under pressure due to e-commerce and an over supply of mall space. Therefore, investors would need to be comfortable that the retail assets Emira is acquiring are defensive and offer longevity,” says Smith.