Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Brilliant. Good morning all, and thanks for joining us for the Dipula Income Property Fund pre-close business update as they head into their closed period for the FY '21 results. We'll kick off today's session with a brief presentation by the CEO, Izak Petersen, which will be followed by a Q&A session. [Operator Instructions] Thank you again to the Dipula team for giving us the opportunity to host and over to you, Izak. Izak?

Thank you, Nazeem. Good morning, everybody. I will take you through a short presentation. I think as Nazeem indicated, there will be an opportunity for questions at the end, and we will tackle those as a management team. Hope you can all see my screen. Just want to get to my presentation here. Okay. Cool. Yes. We've broken the presentation into 3 sections. Just very briefly on the trading environment. I mean it's a normal format that we follow for this -- for our pre close. And then we'll give you a bit of a business update and then deal with the questions and answers at the end, as I said, but from a trading environment point of view, yes, I think also leaking out from the civil unrest that's just unfolded in the country. We'll talk a bit about what this has meant to us. But I mean, yes, that's -- that is keeping us busy at the moment. And there appear to be ongoing threats of another flare-up. We hope not. And the increasing unemployment is visible on the ground. Although we haven't necessarily seen that affect turnovers for our retail tenants, we certainly can -- there's probably a bit of a link between some of the crime that we see in country close to our sites and the rising unemployment rate. We expect insurance costs to increase substantially for the coming year, that for ourselves and I think for SA incorporated. Obviously, an unprecedented number of claims going through for underwriters. I think reinsurers globally are looking at South Africa very differently. And all indications are that they're sort of trying to limit their losses. I mean we're finding ourselves in a situation where we have to go to about duplicity of underwriters. No one underwriter wants to underwrite SA risk at the moment. And they're also looking at increasing the excess payments that one has to fund on the back of claims quite substantially going forward. So we see this obviously putting a little bit of pressure on the income statements going forward. The low economic growth that's ongoing, obviously still an issue for us. I feel the pinch of that, especially in our office portfolio. And COVID-19 is still with us. All of our sort of restaurant, leisure and entertainment and your gym type tenants still going through reasonably tough times. And at the same time, whilst all that is unfolding, obviously, people are trying new things, but at the far lower pace than what we've become accustomed to in prior years or during better times. The one big killer, and I think we had administered costs, municipal electricity and all these other costs. Those are expected to continue to put pressure on our tenants going forward. And obviously, the dysfunctionality of municipalities is top of mind when one starts to think about these things. So yes, so quite a tough environment to operate in. And I think we're quite lucky that in spite of all these things, our portfolio is still holding up quite nicely, again, kind of speaking to the defensive nature of it. I thought I should share this, I mean, that's actually quite scary read. I mean, if you look, we've got 257 municipalities in the country. And only about 5% of those are stable. A lot of them are falling into a dysfunctional category. 64 municipalities in the country are completely dysfunctional, and another 111 are sitting in the medium category. So between the dysfunctional municipalities and medium category ones, which means they're kind of just limping on, we're looking at 68% in number out of 257 municipalities -- basically, just looking at 16 that are functioning. So yes, I mean, we -- these are daily -- I'm just giving you a feel for some of the daily things we're facing. Is it municipalities? Is it increasing rates beyond where they should be increasing? Is it basically just not getting plans passed? So -- and therefore, delaying projects, all kinds of frustrations really that one is going through in the municipalities at the moment. Just coming to our business and how we're looking at the moment. Our year-to-date performance is in line with the first half, which means that probably going to deliver in line with what we had expected and so on. Never gave guidance, but I mean, we -- there hasn't been a follow-up in the first half. And so we're still looking quite good. We've also got about 90% there with the 2021 valuations. And those all seem to be, again, more or less in line with the prior year. So there is no collapse in valuations on our end, which is, again, great news. And so far, on a year-to-date basis, we've got about ZAR 12 million relief. If you remember last year, we had actually given about ZAR 50 million of relief to tenants. So that's come down substantially on a year-on-year basis, which should further support the 2021 number from a performance point of view. Our Board has resolved not to pay the 2020 dividend. And that decision was informed by a requirement to repay about ZAR 200 million of capital and to fund some of the CapEx, so far about ZAR 45 million, that we've incurred versus ZAR 90 million that we still want to -- that we wanted to incur for this year. And we also had to fund the Cosmo acquisition. And I think outside of that, obviously, gives us a little bit of a cash buffer for these uncertain times -- COVID times. And it supported our balance sheet quite nicely. Gearing is currently sitting at 37.5% after a settlement of about ZAR 80 million -- or ZAR 86 million of tax to SAPS related to the nonpayment of the divi. And our interest rates at 31 July were hedged to the extent of 67%. And we had -- or we were substantially done with the renewal of about ZAR 200 million worth of debt facilities with Standard Bank for an expected period of 3 years. We're looking at a complete restructure of our debt facilities with Nedbank, probably looking at -- even in doing ones that are a little bit further out. I think that will give us a little bit more certainty now going forward. Also deal with both Standard Bank and Nedbank and also the other issue of whether there's going to be any further capital impairments going forward, which we're not expecting. Vacancies, excluding residential, were in line with what we reported at interim. So we're still sitting at about just over 7% vacancies. And we had sold ZAR 90 million worth of property with about ZAR 28.5 million of that transferred and another ZAR 62 million awaiting transfer. We took transfer of 272 residential units valued at ZAR 150 million. We have told the market this at the interim that we're looking to transfer these units into the portfolio. These are all prior commitments that we're basically just executing on. Rental collections post COVID are averaging 97% at the moment. And I think all sectors are performing more or less in line with what we previously reported. Obviously, July and August has been affected by the riots. [indiscernible] If you look at our retail portfolio, experience so far, supermarkets and basic retailers still trading quite well. As I mentioned earlier, the sort of discretionary spend side of the business still going under pressure, but luckily, Dipula is not too overexposed to that side of things. We had 2 leases expiring with Virgin Active and only 2 gyms that we have in the portfolio. I think we're pretty much done with the main terms and conditions of the gym at Chilli Lane, and the gym in West Rand was renewed about a month ago. So we're doing a 7-year deal at Sunninghill, and we're doing a 5-year deal at -- in the West Rand. I mean that's obviously good news because of another -- that uncertainty, we had very difficult renewal discussions there, but we're glad we renewed those 2 gyms. Post these riots, most tenants have indicated their willingness to come back and trade in the centers again. We're pushing really, really hard to get the centers going full on. I'll give you a bit of a picture of how far we are with all of that. There's been a fair amount of back and forth with which [ pact ] you actually reinstate to and just making sure that we don't commit to anything that's not necessarily covered by the insurance. And we've got a very good team on board there running with that. We obviously need those -- especially those anchored tenants trading as soon as possible, so that our line tenants stand a reasonable chance. There are instances where the anchors are not back, but some of the line tenants are trading. But obviously, you need to make sure that those anchors are back because, I mean, that gives the line tenants a better chance of survival. We also see that some of the larger retailers are still seeking expansion opportunities, and we are doing deals there. Not reflected in that vacancy number is the fact that post July, we've opened a few supermarkets in the portfolio, but we'll tell you all about that at the year-end presentation. And the ongoing consolidation by retailers is also giving us interesting opportunities because we're getting stronger tenants and their competitors are also trying to hold their own. So every time that happens, and we've got -- and a pharmacy moves from being a -- say, a Pick n Pay Pharmacy to being a Clicks Pharmacy, it brings up very interesting dynamics from a leasing point of view for us. So I mean that's -- we find it all very exciting. I think it makes the retailers more secure, more safe. I think the fact that the retailers are pulling out of [ period ] jurisdictions in the continent is also interesting for us because they're not necessarily going to other markets, but going -- coming back home and still seeking expansion on the back of very subdue development activity. So that gives us a chance there to move space. So even in the negativity that was described in those first slides, there's still opportunity to do transactions. We've been very busy, we did about in the past 5 months, 12,000 square meters of new leases for an average period of 3 years. The rentals were 0.4% below our asking rentals at weighted escalations of just over 7%. So we're still achieving reasonably good escalations in our retail side of things. Renewals-wise, it's about 16,000 square meters, average lease period of 3.5 years. We did go back about 3% on the expiring rentals, but it was only about 0.3% lower budget. So we expected a lower renewal environment, but it wasn't that severe compared to our expectations. And escalations achieved there, about 6.6%, obviously, reflective of the fact that there was a fair degree of large national tenant in that mix of renewals. And our vacancies here, as I said, are more or less in line with interim. There were some tenants vacating, but we mostly relet the vacated space. Look at our office portfolio, negotiating hard. It's hard work. There's a few SMME tenants that are not coming back and sitting on the sideline. Luckily, they're only about -- generally speaking, about 5% of our portfolio as some of you might know. And there are some tenants asking for downsizing, and they've been given back some space there. We got 3 expired government leases at the moment. One is the founding provincial human settlement department. The other one is in the Free State with the social development department. And then we've got a CEP lease in Rosslyn also expired. So we're busy negotiating on those. We've been fairly confident that they will be renewed. They're running month-to-month at the moment. From a leasing point of view in our office portfolio, that's only about 2,000 square meters, again, it's not -- offices are not big in our lives. But 2,000 square meters, average lease period of 3.7 years. The rentals were substantially below our asking rentals at about 18%. And the weighted average escalations there were about 6.8%. So renewals, 7,000 square meters, 7,600, 2.4 years on average. And negative reversions of 13%, but that was 24% higher than our budget. So we're a lot more conservative in what we expected the portfolio to lose. So I mean -- but yes, the renewals were looking better than what we anticipated. And the weighted average escalation was about 6.7%. Looking at industrial, yes, so there's interesting trends here. I mean with the accelerating cost of electricity in some of the sort of industrial properties that we're only starting to see that electricity costs are now starting to outstrip rentals, which means that -- I mean, these tenants are looking at all-in cost of occupation. So that becomes a bit of a problem for us in terms of the rentals that we can push there. We've been seeing a lot of activity with the online shopping-related logistics guys looking for space, and we've signed some of them when we've got the relevant space. And we're still experiencing a reasonable amount of demand for space in this sector. We did new leases of about 10,000 square meters, average lease period of 3.3 years. And rentals were 16% below asking, and our weighted average escalation was 7%. From a renewals point of view, we only had about 6,500 square meters that we did -- that were coming up that we did, average, 2 years and a 0.5% positive reversion. And that positive reversion volume was about 19% higher than what we had budgeted, and the weighted average escalations achieved here, about 6.3%. The big thing that hit us in this sector was the liquidations at Range Road and Mandy Road. But I'm glad to report that most of Range Road has now been relet, and to very strong tenants. Mandy Road wasn't a huge space, but I mean, yes, Range Road, we've moved most of that space. Those leases are kicking in now and -- post this reporting period. From a residential point of view, last sector, we currently own 711 units. And we are 98% let at Bruma and 96% let at Midrand. Norwood is 100% let and Palm Springs, which was a subject of a rental guarantee up to the end of June 2021, is 30% vacant at the moment. And there's all kinds of interventions there, including renting out some furnished units. And I think some of that effort and attempt should crystallize as we go further into this year. Just to give you a sense of the civil unrest cost to us estimated so far. The full value, the value of this portfolio at the end of Feb, was ZAR 723 million. And the damage estimated on these properties is about ZAR 111 million. There are 2 properties that aren't trading at all. The rest of the properties are either fully trading or part trading. And obviously, the race is on to actually just get all of them trading. Something like a Dobsonpoint and an October Avenue Ivory Park is only expected to be fully functional by June 2022 because there, we suffered substantial damage. Our rough estimates of the loss of income is roughly ZAR 30 million at this stage. Just reminding you, we bill about ZAR 1.3 billion per annum. So it's ZAR 30 million out of ZAR 1.3 billion per annum, and that's all insured. And it's obviously going to be over this period of time until the 2 fairly damaged properties are tended to. So it's not a big number. But yet, I think the amount of effort that goes into reinstating these properties is going to take a lot of management time. So you have all seen our announcement on Friday. And we will be giving a lot more color on this transaction in a few days. But I think we've had some exchanges with some of you around the transaction. And our feeling is that it's the right thing for Dipula. And we hope that you will see it that way as well. But just maybe for everybody's clarity, I think anything that simplifies our capital structure is a good thing because I think Dipula has been sitting on the sideline regardless of our consistent performance over the years. We kind of are in terms of rating nowhere close to where we should be. We believe that simplified capital structure will give us the right rating and therefore, be positive for shareholders. I think you've seen that squeezing our CapEx spend out of just the money that we generate from rentals is probably not possible or even if possible, it's not going to give us CapEx capacity to the point that we should be having. I think a deal like this would give us that ability to actually look after these assets to ensure that our consistency in performance is maintained or even improved. Tenants want to go into decent property. It's expensive to put tenants in there, especially retail and office tenants. The care requirements are high. You can't really compete with stock that's not up to scratch. A transaction like this actually opens it up first. I think the question of scale, liquidity and tradability -- we've seen during tough times like these, asset managers tend to avoid smaller illiquid stocks. This is the time for consolidation in the sector. This would actually get us there in terms of just ensuring that what one share -- we give the market at least another option in that mid-cap category. And I suppose it will also open up Dipula to a much broader investor community that has tradability and liquidity in mind. It addresses a value trap. I think there's no doubt that there's a value trap in the stock for both the A and the B. I mean that sort of thing would actually open up that value trap for everybody positively. And there's potentially a reduction in gearing here as the asset that we're going to be acquiring is going to be ungeared. And the strategic input that we'd receive from the Resilient team as they put a member on our Board would also be invaluable. I think they've got a solid proven track record of bringing good deals. And you can see it in the rating of their stock. I mean Resilient has rated -- is probably the best-rated REIT in South Africa at the moment, if you just look at where their share price is trading relative to NAV. That sort of input will be invaluable to us. And it gives us opportunity to improve our portfolio even further and gives us opportunity into -- further growth opportunities to the benefit of all shareholders. So as we engage with it further, and we want to -- keep some of these things in mind and understand where we're coming from, from a rational point of view. What are the next steps in this transaction? We've already appointed an independent Board. So quite a lot of work has already gone into this. And we have agreements that we need to execute on. And I think following the finalization of those agreements, there will be a firm offer forthcoming. And then we obviously then need to deal with all the TRP requirements, the guarantees and whatever asked -- TRP that would normally require under the circumstances. And then the circulars will go up -- out and then its implementation. And in between the implementation, which is basically the regulatory, JSE, shareholder engagements and all that, in the background of all of that, we'd also be dealing with the [ comm ] and all of that. So I know you've got a lot of questions. I think we will try and address them as much as possible. We're obviously restricted in terms of how much we can say. We can't engage too much on the pricing at the moment until we've actually come out with the detailed announcement, after which we will gladly sit around the table and discuss all the nitty-gritties of the transaction. And you can rest assured that it's not going to be in a long time. So we're talking about in a matter of a few days here. The next steps will become apparent and as I said, a detailed announcement will be made. That is all from our side, and I'll now open the floor for comments and questions [ called in. ]

Thanks a lot, Izak, for that update. [Operator Instructions] Maybe just to sort out, we've got a few questions in the chat box already. I just want to go there. It seems like there's 2 themes: one, with regards to the dividend; and the other, to the actual transaction. Let's maybe just run through the dividend quickly. That's been confirmed, that FY '20 won't be paid. [ Evan ] has a question with regards to that. What has changed in the approximate 3-month period that caused the financial position to change so dramatically that you will miss a distribution and incur ZAR 84 million in tax and then pay out 100%?

[indiscernible] Okay. Yes. Yes. Look, I think we have been very clear from the word go that -- I mean, the sole reason why we're without that dividend last year was this whole question of the Board applying its mind to liquidity and solvency. I think any REIT that has approximately ZAR 400 million of distributable income and also other source of income to repay capital call of ZAR 200 million, and where we've had to also fund the Cosmo acquisition to the tune of ZAR 70 million, we've had to fund discounts across the portfolio and then still also have to have a bit of a buffer. So though our gearing is a result of not paying that dividend is sitting at about 37.5% after paying the tax, we don't have lines with the banks. So I mean, at the end of the day, the only thing that could happen is -- I mean, if things go south for us, I don't know where we'll scramble around for that money. So I think the Board just had to be responsible here to say, keep a little bit of a buffer. We have no where to turn in terms of capital repayments that have been asked of us. And this is where the money will be applied and has been applied. That's between CapEx, capital repayments and a little bit of a buffer for COVID-19, that's what's happened. I mean as I said, the company is performing solidly, but we've also got -- we've got this CapEx to fund. We've got these [ TIs ] to fund, and those things all require cash. But the key thing has obviously been the capital repayment, that's a big number.

And then just another technical one from [ Evan. ] When was the deadline for the distribution payment from which we are liable to pay tax?

So we needed to have made a decision before the end of August or close to the end of August. And that's what's happened. I mean I think the Board met about 3 weeks ago. And again, about 2 weeks ago, and again, we've gone -- I mean, the Board has been taking this very serious. And they've given -- they send us back and we crunch numbers, and we look at this thing from all angles, and it came to this conclusion that it's probably the best thing to do for the company.

And our last question on the dividend, and then we'll move on to the transaction. It's from Junaid. Any thoughts on the payout ratio of the 2021 final dividend? Is it expected to be at a 100% in line with the interim payout?

Yes. The Board hasn't decided -- I'm going to be honest that I think we've been -- obviously, last year was a bit of an anomaly for us because we've never -- we never really invested dividend. But I mean, we have been taken aback by, obviously, the requirements to repay some capital, the whole COVID thing. And it's been very hard for the Board to get to a sensible decision around whether we pay out ZAR 190 million or ZAR 195 million or ZAR 70 million because if you're sitting in a 2-share dispensation, it's not an easy decision to make. But I mean I don't think that Dipula will be in a 100% paying dividend dispensation forever. And whenever that starts, it's going to have to start at some stage because that's where the industry has moved. But I mean, I can't give you a number now in terms of what's going to happen by year-end because, I mean, that -- we still need to do work around that. But yes, I mean, it's quite clear that 100% is definitely not a sustainable dividend payout ratio.

Cool. So we've got some operational questions, but I see a few on the transaction, and you can just kind of provide information where possible. I got a question from [ Jared. ] How is the swap ratio determined?

Yes. I think we'll deal with that in a few days.

Okay. And from [ Louis, ] this is also on the transaction. Do you want to kind of leave all transactional questions for another day? Or -- because I think this one is more generic.

I can deal with the generic questions, but I wouldn't like to get into the pricing discussion. To be fair to everybody, the moment we provide more color on that, we can engage in a little bit more meaningful around that whole topic. I mean the only thing I can say is that we believe that the pricing is logical and that it's fair, if you look at it in the bigger scheme of things. But also just as we provide more color, it will probably become more apparent to people generally. But I mean, this is -- it's -- I think when a Board applies itself or management, it's always about thinking about the company holistically and thinking about our survival. As I said, we should have probably been very far as a fund, but we've been held back a bit. But whatever we're doing is in the interest of trying to achieve that to all stakeholders, all shareholders, make the company safer for everybody. I mean we don't believe there's a lack of opportunities, but we don't think that we've got the currency to play within this market, whether being sort of just generally becoming leaders of corporate action in the sector -- we can't do it. We just don't have the currency. But I mean, I think a transaction like this gives us that opportunity. And it comes with a lot of potential benefits.

So [ Louis ] got a question, part pricing and part generic as well. I'll ask the whole thing. But why would A shareholders take a 2x ratio of B shares and 661? Seems it favors B shareholders more than A shareholders. And this is where I think you could provide some color is, why do you need Resilient as a shareholder? At what price are they coming in? And if you are desperate for capital, have you considered asking existing shareholders given the discount you're trading at? Because this is a capital raise at a deep discount not offered to current shareholders.

Well, that's an interesting question. I mean our sense in basically just engaging with some of the shareholders was that there wasn't really liquidity -- available liquidity willing to come into Dipula. But I think Resilient is not just a shareholder. They're coming in as a strategic partner here. And I think there's some benefit to that. I think it might open up some opportunities for us going forward. And I could go through the logic of the transaction and rationale in the previous slide, which indicated what our thoughts were around Resilient as a possible strategic partner. And yes, I suppose -- I mean, the other thing is that this thing comes together with an asset, and we quite like the asset that it's coming with. So it's a combination of cash and an asset that we think is very complementary to our portfolio. And yes, that's about all I could say around that. But -- yes. So from a shareholder capital base point of view, we just didn't think it was possible, to be honest with you.

Cool. So I'll run through the operational questions from when they began. It looks like Ridwaan had the first question. What reversions are you budgeting for the 3 government leases that are currently on monthly?

The -- I mean, I can't give you a specific number there, but the property in Rosslyn, I think we're looking at the reversion of more than 20% there. And then the other property, we're probably looking at a reversion around 10% mark. And then the one in the Welkom, also around about that -- at least around about that 10% to 15% mark.

From [ Evan, ] how much has been spent to date in generating this proposal? So it's not about the actual transaction, but just the actual cash cost so far.

We'll come back to you with a number there. But a fair amount of the work has been undertaken on risk. And obviously, there are some legal fees that's been incurred and professional fees. But I mean it's -- I don't anticipate that that's a substantial number. But yes, there's a lot of work that's gone into it. But I can't give you that number now. We'll have to come back to you on that.

From [ Myer, ] would a simplified capital structure be a catalyst to more aggressively dispose of assets? If so, can you quantify the tail or noncore component of your portfolio?

I think this deal probably sort of set us on a path to becoming a specialized fund. So there's probably the possibility of selling offices. If we did that, our offices are north of ZAR 1 billion. And then we've got the retail tail there of anything between ZAR 500 million and ZAR 800 million. So possibly -- we'd possibly sell about ZAR 1.5 million worth of property minimum.

I've got a question from Matthew. Would you need 75% A shareholder approval to effect the conversion of A shares into B as envisaged under the current offer?

We get -- it's -- I think there are 2 steps to this transaction: one is an honorary resolution for the issuance of those shares for that asset and for that cash from Resilient because they all -- the Board doesn't have sufficient authority there; and then the second step would obviously be the buyback, and that requires a combined 75%, as I understand it.

Question from [ Louis, ] if you need the cash for CapEx, why pay out 100% in 2021? And why not drop the payout to 80%?

Well, this is what I said, Nazeem. I think I did indicate that 100% payout for Dipula is not a given going forward.

From [ Nick Quicker, ] do you have any irrevocables from A shareholders for the deal? How are you pitching the deal to A shareholders to get them over the line?

Yes. Look, we did the start away this time around. And I think we first put out the transaction out there, but it's pros and cons. And as more color is provided, I think more meaningful engagements will be undertaken with shareholders. But yes, the sort of simple answer there is there are no irrevocables at this stage.

Got a question from [ Yesh, ] what percentage does government contribute to the office portfolio?