JSE-listed Vukile Property Fund’s 88%-held Madrid-listed subsidiary, Castellana Properties Socimi, has acquired a 21.7% shareholding in its market peer Lar España Real Estate Socimi.

The transaction, valued at about €100-million, represents an investment with outstanding synergies, posits Vukile in a statement.

Both Socimis – Spanish real estate investment trusts (Reits) – are specialist retail property investors with high-quality, low-risk and geographically-complementary portfolios of shopping centres and retail parks, which will give Castellana exposure to the entire Spanish peninsula.

“Castellana’s strong cash flow position, combined with the right opportunity to invest in Lar España shares, presented us with an exciting prospect to recycle capital into a compelling investment, with more attractive yields than other opportunities in the direct property market,” says Vukile CEO Laurence Rapp.

Lar España has exhibited a similar performance to that of Castellana. In October and November 2021, Castellana’s footfalls were 99% and 98% of pre-pandemic levels, its portfolio occupancy has been consistent at about 97% and its collections above 95%.

Like Castellana, Lar España’s portfolio of 14 assets, spanning over 550 000 m² of gross lettable retail area, has bounced back strongly to pre-pandemic trading levels, Vukile highlights.

Similarly, Lar España has a high occupancy rate of 95%, it notes.

Moreover, Vukile says Lar España has demonstrated strong earnings generation and a robust balance sheet with healthy cash flows.

After its recent debt restructure using corporate bonds, all of its assets are unencumbered. It has a loan-to-value ratio of about 41%. The current discount to tangible net asset value (NAV) of about 48% does not reflect the retail recovery experienced on the ground, as evidenced from actual trading by both Lar España and Castellana, Vukile points out.

“We strongly believe Lar España is an undervalued stock that is due to re-rate. This makes it a very attractive investment opportunity indeed, and one that we understand well, given the many similarities between Castellana and Lar España,” Rapp says.

Castellana will fund the purchase of more than 18-million Lar España shares with a combination of €15-mililion of available cash and a shareholder loan from Vukile of €75-million, which will be converted to equity, thereby improving Castellana’s balance sheet metrics.

Vukile, in turn, will fund its investment through the recycling of capital, including proceeds from its placement of R400-million of Fairvest shares on January 26 and R840-million from the sale of its Namibian assets and other noncore properties in its South African portfolio, which will be transferred before the end of March.

Castellana’s market intelligence estimates Lar España’s funds from operations forward yield at between 9% and 11%, which Rapp says makes this a very accretive transaction going forward.

He notes that the transaction will have an immediate positive impact on Vukile’s funds from operations per share for its 2022 financial year, with a neutral effect on its loan-to-value (LTV) ratio in year one, and beneficial to LTV thereafter, and neutral to NAV in year one and thereafter accretive to NAV over the next five years.