May 15 2024 08:42
Equites Property Fund, the only pure logistics real estate investment trust (Reit) listed on the JSE has seen its share price rise 9.21% to R13.09 over the past seven days, with the market being pleased with its financial results
Equites which owns assets in SA and the UK, achieved a distribution per share of 131.12 cents, at a 100% pay-out ratio, in line with market guidance, for the year to end-February 2024. This was a strong result. Investors buy shares in Reits in order to have access to regular dividend payouts. Reits are obligated to pay a minimum of 75% of their distributable income as a dividend each financial year. Reit investors tend to include pensioners. If a Reit pays out 100% of its distributable income as a dividend that pleases them even more.
Equites’ CEO Andrea Taverna Turisan said that both the SA and the UK property portfolios were performing in line with expectations, driven by robust like-for-like net property income growth, zero vacancy, and an uptick in property valuations. The SA portfolio increased 4.2%, and the UK portfolio 2.1% in British Pound terms, both on a like-for-like basis. Its net asset value per share grew 3.0% to R17.14 over the past twelve months. Total GLA under management increased to 1.45-million square metres at year-end.
“We are pleased with the strong progress this year in building Equites’ resilience. We divested R4.8bn of older, non-core assets and improved the portfolio by reinvesting into state-of-the-art, ESG-compliant logistics campuses and distribution centres, tenanted by blue-chip companies on long-term leases. The portfolio is fully let with a WALE of 12.6 years, demonstrating the quality and durability of the assets. Equites also continues to receive strong support in the debt capital markets, as evidenced by the very positive outcome of the debt auctions and private placements during the financial year,” Taverna-Turisan said.
Like-for-like rental growth in the South African portfolio was 6.4% for the financial year. The weighted average lease expiry (WALE) on its leases remained stable at 13 years, and the weighted average escalation by gross lettable area saw a slight reduction to 6.2% from 6.5%. This was because of the inclusion of two more Shoprite assets with lease escalations of 5% on 20-year lease terms.
The group predicted that the national vacancy rate for high-quality, environmentally sustainable warehousing space in South Africa would remain below 1.0%. This was because of the continued demand for quality warehousing space in key logistics nodes, combined with the scarcity of appropriately zoned and serviced land. The low vacancy rate and construction cost inflation have led to an increase in market rentals, with Equites’ base rentals on generic warehouses now starting at R85/sqm. This represented a 31% increase from base rentals of R60/sqm for comparable warehouses in 2020.
The UK portfolio showed a like-for-like rental growth uplift of 5.0% (in GBP terms), as a result of a single rent review concluded during the period. The UK WALE fell to 10.6 years from 15.8 years because of the sale of assets with 25-year leases.
The logistics property market in the UK has seen an increase in take-up rates that are even higher than those before the COVID-19 pandemic. The lack of available new space has led to a consistent rise in rental prices. Equites’ UK portfolio remains under-rented. The group recently agreed to a 39% increase in rental at the GXO property located in Coventry, resulting in a 13% valuation uplift of the property. In addition, a rent review was conducted at the DPD site in Burgess Hill in March 2024, which led to a 68% increase in annual rentals. These rental uplifts, along with the expected yield compression, were anticipated to unlock value over the medium term.
Equites disposed of South African assets worth R1.2bn, at a 0.1% discount to its last external valuation. The proceeds were used to repay debt and fund development activities. Another R0.4bn of SA assets have been classified as held-for-sale at year-end, with transfers expected to occur during the 2025 financial year to end February.
UK property disposals were worth R3.0bn, including the first of two payments relating to the Newport Pagnell forward-funding transaction. The group concluded the sale of Newport Pagnell in January 2024 for £59.8m, of which £30.8m was received in January 2024 with the balance expected to be received in October 2025 on completion of the development. The Group has a further R1.8bn of UK assets held for sale.
Equites initiated the sale process for the ENGL development platform in the UK. Equites continues to engage with Newlands its co-investor in the platform, and potential acquirers.
Equites completed a new regional hub for TFG at Equites Park Riverfields at an all-in cost of R591m. An external valuation of R600m was reflective of the positive total return generated by new A-grade developments. The group completed two pre-let developments at Equites Park Jet Park with a total GLA of 14 784m² and a capital value of R197m. These facilities are both let to A-grade tenants with leases expiring in 2028 and 2032, respectively.
Equites completed two speculative developments with a total GLA of 26 005m², with both let within the vacancy provision period. Equites has begun construction on three new speculative developments at Meadowview with a combined GLA of c.20 000m², expected to reach practical completion in the fourth quarter of 2024.
Through RLF, the Group acquired and completed an R185m extension of the Shoprite Canelands facility in KwaZulu-Natal on a lease which is coterminous with the existing Shoprite Canelands’ lease that expires in 2043.
Equites’ share of the total pipeline of development and acquisition opportunities in South Africa amounts to R2.5bn across 177 000m² of prime logistics space. The R0.6bn of capital expenditure outstanding at the reporting date will be disbursed over the next 12-month period and will be funded from cash on hand, undrawn debt facilities, debt raised against completed developments, and equity that will be released from property disposals. Given the process currently underway for the ENGL platform, the group is still committed to funding any expenditure on progressing planning on current land parcels.
Equites spent R3.2bn on new developments, funded through the successful asset disposal programme during the year ending with a group LTV ratio at year-end of 39.6%. Equites increased its debt maturity to 3.7 years and reduced the all-in cost of debt from August 2023. As much as 83% of all long-dated debt maturing after the 2025 financial year is hedged, with an overall 33% sensitivity to interest rate changes.
The group rebalanced its offshore LTV and streamlined its UK portfolio. The UK LTV at year-end was 45.8%.
Equites held several successful listed debt auctions during the financial year, with debt raised in November 2023 clearing at the lowest levels for 1-, 3- and 5-year debt to date. In February 2024, the group raised its first 7-year listed debt at 3-month JIBAR plus 153 bps.
Equites has achieved its target of certifying R500m of existing buildings with EDGE Advanced certification by 2024. It continued with the expansion of its solar PV roll-out to meet the demand for greener sources of energy and to mitigate against the effects of rolling blackouts.
Equites grew its total installed solar capacity to 20.2MW from 9.4MW in the 2023 financial year, while the number of buildings with solar PV increased from 19 to 29. Almost 50% of the portfolio is now supplied with solar energy. The opportunities presented by the global shift to renewable energy have the potential to unlock significant value for the business. The group’s first energy wheeling agreement was concluded in the Western Cape, and this project is expected to commence revenue generation in the 2025 financial year.
Equites’ board expected the distribution per share to remain relatively in line with the 2024 financial year, within a target range of 130 cents per share and 135 cents per share.
“Our track record of developing world-class facilities for our clients continues to unlock opportunities for the fund to grow. The R2.3bn in cash and available facilities at year-end places the Group in a favourable position to take advantage of performance-enhancing development opportunities in the coming year. The Group remains confident in its ability to drive sustainable value creation for shareholders over time,” said Taverna-Turisan.
Equites’ Chief Financial Officer (CFO) Laila Razack said Equites’ portfolio has improved steadily since it listed with R1bn in assets in June 2014.
The fund would consider specialised/non-logistics assets and assets which are not able to be retrofitted with sustainability elements for disposal. It would also look at older assets which no longer met its “A-grade” standards and assets which were below a certain asset value or assets which offered rental growth that may be constrained in the future.
Equites would focus on the UK and its team was not looking beyond this market at this stage.
“We still believe that the UK serves as a Rand hedge, is one of the most sophisticated logistics markets in the world and will still benefit from continued demand for the logistics asset class,” Razack said.
Equites is hoping for share price growth in the near future.
“A reduction in interest rates would definitely NAV, which should drive share price growth (assuming share price tracks NAV). Secondly, macroeconomic stability and reduction in rates would make property stocks more desirable to investors; increased demand would further drive share price,” said Razack.
alistair@propertyflash.co.za
