Spanish Retail

Vukile’s excellent first-half puts it firmly on track for full-year guidance

Vukile Property Fund (JSE: VKE) has reported an impressive 6.0% increase in its interim cash dividend to 55.2cps for the six months to 30 September 2024. The consumer-focused retail real estate investment trust (REIT), distinguished by its sector specialisation and international diversification, has reported excellent half-year operational results. This strong performance positions it comfortably to meet its full-year guidance of growth in FFO per share of 2% to 4%, with a trajectory towards the upper end of its 4% to 6% DPS growth target.

Laurence Rapp, CEO of Vukile Property Fund, comments, “Our strong first-half performance delivered outstanding operating results and solid trading metrics across our property portfolios, which positions us well for continued growth. Vukile’s businesses in South Africa and Spain are intentionally structured for seamless success, driving the strategic and operational progress that we’re pleased to report.”

Vukile is a leader in consumer-focused shopping centres with total property assets of R40.1bn. Its commitment to customers shines through in its convenient, community-focused, needs-based retail centres. It is invested in a portfolio of 33 urban, commuter, township, and rural malls in South Africa. Through Vukile’s 99.5% held Spanish subsidiary Castellana Properties, it has a portfolio of 15 shopping centres in Spain and a portfolio of three newly acquired shopping centres in Portugal. Some 59% of Vukile’s assets are in the Iberian Peninsula, and almost 48% of its property net operating income is earned in Euros.

In South Africa, Vukile’s robust operating platform, coupled with a strengthening macroeconomic environment, has delivered outstanding results.

“With sentiment improving, loadshedding decreasing, consumer confidence rising, and interest rates falling, the sustained strong metrics produced by our successful operating platform enjoyed a welcome boost. We anticipate this momentum to persist into the second half and beyond,” notes Rapp.

Valued at R16bn, Vukile’s defensive, dominant South African portfolio delivered strong performance and growth, with like-for-like net operating income growth of 4.6% and a 3.7% increase in the value of its retail portfolio. Vacancies remain at an exceptionally low 1.9%, supported by active letting, with 85% of leases signed at better or the same rental level and 93% tenant retention success. The portfolio achieved impressive trading density growth of 4.2%, with Vukile’s shopper-first focus driving increased footfalls and sales. A key highlight is the portfolio’s decreased cost-to-income ratio, down to 15%, the lowest level in a decade.

Vukile’s solar PV rollout in South Africa has been tremendously successful, driving margin and propelling it towards carbon neutrality. During the six months, it added four PV plants with 4.9MWp of capacity to its existing 28 plants of 21.6MWp. It is also applying the same focus to water management and efficiency.

Adding value to its South African portfolio through acquisitions and developments, Vukile’s redevelopment of the recently acquired Mall of Umthatha is on of schedule, with completion and substantial letting expected by the first quarter of 2025. Vukile anticipates a minimum 10% yield on this acquisition. The reconfigured East Rand Mall in Boksburg is trading exceptionally well following the introduction of Checkers FreshX as its first-ever grocery anchor. The R141m Bedworth Centre upgrade in Vanderbijlpark is progressing rapidly, with both new anchor tenants, Boxer and Shoprite, opening in time for the festive season. The development of Thavhani Retail Park in Thohoyandou, Limpopo, where Vukile acquired a 33% stake for R101m on an 8.6% yield, has broken ground. It is located adjacent to Vukile’s very successful Thavhani Mall asset.

Vukile remains keen to invest in South Africa. “We are actively exploring opportunities and are currently in the early stages of evaluating several potential deals in the market,” confirms Rapp.

Vukile’s well-established investment in Spain has cemented Castellana’s position as a market leader, capitalising on the advantages of the country’s status as a European growth powerhouse. The on-the-ground presence of Castellana not only ensures first-hand market knowledge but operates as a local business, which has proven a distinct advantage in accessing opportunities.

With Spain’s economy leading the Eurozone and its financially healthy consumers driving growth, Castellana’s consistent consumer-focused model has excelled, surpassing market benchmarks and outshining peers with high footfall and sales.

The Spanish portfolio remains fully let, with marginal vacancies of around 1% and 95% of space let to blue-chip international and national tenants. It achieved like-for-like rental growth of 2.1% and exceptionally high positive rental reversions of 45.5%. The portfolio has the market’s lowest occupancy-cost ratio, 9.5%, providing further room for future rental growth.

Vukile is well-known for its astute capital allocation. Post-period in October, it accepted the offer to sell its entire 28.8% stake in Lar Espana for €200 million, generating a capital profit of some €70 million and an IRR exceeding 30% in Euros. The proceeds will be redeployed into physical assets in well-advanced transactions currently being evaluated

As previously disclosed, Castellana remains in exclusive discussions to acquire the largest shopping centre in Spain’s Valencia province, Bonaire Shopping Centre, from multinational retail REIT Unibail-Rodamco-Westfield. The transaction’s closing has been extended due to the tragic floods in Spain, pending a full damage assessment and remediation timeline for the flood-impacted shopping centre.

Rapp notes that a key highlight executed post the reporting period was Castellana’s strategic entry into Portugal, a compelling new market, which has expanded its Iberian investment footprint. “The move capitalises on Portugal’s strong economic growth and fragmented retail property sector ripe for consolidation, mirroring opportunities seized in Spain.”

With its investment in a high-quality, blue-chip-tenanted portfolio of three Portuguese shopping centres valued at €176.5m, the expected 10%-plus cash-on-cash yield in Euros underscores the market’s potential for value creation. Castellana’s on-the-ground expertise positions it to add substantial value to the Portuguese assets while growing in this market, with liquidity in place and further transactions under consideration.

Vukile’s robust balance sheet and disciplined capital allocation are enduring merits for this REIT. Its balance sheet remains exceptionally strong, with a reduced LTV of 35%, an increased ICR of 2.5-times, and R6.4 billion in liquidity, including R5.1 billion of cash on hand and R1.3 billion undrawn facilities.

Vukile remains one of the most highly rated credits in the property sector with its AA_(za) corporate rating reaffirmed by GCR, with an upgraded positive outlook. Fitch also upgraded Castellana’s Long-term Issuer Rating of BBB- with a positive outlook. These high international investment-grade credit ratings underscore excellent access to debt and equity capital markets. Vukile raised approximately R2bn during the period from new share issuances.

“We are tremendously appreciative of the support shown for our capital allocation strategy, as evidenced in our equity and debt capital raises. Strong capital allocation lies at the heart of our expansion strategy, and we are dedicated to dealmaking discipline in seeking new opportunities that are strategically aligned and financially accretive in our core markets of Spain, Portugal and South Africa,” says Rapp.

He concludes, “Vukile delivered excellent first-half operating performance and has laid a firm foundation for future growth. We remain committed to our scalable consumer-led model to create value for all our stakeholders.”