Property Flash


June 12 2023

Vukile Property Fund, the JSE-listed Real Estate Investment Trust (Reit) showed with its results for the year to end-March 2023 released on Monday, that the company has built up a good track record of knowing when to spend its capital at home in South Africa (SA) and when it is better placed to do so in Spain.

Vukile reported a 6.2% increase in its cash dividend to 112.4cps for the reporting period and 6.0% growth in its funds from operations (FFO) to 144.5cps. These results meet Vukile’s guidance and the business is forecasting growth again next year, notwithstanding the headwinds in its markets, CEO Laurence Rapp said.

At the end of the reporting period, as much as 58% of Vukile’s assets by value were in Spain, worth R21.5bn while 42% were in SA, worth R19.5bn. Vukile listed on the JSE in June 2004. It focusses on owning shopping centres in SA which serve people placed among the lower and middle living standards measure (LSM). The fund first expanded into Spain in Jul 2017. Today, the group has exposure to Spanish retail through its majority shareholding in Castellana Properties, a Madrid-listed landlord. Vukile also also owns 25.7% of LAR  España, a listed group with its holding worth R2bn, through Castellana, and 6% of SA listed group Fairvest, with its holding worth R285m. The group achieved net operating income of R1bn from its Spanish assets and R1.3bn from its South African assets. Its Spanish portfolio has achieved a 6.4% EUR yield while its South African portfolio achieved an 8.8% Rand yield.

Rapp said Vukile’s strong performance was driven by strong operational results in both the South African and Spanish markets and the strength of its financial position. Vukile was in a healthy position and had been rewarding its shareholders. The group’s share price ended 1.88% higher at R13.04 on Monday.

“This is the best set of results Vukile has produced in SA in nearly two decades since listing. Similarly, Castellana delivered another set of market-leading results in Spain. The strength of our portfolio, a committed, specialised team and strategy of owning dominant assets in their catchment areas is reflected in excellent operating metrics,” said Rapp.

In its domestic portfolio which included shopping centres located mainly in townships and rural areas, like-for-like net operating income and retail valuations increased by 5.4% and 5.8%, respectively. Vacancies reduced from 2.6% to a low 2.0% while rental reversions turned positive, moving from -2.4% to +2.3%. Trading densities increased 6.2% and rent-to-sales ratios remained at 6.1%.

In the Spanish portfolio, normalised net operating income grew 9.0%. Vacancies closed at a very low 1.3% with positive rental reversions of 3.3%, enhanced by inflation indexation of 7.7%. The portfolio has a long weighted average lease expiry of 12.6 years. Castellana’s 25.7% investment in Lar Espana also continued to perform well.

“These operating metrics show that the expected challenges in consumer spending over the past 18 months didn’t materialise as anticipated. Only now are we seeing some impact of higher interest rates filtering through to consumer spending in SA. Vukile is well-positioned to navigate short- to medium-term cyclical downturns such as this and protected against reduced spending, with defensive tenancies and strong security of contractual rental income with 99% of income provided by the best retail covenants in Spain and SA,” said Rapp.

Over the next year, Vukile would invest R350m in sustainable backup power in SA at an accretive yield, building on Vukile’s well-established energy savings initiatives. To date, it has installed 20 solar plants of 14.9MWp, accounting for 9.6% of its energy consumption, Rapp said.

Vukile also announced a new energy solution. Through a combination of solar plants and battery storage, the fund would guarantee sustainable power to retailers in 17 of its shopping centres in SA between the hours of 9am and 4pm, removing the backup burden and cost pressure from its tenants and consistently enabling uninterrupted shopping for customers.

This project insulates Vukile from the impact of load shedding, one of several SA-specific risks it is managing, Rapp said.

During the reporting period, Vukile spent R11.2m on generator diesel. As much as R7.8m of this was used directly by tenants, of which 54% was recovered. The rest was for common area and emergency lighting. Some 75% of Vukile’s tenants trade during load shedding and 88% of common areas have backup.

“Our energy solution reflects Vukile’s customer focus and tenant partnership. It has been carefully crafted to benefit all stakeholders,” said Rapp.

Water security was also a growing challenge in SA and Vukile invested in more boreholes, which now provide water to 58% of its portfolio and 98% of its rural malls, which all have backup water.

Rapp stressed that Vukile has a strong balance sheet with no refinancing risk in Europe over the next two years. Its corporate long-term credit rating was upgraded to AA(ZA) by GCR during the year.

“Vukile has done well to deliver on its promise of being a centre of growth by creating value for all our stakeholders through delivering excellent operational results,” said Rapp.  

We are realistic about the headwinds in the market caused by inflation, higher interest rates and increased pressure on consumers. Cycles turn, and until this happens, our business is exceptionally well-positioned to navigate these challenges with our clear strategic direction, robust operating platform, strong balance sheet and active ESG focus,” Rapp said.

Nesi Chetty, head of listed property funds at Stanlib said Vukile’s results were very strong with pleasing performances from its SA and Spanish assets.

“The valuation uplift in the SA portfolio is very encouraging at 5.8%. Their assets continue to be very defensively positioned. A higher cost of funding globally has created opportunities for Vukile to look at assets offshore where companies are looking to sell,” he said.

“The balance sheet is well-positioned for growth but they need to decide how best for them to access new capital. They will deploy cash opportunistically where it makes sense. They can get 9% to 10% yields in Euros on offshore assets where in the SA core portfolio, the yield is closer to 11%,” Chetty said.

Vukile expected its 2024 financial year FFO to achieve growth of 3% to 5% and dividend per share growth of 7% to 9%, which equated to 120cps to 123cps, to be paid in an interim and final dividend.

Ahmed Motara, fund manager at Stanlib said Vukile was a strong group. Spain was firing well and “even with rising cost of debt expected”, the company was well positioned to generate growth.

“They are holding around 25.7% in Lar Espana. They would probably increase this shareholding, if they had the firepower. Already 45% of net property income comes from Spain, so the company is nicely diversified as is. The SA portfolio is very strong on the retail side,” he said.

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