Property Flash


November 15 2023

Dipula Income Fund, the JSE-listed fund led by CEO Izak Petersen has solidified its position as a landlord which pays out regular dividends. The group is a diversified real estate investment trust (Reit) which owns a R9.8bn 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 each year.

Dipula released financial results for the year to end August 2023 on Wednesday, reporting increased property values, higher occupancy levels and improved rental renewal growth.

“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,” Petersen said in a meeting presentation on Wednesday.

He said the company disposed of R190m worth of non-core assets compared with R56m in the 2022 financial year. 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.

Improving basics

Total vacancies were reduced from 10% to a 6%. Lease renewals were concluded at a positive renewal rate of 1.1%, up from 0% in the 2022 financial year.

Net property income grew 1.8% thanks to a 3% increase in revenue and a 3.4% increase in property-related expenses. This is while Dipula like other landlords is operating in a high inflation environment. Administered costs have also been rising at higher-than-inflation rates.

Petersen said the group’s balance sheet was in a healthy position. The company’s debt level was stable at R3.6bn while its loan-to-value (LTV) sat at 35.7%. LTV measures a company’s debt relative to the value of its assets. In SA, analysts tend to argue that LTVs should sit below 40%, as when LTV breaches this mark it may indicate financial distress. The group’s interest cover ratio (ICR) was 2.8x. This means the LTV and ICR are both comfortably within covenant levels of 50% and 2x, respectively.

Dipula had R178m in undrawn debt facilities on hand compared with R80m in the 2022 financial year.

GCR Ratings affirmed Dipula’s credit rating of BBB+(za) long-term and A2(za) short-term, with a stable outlook.

But Petersen warned that SA’s significant increases in interest rates in recent months had 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 R514m.

Dipula declared 90% of distributable earnings as dividends, suggesting its profitability was still strong. As a Reit, the group is mandated to pay a minimum of 75% of it distributable earnings out as a dividend each financial year.

A new capital structure

Dipula also changed its capital structure in June 2022, with the dual A and B shares being consolidated into a single share structure. All of the A shares were repurchased, and B shares (DIBs) became the
company’s only ordinary shares. Petersen said this meant that full-year distributable earnings per share of 56.96c could not be compared with prior periods. Dipula’s capital restructure resulted in the number of DIB shares tripling and a more than 200% increase in liquidity this year.

Petersen said Dipula was focused on increasing the liquidity in its shares, something the company has battled with in recent years.

The future

Going forward, the fund would focus on improved occupancy. It signed leases worth R1bn of
rental income during the reporting period. Of this, approximately R300m were new leases and R700m were renewals. There was an improvement in the tenant retention ratio from 72% to 84%.

Dipula’s industrial property portfolio saw a 2% vacancy. Petersen said the group would consider investing deeper in this competitive asset class. Its retail assets benefitted most from new leases and vacancies
improved from 10% to about 7%. Office vacancies were reduced from 29% to 15% during the year.

Dipula’s residential portfolio comprised 716 rental accommodation units valued at R409m, or 4% of rental income, with a vacancy rate of 7%.

Dipula’s portfolio valuation increased 2.9% year-on-year.

“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,” said Petersen.

Dipula dedicated R147m to asset refurbishments during the year, funded
primarily by recycled capital from asset sales, and allocated R370m for upgrades in the next 18 months.

Petersen said ongoing concerns including local economic weakness, high unemployment,
lacklustre economic reforms, power shortages and deteriorating logistics infrastructure as well
as global events meant for high volatility in SA. Dipula’s board decided not to provide guidance for the 2024 financial year.

“With scant economic growth of 1.0% and 1.1% expected by the SA Reserve Bank 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

Petersen said Dipula’s future investment plans included buying convenience retail centres in semi-urban areas.

“There is no lack of opportunities for Dipula. The lower LSM township convenience retail market stands out. There really is space to play. The concern is that capital is expensive right now in the cycle. We aren’t rushing to buy assets,” Petersen said.

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