Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Dipula Income Fund Preclose Business Update Conference Call. [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. Thank you very much for making the time to listen to our preclose presentation. We will upload this presentation on our website after this brief conversation. I think as the speaker said there, we will take your questions at the end of the presentation. With me is our CFO, Ridwaan Asmal. And I think questions today can be directed to myself and him. We've got very big slide. So I'll now just run through the whole thing and then sit and direct your questions to the 2 of us. Just to start off with, maybe just give you a feel for what we're seeing in the market. It is probably not different from what you guys are seeing out there at the moment. We're plagued with extremely weak economic fundamentals at the moment. You will have seen various numbers coming out of Stats SA and various tracking performance in the economy at the moment. And I think the ones that stand out, particularly for us, that's come up in the past few days is the numbers on unemployment. The unemployment number is really at precedented levels, Q3 2020. The number almost feels like it's approaching 50%. I mean that's quite a scary stat that out of every sort of 10 people that can work, only about 6 are employed. I mean, that number is sitting at -- on an adjusted basis at about 42.6%. Now I don't think we could really produce magic in our numbers with unemployment numbers at those levels. They affect everything. And I think people are unemployed, it implies that industrial property is affected because we know how those numbers stack up in terms of employment. I mean, lots of people are employed in the government sector, but there's also a huge amount of people employed in the retail and services sector, which is -- which implies our clients are affected. And there's quite a few people employed in manufacturing, which implies that, to some extent, some of our industrial properties will be affected. And the movement of goods and people on the transportation side, I mean, every single part of the economy is affected at the moment. And we've seen that come through feeling the pressure. And it doesn't [indiscernible] in a moment. So at a 42.6% adjusted unemployment number, we're really in dangerous territory, and we're going to have to really manage smart to survive the scourge. What sort of adds to our headaches at the moment is that with all that in mind, you've almost got collapsing utilities. No improvement in that front whatsoever. Municipal valuations are still going up, but municipal services are nonexistent. So our rates and taxes are going up. Electricity is going up by another 15%. All-in cost of occupation is just becoming higher and higher for tenants. And obviously, that means that the net number that flows to the landlord's pocket is under threat here, and it's coming lower and lower. So I mean even if you are growing your rentals, which is really positive nowadays, the net number is just going to continue to be under pressure here as a result of all these factors. So we're quite worried about this. As a result of unemployment, tough economic times, everything else that I've just described, we see a marked increase in crime and vandalism at our properties. Not a joke at all. I mean we've got people wanting to claim free stakes in our properties. We've got people stopping construction sites. We got people want -- demanding service contracts. Quite a lot of criminality in that, but it's also reflective of a huge amount of desperation. You don't want to say you can't blame the people that have been, if you combine that with effect that our law enforcement is a bit low in the country, we're really setting here with quite a disastrous situation. So that's got an impact on everything in our business, including our costs. If you have crimes going up, we have to secure a little bit better. We have to manage a little bit the properties a bit more. So I mean there's definitely pressure there on both the top line and the sort of cost line of our business at the moment as things stand. The crime and vandalism is also leading to skyrocketing insurance premiums. So again, pressure on the cost line there. I mean, the South African risk premium has skyrocketed that your reinsurers from -- which are mainly -- almost always offshore companies have very little appetite to start investing now at the moment, so they're increasing this risk premium. And all of your life insurance is also going up at double digits. So very tough conditions at the moment to trade under. And as a result, these negotiations are protracted, takes us very long to renew, takes us very long to close new deals, and it's a back and forth struggle with tenants from that point of view. And we've seen an increase in the number of business failures in our smaller tenants. I think the sort of bigger business failures are well publicized. So we're not going to get into those. But we're also seeing the small guys are starting to actually experience quite pressured situations. And I think that in the first round, we had a little bit of assistance from the banks and a little bit of assistance that hasn't come through yet from government was promised. But in some of that -- some of those savings from those small businesses, some of those bank assistance that some of them might have received, I'm still trying to claim for COVID-19 from insurance companies that aren't playing ball. I mean that's drying up quite quickly. And we foresee a very tough 6 to 12 months going forward as all of that dries up in the marketplace at the moment. So definitely not the easiest of markets to operate in, and we're sailing hard against the storm there. Just on the specific business update point of view. Our year-to-date performance to the end of our numbers are up to the end of January because Feb is still in progress here. On a year-to-date basis, our numbers were in line with the prior year. I think that was a prior year -- prior to lockdown, so it's not a bad number at all. Performance maybe in all probability be affected by additional discounts and perhaps quite a larger number of tenants not making it. So we foresee that happening in the second half of this year. From a balance sheet point of view, balance sheet is still looking okay. We're sitting at about 37% LTV or gearing. And our ICR was about 3.6%. I mean our minimum ICR requirement by the banks is about 2x. So we're sitting at about 3.2x. So balance sheet is not looking too bad at this stage. And I think we need that. We desperately need that. We need the ability to attract new tenants into our space, have a little bit of liquidity, but have a bit of breathing space from a gearing and an ICR point of view. We were hedged to the extent of about 68% on the 31st of January, so still fairly highly hedged. It's probably coming down a little bit more. And I think, with the low interest rate environment, that will provide a bit of support for us going forward as that number sort of tapers down as the facilities come up. We're still in negotiations with our funding banks for the ZAR 900 million or so that's expiring in this calendar year. It's tough negotiations, and we're hoping to close out there in the near future. I think we fairly close to closing out there. Our collections are still at acceptable levels. We're averaging about 96% in collections now at the moment, and we're in the high 90s in all sectors. I think our residential last year, post lockdown, went as low as about 48%. I mean that's sitting in the high 90s now. So that's sort of normalizing a bit. So -- but we'll obviously touch on the sectors as we progress in this presentation. And we're seeing an increase in vacancies at the moment, but our portfolio is still proving to be resilient. I think we're definitely pleased that we're covering the market segments that we are because we then feel less vulnerable, relatively speaking, to some of the carnage that's happening out there in the market at the moment. So our vacancies have gone up by about a percentage point. We're sitting at 7.8%, and we were at 6.9% at year-end. I think that's pleasing under the circumstances. But as I said, I think we're expecting a little bit more headwinds going forward. So I mean we can't really judge the past 6 months has been reflective of what's going to happen going forward under circumstances. We sold properties of about ZAR 102 million that -- some have transferred, 1 or 2 have transferred, but some are imminent to transfer at the moment, but ZAR 100 million of sales. And we, in the period, acquired the remaining 50% of Marikana from the Moolman Group for ZAR 63 million as a setoff against the vendor loan that we had with them. So we're pleased to have that property. It's a well-performing property that we now own 100% of it. I think when we did the deal with Moolman, the plan was to sort of try and do a bit more of the same, but we're not in a position to necessarily acquire properties. So I mean we sort of cleaned out that structure now, maybe we'll do something else with them down the line, again, if need be. And we -- in the process of take transfer of 272 residential units valued to ZAR 150 million. That will all be funded with some of the proceeds coming in from the vendor loans and the proceeds coming in from the sales. Just looking at our retail portfolio. December was a great month for our essential trading tenants, but fairly lackluster for the rest of the retail guys. I think anything that has discretionary spend on it, anything that was selling alcohol or entertainment or anything like that, I mean that really got nailed in December. Saw some numbers coming out also from Stats SA. I mean some of these restaurants reported numbers as low as 60% year-on-year. I mean those Stats SA numbers are no different from the experience that we're seeing on our portfolio, judging from what the numbers that the tenants are reporting to. So I mean, those parts of retail are really vulnerable. But we don't have massive exposure to them. But I mean every little cent counts. It's these little pockets that aren't performing over time, they become an issue in our lives, and that's how fear now for this second half going forward. As I mentioned earlier on, we're busy negotiating quite a big chunk of renewals for this year, and it is going slow. We are reviewing. And I don't think -- I think lots of people are trying to look after their livelihood and stay, especially on the retail side, stay in their locations, try and remain positive client trade, but I mean, they're pushing back and they're battling, and we're trying to see where we can help. But we can only help up to a point. So we'll see how these negotiations go. And yes, your smaller nonessential tenants are under tremendous amount of pressure, as I just mentioned. But we're also seeing demand from larger blue chips for smaller formats. And some of that is driven by the competition commission movements with the shore parks in your pick and place, where you can actually put the second tenant in centers we previously couldn't put that. But there's also people trying out new things and wanted to come into our spaces. They've got decent balance sheets. They're proper traders. So I think we will replace tenants. I think it will take us time where these tenant failures happen. It will take us time and money and added skill to sort of attract and to retain and to sort of support. But yes, in the short term, you're going to have that movement of tenants, that's an inevitable reality of this market now. And so far on the retail side, we're really pleased that we're sitting in a convenience, rural and concept center segment. The working from home is a benefit for us, as people sort of travel less to the bigger centers, people avoiding crowded places, open air, in and out centers. They're faring well under the circumstances. We also see the reduction in development activity as an underpin for stability on our retail portfolio going forward. So that's a bit of positive news from that end. Just looking at leasing on the retail side, we let about 15,200 square meters during the period, new leases that is. And the average lease period is about 3.8 years. So we are designing longish leases, new leases in that space. They're all up to fairly strong tenants. I mean, the new leases that we've signed. And from a rental perspective, we achieved 1% below our asking rentals, 1% lower asking rentals. So that's not too bad. It's almost flat on asking rental. And weighted average escalations were about 7.2% on those new leases. The renewals, we did about 15,000 square meters there, but we still got quite a bit to go. We've got another 80,000 square meters or so to go to lease. I mean, obviously, they're trickling in slowly, but we haven't seen a situation where people have moved out necessarily. We do have tenants that vacated, and I'll give you that number just later on. The number of vacated tenant versus new leases is lower. But what we are seeing is obviously the people drag their feet a bit longer because of the uncertainty and so on. So we're confident that we will renew most of what's coming up this year. But obviously, I think, it's going to be perhaps not favorable rentals necessarily. The average lease period from renewal is about 2.6. I mean if you look at those new leases, about 3 -- 2.6 on renewal here. Kind of a difficult number to read because, I mean, your smaller tenants typically would sign for about between 2 and 3 years, and it is mostly smaller tenants coming out. So I won't read too much into that, thinking that it's lower commitment. I think what also drag that number is when a guy sort of signs for 1 year, sort of thinking, okay, let me check this up, or we decide to keep them on a shorter lease for obvious reasons and that sort of thing. So I mean, yes, it's going slow there. From a reversion point of view, we had a 1.8% negative reversion so far on the leases that come up, but that was about 4% higher than what we budgeted. So we anticipated that there was going to be pushback by about 4% higher than the budget. The weighted average escalation on renewals is about 6.6%. There is -- obviously, national tenants are pushing that quite hard on escalations at the moment. So from a vacancy point of view, looking at the retail vacancy, what we've -- in fact, down there, sort of bucking the trend a bit is we are actually sitting at 10.9% as opposed to about 8.6% at the end. So that's been an improvement in occupancy in our retail portfolio. And we had about 12,900 square meters of tenants vacating the properties. But as I said, we lapped, during the same period, about 15,000 square meters of new leases. So we more than replaced the guys that left. And the good news also is that we are unaffected by the Ster-kinekor closure. We don't have a single cinema in our portfolio. Moving on to the office portfolio. We've seen the remote working trend continuing, and we're particularly affected by that. There's low demand from new space here. Very, very low demand. I mean there are a few tenants in the market. Hell of competitors. Anybody could have a tenant before they even decide that they're looking for space. We've seen quite a bit of tenants coming through with downgrade requests. Wanted to stay on the space, downgrade a bit, a little bit of flexibility. That's the order of the day. And I think in a funny way that our government portfolio has actually been a bit of a savior for us on the office side because I don't think government moves as fast as the private sector in that regard, and they've been very good payers from that point of view. So looking at leasing trends here, we did about -- only about 1,400 square meters of new lease here. And average is just under 2 years for a lease period. And rentals were above -- our asking rentals were about 9.5%, and we achieved escalations of 8% here. So there's obviously a bit of a -- because you're dealing with -- generally speaking, with smaller tenants here, we are pushing that escalation envelope a bit harder. On the renewal side, we've renewed about 14,300 square meters. We still got another 50,000 square meters to go of renewals in this period. Average lease period was fairly short at about 1 year. So the guys are definitely rolling a bit here and applying a wait-and-see attitude. And we have achieved a 0.9% positive reversion rate, which was 1% lower than what we had budgeted. We're a little bit ambitious here. And escalations on the renewals were about 7%. Vacancies here had increased, okay, from 8.9% at year-end to 11.9% currently, not the highest vacancy in the property sector, but nonetheless, moving in the direction that is not desired from our point of view because we are fairly hard on ourselves in terms of what we want to achieve. And we are about 4,000 square meters vacated by tenants. And it's all mainly due to downsizing, people leaving the country. I mean we have some IT companies that sold out to locals and left the country that was -- in fact, our biggest vacating tenant was one of those. On the industrial side, very high turnover of tenants in many units. So typically the case during half times. We're still achieving reasonable rentals and getting some escalations through, but I mean it's a hard work and the sort of smaller industrial that we have in the portfolio. Tenants now opting for short-term leases here. I think this whole delay in government infrastructure rollout, the lack of activity in the construction side and literally lack of activities throughout the economy and the manufacturing and even import, I mean car manufacturers did imports and assembly or imports and distribution stayed back at the moment because the demands stopped, the economy is not there. So -- and a lot of these industrial tenants are also dependent on the performance of some of their bigger customers, that is those customers that are doing more -- I mean, the smaller guys are definitely not doing more, and that's [indiscernible]. And the lockdown restrictions have not done us favors here from that point of view. I mean, becoming -- if you're not selling product, there's no need to have storage, you don't -- no need for anything else and that sort of thing. So going fairly slow here. We did about 7,400 square meters of new leases here, average period of 2 years. And the rentals were above asking rentals by 6%, at escalations, about 8%. And on the renewal side, a lot of our renewals are coming up this side of the financial year, about 60,000 square meters that we need to speak for here. By January, we had only spoken for about 5,000 there at an average lease period of about 2.5 years. And we have experienced almost a 12% negative reversion rate here. But that was about 6% higher than what we had budgeted. So we foresaw issues here. And weighted average escalation on the renewals was about 7%. On the vacancy side, we had an increase in vacancy here from 3.3% at year-end to 5.9% currently. And that was as a result of one big liquidation, about 12,000, almost 13,000 square meters of a tenant having been to be vacated as a result of a liquidation there. That's industrial. And moving on quickly residential portfolio, so as I mentioned earlier on, Palm Springs, when we took ownership of it in July last year, has shown fairly low collections, but we've gone back, we've clawed back, and we're now collecting more than 90% of our rentals, north of 96%, 98%. And we are now renting between 15 and 20 units per month. Our target is 50. So we're not quite at the 50 yet. But as you will remember, I mean, this property has a head lease for this financial year. So we're unaffected by that because of that head lease. And hopefully, by the time the head lease expires, we'll be fully let at the property at the moment. Lockdown restriction sort of almost into a situation where we're standing still, but we are seeing progress now because on a net basis, we lease 15 to 20 units now clearing through. Now -- it is now fully let. And we will be taking -- as I mentioned earlier on, we'll be taking ownership of Bruma Midrand, which have now stabilized. I think the premise is always to leave them there until they stabilize, it's now stabilized. So those units have transferred across at about 272 units of the conversions we did a few years ago. Well, just in conclusion, we are expecting more tenant failures going forward. I think our focus is absolutely on tenant retention. And I'm not sleeping on the job here, so pushing our teams fairly hard. And I think we'll try and counter this weak leasing environment with an increased value proposition to tenants in whatever shape or form. And we're challenging ourself here to manage better and smarter and to do things differently and to continue to be nimble and also not be stuck in a negative mindset. I mean we -- I have actually given you a very realistic picture of what's going on in our business. But look, we're not taking entity presence here. We're waking up excited in the morning to do what we do, and we'll continue doing that. And I think it's key for us to actually also just conclude on our refinancing negotiations with our banking partners. Thank you, very much.

Thank you, sir. Are we ready to take questions?

Yes, we are.

[Operator Instructions] The first question comes from [ Alvi Sillies ] from Salandia Capital.

Can you hear me?

Yes, we can hear you.

I must say this is possibly the worst doom and gloom scenario I've heard out of your guys in the recent times. Going forward, do you think there's a future for Dipula as a REIT on the JSE, just giving this background that you have given us as shareholders here? I mean, surely, the prospects of paying dividends looks very remote, given that you're going to have to squeeze in margins, and utilities going up and your rentals going down and vacancy is going up. And just anything you said, it seems like this. Now despite insight, what's your view currently going forward on the future of Dipula as [indiscernible]?

Yes, So Alvi, I think we gave you a very realistic picture of circumstances in South African environment in which we operate. I think maybe I might not have come across clearly, but we're not saying that's completely doom and gloom. And I think you can see that our performance to date is actually very, very good. I mean, we're in line with last -- pre-COVID, for the 5 months ended January. So our business is not collapsing here. And I think that we don't necessarily share the view that prospects of dividends are nonexistent. In fact, we think that the opposite is true here. What we are saying, though, is that it's not the easiest market to operate in, and there is definitely going to be a filter of the 40% unemployment or so, the negative economic growth. I mean we're not operating an island here. From a future point of view, I think if you take our company, without all the noise around some of our challenges, which are mainly related to our share structure. Our -- in relative terms, we're producing -- we're still producing decent numbers. And so it's not -- the environment is negative. We're sitting with a defensive portfolio, as I've indicated earlier on, we don't have a lot of these structural issues in our portfolio to come out taking shape in some other segments. So I think you're sitting here with a company that's in the sweet spot in terms of the nature of this portfolio. It's got decent and very good management in place here and pushing ourselves very hard. But we're pushing against a storm here, but I don't necessarily -- we don't necessarily say we're going to be the worst-performing fund here. And I think, in fact, in relative terms, if you just look at performance numbers, okay, stripping any sort of financing and all these other things that normally introduce the different noise into the system, you strip just the performance numbers out, Dipula is actually performing very well.

I agree it [indiscernible], and that's why I'm [indiscernible]. I mean relatively wise, I could never believe why the market is so negative. But given that, it doesn't -- I feel that way and you feel that way, and the share price of DIA shares is still [ ZAR 1.45 ] and the NAV is ZAR 15. And we look forward to dividends, at least some dividends being declared. That has not happened. You shouldn't know. So from an investor prospects point of view, is there any hurdles when you buy back shares in the market instead of paying dividends, of buying back A shares or B shares or must it be always equal amount of A shares and B shares in structure. What's your -- what's the hurdle in that kind of structure scenario?

Yes. Alvi, I would just sort of caution you that we are under cautionary years. So there are sort of things happening. But just to answer your question, sort of just like on a very few sort of MOI basis in terms of what we are allowed and not allowed to put A and B things -- side of things, is issuance, it's -- MOI is fairly clear that we can't have more As than Bs in the system. So we couldn't add more. But the MOI is not that clear about whether you could buy back more As or Bs. And as we often [indiscernible] that's probably a receiving that can be taken if a buyback was the decision and could fund a buyback. And as I said to you earlier on, I mean, I don't think that the door shut for dividends. I think this year is a particularly different year, for reasons that we actually shared with the market in the sales announcement that we made. And I mean, none of that corresponds that we ever indicate that dividend prospects going forward are null and void. We definitely don't share that sentiment. We don't think that's true. And like I said, I think we're very positive that those steps will be reopened again and so on. But yes, as I said to you, we're looking at solutions here that would be to the benefit of shareholders. And I unfortunately can't say more than that because we are under cautionary.

The next question comes from Jonathan Detoik from [indiscernible].

Can you hear me?

Yes, we can hear you.

Okay. If I can have 3 questions. Could you elaborate more on the refinancing of the debt? What are the stumbling blocks? Was it just normal negotiations? And then could you confirm your LTV? I think I heard 37%. And then have you -- can you -- if you can give any comments around property valuations and what you're seeing on the ground in terms of what property values are doing?

Okay. On the financing, I think that we're going through normal course there. And so I mean, as I said, it's taken a bit longer because the processes are taking a bit longer because, I mean, banks are more cautious and everybody's applying themselves with better networking, and we've all been extremely busy. But all things just surviving under COVID. I think we all get into a space where we've now accepted this is what it is. And I think things are sort of returning to normal here, and we should close out fairly quickly with our negotiations. LTV is just north of 37% at the moment. And from a property valuation point of view, I think property valuations will obviously be affected by occupancy levels, by vacancies that people might perceive to be structural and more of a permanent basis. And I don't necessarily see any drastic things happening to discount rates at the moment and that sort of thing. So if I were to relate that to Dipula, I mean without sticking my neck out there, we are showing reasonably stable performance in the income side at the moment. Yes, there's a slight increase in vacancies. We don't regard any of those new vacancies as structural vacancies. We think they are, relatively speaking, easy to fall. It might take us a bit longer because of current market conditions. But with that said, relatively speaking, I think our portfolio should once again show very resilient valuation results going forward.

The next question comes from Nesi Chetty from STANLIB.

Just a question on the, I guess, valuations as well. I mean, you're still sort of alluding to maybe the technical cycle being weaker, potentially vacancies increasing. But I mean, if I look at the sort of, I mean, last 6 months to a year, even in the tough months, I mean, you're still maintaining decent level of rental collections high, 95%. Your comment on stability of valuations, is that because you still think that -- or let's call it, you're not going to see a big shock in the asset value in terms of [indiscernible]. Is it because you think in the properties that you currently own the rentals or older? Or do you think you'll do a lot better job in terms of the vacancies and tenanting those properties, even on properties where there might be structural issues?

Thanks for your question, Nesi, and I hope you've been well, too. Look, what we are saying is that, as we've always maintained, we say, I mean, I think your property valuations are extremely sensitive to over-rented property. It's extremely sensitive to that. And I think that the valuations are all -- if it's over-rented, it means that their income is going to come down drastically. And I think valuations are also extremely sensitive to structural vacancy. I mean if we have to repurpose space or try and do something else, the CapEx that goes into that. So I mean we've always maintained that if we look at our rental levels for the space we are renting, okay? Those rental levels are still very reasonable. As -- I mean, we're not asking ZAR 100 for space that we should be asking ZAR 50 for. And that's what got us through last year. Last year, we dropped ever so slightly when there were drops in the double digits here and that sort of thing. That hasn't changed in our side. But I think where -- what's different this year is that there's definitely going to be business failures and that sort of thing. And some of that might filter through into our valuations, but it wouldn't be because our portfolio in terms of the market segments we cover and in terms of rental levels, and in terms of the risk premium attached to it is necessarily vulnerable to come down. That will purely be a reflection of tough economic times or maybe tempered situations at the time of valuation. So -- and we're always worried about the cost side pressure. So to counter the cost side pressure, we obviously need to make sure that we lease-up more aggressively and that we protect the top line a bit more because we can't control where insurance is going to come out. We can't control rates and these sort of things. And it's naive for us to necessarily assume that we're always going to pass on that rates to the tenants and as well that they'll pay an increased rent forth. So those are worry points there. All of these things are outside of our control. But we're proud to say that the things that we control, we actually control very well.

The next question comes from Glenn Baker from Anchor Capital.