Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good morning, investors and participants. My name is Izak Petersen from Dipula Income Fund. Welcome to our pre-close presentation for the year ended 31 August, 2023. I will go through the entire presentation and with me our CFO to deal with some questions at end if any. Please note that this is being recorded and if you have any questions that pop up in your mind as I'm presenting, will you kindly post that on the chat and we will look into the questions at the end of the presentation. Welcome and thank you for joining. Presentation will be done in 3 sections. I'll start with a brief business update. Then go on to portfolio update, emphasizing on our 3 material sectors that we cover; retail, office and industrial. And then we'll just have some questions and answers after that. Most of the numbers in the presentation, unless stated otherwise, up to the end of July, we're still -- obviously with August today being the 31st, the end of July this year, we had completed the ESG framework. We had a consultant that we had appointed and we're glad to report that all of that work is now done. It's not really a question of us getting down, setting our targets and basically implementing some of those recommendations into our integrated annual report from a reporting perspective. In summary, we've opted to go with the JSE ESG framework. Obviously, with aspects of all the other GRIs and a few other frameworks around the world. There seems to be quite a lot of progress in this area at the moment with even the accounting bodies now adopting standards. So that's obviously good news means that the still will get standardized across the board, greater investors, so you can actually compare different companies. To date, I think it is a bit of a salad bowl in terms of how it's been approached. We capacitating in a way that ensures that we track and report in a sensible way. And obviously, the capacitating has to do with making sure that the format is right and that everything is reported. And we often find that we do a lot of good and a lot of work, but it's not necessarily always tracked in a way that makes it reportable to the market. The consultants also did permanent gap analysis between where Dipula is relative to the certain market participants and relative to the standards. I must admit that we did not score too badly, but there are gaps that we need to fill going forward. So watch the space, we will be improving quite a bit in terms of our ESG reporting and activities going forward. Our debt syndication is expected to be completed by November -- materially completed by November. I mean, there might still be a little aspects that are undertaken beyond that period, but all material terms are agreed and term sheets have been signed off. Credit processes have been completed on the funding side. That's literally just a question of our executing. And you know that we've got quite a large portfolio in terms of number of assets. So the convention that goes with that is not a simple task. But yes, we're glad to report that that's gone off smoothly. Alongside that, we obviously also undertaking the group restructure, which is also expected to be completed by November. So yes, we have been fairly busy with these processes. And it's good that they come in to some sort of end now. We received our credit rating earlier this year around June, July. And basically, GCR has kept us a BBB+ ZA long term, and A2 ZA short term with a stable outlook. I think that's quite decent under the circumstances. I mean we have seen credit rating downgrades in certain other sectors of the economy, et cetera, et cetera. But I need to maintain -- you'd recall that we had been upgraded last year. So this is on the back of last year's upgrade. Obviously, working -- constantly working on trying to get that credit rating higher and higher. Obviously, a fair amount of nervousness stood around the impact of high interest rates, et cetera, et cetera. But I mean, the rating agency had some really good things to say about Dipula's balance sheet management that the rating has been uploaded to the website. You're more than welcome to actually go have a look at that. Following the A and B in our consolidation, we've definitely seen a decent uptick in volume traded in the share and value traded. Just up to the end of June this year, there were about 119 million shares that exchange hands between shareholders. And basically, just by way of comparison, in June 2022, 12-month period up to then, we had only traded about 56 million shares. So the value traded had gone up to about ZAR 750 million for the comparable period compared to about ZAR 222 million or ZAR 200 million in the prior comparable period. So by comparison, if we look at the DIB volume traded before the restructure, I think we were averaging about 20 million shares per annum. So that's a significant improvement on the tradability of the share. I think we've always made the point that tradability should improve on the back of a restructured share structure. We saw quite a big distortion in our share price in prior months leading up to about now. And we believe that that's obviously because the market was on the news that there was quite a big seller in the market of DIBs. That volume seems to have been worked through the market substantially now or maybe completely. And I must say that the past few days, it looks like the share price is starting to recover quite nicely again. Our average monthly collections over 11 months to the end of July amounted to 98%, that's September '22 to July 2023. So we're still collecting quite a half year amount of our billings at the moment as things stand. And as I always say, we've been improving the quality of tenant. With improving the quality of talent comes better collections, better everything, and that's definitely reflected in that number there. We have disposed off ZAR 200 million worth of property, of which ZAR 117 million had transferred that's between last year and this year. And we've seen to the end of July, a significant drop in vacancies of about 10% when we last reported to about 6% at the end of July. We had spent about ZAR 100 million in CapEx, obviously, ongoing timing, determined sometimes by external factors and those all things. But I mean that's a mix of defensive and sort of expansionary CapEx in that number. And you would have known that our facility with Nedbank for reclaim had come to an end. That's now been successfully refinanced with Investec. We're just busy implementing all of that. So that's great news. And the terms are very similar to the previous terms and that facility is a 5-year facility. So we've got comfort there that's locked in. We're currently about 65% hedged on the interest rate side. Operationally, focus wise in terms of what we set out to do and what we're communicating on to the Teams here. We obviously -- we're navigating our way through the high interest rates and low economic growth. So very defensive mindset continue to run the business along prudent lines to ensure there's no shocks in the system. The interest rate is obviously not just a challenge for us, but it's obviously a challenge for our stakeholders in the form of tenants just making sure that we take that into account as we think about our business, the sort of ultimate recipient of higher interest rates is also the end user of the customer. And I think it's always important to kind of think about it in the context of what impact does that have on your tenant and therefore, what the talent's turnovers and therefore, what impact would that likely have on the landlords that you achieve going forward. Fortunately, it does look like there's a bit of stability on the interest rate side of things. I mean, that's certainly what swap curves are telling us now because they're starting to invert. So hopefully, that's a sign that we'll start seeing a drop in interest rates going forward. As mentioned earlier, now that we have a framework in place, we need to put those measurement tools in place around sustainability broadly. I mean we're not just talking energy here, we're talking the entire sustainability. We are talking staff. We're talking the shape of our Board. We're talking transformation, we're talking all of these important things around sustainability and how we run our business. So that's an ongoing task, but I think it's definitely quite high on the agenda of the Dipula Board now at the moment in terms of just making sure that we run the business in a sustainable way. That's key for us to keep a close eye on collections and keep those bad debts low because on debt, mostly that number is high. It kind of just reduces your hard work to nothing type of thing. So it's important that we take on -- we ensure that we take the right talents on to our books, et cetera, et cetera. We're pushing real hard for positive revergence within the portfolio. Can we achieve that, the product must be right. The service levels must be right, and we need to be proactive in how we deal with leasing and that's certainly what we're doing. We want to maintain our vacancy on the low side, and I'm very pleased that, that numbers come off whole 4 percentage points from where we last were. So I mean the push here is going to be to try and keep it at those levels or lower because that can only lead to upside in months and years to come. We will continue to implement prudent hedging, obviously, not the simple thing in a high interest rate environment. So we need to think quite carefully about the mix of instruments and when and how -- and that's certainly a priority area for us now. And as always, very strong focus on property and asset management. We need to find these things that give us the extra effect in terms of the property and asset management angles that we take. And basically, I think there's still a fair amount of value, a lot of value in this portfolio to unlock through clever number management. So we will continue to do that. And we are well on track with our solar rollout and energy efficiency projects. Keep reminding my team here is not about putting those panels on the roof. That's about a higher proposition around that and looking at it in a broader context. And there's a lot of developments in that space. And I think if you're simply just thinking that it's about solar panels, that you're completely missing the point here. And then, of course, we will continue to dispose off noncore assets. So on portfolio update quickly, retail. Our convenience, rural and township centers are expected to outperform in the short term. That's been the case for a long time. It's certainly still continuing. We're not seeing a trend where the super regionals are starting to attract back tenants to our detriment in any form or shape in the short term. We still got robust demand for space, especially for non-flows type of space. We think that within this portfolio, correctly implemented so that it should enhance returns going forward and give you the sustainability edge that you need. And obviously, we believe that performance could be given a boost by improved consumer and business confidence. I mean this is going sideways to dawn. Every time things look like they're on up, something happens in the world or locally sort of just crushes the confidence levels. But when -- these things are cycles, I think the market will turn. I think South Africans are strong by resolve. And I think we'll find those angles and continue to look for them. Certainly not trying to do that on our own because we're obviously operating in a market where our success is dependent on our tenant success and ideally, our tenants speaking only just doom and gloom. I think they're looking for those angles, and I think we will continue to look for those angles with them. I believe that, obviously, in the short term, rental growth will remain modest because as landlords, we have been supporting tenants in some form, shape or the other throughout COVID. We understand that their costs are up. Our costs are up, everybody's costs are up. So it's not just the top line growth thing. I think the top line growth thing is a bit not that simple, but I mean how do you protect margins in a market where top line needs a bit of a [indiscernible] from economic growth. You've got to just manage better to ensure that at least you get some growth through. And and obviously costs are still outpacing rental growth levels. And that is a result of extremely high administered costs, I mean there still seems to be a complete disconnect about what the impact of this increase in elements on costs are and on economy as a whole, let alone landlords and tenants. And I think that one would hope to lock in much high escalations when inflation was sitting at almost double digits. But we simply couldn't do it. I mean, I think across the board because there were other factors that sort of just like we come to that, such as cost. So things like backup electricity and water have become critical necessities when you think about your portfolio, again, kind of cycling back to the sustainability thing I mean, it's like -- it's not a buzzword. I mean, it's -- there are things that need to be done to ensure sustainability and things like services and utilities is definitely on the top of that -- of that list of things. There has been consolidation in the retail centers -- in the retail sector. I'm talking about retailers themselves, find each other out that obviously, I think, is leading to fewer people to speak to and fewer options for a customer long term. I mean, you've got an independent brand being taken over about one of the large brands in 3 years' time, they look just like a large brand. Differentiation is gone in the market, but then your Tier 2 guys will come back into the market and fill that gap again. That's an endless cycle. But obviously, in the short term, we end up just negotiating with fewer guys, and that sort of phenomenon at times actually lead to a situation where you can't push rentals as hard as you could with independent guys. But I suppose the key thing is to continue to support our centers in such a way that they become wanted in a way that people can be competitive in the rentals they are willing to pay. And another challenge is obviously the fact that disposable incomes are getting nailed by higher interest rates and then basically salaries that are going up below inflation. But that, in a way, also supports our no flows investment space on the retail side. Some of you that went on that tour with us. I did promise that our breakdown, the retail vacancy in more granular form, just to show you where the vacancies are. So this table here tends to do exactly that. So we've basically got 27,000 -- almost 28,000 square meters of vacancy in the portfolio that those are at the vacancies, that's excluding Kerk Street redevelopment. And basically, that number sitting at 6.8% now. Now how that sort of translates into the various subcategories. We try to break it up into basically 6 subcategories. So we've got mixed use. Mixed-use would be non-CBD mixed-use properties, so it might have a component of residential and retail or office and retail. And those properties, it's quite a small component of our portfolio. It's only about 2,000 square meters, just 1,980 square meters. And at the moment, our exposure to that relative to our retail portfolio is 0.5%. And the vacancy there is 19.1%, but it's not a big number. It's only 378 square meters. So it's big in comparison with mixed-use, but quite small in comparison to the entire retail portfolio. I mean, mixed-use is only about 1.4% of our entire retail portfolio vacancy -- of our entire retail vacancy. So that's not material. We're not worried about that. Then mixed-use CBD. Basically, we've got about 5,000 square meters, 4,873 square meters vacant. Our exposure to that as a percentage of the entire population for retail is 30,500. And that vacancy there is quite alarming at 36.1%. It contributes about 17.5% of our retail vacancy. These are properties located in CBDs. I mean the CBDs that are giving us -- that are contributing towards this 5,000 vacancy located in Krugersdorp and Welkom and Vanderbijl I think those towns experienced some extreme competition in the past few years. I mean that we've identified as noncore. And I think that's part of the portfolios that we've been moving. If you look at the list of properties that we've disposed, but we've nonetheless still got exposure there and we'll continue to work our way out of that because we don't even really foresee angles and our growth when it comes to those assets. Then our retail centers, which is really the heart of the portfolio. There, we have about 12,000 square meters, 12,900 square meters vacant. That's only about 4% vacancy. And that's concentrated in 4 assets. It's the vacancy in Orange Farm, sizable vacancy there, and we've got a vacancy at Taung Mall, and we have a vacancy at Belle Ombre. Orange Farm and Taung Mall, those are not structural. So we should be -- we should try angles for those. Belle Ombre, we were hit by obviously the trains that stopped running. But there is some stabilization coming there that is a commute-located. And then there's Palm Court with a bit of a sort of what you call second floor retail that's contributing towards that vacancy. But I mean those vacancies don't really give us a sleepless nights, as you can see at 4%. I mean, there's a good chance that we could drop that significantly below that as we go forward. And then your stand-alone CBD, we've got 0 vacancies there. And then strip retail, that's about 9% exposure to that sort of thing. And basically, we have leasing strategies in place for those. We did move a fair amount of space in that category post July. So I foresee that number coming down and so on. And then strip retail, CBD, these are all CBD buildings that at some stage also have maybe a banking component to them, whatever the case may have been. And that vacancy of 4,000 square meters is concentrated mainly in front of the Bellpark. So that is noncore. So if you look at mixed-use CBD and you look at strip retail CBD that's been identified as noncore. And I think over time, that should actually disappear from the portfolio. But I mean we really wanted to do comparison between our retail and that of our peers, you look at that retail center number. Right. So as mentioned, there's been a significant drop in this vacancy since Feb. We're now sitting at 6.8% and definitely moving in the right direction, as I said. And our trading hasn't been significantly impacted by load-shedding because there is a fair amount of backup power solutions in the portfolio plus the design of these assets lend themselves to a situation where during the day, you can still trade with a smallish battery in your speed points and sort of thing because there's sufficient light coming through. Between March and July, we did 12,437 square meters of new leases, new tenants at an average lease period of 4.2 years. And basically, post that period, we have done 35,300 square meters. So I mean we've done -- I mean, we've done close to 18,000 square meters, almost 20,000 square meters of new leases in the past 5 months. So that's quite good showing there. The weighted average escalations was 6.9%. And we continue to renew. We have renewed 27,000 square meters on the portfolio. The lease period is about 3 years, 3.3 years. And we have achieved a positive renewal rate of 0.9%. Let's just say flat for argument sake. And the weighted average escalation was 6.4%. This is what was referred into earlier that you're not really achieving inflation escalations, but that's also because we've been changing the constitution of the portfolio by moving towards more defensive, more national tenant, so security in lieu of escalation and in some instance, even rentals. On the office side, current GLA for our office portfolio is 127,000 square meters. That's about 13% of our total GLA exposure. Active vacancies in that portfolio are 23,000 square meters. It's 18%. That's the vacancy that we're recording in a moment. But if you look at that in the context of the whole portfolio, that vacancy is about 2%. We have to take our office vacancy related to the entire portfolio is about 2%. And the above is obviously excluding unlettable space and it's also excluding the redevelopments and potential -- the potential redevelopments. And if you look at that number, with the redevelopment in there that's obviously that's at about 28%. The active vacancy opportunity at a low net rental of 60% square meters approximately ZAR 17 million per annum. That's about ZAR 0.02 in distributions per share. Not a big number at all. And then you look at basically leasing activity in as portfolio. We have concluded only about 2,000 square meters -- 2,600 square meters by the end of July. And post period, we have done another 5,600 square meters. So obviously, that number is going to drop that 18% vacancy further and your weighted average escalations achieved there of about 6.5%. We are still negotiating with government. I think I'm feeling progress there, stuck in process in it. And I think those renewals should come through. Hopefully, by November, when we report, we're not going to be standing like a statue about the renewals coming through, they would have come through. So we renewed about 5,400 square meters and it was short and it was people are basically just holding their leases. But I mean if you look on top there, I mean the new guys coming in are signing for 3 years, so I think that we are going to be able to actually push these renewals to periods of between 3 and 5 years when we conclude the permanent leases. But the renewal rate obviously compensated for a shorter lease at a positive reversion of 6.3%. Pointed average escalations was sitting at 7% on those renewals. Industrial, looking extremely good 2% vacancy there, good demand for space. And I don't have to spend too much time on the side of our business. I think it's looking good. Residential vacancy was sitting at about 6%. I think what we'll do next time because as a residential vacancy can jump because we signed these very short leases. So I think we'll report this number on a monthly basis. So you can actually see what it does on a monthly basis. But I mean there is no vacancy concern on the resi portfolio at the moment. And we're hoping that some escalation will come through in this portfolio because we have instructed our property managers to start filtering through. I think it's stabilized now since COVID. Now it's a question of getting some growth out of it. And that's what we are attempting to do in the next few months. And if you look at the industrial, new leases, about 5,556 square meters, 2-year average. Those are mini-units that we tend to do 12 to 24 months. And basically, post period, we'd conclude another almost 7,000 square meters of leases there. And you have escalation sitting at 7% and renewals, we renewed about 15,000 square meters, all mainly in the mini-units because some of the larger boxes have locked in longer leases and a weighted average escalation for those renewals of about 6%. That, ladies and gentlemen, is my presentation, and we're happy to take some calls -- some questions now.

Got a few questions from Denise. Four questions. Do you want me to read them all or one by one.

No, all of them please.

Okay. First question, are you able to tell us now much disposal in the pipeline? And what are these assets? Second question, how much bad debts do you have on your books? On retail, what type of support are you providing tenants? And fourth question, where is demand for retail coming from and what is no flow through?

Great. Thanks for those questions, Denise. In the next 5 months, we're looking at another roughly ZAR 300 million of disposals that are planned. Obviously, if there was the opportunity to do strategic disposal that gave us the opportunity to maybe swap out of one sector to get into one of our core sectors, we will do that. But I mean, we haven't marked all of those properties necessarily for disposal. But I mean, we're looking at on a normalized basis, about ZAR 300 million that we want to dispose. Bad debt, we write-offs for this period. I think we'll report on that to the end of the year. But all I can say is that we've added another about ZAR 5 million to ZAR 7 million of provisions to our book for this coming year. But I mean, I think that number will crystallize as we go. So that ZAR 7 million out of billings per annum of about ZAR 1.5 billion. So it's not a big number at all. What support we provided to tenants, there is no direct support provided to tenants. I think I was merely just referring to the fact that in sort of the balance of things, we understand that some tenants or tenants generally speaking also experience some headwinds on the cost side of things, and we're kind of sharing the burden there. I think when the market does turn positive -- quite positive winds -- economic winds start blowing through SA, all of that is just sort of is pent up, it's sitting there, and I think it will allow for us. I reckon you'll see super growth in the sector if the economy even grows just by 2% because rentals are actually fairly low. Where we're seeing demand for space. It's same tenants. I think that's still the -- and was no flows. No flows is basically a nondiscretionary spend. So those would be supermarkets, basic clothing and that sort of thing. So basically, we're excluding just spend related to lifestyle or luxury or anything like that. It's basically it's what you typically find in a convenience center/rural center/township center. That's no flows. That's how we define no flows. So there, as I stated earlier on, I mean, if anything, people are adapting format so that they can actually move into that opposite. I mean, for example, we signed 3 bigger pay clothing stores in our portfolio in the past 3 months. I mean that would be a no flow stunt, for example.

What cap rates were you able to achieve on the sales? And what NRI increase should we expect for the period?

Cap rates achieved were an average 9% and NRI for the period -- NRI. What is NRI -- maybe you can just clarify that we might use different words.

Net renal income.

Net rental income. We will report about that at the year end. I think if you just look at these numbers, I think you can comfortably see that things are not going backward, but they are going forward in terms of our numbers are looking at the moment. So between interim and final, I think we're comfortable that we're still tracking at similar levels, if not better.

You've got the office vacancy reduction from 27.4% to 18% -- more at 18% now.

On office side, there has been some relocations there. I think where we've taken -- where we're now reporting in line with how our peers are doing. We've taken the development properties out a bit, but you will see that we've actually let in total, almost 10,000 square meters of offices. Some of those leases are obviously kicking in post July. So by year-end, I think we would have comfortably done about 11,000 square meters of new office lettings. So there's definitely a movement on our office side. And I think that activity is -- we've stabilized as a sector there, and there's definitely picking up there.

Thanks, Izak. Are you able to give us more color on the reversions on the new leases versus the outgoing tenants?

The numbers are very difficult to report because I'll tell you why because, I mean, we will -- we haven't reported on that. We try kind of looking at because if I have a 1,500 square meter tenant and I go and I chop and change this space in a different form. It's not directly comparable. And I know I get that question a lot, but I mean, I don't have that ready sort of answer now at a moment. But I imagine that if that number was going backward, your average rentals period-on-period will be dropping, but our average rentals are not dropping period-on-period. So although I can't give you a direct number, I don't believe that, that number is going back significantly, but I will work on something and report to you guys maybe at the end.

In recent years, contractual rental income growth is not tied up with the disclosed metrics. Would you be able to give us some guidance on contractual rental income growth for the full year?

Okay. We'll report on that. If there's no further questions, we thank you very much for your participation. And please feel free to send us e-mails, you can send directly to Taryn or you can contact me or Sudesh with any other questions that you might have. Thank you very much.