Archives for November 2023

Fairvest Limited today announced results for the year to 30 September 2023, with an annual distribution of 132.53 cents per A share and 41.29 cents per B share, within the guidance issued to the market. Chief Executive Officer, Darren Wilder said: “Fairvest has made excellent progress to de-risk its balance sheet, reduce vacancies and
dispose of non-core assets. He said Fairvest was pleased with its disposals of just under R1 billion this year and achieving like-for-like net property income growth and positive rental reversions. This is notwithstanding exceptional headwinds in the form of a weak economy, high-interest rates and sustained load shedding.” He said that Fairvest is operationally strong and agile in a rapidly changing environment.

Operations

In what has been a challenging economic environment, Fairvest experienced positive letting activity and a strong performance from the portfolio. Vacancies decreased from 5.9% in the prior year to 4.5% at 30 September 2023, with an aggregate retention of 86.5% of GLA. Rental reversions were positive at 2.8% overall, comprising retail +3.3%, office -0.4% and industrial +5.8%. The weighted average lease escalation across the portfolio was 6.6%, with retail at 6.5%, office at 6.9% and industrial at 7.0%. The weighted average lease expiry was 29.0 months.

Expenses have been exceptionally well contained at 1% growth despite most expense items increasing in line with inflation. The Group continued to invest in its property portfolio, incurring a capital expenditure of R190.3 million, of which R26.2 million was for further solar investments.

Disposals
The Group’s stated strategic objective remains to continue its move towards a retail-focused fund by disposing of non-core assets. Great strides were made during the year, with a total disposal of R989.3 million. Seven disposals valued at R338.0 million were finalised at an average yield of 10.5% and a 3.2% premium to book value. SA Corporate Real Estate Limited also acquired all the issued shares of Indluplace at R3.40 per share, equating to R651.4 million for Fairvest’s shareholding. The scheme was concluded on 31 July 2023. This disposal of its entire residential portfolio marks significant progress in Fairvest’s strategic realignment to a retail-focused fund. A further six properties valued at R307.3 million are currently held for sale, pending registration and transfer.

Debt funding
The Group reduced its net debt ratio from 38.1% to 33.3% through these disposals and is now well within the Group and portfolio LTV covenants for its facilities. The weighted average interest rate for the year was 9.74% (2022: 8.97%), increasing in line with the SARB repo rate.

The weighted average maturity of the debt was 2.2 years, with 64.8% of the debt being
hedged. The interest rate swaps have a 1.6-year weighted average maturity.

The Group interest cover ratio (“ICR“) is 2.5 times, above the two times cover required by its funders and well above the portfolio ICR covenants of all funders.

“At year-end, the Group had cash on hand and undrawn debt facilities of approximately R1.0 billion to execute its strategic initiatives”, said CFO; Jacques Kriel. The Group also finalised a syndicated loan process to re-finance various maturities and streamline the borrowing structure for the Group. This has resulted in a new consolidated debt pool consisting of R3.1 billion of debt facilities, of which R2.1 billion are new. The average margin to three-month JIBAR achieved on the new facilities is 1.62%.

Environmental, Social and Governance Projects
The Group made considerable progress with its integrated backup power strategy, aimed at maintaining business continuity in adverse conditions. The Group has 38 solar plants with 16.4MWp of installed capacity, producing 10.1% of the combined portfolio’s electricity requirement for the year. Fairvest’s first ground mount solar farm of 1MWp at Cleary Park Shopping Centre was switched on in January 2023, followed by Eersterust Shopping Centre of 402kWp in February and a 134kWp plant at Midrand IBG in March. A further 12 approved plants are in various stages of implementation, which will add 7.5MWp capacity. In combination with its 58 generators with 14.2MVA capacity, 45% of the portfolio now has access to partial or full backup power.

Several water management projects are also underway, including 18 groundwater harvesting plants that are in operation, with a further two currently in the construction phase.

Outlook
The challenging operating environment is expected to persist, with interest rates expected to remain higher for longer. The Group made excellent progress in reshaping its portfolio to a retail-focused fund, and disposals will continue in 2024 while also starting to explore acquisition opportunities in the non-metropolitan rural retail sector.

Fairvest again expects net property income growth from all sectors on a like-for-like basis for the 2024 financial year. Combined with synergies achieved through the merger, this should generate growth in distributable earnings per B share, with the anticipated distribution per B share to be between 41.50 cents and 42.50 cents per share for the 2024 financial year, despite the significant increases in interest rates during the year. Distribution per A share will increase by the lesser of 5% or the most recent Consumer Price Index (“CPI”). The Board has resolved to maintain the current 100% dividend payout ratio of distributable earnings.

Vukile Property Fund (JSE: VKE) has reported an impressive 10.0% increase in its cash dividend to 52.1cps for the six months to 30 September 2023 and 5.2% growth in its funds from operations (FFO) to 85.0cps. The consumer-focused retail real estate investment trust (REIT), differentiated by its sector specialisation and international diversification, has increased its full-year FY24 growth guidance for FFO per share to between 4% and 6% and dividend per share to between 8% and 10%, notwithstanding the headwinds in its markets.

Laurence Rapp, CEO of Vukile Property Fund, confirms, “Vukile has sustained strong operational results and positive trading metrics in both our South African and Spanish portfolios and our balance sheet strength is supported by robust credit metrics. We have proven to be a resoundingly strong, sustainable business through some truly torrid times. Vukile has consistently and significantly outperformed the South African Listed Property Index (SAPY) over a 10-, five-, three- and one-year period. We are confident that we will deliver on our increased
guidance.”

Vukile has a R39bn defensive portfolio of retail property assets diversified across South Africa and Spain, through its 99.5% held Madrid-listed subsidiary Castellana Properties Socimi. Around 60% of Vukile’s assets are in Spain. Almost 50% of its earnings are in Euros, and Vukile’s results were further enhanced by the Rand hedge nature of its earnings.

Rapp says, “Vukile’s strategy of owning dominant assets in their catchment areas and operational focus on the consumer as the source of value creation has become our differentiator in driving performance. Our South African assets are delivering excellent results, and our Spanish portfolio is maintaining its market-leading position.”

In a persistently challenging environment, Vukile’s defensive domestic portfolio of high-quality shopping centres located mainly in townships and rural areas achieved like-for-like net operating income growth of 5.1%, and property valuations increased by 3.9%. Vacancies remained at a low 2.0%, and excluding office space within retail properties, this figure decreases to 1.3%.

Rental reversions rebounded from -2.4% to +2.4%, and 86.0% of leases reverted flat or positively, the highest proportion since 2018. Vukile’s appealing spaces supported a 3.9% increase in tenant trading densities. Its township centres outperformed, and the retail assets in Cape Town and Ekurhuleni led the pack.

In the Spanish portfolio, which is 95% let to top-tier international and national retail tenants, normalised net operating income grew by a sterling 13.0%. High tenant demand and excellent asset performance yielded vacancies of a mere 1.0%. Rental reversions gained a pleasing positive 8.3% and, including inflation adjustments, rose by 11.6%. Castellana’s 25.7% investment in Lar Espana is performing exceptionally well with a 12% dividend yield, with Vukile’s dexterous dealmaking once again rewarding stakeholders.

Sound Spanish economic fundamentals underpin the portfolio’s positive and improving metrics. Spain is outperforming the Eurozone, and employment is at the highest levels since 2008. Households are both saving and spending more, indicating fiscally responsible consumers, and this is being supplemented by growing international tourism, up 14% from August 2022 to August 2023.

Vukile has a strong balance sheet and its corporate long-term credit rating of AA (ZA) by GCR was reaffirmed during the year, with a stable outlook. It has no refinancing risk in Europe until FY26 and all its FY24 debt maturities have already been repaid, refinanced or renegotiated with Vukile’s High-Quality Liquid Asset (HQLA) status enabling it to access debt at lower margins, albeit that base rates are up. Its interest cover ratio (ICR) is a comfortable 2.9 times. Vukile engages closely with its diverse funders and has strong liquidity with cash and undrawn debt facilities of R3.1bn.

“Despite constrained capital markets and real estate being out of favour globally, there is exciting potential for brilliant deals to be done at attractive pricing in this market. Those ready to move at the first signs of the global cycle turning have the potential to close exceptional deals,” notes Rapp.

Environmental, social and governance (ESG) matters are a focal point for Vukile. In South Africa, Vukile installed a further 3.7MWp of renewable solar energy generation, bringing its total capacity to 18.6MWp. It intends to increase this to 25MWp by FY25, with projects for a further 7.1MWp already underway. In addition, 43% of the Vukile Academy Class of 2023 have already been placed in formal employment since their graduation and the Vukile Retail Academy gave eight emerging retailers a foot up into the formal retail arena. In Spain, Castellana again received EPRA gold awards for its financial and sustainability reporting. It made significant strides in its
Global Real Estate Sustainability Benchmark (GRESB) rating, increasing its score by 15% to achieve 4 out of 5 stars.

Rapp concludes, “We are realistic about the headwinds in the market but upbeat about the opportunities they create for us. Vukile is well-positioned, and we are confident that our clear strategic direction, robust operating platform, strong balance sheet and active ESG focus will enable us to deliver on our upgraded guidance.”

Emira Property Fund (JSE: EMI), the diversified, balanced REIT with a track record of delivering stability and sustainability through different cycles, achieved several strategic milestones while improving key operating metrics across its diversified portfolio during a busy six months to 30 September 2023 defined by successful capital recycling and de-risking.

Emira successfully concluded two major transactions. It completed the disposal and transfer of its holding in the rural and lower-income retail property venture Enyuka Property Fund to co-investor One Property Holdings, successfully exiting an indirect investment at a favourable price in a single deal aligned with its objectives. It also finalised the scheme of arrangement for specialist residential REIT Transcend Property Fund, enlarging its foothold in the defensive residential property sector that now represents 16% of Emira’s South African portfolio value.

Additionally, Emira moved beyond the halfway mark in the sale of its units at The Bolton. It has completed a full cycle with The Bolton, transforming offices into residential units and fully leasing them, and now reaching the stage where the best use of this capital was to sell off individual units, at higher prices, on a sectional title basis and reallocate the proceeds to other strategic investments.

Emira also continued to benefit from the buffer it has created against the low-growth domestic environment in an asset-by-asset capital allocation approach to co-investment in the US with in-country specialist partner The Rainier Companies, securing a meaningful 19% of its asset base offshore.

Geoff Jennett, CEO of Emira Property Fund, notes, “It is a common misconception that REITs are passive property investors. At Emira we are extremely active in capital allocation; we don’t simply buy and hold. We constantly evaluate our assets for their best use and proceed accordingly.”

When it comes to capital allocation, Emira’s diversified portfolio is balanced with a mix of assets across sectors and geographies. In South Africa, Emira’s 91-property strong portfolio includes commercial – retail, office and industrial – and residential assets valued at R12.1bn. Emira’s offshore asset base is made up of equity investments in 12 grocery-anchored open-air convenience shopping centres in the better-performing economy of the US representing a total equity investment of R2.8bn (USD151.9m)

As previously flagged by Emira, its dividend per share of 61,74c for the six months to 30 September 2023 decreased by 7.1% from the prior first half in line with expectations, and primarily due to higher interest costs on debt, one-off events impacting distributable income from its well-performing US investments and the sale of the high-yielding Enyuka. Emira’s total direct portfolio value increased by 0.7% and net asset value increased during the six-month period by 0.4%.

Jennett notes that Emira achieved a solid operational performance in a very challenging South African economic environment. “Our portfolio metrics mostly improved across all sectors, reflecting increased stability in the operating environment, giving us cause for cautious optimism that the market is nearer to bottoming out and may be poised for upside.”

Among these positive metrics is the improved overall vacancy in its commercial property portfolio from 4.7% to 4.1% over the six months with all sectors outperforming their SA benchmarks. In addition, like-for-like net property income grew 1.4%.

Emira’s SA direct commercial portfolio is split between retail (51%), office (30%) and industrial (19%), and continued to benefit from diversification.

The retail portfolio of primarily grocery-anchored neighbourhood centres traded well with trading densities growing 3.8% year-on-year. The total weighted average rental reversion improved over the six months from -5.5% to a pleasing -2.6%.

Vacancies in Emira’s office portfolio of mainly P- and A-grade properties again improved, decreasing from 12.5% to 12.0%, showing more demand for well-maintained office space in sought-after locations. The total weighted average rental reversion also improved over the six months from -14.8% to -8.8% but still reflects the ongoing depressed fundamentals in this sector.

Emira’s diversified industrial portfolio delivered a strong performance, with vacancies further decreasing from 2.1% to a negligible 0.6% and stable rental reversions, improving slightly from -6.5% to -6.0%.

Load shedding continues to plague South Africa and push up operating costs for businesses, and diesel costs for backup power generation inEmira’s commercial property portfolio was a slightly higher R17.7m, of which 87% was recovered from tenants in line with lease agreements.

The commercial portfolio benefitted from R68.1m in tactical upgrades, including installing backup power at three properties in response to South Africa’s electricity crisis and various sustainability initiatives such as cost-saving energy and water efficiency projects and waste management systems.

“These projects respond to Emira’s environmental commitment, but also to the general deterioration of municipal infrastructure, the inconsistent supply of critical services and the rapid increase in the municipal rates and cost of utilities, which place downward pressure on rental growth and ultimately impacts property values,” notes Jennett.

The composition of Emira’s portfolio in the defensive residential property sector has changed considerably from the prior comparable period. It now includes Transcend’s 20 residential properties plus The Bolton in Rosebank. Emira’s residential portfolio offers 4,063 units in Gauteng (87%) and Cape Town. The properties are in high-demand neighbourhoods and cater to the affordable rental market in the R4,500 to R8,000/pm range. They are attracting growing demand as high-interest rates make renting a more favourable option than buying for many South Africans. The portfolio’s 3.4% vacancy rate includes units intentionally left untenanted for a unit-by-unit disposal process. During the period, 157 of The Bolton’s 282 had been sold and transferred and Transcend disposed of 95 units.

In the US, Emira’s 12 equity investments are grocery-anchored dominant value-oriented power centres. Real GDP growth in the US economy accelerated to 4.9% in the third quarter of 2023, from 2,1% in the second quarter. Inflation eased from 4.9% to 3.7% in the six months to the end of the third quarter. Additionally, consistently low unemployment of 3.8% was reported in the robust US job market. These economic fundamentals continue to support Emira’s investment in US open-air centres with a high-quality tenant base focused on popular value retail and essential goods and services in strong markets with sound property fundamentals.

Good leasing saw positive rental reversions of 6.8% achieved on new leases with a lease expiry profile of 5.6 years. US portfolio vacancies edged up slightly from 2.6% to 3.6%.

Distributable dividend cash flow income received from Emira’s US equity investments increased by R12.9m, with both 32 East and Beldon Park resuming dividend payments. However, once-off adjustments for tenant failures meant that leasing commissions and tenant installation allowances usually amortised across a lease period, were written off during the six months. This impacted Emira’s share of the accounting income but not the portfolio cash flow it receives.

Emira’s balance sheet remains robust. Proceeds from the sale of Enyuka helped to keep debt levels lower in the persistently high-interest rate environment, contributing to an improved loan-to-value ratio from 44% to 41.2% and cash-on-hand of R850m. Emira has diverse funding sources, including all major South African banks, and access to debt capital markets. As expected, the higher interest rates have lowered Emira’s interest cover ratio, but the company’s debt metrics remain well within the required limits. Emira has a corporate long-term credit rating of A(ZA) and a corporate short-term rating of A1(ZA), with a stable outlook from GCR.

“We are particularly pleased to have satisfied several strategic objectives, successfully recycling capital. Our decisive operational focus delivered value-enhancing progress. The positive signs emerging in our operating environment are encouraging, and we are well-positioned to take advantage of opportunities and the eventual upward cycle. Given global and local volatility, though, we remain cautious and will continue to focus on fundamental excellence in the elements we can control,” concludes Jennett.

Dipula Income Fund (JSE: DIB) delivered a defensive performance for the year ended 31 August 2023 with increased property values, higher occupancy levels and improved rental renewal growth.

Dipula is a prominent, diversified, South Africa-invested REIT that owns a R9.8 billion portfolio of 170 retail, office, industrial and residential rental assets countrywide. Convenience, rural and township retail centres comprise 64% of its portfolio value, with 61% of its rental income generated in Gauteng.

Izak Petersen, CEO of Dipula, says, “Dipula is pleased to report a good set of results given the low-growth environment in South Africa with its power challenges and spiralling costs.”

The company reported increased non-core asset disposals of R190 million (FY22: R56 million). The sales were achieved at an aggregate 9% yield and proceeds are being recycled into value-enhancing property revamps, repaying debt and the roll-out of renewable energy and back-up power solutions.

Excellent leasing results reduced total vacancies from 10% to a pleasing 6%. Lease renewals were concluded at a positive renewal rate of 1.1%, up from 0% in FY22. Resulting increased rentals and property income position Dipula positively.

Net property income grew 1.8% based on a 3% increase in revenue and a moderate 3.4% increase in property-related expenses, notwithstanding the current high inflation and higher-than-inflation increases in administered costs that are over-burdening property owners.

Dipula’s balance sheet strength was bolstered by its higher property valuations, and it concluded the year with debt levels stable at the R3.6 billion mark. Low gearing of 35.7% and an ICR of 2.8x are both comfortably within covenant levels of 50% and 2x, respectively. The company had R178 million undrawn facilities (FY22: R80 million) on hand at year-end. GCR Ratings affirmed Dipula’s credit rating of BBB+(za) long-term and A2(za) short-term, with a stable outlook.

However, SA’s significant increase in interest rates resulted in a 14.1% increase in net finance costs and was the main contributor to a 6.9% decrease in Dipula’s distributable earnings to R514 million. Dipula declared 90% of distributable earnings as dividends. Given Dipula’s successful capital restructure in June 2022 – its dual A and B share structure was consolidated into a single share structure, where all A shares were repurchased, and B shares (DIBs) became the company’s only ordinary shares – full-year distributable earnings per share of 56.96c cannot be compared to prior periods. Dipula’s capital restructure resulted in the number of DIB shares tripling and a more than 200% increase in liquidity this year.

After year-end, Dipula also restructured its debt, concluding a R3.8 billion debt syndication programme that has diversified its funding sources, increased debt tenure and reduced funding margins.

“Dipula is strategically focused and defensively positioned to continue to deliver sustainable value for stakeholders. The first signs of economic improvement will immediately reflect in our performance,” reports Petersen.

Improved occupancy is a stated management focus, and Dipula signed leases worth R1 billion in rental income. Of this, approximately R300 million were new leases and R700 million renewals. The company’s tenant-centric approach led to a noteworthy improvement in the tenant retention ratio from 72% to 84%.

Dipula’s industrial property portfolio demonstrated robust performance with a steady, low 2% vacancy. Its retail real estate investments benefitted most from new leases, and vacancies improved from 10% to approximately 7%. Showing the most improvement, office vacancies were reduced from 29% to 15% during the year. Dipula’s residential portfolio comprised 716 rental accommodation units valued at R409 million, or 4% of rental income, with a stable vacancy rate of 7%. Dipula’s portfolio valuation increased by 2.9% year-on-year. The increased value of Dipula’s defensive industrial (9.7%), retail (2.9%) and residential (5.6%) portfolios was somewhat offset by a decline in the office portfolio value (2.5%).

“As the improved occupancy in our office portfolio shows, better performance in this sector was evident during the year. However, a significant improvement in offices is highly correlated to economic growth. Businesses need to be doing well for office occupancies and rentals to increase,” notes Petersen.

The improved leasing and positive rental renewal rate driving Dipula’s defensive performance are a direct result of its strategic capital allocation to improve the quality of its portfolio with value-adding investments that ensure its property assets are attractive and competitive in the market. The REIT dedicated R147 million to asset refurbishments during the year, funded primarily by recycled capital from asset sales, and has allocated a further R370 million for upgrades in the next 18 months.

Making giant strides in the areas of ESG, in FY23 Dipula completed its first ESG benchmarking and gap analysis as the basis of a formal ESG strategy, for which targets will be set in FY24. Dipula is committed to align its reporting on these matters with the JSE Sustainability and Climate Disclosure Guidance.

“Besides water savings and waste recycling, energy is a vital operational and environmental consideration for Dipula. We are currently finalising a strategic energy plan, including solar and broader backup power solutions, in addition to the measures already in place for our portfolio. The three-phased plan prioritises properties based on financial feasibility, optimising trading hours and tenants’ needs. Its implementation will begin in early 2024,” confirms Petersen.

While the expected slowing of interest rate increases is good news for much-needed market stability, Petersen says ongoing concerns include local economic weakness, high unemployment, lacklustre economic reforms, power shortages and deteriorating logistics infrastructure, as well as the impact of global events. In light of the high volatility being experienced in the economy, Dipula’s board has decided not to provide guidance for FY24.

“With scant economic growth of 1.0% and 1.1% expected by the SARB for 2024 and 2025, respectively, Dipula will remain focused on keeping occupancies high, making our properties attractive for rental, unlocking value from our assets, keeping a tight grip on costs and rolling out our energy strategy. The higher occupancy levels and lower funding margins already in place will support us in tough trading conditions. We are well placed to navigate the expected economic headwinds and poised to benefit from any economic improvement,” Petersen concludes.