Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Dipula Income Fund voluntary pre-close business updates. [Operator Instructions] Please note that this call is being recorded. I would now like to turn the conference over to Izak Petersen. Please go ahead, sir.

Thank you. Good morning, everybody. We've put together a very short presentation for you on Power Point, which will drop on our website after this call. I think the call itself would also be put up on the website for the benefit of those that could not dial in. I think the idea here is to sort of give you a very brief overview of the market that we're experiencing now at the moment and basically, just what's going on specifically in our company. So without wasting too much time, I'll get on to it. And we thank you all for making time [indiscernible] to listen to our call. From a trading environment point of view, I think one doesn't want to sort of spend too much time beating the same drum that's beaten out in a public domain, I mean, [indiscernible] to where you read them but you -- who you're talking to. It's quite clear that [indiscernible] sort of entered the very difficult trading period, and we are all affected by it. And obviously, slow economic growth, big issue. I think very specific to property. One of the trends that we've seen in our expected market is a spike in crime. And that's obviously leading to an increase in operating costs. We haven't seen a massive spike yet. But I think going into the future, there's definitely going to be an increase in security costs that one is a little bit concerned about. So to sort of counter that trend, we're trying to secure the properties differently, use different service providers, employee technology where possible. That's obviously sometimes even more positive than just a reinforcement, in that you take the human factor out of it. But there's definitely an increase in crime. If you just look at the situation over a 2, 3-year period. The load-shedding issue is a massive headache for us as it for everybody else. But I think specific to our business, again, all these spikes and power surges, we find ourselves having to replace quite a bit of chemical equipment components and basically, the knock-on effect of some of the load shedding where we don't have sufficient backup power. It's obviously lower trading numbers for tenants for those hours lost, sort of just the turn off of the ultimate customer on going to these centers. So we're obviously a little bit concerned that, that sort of slowdown in turnovers might have a knock-on effect down the line in terms of our negotiations with tenants on the rental side. And the other big issue in our lives at the moment is this failing municipal infrastructure. But to just cite one example, I think, in addition to the multiple load shedding that we had in Sunninghill in the past few months or so, we've also seen blocked sewer lines and sewer lines -- sort of sewer running into our center and us having to actually do the work and then go argue counsel afterwards about whether they'll cover it or not. And I think chances of recovering that money is quite slim. So we have -- we had to do what we had to do to sort of counter that. So big concern around these municipalities continues. And feedback from tenants that we tend to track turnovers in the sector. But we're not always aware of what's going on in the actual operating margins of our tenants. And speaking to some of them, it will appear that margins are under pressure. And some of the -- especially sort of little takeaway guys that are using your Uber Eats and these guys that deliver, there's a spike in turnover there. And we get excited about that, but it will appear that after paying Uber Eats and warehouses is doing the deliveries, your margins are actually dwindling lower. So again, a trend that's worrying us a bit there. And I think in any number that we put out and any sort of assumption we make, your biggest forecasting risk is around potential business failures, very difficult for us to tell who's going to collapse, although we obviously do everything in our power to sort of stay close and understand our tenant businesses. But I mean, I can't help but to think that there will be quite a few business rescues and potentially even liquidations in this economy, if things continue as they are. But that's really broadly what we're seeing out there. And it's obviously quite concerning. And we can only counter that with, obviously trying our business a bit more efficiently, being a little bit more nimble in our response. The upfront credit checks that we're doing needs to be at even more intense level now and perhaps flexible lease arrangements. You'd appreciate the difficulty of dealing with delinquent tenant in the South African sort of regulatory and legal environment. I think the landlord has seen as an enemy and the tenant has got all the rights. So tenants can trade in your space forever if you follow the letter of the law in terms of getting them out. So we need to always be aware of how quickly you can get ourselves out of those situations. And just specific to the business now in terms of [indiscernible] in our numbers and so on. Our gearing is at about 41% as at the end of January. And all the figures I'm giving you now is end of Jan because we're only closing off Feb now. And we have so far refinanced facilities to the tune of ZAR 663 million for an average period of 3 years. It wasn't too difficult, the discussions with the banks, and we actually did get quite competitive funding rates. That obviously implies that the banks are obviously reasonably happy or quite happy with the valuations of our portfolio. Otherwise, I think we'd have had to have some sort of LTV discussions with the banks, but there was none of that. I mean our interest cover ratio is well in excess of the requirements, trends even closer to 3%, it's about 2.7%. So more than covered there from an interest rate perspective and I think comfortably within the out LTV requirements of the banks. But obviously, like everybody else would like to hear about gearing much lower than that, but I suppose in this market, that will take some doing. [indiscernible] I mean, it's obviously a strategic objective that can only be, at the moment, realistically, be achieved through asset recycles and things like this, which are happening, but they're not really happening at quite a very fast pace, I must tell you. We've had 80% or 79% of our interest rate exposure through fixes and swaps. And from a dividend policy point of view, something that's obviously very topical at a moment. Our Board has not changed our practice for the past few years of declaring substantially everything. That's obviously -- I suppose, something that I don't think anyone has actually adjusted their dividend payout ratio is lower for just the sake of doing it. I mean there's always a reason for that. But I think for now, we still will pay out a substantial but about the sort of same number. And we expect our interim dividends to be in line with guidance. And just moving on to sales, CapEx and acquisitions. From September last year to sort of end of Jan, we had sold and transferred 4 properties for roughly ZAR 49 million. And we've got another 2 properties that are waiting transfer for roughly ZAR 26 million. We spent a total of ZAR 24 million on CapEx, both defensive and accretive CapEx, almost in a 50%, 50% ratio. There's obviously quite a bit that we need to spend there in terms of the [ ZAR 19 ] million sort of year marking when we last reported. And from an acquisitions point of view, we've still got the Cosmo City development that's awaiting transfer, and we expect that to happen us at the end of Q1, 2020. So end of March, round about then that you transfer -- the property is leasing quite nicely. And we've completed Norwood. And I think there, still got another 2 or 3 units to go, and then we fully let in those ready units. From a leasing perspective, across the business, we did about 21,200 square meters of new leases. There was about 16,800 square meters of tenants vacating our space during this period, all that 7,732 square meters subsequently been led to other tenants. The big ones who are basically an industrial property out in the west of [indiscernible], where a single tenant, about 2,500 square meters moved out, but we replaced them. And then we also had [indiscernible] move out to [indiscernible] properties in Montana, they changed purpose there. That's been subsequently led to a supermarket. That's also roughly another 2,500 square meters. Other than that, it was recognized all over the place. And from a renewals point of view, as you know, we've got about 160,000 square meters coming up in this period. Of that, to date, we've done about 50,148 square meters of renewals. And I'll sort of drill into that under the factors when I get there, just to give you a sense of how those are going. And our current vacancy is sitting at 5%, which is about a 20% drop from the vacancy of about 17% drop from vacancy reported at the end of 6%. So wagon has start trending in the right direction. I'll provide a bit more color on the sectors in terms of how that sort of pans out. And just touching on our operations. Team is stable. We've got a solid operating platform. I think if we just sort of listen to the summary I've provided so far. And what I've just said in terms of team, obviously, a complete disconnect to our share price is [indiscernible] at the moment. But I guess, it's a sector-wide and [indiscernible] issue here. But I think you can rest assure that the things that we can control, we're actually controlling very well at the moment, even better than during better times. But it's a pity that's not reflected in share price and so on. We've employed additional debtors, administrators because, as you can imagine, as cost come down to -- under the pressure economically, we sort of need to monitor that area a bit more. We do have about 1,700 tenants. So there's a lot of talents to deal with. So the trend is every one is reducing vacancy, strengthening operating platform, stable team, where we have rolled out [indiscernible], it's performing beyond expectation. Obviously, limitation there is always going to be capital under the circumstances at the moment. And as I initially stated, from an operational point of view, our biggest concern would be around business values going forward. All right. Just looking at our retail portfolio briefly. We've done about 19,556 square meters of new deals there at an average lease period of 3 years, gross rentals of 91% and escalations of 7.8%. And from a renewal point of view, we've renewed 19,314 average lease period of just under 3 years, gross rentals of 144 rental square meter escalations of 8% and the reversion rate there was a positive 2%. There was only 2 large supermarket renewals and the rest were client tenants, I suppose, hence the sort of [indiscernible] escalation of round about 8% because obviously, escalations are generally under pressuring when you're dealing with the larger tenants. Our vacancy there is currently 6.4%. It was 8.4% at the end so that we've actually managed to bring down quite nicely. Apologies, we -- our call was dropped. I'm quite sure where I ended, but I'm just going to go on. I'm just going to start with the retail portfolio again and move on from there. What I was saying was that we have done new leases of 19,556 square meters. In the retail portfolio, average period of 3 years and gross rentals of 91%, debt escalations of 7.8%, and we had renewed 19,314 square meters. Average lease period of 2.7 years, gross rentals of 144 rental square meter, escalations of 8% at a positive reversion rate of 2%. Our current vacancy for retail of 6.4% compared to 8.4% at the end of the financial year. In terms of major sort of activities there that we're busy with at the moment. We believe the effort at Bella Ombre that commenced about a month ago. We are putting in a new shop right and a few other retenancies there and a bit of a facelift. And our biggest issue in this retail portfolio from an occupancy point of view is obviously, the sort of big change in how banks are conducting their business. So we do have a few branches that we need to find alternative users for at the moment. It's not massive exposure because those things are not actually attracting the biggest of rentals. But there is about 5 or 6 or 7 of them in our portfolio that need chances at the moment. And we're seeing significant decay in the CBDs of [indiscernible], for [indiscernible] through the [indiscernible], especially. But steel industry under pressure in the [indiscernible] area. [indiscernible], just like a [indiscernible] and [indiscernible], I think also probably a similar trend there. The exposure in those towns is not huge. I mean, [indiscernible], obviously, we do have [indiscernible] more there, which is quite big, single exposure of about 15,000 square meters. As for [indiscernible] for [indiscernible], it's not massive exposure, but nonetheless, a bit of a worrying situation there. We have solutions for a lot of our issues, but we do tend to find that exclusivity clauses are still being enforced quite aggressively by the national retailer, so that limits our options. And we've also seen the disappearance of, especially our high-end furniture retailers. It would appear that some of the disposable incomes that were in the system, 2, 3 years ago, no longer there. So I think those [ iron ] guys are probably something in the past for trading out of certain locations, especially shopping centers and all that. And we've got 1 or 2 spaces still left that -- where we haven't replaced [indiscernible], as an example, and that sort of environment outside of that, I think, substantially replaced in a way they moved out. And on the office side, there isn't much activity on that side because, obviously, we've got the relatively little exposure there, but we did about 1,100 maybe 2 square meters of leasing there. But a gross rental of 154 rental square meter. And that was mainly leases done at our [indiscernible] property in Cape Town in Durbanville, escalations achieved there about 9% and the renewed 10,953 square meters average lease period of 2.6 years, gross rents of 150, escalations of 7%. Bulk of that was [indiscernible] IJS. And as you know, other leases, what we [indiscernible] [ in the part ] period are set leases. So that's all done now. And unfortunately, mainly due to DPW, our reversion rate there was minus 9.8%. Vacancies at a moment at -- trended slightly upward there from 7.8% to 8.4% and our biggest challenge is obviously just dealing with especially provincial government. We've got in [indiscernible] exposure to provincial and in PE, exposure to provincial, and that's -- it's not the easiest doing of government to deal with that. And the market, obviously, remains extremely competitive due to oversupply issues, et cetera. And on the industrial property side of things, we did only about 500 square meters of new leases there, average lease period of 2.5 years, gross rental of 59,000 and escalations of 9%. On the renewals, we renewed 19,881 square meters. Average lease period of 2.2 years, gross rentals of 51 escalations of 7%, eversion rate was a minus 6%. And yes, you -- many sort of smaller industrial parks continue to sort of -- just sort of trend sideways from a rental perspective. So no fireworks there, but stable. It's not sort of massive negativity that we're experiencing there. But we are doing the shorter leases to try and not lock in lower ends for too long a period of time. Our current vacancy there is 1.7%. So the reason could be low support in the vacancy trends and at year-end, we had a 2.3% vacancy there. So we're still leasing space there. So I confidently say that industrial is obviously at all-time lows from a vacancy perspective. Ladies and gentlemen, that's really where we're at for the moment. And I think there's a process for allowing for questions. But as I said earlier, we will put this on our website and you're more than welcome to contact us directly. But I think overall, sort of a -- healthy operationally, concerns macro picture wise, but very focused on the chosen strategy. And I suppose, hopefully, this means that for the entire financial year, one could actually, at least perform in line with that guidance given. But obviously, the concern is always around whether our tenants will make it up until that point. Yes. So that's our story there. Thank you.

[Operator Instructions] The first question we have is from [indiscernible] Capital.

Yes. Can you hear me?

Yes, we can hear you.

I just -- your share price is currently ZAR 2 at 80%, or at least the B shares or 80% of NAV note. You mentioned that you think the concern might be rather the survival of your tenants. Do you recognize other concerns from in basis given the way your share price is? I mean just as an example, I listened, I think 2 days ago for the weekend to another property REIT company and they made a comment that their loan-to-value is 40% and the banks are putting pressure on them to reduce that. So that limits them in terms of the capital expenditure that they need to make -- to maintain their buildings, so tenants will stay there. And I think [indiscernible] mentioned, the distributable earnings was about -- or dividend is about ZAR 500 million, similarly as yours. And they reckon they need to do capital expenditure of ZAR 150 million to ZAR 200 million to do that, and they can't borrow anymore. So they need to reduce the payout ratio. What is the situation with [indiscernible] it in that regard?

Okay. Yes. I think there's a few components to your question, and I hope I'll do the question justice. I mean, in the first instance around the share price, look, I mean, as far as we're concerned, and given the information at our disposal at this point in time, we don't really understand beyond the macroeconomic picture, why the market would be at a such heightened nervousness when it comes to especially our B shares. I mean, obviously, we understand that macroeconomic picture would play a role in how people perceive this sector. But should the fees be knocked to the levels that it has, we don't believe so. The other thing is, there's obviously -- there are ongoing debate around the A and B share structure that might have an impact in terms of how people are viewing the share. Again, I don't believe that it should be to the extent that the share has been knocked down. As I said, operationally sound, you can see that in the falling -- or the increasing occupancy levels, why is our occupancy going up, it's going up because we started the CapEx program again, about 5 years ago, improved the assets, continue to improve them. We're hoping that we can maintain that trend through some sort of asset recycle where we can. Because, I mean, these things are actually working quite well for us. If we don't, obviously, that would slow down that program. But I don't think that, that will necessarily, over night have an impact on the valuation of assets. In the valuation of assets is probably impacted by rather the sort of rental levels and the discount rates applied. And again, if you look at the average rentals in our portfolio, they're not very high. So I mean, we still got room there to renew at reasonable levels, putting tenants at sort of expected rentals. So I think over rented property at the moment. And obviously, over exposure to the sectors about completely oversupplied is a big issue. Again, if you look at Dipula's portfolio, even when all of Africa opened and there was a sort of big CapEx program from competing centers to try and keep up with that, we were pretty much unaffected because we've got the smaller center. We've got the community center. We've got the convenience center. And if it is conveniently located, that should be fine. And we also find that we do have alternative tenants going into those convenience centers more so than what you'll probably find for big boxes in large superregional centers [indiscernible]. So I mean, I think this portfolio is definitely defensive from that point of view. I think the last component to your question was payout ratio. And there, as I said, [indiscernible] answer on our call is -- I think people are not reducing those payout ratios because they necessarily have a choice. I think they do see those payout ratios because they want to continue running their business as well. And they can't fund CapEx from anything else, but perhaps a payout ratio reduction. At this stage, our Board has not made a decision to reduce the payout ratio.

Yes. Okay. So -- no, that's great. If I understand correctly, correct me if I wrong, you're satisfied and confident that your -- I think you mentioned [ 3 of ZAR 90 ] million CapEx for the year. That you can finance that with smaller disposals. And if I understand that correctly, I think the comment on the other REIT was it's stuff out there and they're having trouble making disposals. And then I have kind of aligned to that and attached to that is, also, you don't seem to me to be facing pressure from a banks to reduce your loan-to-value ratio and i hear that mainly because comfortable with your valuations. And I think I know why. I mean I'm -- just can correct me if I'm wrong, is that if I compare your capitalization [indiscernible], informs your valuations, seems to be quite a bit of headroom above a lot of other similar REIT's. Is that correct? Maybe, just correct me.

Yes. Look, I mean, there's two sort of positives when it comes to Dipula. Firstly, Dipula has this diversified portfolio. And secondly, there's also the types of assets that we acquire, I think, I think we've sort of tended to steer clear of over rented property. But what we've done once acquiring the properties, we've also sort of ensure that there's some value of adding strategy or the other that we sort of unlock in a property. They've always sort of an angle as to why we're buying the properties. So if you look at our average leases, the sort of rental across the portfolio per square meter, you will notice that, that number is at a reasonable number. And if you go look at the per square meter valuation, okay? And you do a market comparison across the board. You also see that, that number is probably fairly comparable, if not sort of slightly below comparable properties. So if I look at that and you sort of look at, sort of the cap rates applied, I think for a long time, the sort of no regard to the relative growth prospects of properties as a sort of more the glossier, the more beautiful and the larger the shopping center, always a presumption that, that shopping center because it's larger, will necessarily attract a lower cap rate on valuations. But I mean that's the furthest thing from the truth because it does regard the very essence of why you have a low cap rate versus a high cap rate and a low cap rate versus the high cap implies more growth in the other scenarios and probably less growth in a higher cap rate scenario. And I think those things are starting to sort of come through where your [indiscernible] centers are not necessarily centers that are embedded to better growth. And I think as that unfolds, where maybe more aggressive cap rates were applied, that situation is sort of reversing itself. And I think there were also a fair amount of evaluation on the office side, and we've always been [ under-rate offices ] for the -- at least for the past 5 years within [ under-rate offices ]. And that was a tactical management decision from about 8 years ago that we would go [ under-rate offices ].

The next question we have is from [indiscernible] from Carnation.

It's actually [indiscernible] from Carnation. I just wanted to get some clarity on those disposals. Were they done at book value or below book value? And are you struggling to also get rid of the other tail-end assets? Or what's the progress on that?

Okay. No problem, thanks for your question. Those disposals were down substantially at book value. I think we're about -- probably about $1 million below book or something. But I mean, other than that, it was at book. And it was obviously give-and-take situation on aggregate about $1 million below book. And from a looking forward point of view in terms of disposals, again, not the easiest market. So we have been trying to focus the smaller property into the market. There's still biasing handles there. And there's -- there are some inquiries of properties. And I don't think the guys are paying top dollar for property necessarily. But we're not -- I don't think that we have an opportunity here to do one massive wholesale sale of properties because I don't think the market lends itself to that. So we're going to have to very cleverly filter the property into the market and where we sell, we sell. And it's really core to our strategy that we client-dispose enough property to cover our requirements. But it's, at this stage, not a desperate situation, if I may put it that way.

Okay. And then just one quick one. Do you think that your current escalations are sustainable given what's been the media lately?

Yes. Look, I mean, you know what my worry is, and I always say this is -- I don't know these numbers coming out of, say, a big problem for us because I mean, our -- obviously, our cost inflation experience is very different from the CPI numbers and all that. Because I mean when we negotiate with security companies and all this, they're always starting at a double-digit number type of thing. We don't necessarily settle there, but that's sort of really a very different escalation or inflation experience. And I feel that from a tenant point of view, especially where we're performing all of the operations for the common areas, obviously national tenants are pushing quite hard, especially our food retail guys for low escalation, but I think at some stage, people have to take their locations seriously and where we've got options, we're not necessarily going to renew someone. We're trying to get the reasonable escalation after them. So our expectation is sustainable, I think so. But I think there's also been a little bit of a give and take on rental versus escalation, technically from our side. And yes, I mean I think that's high on the agenda to sort of try and deserve. And it's a question of the rental level rather than the escalation. In other words, I mean, I think that guys are already paying too higher rental. That escalation becomes an even bigger talking point. But if we are at a reasonable rental level in, then yes, it's a difficult discussion, but it's a discussion that you can still have because the rent is not over yet to speak on what I'm saying.

It seems that he has dropped off the line. [Operator Instructions] Next question we have is from [indiscernible] from SBG Securities.

I have one question. So you've got about a 2% exposure to Massmart as a whole. Can you give us a bit more color as to which stores you actually have exposure to?