Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Dipula Pre-close Conference Call. [Operator Instructions] Please also note that this call is being recorded. I would now like to turn the conference over to Izak Petersen. Please go ahead, sir.

Good morning, everybody. Welcome to our pre-close call for the upcoming year August 31, 2020. We have a lot of facts and figures that we're going to be discussing with you today. The numbers are as of end of July. We're, obviously, busy finalizing numbers for year-end. So I'll go through a few facts and figures with you, and we'll then have an opportunity at the end for questions, as operator's already indicated. I hope the line is clear. Just briefly on the trading environment. I think we don't want to worry of things that you already know. But obviously, things are quite tough out there. And we're kind of all sort of navigating our way through this COVID-19 situation. There is a fair amount of risk aversion in the market that we're observing, and this has led to a slower pace in space absorption but also these lower amount of tenant failures that we're starting to observe within our portfolio. Collections are, obviously, slower even with the tenant relief that we have provided so far. We'll speak a bit about that later. I suppose the biggest concern on our end is how intense the business failures are going to be going forward. It's clearly an environment where capital allocation decisions are made very challenging. And I suppose the key thing is to always have cash to run your business and sort of deciding how you spend that cash and still ensure your assets sort of looked after your business to survive is quite challenging for us at the moment as businesses. The sort of key observations from our side is that people are sort of very focused on the current macroeconomic and sociopolitical situation in SA. So in terms of decision-making, that's sort of the key theme, a fair amount of negativity out there and very low business confidence. So therefore, from a leasing and a commitment point of view, tenants are not really committing all that much. Having said that, there are sort of certain opportunities that are emerging as a result of certain structural changes in the market at the moment. I suppose the key question here is where to from now for SA Inc. and all of our -- sort of how we perform going forward is going to depend on the performance of SA Inc. Just a brief business update. Our gearing at the end of July was around 39% LTV. We had refinanced on a short-term basis, about ZAR 109 million of facilities. We're still engaging with the banks to roll another about ZAR 1 billion in the next 12 months. And basically, of that 39% debt LTV, 68% of our interest rate exposure is hedged. That's obviously a few percentage points lower than when we last reported. Obviously, short-term interest rates at the moment are fairly favorable. So we're seeing a little bit of that sort of filter through our numbers on the income statement. From a sales and CapEx perspective, sold and transfer of our 2 properties for ZAR 25 million since March, and a total of about ZAR 12.5 million was spent on committed CapEx. So these are deals that were in the pipeline pre COVID-19 that are still sort of filtering through on the CapEx side. Cosmo City have transferred, and that we obviously were precommitted to that and we bought that for about ZAR 120 million our portion of it. The total development is double that. And our partner story tell another 50%. A portion of that was debt funded, and we had to pay cash rather for about ZAR 70 million of that was paid in cash. From a leasing perspective, we have concluded 25,000 square meters, 25 -- exactly 25,736 square meters of new leases. So we're still doing deals, which is quite encouraging. But between March and now, we've also lost about 29,000 square meters of tenancies. There's a bit of Edcon in that, but there's also 1 or 2 bankruptcies of smaller tenants that are in that number. So obviously, as I said, in the beginning of this presentation, obviously, quite a big concern on our end. Inquiry around -- I mean we've got 2 gems in the portfolio, and we're kind of worried about where that story is going to end up at the moment. The total renewals during the period was about 36,875 square meters. We had about 100,000 square meters of renewals still to do in this period. Quite a few of those leases are coming through now because negotiations obviously have been relatively slow as we -- because of lockdown, but all indications are that most of the tenants are going to renew probably on sort of a shorter sort of 3-year deals, between 3 and 5 years. We're not seeing anything longer than that at the moment. And the vacancy in the portfolio has gone up from about 5.8% to 7.7%. We think that will go up even further going forward. Should sort of normalize around it, I suppose, maybe the [ 10% ] back and then sort of we're definitely going to see more vacancies coming through in the portfolio. Our portfolio is showing very good resilience in spite of all of these negative factors that I've highlighted. We have gone through our valuations for 2020. As you know, we use 5 valuers in the portfolio. We circulate. In fact, we sort of circulate a portfolio amongst them. So in a year, each valuer gets a different allocation of the properties. So that gives us a good sense of sort of keeping that as neutral as possible. And the valuations came out 0.5% higher than the prior year. We obviously -- we expected worse than that, but we're very pleased to have that. I think the main reason for that is quite simply the fact that, as I demonstrated in our interim presentation, we've got a very defensive portfolio here. I mean, if you look at the proportion of essential tenants on our retail portfolio versus non-essential, that's quite a high percentage. And if you also look at a percentage of sort of national tenants and sort of blue-chip tenants, that's quite a high percentage. And previously, valuers had taken a fairly conservative view on the portfolio. And I think that our assets were not aggressively valued previously, and I think that's sort of showing now as you could see from this number that I've just indicated to you. So I indicated earlier, I think there's definitely going to be a short-term spike in vacancy here, it's good quality space that we think will move, especially in light of some of the sort of new retail -- smaller retail formations that we're starting to see being demanded by larger tenants. I think that's perfectly suited for our type of assets, and for the markets that people are chasing. From a retail perspective, we did about 15,000 square meters, 14,000, 14,700 square meters. That was a total number of 57 deals, new deals on the retail side at an average lease period of 3 years. Rentals were in line with budget. But they were about 4% below our asking rents obviously always trying to do better than budget in terms of our asking rentals, but we were about 4% below those asking levels, but in line with budget. And the weighted average escalation on those new deals on the retail side was about 7.7%. So we're still achieving fairly good escalations on new deals, and we're quite pleased with that. Renewals on the retail side, 15,000 square meters. We did there, 50 deals. Average lease period about 4 years, okay? And it was a 1% positive reversion rate and a 7% better than budgeted performance on the renewal side. The weighted average escalation on the renewals about 7%, slower than the new deals because, I mean, obviously, most of those renewals were done with national tenants that are pushing that part on the escalations at the moment. On the office side, we only did about 3,300 square meters of new deals. This is about 6 deals that we did there. Average lease period is about 3.7 years. I mean these numbers are all March to the end of July, as I indicated in the beginning, and rentals will be lower asking rentals and budgeted rentals by about 14%. So obviously, a lot more pressure on the office side. Our weighted average escalation that we achieved there was 8.6%. So there's definitely a trade-off between the rents that we achieved and escalations that we locked in, and we should make up some of that lower rentals through these escalations over that 3.7 years. On the renewals and office side, we renewed about 14,300 square meters. That was a total of 9 deals, so fairly chunky deals that we did renewals on there. Shorter average lease periods there of about 2 years on those renewals. And people are not very confident at the moment. There was a 9% positive reversion rate. Reason for that 9% positive reversion rate is that quite a chunky transaction we did in our park town property with a particular tenant that we expected to push back much harder than they did sort of pushed that number quite nicely for us to get 9% positively very good. And the weighted average escalation on those renewals was about 8%. So again, pleased with that. Industrial, we did 7,700 square meters, 6 deals, so not a lot of deals. As you can remember, our vacancy on the industrial portfolio is only about 2%. It was actually even lower than that in the interim period. So I mean there isn't really much scope to do new deals there, although we've had 1 big tenant failure there that's been liquidated. So I mean that's added quite a bit to that vacancy. At the end of June, I think we vacated that tenant. So the average lease period, there is about 2.3 years on the new leases, so people doing shorter leases. Rentals were in line with our asking rentals and budgeted rentals. So we're pleased with that. And the weighted average escalation was about 7.4%. Renewals, we renewed 7,563 square meters. It was 5 deals, there isn't a lot coming up in the industrial portfolio for this year, most of the renewals are sitting in that retail portfolio. Average lease period was about 2 years there. We achieved a 14% positive rent reversion there. Main reason for that was that Skynet and RTT at Corporate Park, we managed to actually renew at quite favorable rates within there that -- those are the 2 deals have pushed that reversion positive. Obviously a small number in a bigger scheme of things, but nonetheless, a pleasing performance there. Our escalations achieved there were about 8%. Moving on. Just to give you a sense of our collections. We have on average, for the 5 months since April, collected 88% of gross billings, and all of these are better percentage over the number before the discounts, of about 88% and -- on the total portfolio. If I break that up into the sectors over the 5 months, rental was 86%. Office was 98%, and industrial was 87% on the collection side. Our best month so far has been -- we had a June and then we're having quite a nice August again. I've broken these numbers per month per sector on the slide. I mean we will post this thing on the website. But if you look at April, I mean our collections in April overall were about 72%. We then moved to about 86% in May, 97% in June, 89% in July, 96% in August to date. Obviously, we still got another 3 days to go. So that number will probably go up. But in terms of discounts, so far, in by the 1st of July, we're still are processing more discounts so that numbers with all probability going to go up. What might also happen in the portfolio is that I think a few tenants are definitely going to go bank. So we need to think about the -- what we do of provisions on the bad debt side. But so far, we have provided total rental release of about ZAR 25 million. As I said, I mean we expected that number on a low case basis, to be at about ZAR 15 million when we reported in May. We're probably are looking at about that number at the around ZAR 50 million, maybe a little bit more than that by year-end. Just briefly on how we move forward from here. Obviously really tough times now at the moment, but we're not getting caught up in the negativity of the situation. We're pushing our teams very hard to keep our occupancies up, collect as much money as possible. We are focused on today, working tomorrow obviously, really not too much worried about what we could have done that we haven't done because it is what it is, the situation at the moment. We will focus on maximizing free cash flows and balance sheet preservation of utmost importance here. We need to look after these assets. I mean we can't let our assets decay. We can't sell ourselves out of problems. We need to work our portfolio. I mean that's ultimately our sort of key objective here is to build a good portfolio and then manage it well. And that's -- I think we're achieving that, to a large degree, even with the challenges we're facing. Obviously, our survival is initially linked to the survival of our tenants. So we will continue to lend support where we can there. And basically, also work very closely in understanding their businesses and seeing how we can all survive this. We need to adapt and adjust to the situation. And the focus on our end is on basics, manage property while look after property, collect rentals and basically spend in a responsible manner CapEx where we can, very tough. So we need to sell property to raise a bit of money for CapEx purposes. But ultimately, as I said, our business is property. So we can't run away from property. I mean, otherwise, we have to lock our doors. So we need to just find the best balance here. Obviously, I suppose, even with the relatively good work we're doing at the moment, there's less of restrictions on our end due to our capital structure, hopefully, one can find the right solution there in the interest of all stakeholders and all shareholders at some stage. So we are thinking of a few things there that we put in front of you at the right time, pretty soon. And yes, I suppose, for purpose of just surviving here, our commitment to our people, remaining tenant-centric, improving our systems, and we've done quite a lot of IT improvements on our end. We're literally approving almost everything electronically now so we literally can work from anywhere, our building inspections are done electronically. So a lot of improvements on the system side on our end. And we literally have our figures on our fingertips from wherever we might be, which is quite great. So I think COVID has really accelerated the IT side for us, and we're very excited about that. Thank you. They will be opportunity for questions.

[Operator Instructions] Our first question is from v Dineo Matjila of Meago asset Management.

Can you hear me?

Yes, we can hear you.

Can you just please repeat the reversions number for the office portfolio? I missed that.

Office reversions?

Yes, please.

9% positive.

9% positive. And then -- sorry, for your industrial portfolio, what is the WALE?

For new leases?

Yes, please.

New leases, we did a WALE of about 2 years. I mean...

And the reversions on that?

The reversions were 14% positive.

14% positive, and the escalations?

Escalations at 80%. That indicates that it was a low number of deals. So that was about 5 deals we did in industrial on the renewals. And the main reason for that nice positive reversion there was at Corporate Park, we had the new Skynet and RTT at very favorable rates.

The next question is from Jonathan du Toit of Oystercatcher.

Izak, can you hear me?

Yes, I can hear you loud and clear.

Okay. Just -- I don't know if you can give a few -- on your balance sheet, you had 3 loans to Vandanex, Phepha and Sakhumzi. Can you comment on if they're performing and if they still make good payment?

Everybody's got pains. And yes, we got no issues for those loans at the moment.

And I mean, you haven't got any concerns on -- they haven't indicated any stress that they are under?

No, nothing. I mean look, I mean it's a -- the Sakhumzi loan is asset-backed as opposed to if we run into problem -- it has faced slower times. But I think if we run into problems, they will just take our property back.

Okay. And the other 2 loans?

The other 2 loans are actually are performing excellently and they're backed by very good balance sheets.

Okay. Perfect. And then you also mentioned that you've refinanced ZAR 109 million on a short-term basis. I don't know if you can explain, I mean, how short term is the basis that you have there?

We just did 5 months there, and I think the banks added to you that the time of renewing that loan was let's go through 3 valuations first, and those valuations have now come through. And obviously, as we discussed our loan, which is sitting with different banks, I'm sure the one-on-one is also on the agenda. And hopefully, we can do that for a longer period now. Unfortunately, I think that loan sort of expired during COVID and/or just before and discussions are a bit slower due to COVID, but I think the banks have adopted a bit of a wait-and-see attitude. I think when some of the valuation numbers and expected falling valuation came through in a market. Everybody sort of got painted to the same traction. People are concerned that maybe the portfolio might go down aggressively. As I said, fortunately, I think our portfolio has held up quite nice under the circumstances.

Okay. And then I mean, just on -- I mean, obviously, I mean, with the Cosmo deal, I mean, as you said, I mean it sounds like there's not a lot of cash. Your thoughts around distributions and potentially not paying distributions? I mean, you talked about restrictions due to the capital structure. I mean are you also thinking about potentially collapsing the AB structure?

We are thinking of finding a solution that makes sense. I mean, there's a lot of options here in terms of what one can do. But obviously, it's not necessarily a management decision or a board decision that's a decision that shareholders will have to endorse. So we'll put forward some ideas as I said, soon and see where it takes us. And from a distribution payment point of view, which was the other part of your question, yes, we obviously -- we're just seeing where this year is going to end from a cash point of view. And obviously, further relief that we need to provide the tenants. And then beyond August, there may be further business failures, and we kind of just need to assess what the situation is going to be. And I suppose the sort overall consideration from a Board point of view is this issue of solvency and liquidity as you need to do in terms of the company's act and that might kick off the number for distribution, so distributions if makes sense. But we will be meeting with our Board around October, sort of early in October once we have a fair and more reasonable picture of what our cash flow situation is. That ZAR 25 million in rent relief to tenants so far is probably not our last number on this. So I think maybe just be patient and wait for us to actually work our way through this to see where we land.

Maybe if I can ask it slightly different. I mean on a cash flow basis, let's take always I mean August is almost done, cash flow after paying all your costs and your interests, there's a net positive number. Are you still net positive on a cash flow basis?

Yes. But our cash flows are positive. After paying all of that, we bill about ZAR 120 million a month in rentals. And I think free cash flows are around ZAR 40 million, ZAR 45 million, ZAR 50 million per month. In normal circumstances, our distributable reserve or distributable income is just over ZAR 500 million, ZAR 500 million to ZAR 550 million. So obviously, I think because we -- at normal times, we need to see how much of that is going to be knocked by potential bad debts, tenant failures and, obviously, the rent release that we're providing at the moment. And we have paid for Cosmo in cash also I mean that number also if you take into account.

Okay. I think, I mean, my only comment that I'd say is and this is a very tough environment. And we are shareholders, and we back you. And I think the thing is protect the balance sheet is my view. We don't know how thing -- tough things are going to get. So even if it means not paying a distribution or something like that, rather protect the balance sheet.

That's pretty much the attitude of my Board as well is look after the business, the rest will follow and I think if things stabilize, if we just look at what this portfolio has done, give another very tough circumstances. But we haven't sold property. We haven't bought much property. And the fact that our vacancies have remained at about 7% because there is -- you can actually manage number through selling property or buying property. We haven't done any of that and our vacancy is still at quite a good level at below 8%. As I said, maybe that number might peak just over 10%, whatever the case may be. But I mean, it's not -- the portfolio is not that sensitive to it. I mean the portfolio is very sensitive to it if there are peak tenant failures and on especially the asset maybe side. So we just need -- and we'll be very proactive in placing tenants where we need to and replacing them with more resilient and more defensive tenants. And I think we'll continue to do that. I mean, we were one of the first to not do an Edcon deal 2 years ago and a 41% substantial part. We took that most of our space, and we've subsequently relet that space. So now when the final sort of nail in a coffin game as it were, literally, we just lost 2 stores that were working fine and the rest of it is taking so that we have an experience. So we're very proactive managers of our portfolio, I can tell you that.

Next question is from Sheldon Kisten of Kagiso Asset Management.

Thanks, Izak, for the update. Just a quick question or a question or 2 rather from my side. In terms of property valuations, is that number, that 0.5% that you gave us, is that like-for-like? Or is that inclusive of your acquisitions for the year?

Excluding acquisitions. Excluding the one small acquisition of Cosmo. So that's like-for-like.

Okay. Got you. And then on your refinancing that you spoke about, can you maybe indicate us the terms of the deals of the refinancing? Can you disclose your average cost of debt on -- post that refinancing?

Ridwaan, do you want to take that?

Yes, Izak. So I think we -- as you mentioned correctly, the banks are redoing the valuation, the budget. So we haven't had any firm commitment from them on what the actual margin cost, the effect it will be. I mean the margin on those expiring debt is about 3 [indiscernible] plus [ 190 ]. So we're definitely going to see an increase in margin on that refinance. But exactly where it's going to end up, we're not certain at this point in time. I think maybe just to add to Izak's comment is, I mean, that we were about 68-odd-percent of the debt we hedged and there's about 32-odd that's not yet. So we still -- we are currently benefiting from that 32% where the driver right now obviously much lower now than they were previously, so there is about 30% of benefit on that. So I think all in all, we still -- we should be achieving a much lower all-in weighted average rate once we conclude on the refinancing renewals.

Thanks, Ridwaan. And just last question from my end, it's relating to maybe deferred rentals. I mean are you guys going to put that into accrued rentals? Are you going to write it off? What are you looking to do with that? And then maybe on that, can you give us a sort of guidance for a percentage of bad debts for the year or an amount?

Okay. Bad debt we thought that we will be doing a proper analysis there. There's certainly going to be some increase in the provisions numbers. I can't really give you a number at this stage. To the interim, we have actually provided an extra ZAR 6 million rent the interim period in there. I think there's going to be a bigger number than that coming through. That, in addition to what we already have in the books. When the -- I think the second part of your question was around what is it again?

Accrued rentals.

Accrued rentals. How we dealt with the rentals on the deferrals, is we take it out the books and then we just rebill it every month, okay? And that's not a big number. It's not a big number. That's about ZAR 3 million so far. And then obviously, discounts are discounts. I mean we pass the credit on the [indiscernible] account.

The next question is from [ Aldi Suvere of Sudhendear Capital ]. [Operator Instructions] I do think that there is a bit of an issue with the connection there. [Operator Instructions]

I'll take that as no further questions?

No, we do have a question from [ Tahania Khari of Coronation Fund Managers ].

Just to get clarification on those deferrals. Is there any interest charged for them? What's the -- or what would be the length that you gave those tenants the deferrals to pay over? And were there any renegotiations done over and above those deferrals?

Yes. Look, we -- obviously, as I said, I think the chunk of the relief that we provided is in the discounts, that's loan and of the ZAR 25 million, that I indicated. Only ZAR 3 million of them were deferrals. So it's not a big number, and we're not charging interest on those numbers. And the repayment periods vary between 3 to 6 months. In terms of collecting that money. And this thing -- the situation is fairly fluid. I mean, sometimes, it sort of -- it goes back and forth and some tenants need a little bit more time and so on. I mean that number might get repaid over a slightly longer period than what I've now just indicated. And we've also had situations where deferrals have turned into discounts, just to support the tenants a bit, but it's not a big number, the deferral part.

[Operator Instructions] We have a question from Sheldon Kisten at Kagiso.

Izak, I mean, very a sort of open-ended question regarding your office tenants, I know quite a big chunk of that is government tenants. Looking at another count of delta, obviously, they have notoriously quite a tough time of negotiating with them. How has your experience has been with them? Has it been tough? Are you finding it a bit easier to renegotiate terms and renegotiate leases, et cetera?

I mean there are a number of dynamics that play out on the government side. One is that you need to you need to look after these properties. I mean, and it's a tough thing to do because government pay these gross rentals, and they're really very hard on buildings and I'm talking but I can assure you that when it comes to renegotiating leases at the end of a lease and you haven't actually looked after that property then you have a tough time of government. And without saying anything about other counters, I think you need to just keep that in mind as the first thing. And second thing is government prior to do this in the scientific and a fair manner. So they basically had a situation where, yes, they looked at impairment in terms of the length of leases they were giving, but they also looked at doing market rental benchmarking and were using to order on the main. So I think when our leases, the chunk of our leases came up about a year ago. We did renew them for between 3 and 5 years. And I mean, we were pretty much -- we took 1 or 2 negative reversions. But on the main, you were not significantly over-rented, so the quality of space that we're actually renting to governments. And some of those buildings were fairly strategic to them from an occupancy point of view. So it is never an easy discussion of government. We don't necessarily believe the government will move out on a wholesale basis. They've actually been very good payers throughout COVID now, thanks God for that. But yes, I mean, there is -- it was not an easy discussion. But I think that you can make the discussion even more difficult by not looking after your properties.

I appreciate that. And last question from my side, I think probably Ridwaan will be best placed to answer this. You did mention that in terms of margins, banks still need to review some things and get back to you. Can you maybe disclose the average debt expiry profile? I know it is about between [ 2 to 3 ], maybe before all of this refinancing. Can you give us an indication of where it's sitting now?

Yes. I mean, there's about ZAR 1 billion of the ZAR 3.6 billion coming up in the next 12 months. And the rest of the facilities are between 2 to 3 years. I mean I think stripping the ZAR 1 billion out, you're looking at about 2.5 years [indiscernible]. So obviously, at billing that average down to about 2 years or something if you put it in there.

Okay. But you are actively looking to refinance that ZAR 1 billion?

Yes. Yes. Yes. No, of course, we'd be commencing those discussions now, now that our valuations are done.

We've got a question from [ Kopani Maku of Mazi ].

Guys, can you hear me?

Loud and clear.

Yes. Just the first question, Izak, is just on the debt side, the funding side. With the valuations having come in your discussions with banks, I mean, have you had to change or ask for covenant waivers or an increase in your covenants given that the valuations have come and gone? And then the second point I got disconnected briefly. So I'm not sure if it was asked. Just in terms of your dual share structure, you did mention that you are looking at something. I mean, have you engaged shareholders with regard to potentially relooking at that share structure?

Yes. So on the question of covenants, yes, we've been touching on that point to the bank there. I think if anything, it kind of feels that the attitude of the banks is lower covenant rather than higher covenant. I mean we think that's unfortunate because, I mean, we obviously believe that there are certain other funds out there that have covenants of anywhere between 50% and 55%. We are still stuck at that 45%. I mean we've been trying to certain time press that upon the bank to say, listen, we don't want to borrow more money, obviously. But a higher covenant could be useful just so that everybody's comps leads a bit easier at my tab. So it's a discussion that we'll continue to have with them. But I kind of think that banks get conservative quite badly in times like this. And they sometimes don't even look at actual fundamentals per counter, and if there is a sort of a gender sentiment that banks apply, then it becomes a general sentiment regardless of your specific circumstances and all that. But we would love a high covenant, as I said, not to borrow more money, but just to give us that value. On the newer share structure, as I said, I mean our auditors still awaiting and looking at various options to put in front of shareholders and to just discuss with shareholders. As things stand, we haven't edged anything forward, but there are a few options here that one can explore, and you'll be hearing from us soon.

We have no further questions in the queue, sir. Do you have any closing comments?

I think no closing comments from my side, I think we will upload this presentation on the website. And you guys have my number. Just give me a shout if there is anything else that you would like clarified. Thank you very much for the attendance.

Thank you very much. Ladies and gentlemen, I think this concludes this event, and you may now disconnect your lines.