Property Flash


May 19 2023

Dipula Income Fund, the JSE-listed diversified real estate investment trust (Reit) reported financial results this week for the six months to end-February, in which it stressed that its diversified assets had helped the group achieve keep the contraction in its distributable income growth to no more than 7%.

Contractual rental income for the period grew by 3% to R556m compared with R541m in the first half of the 2022 financial year. Net property income tracked slightly ahead of the prior period at R447m compared with R441m in the comparative period. Management kept a tight grip on property related expenses, which were limited to a below inflationary 3% increase to R239m.

“Our portfolio of mainly convenience, rural and township retail centres continue to prove defensive, notwithstanding a deterioration in the domestic macro-economic environment, with rising interest rates and unprecedented levels of load-shedding. Our strong financial performance is underpinned by diligent asset management initiatives and a consistent focus on cost containment,” CEO Izak Petersen said.

Despite Dipula’s solid operational performance, distributable earnings for the period contracted by 7% to R257m compared with R276m in the comparative prior 2022 period, mainly as a result of a 3.25% increase in interest rates on a like-for-like basis.

Distributable earnings per share were recorded at 28.72c, with dividends per share of 25.85c declared. This represented a pay-out ratio of 90%. Distributable earnings per share and dividends per share are not comparable with the prior period as a result of Dipula simplifying it’s A- and B-share structure into a single ordinary share with effect from June 2022.

A and B share structures were popular in the past especially during the listed property boom period of 2014 to 2017. A shareholders would be paid dividends first, the growth of which was capped at the lower of consumer price inflation and a set percentage like 5%. B-shareholders would then be paid the residual. But in recent years, post the Covid-19 pandemic and in a high interest rate environment, Reits have battled to grow their income like they used to. There hasn’t been much money left over for the B-shareholders.

In Dipula’s case, shareholders wanted to remove the complexity around Dipula’s capital structure.

The group concluded 99 new leases, excluding residential leases, during the reporting period, with a total gross lettable area (GLA) of 20 825m2 during the period, which amounted to a lease value of approximately R120m at a weighted average escalation of 7.3% and a weighted average lease expiry (WALE) of three years.

As many as 137 lease contracts, excluding residential leases representing a total GLA of 63 897mwere successfully renewed, representing gross lease income of approximately R387m over the WALE of three years.

“We are especially pleased to have achieved an average 4% positive rental reversion on renewed leases for retail and 1% for offices, although lease reversions for the industrial portfolio contracted by 2% on average,” said Petersen.

Management’s focus on attentive tenant service across all sectors is bearing fruit, with an impressive overall 91% tenant retention rate, compared to 78% in the prior period, said Petersen.

Non-residential vacancies increased marginally to 9.9% from 9.3% previously. 

“We are working hard at lowering the Group’s vacancy to between 6% and 8% in the next 18 months,” Petersen said.

“We will reduce retail vacancies primarily through re-tenanting of highly lettable space vacated by Game at Gillwell Mall, as well as the completion of the Atrium @ 45 mall redevelopment and various other strategic letting interventions. In addition, we have seen encouraging demand for office space in recent times,” he said.

At period end, Dipula’s residential portfolio comprised 712 apartments valued at R387m with an aggregate vacancy of 9%, down from 18% a year before.

As at 28 February 2023, Dipula’s portfolio was valued at approximately R9.6 billion up from R9.2bn a year before, driven by revaluation increases at the end of August 2022. The portfolio comprises 179 properties with a total GLA of 915 243m2.

The group invested approximately R63m in refurbishments and redevelopments during the period and disposed of 16 properties with a book value of around R180m. The aggregate disposal amount was higher at R183m, and at an average yield of 9%. Proceeds from the sales will be used to settle debt and recycled into strategic value enhancing refurbishments as well as the roll-out of renewable energy and back-up power across the portfolio.

The group’s loan-to-value (LTV) ratio was stable at 36.9%, well within the group’s lenders’  LTV covenant level of 50%. The interest cover ratio (ICR) was at a comfortable 2.9 times, compared with the lender limit of two times.

Dipula shareholders will be offered an election, in respect of all or part of their shareholding, to re-invest the cash dividend of 25.84695c per share in return for shares.

“By electing to participate in this re-investment option, shareholders will be able to increase their shareholding in Dipula without incurring dealing costs. In turn, Dipula will benefit from an increase in the value of shareholders’ funds available to support its growth initiatives,” said Petersen.

“The immediate outlook will be adversely affected by ongoing headwinds in the property sector, including loadshedding, dysfunctional local authorities, increasing interest rates and weak economic fundamentals. Dipula will continue to focus on controlling the controllable and delivering good performance to its shareholders,” Dipula said.

Petersen said his team was always looking for new opportunities but acquiring new assets in SA may be tricky given the cost of funding deals as interest rates were high. The fund wouldn’t necessarily acquire distressed assets including those owned by struggling Reits under business rescue.

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