Premium, Octodec merger on track

Premium and Octodec surprised the market last week with better-than-expected income growth of 9% and 10,5% respectively for the February reporting period. That's ahead of the 7% average reported by the sector so far this year.

Premium's results were particularly strong, given that a year ago the fund reported a drop in income payouts - distributions were down around 1% for the year to February 2012.

Premium is the only counter among the JSE's 30-odd property stocks that offers investors sizeable exposure to the housing market through a portfolio of some 4,000 rental units, the bulk of which are in the Pretoria and Johannesburg CBDs.

The rest of the portfolio comprises mostly inner-city retail and office buildings, similar to those of Octodec. The latter, however, also owns a number of suburban retail centres including the Killarney Mall and Woodmead Value Mart in Johannesburg and Waverley Plaza in Pretoria.

Jeffrey Wapnick, managing director of both Premium and Octodec, says the strong profit performance, in spite of a tough economy, vindicates the group's continued confidence in CBD property markets.

Refurbishment, upgrades

He ascribes the pleasing set of results for both companies to a strong focus on refurbishments, upgrades and redevelopments and a more aggressive renewal and letting strategy.

Wapnick says there has also been a resurgence of interest from both office and retail tenants in the Johannesburg and Pretoria CBDs in recent months. He believes the higher office demand comes from the government's recent decision to locate public sector departments in city centres.

"Currently only five of about 35 government departments have embarked on this process, so office demand in inner cities is poised for further growth."

Wapnick says it's also encouraging that large food and fashion retailers are starting to return to inner cities. He says retailers are no doubt realising that they can often achieve higher trading densities in the CBDs than in suburban malls. The cost of occupation, including utility expenses, is also much lower in the CBDs than in suburban shopping centres.

Wapnick confirms that the much-anticipated merger between Premium and Octodec is now firmly on the cards, given the JSE's adoption of the new real estate investment trust (Reit) structure from 1 May.

"Though the possibility of a merger was regularly discussed at board meetings over the years, the capital gains tax implications of such a move were a key prohibitor. With the capital gains tax threat removed by the Reit dispensation, the board is now in full agreement that we need to proceed with the merger," Wapnick said.

However, the merger won't happen before March next year, as both Premium and Octodec first have to convert to the Reit structure at the start of their financial years: 1 September for Octodec and 1 March for Premium.

Stanlib property investment analyst Ndabe Mkhize says corporate action between Premium and Octodec offers "value-enhancing" opportunities.

A merger of the two counters should take the group's market cap to close to R6bn, which will create greater size and liquidity, making it easier for investors to trade in these portfolios.

A merger will also bring about cost savings, as the group will no longer need to run the companies as separate entities.

Though the share price performance of both Premium and Octodec was lagging behind the rest of the sector over the past 18 months, both stocks rallied more than 10% last week after the release of their results.

Even so, both stocks are still trading at a slight discount to the sector's current forward yield of around 6,7%. Mkhize says both Premium and Octodec offer "relative value" over the longer term. And there's plenty of potential if a merger is successful.

Source: Financial Mail via I-Net Bridge