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.