Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Dipula Income Fund's Pre-Close Business Update for the period ended 28 Feb, 2025. I will be doing most of the presentation. I've got Sudesh with me to field the questions. Please put all of your questions in the chat room, and we'll do all the questions at the end of the presentation. Presentation is reasonably brief. And hopefully, we provide you some insights for what's going on in the company since we last spoke. [Technical Difficulty] Apologies for this. Presentation just stuck. Trying to resolve it. Apologies about that. It's all resolved. Good. 3-part presentation. We'll do a business update and then take you through the portfolio, and basically just have a brief chat about the way forward. [Technical Difficulty] Yes. So we will upload the presentation. [indiscernible] Just going to stop sharing and go through the presentation. Apologies about that. As I said, there is 3 parts of this presentation. I'll quickly jump into it. By the end of January, our LTV was still sitting around 36%, very similar to where we were at the end of the financial year. Our ICR was 2.72x. Just a reminder, the bank covenant levels are 50 and 2x, respectively. So, we're still very comfortable in terms of balance sheet there. Weighted average cost of debt was sitting at about 9.3%, and our hedge position for the interest rate was about 60%. Obviously, the SAP rates are not presenting much of value. I mean, the SAP rate was fairly flat relative to the charter rate at the moment. And I think some of the interest rate expectations of sort of late last year have somewhat tempered down as a result of global factors that you guys are well aware of. So, it is a position that we are monitoring quite carefully to obviously ensure that we have sufficient hedging in place. We disposed of ZAR 108 million worth of property and ZAR 59 million of that is awaiting transfer, fairly advanced stage of transfer where clearances have been received. Basically, guarantees have been put up. So, very little risk of that properties -- of those properties not transferring. There's quite a bit of potential sale pipeline also that we're busy working. These disposals were mainly offices and some small retail. The single largest office disposal was in Parktown. And so we are completely out of Parktown now. We sold that building at a very nice premium to book to an owner occupier. And during this period, we also incurred CapEx of about ZAR 100 million, half of that being in respect of solar, about half being in respect of the various upgrades that we're doing to our properties, especially the retail side of things. I think as indicated previously, capital allocation decisions are always made in terms of making sure that we skew the CapEx to where we think we'll get better growth going forward. Year-on-year, retail center turnover, which I'll speak to when I get to the retail portfolio has gone up by just under 5%, 4.8%. That's basically year-on-year December '23 to December '24. And the portfolio vacancy, excluding residential have decreased to 6.8% from 7.5%. We'll crystallize those numbers as we go through the various subsectors. But those are all movements in the right direction. So really stable operations, strong balance sheet, sales driven through and CapEx being spent as sort of undertaken. And perhaps if you just look at the CapEx almost matched by the disposals, so it's a proper recycling of that money coming into those CapEx areas. During the period, we did about 21,000 square meters, 21,621, to be exact of new leases for value of ZAR 104 million at an escalation of 7%. We will crystallize those numbers in later slides, but I think it's decent leasing activity. I mean, that's the size of a nice -- for community center, in a way, 21,000 square meters and those escalations are quite healthy at 7% in a market where there's a lot of pressure and pushback. Renewals well on track. We've done to date about 31,510 square meters of renewals for a value of ZAR 181 million and escalations of 6.5%. Look at the retail portfolio. Our vacancy went down from 6.4% to 5.6% between September and January. We were busy there with -- we are busy with quite a few exciting revamps, Protea Point, where we're upsizing the center and bring a whole lot of re-tenanting. Similar exercise being undertaken by Ombre and Ziyabuya. I think Ziyabuya is substantially completed. I mean we had quite exciting times in the community there in terms of just the rollout of that solar -- the revamp of the center and staff. We were stopped quite a few times through protests and basically what I would term construction mafia activity. But we've been successful in navigating our way through that. That's a problem that's not going away at the moment. And I think we obviously need to adapt and ensure that we can manage it. And we expect our new co-anchored to be trading there from the 1st of April. Similarly, Atrium substantially completed tenant fit-outs and that sort of things. So the tenants that are signed up will be trading from the 1st of April. There's some movement in the Joburg CBD in terms of the council fixing all of the exploded in and around this particular property. But we're definitely seeing tenants starting to show a lot more interest in going back and people being less scared to actually go downtown with us and to go view. The space is now available. This particular location is still very, very busy, lots of foot traffic. And I think council is pushing ahead with creating the pedestrianized walkways and closing out some of those roads for traffic, which will further increase the foot traffic towards this particular location. The centers in and around us have also been almost unaffected by what happened in Lillian Ngoyi. So yes, we're very happy that we're finally making progress in terms of this particular property. If you look at leasing in the retail portfolio between September and January, 40,000 square meters of space -- new space let at a value of about ZAR 81 million, escalations of 6.8%, pleased with that. And renewals, we have done about almost 22,000 square meters of renewals there for value of ZAR 172 million. I mean, for obvious reasons, I think if you look at the bulk of our leasing activities, will always be in this retail portfolio because that is the bulk of our exposure. And last year, we did most of the renewals for our office portfolio. So there's very little expiring there. So that's substantially derisked. And we're quite comfortable with a sort of a staggered lease expiring profile with the retail portfolio because it gives us an opportunity to sort of manage our risk from both the duration of lease point of view and being able to get favorable terms when market conditions allow for that and lock in escalations or different sort of regular dispensations of ELS from an inflation point of view. So, I mean, that diversification of expiry profile is actually quite healthy for a company like ourselves. Escalations on the expiring leases that were renewed was 6.3%. 80%, 90% of those leases are with national tenants. So hence, the expiry escalation at that sort of level. If you look at the trading numbers to December, as indicated in our shopping centers, very, very strong trading under the circumstances. About 45 -- almost 50% of our exposures to food and grocers. Another 30% or 28% is to fashion and footwear, so very defensive in nature and then the rest is split between the various other categories. But if you look at our movement year-on-year, positive movement on the food and grocers about 5% and a positive movement of 3% for the fashion guys and restaurants were up healthy 11% during that period and health and beauty also 16%. I think you have seen fairly good results coming out of the likes of Dis-Chem and those sort of operations. We're seeing a similar picture in our portfolio that they are reporting good turnover numbers. And basically, liquor was also up about 12%. What's interesting is just how substantially high the trading densities for these liquor outlets are. I mean, if you look at food and grocers are sitting at about 5,600 square meter monthly trading density compared to liquor that's sitting around 16,474 square meters. So, I think South Africans still like their liquor for some reason. And that's kind of -- we are seeing a lot of inquiries in the space from various retailers, either wanting to upsize stores or get a bit more exposure into that -- those that don't already have liquor outlets. There are some independents that operate in this market, but that's starting to become quite a big play for the large grocery retailers as opposed to sort of independent liquor guys as was the case previously. As healthy as the demand might be for that space, they do get slowed down a bit from time to time by the liquor boards. Very similar with gambling outlets. We often sign up guys, and they have to wait quite long to get their licenses. So big opportunity, but definitely being slowed down by regulators and things like that. But it's nonetheless something that we still have sufficient and good room for growth within the portfolio. On an overall basis, as indicated in the first slide, I mean, those turnovers were up 5%. This is a like-for-like comparison. So, we're not accounting for new stores that were not there in the prior year. So, we've basically adjusted the number to reflect the like-for-like scenario. The overall cost of occupation on our portfolio at the moment, where we're tracking turnover is about 4%, still very healthy and indicating room there for positive renewal situation for us going forward. Looking at our office portfolio. Here too, we are showing vacancies moving in the right direction, dropped from 22 to 19. A few deals in the pipeline. We're hoping that, that will move even further down. And as indicated earlier, we are completely out of Parktown now. And as much as we see heightened activity in terms of inquiries, that is also still a very competitive market where tenants are spoiled for choice in terms of where they can go and the incentives they're still receiving. So, we have to continue boxing to fight for those tenants that are in the market. I mean, I'll be lying if I said that we do see a lot more inquiry for space. I mean, closing is a different story for the reasons I've already explained, but there's definitely tenants about looking to get into spaces. We did about 1,700 square meters of new leases here during the period at escalations of about 7.7% and renewals of about 6,700 square meters, escalation of 6.5%. There isn't a lot of leases coming up in this period as indicated in this particular portfolio because we stretched the expiry profile quite nicely to an average about 4 years last year when we did those 5-year leases for basically the government portfolio. I mean, our exposure in offices, just to remind you, is 50% government. So, government is still a very important tenant in our lives. And we're still having to manage that situation quite carefully in terms of getting in those cash flow quickly. Things slow down towards the end of their financial year, and things pick up quite nicely when the financial year starts again in terms of how quickly they pay us. But we've been managing that for a number of years now, so we know how to deal with that. And government is not necessarily taking up more space. There are some changes here and there where they're actually consolidating space rather than taking out more. So, I think if you look at whatever vacancies there might be in the office sector, I think people pick up a government tenant now and there, but there's not massive vacancy there. Because of their constrained pockets, we also think that there will then be a stickier tenant than would be the case if they had lots of alternatives and people actually like them as a tenant. Industrial portfolio is looking good, a slight uptick in the vacancy there from just under 3% to 3.5%. Very specific to many units, always some high turnover of tenants there. So, we've had a few guys out doing their leases. But I mean that space moves quick. It's fluid. So, I think it will be taken care of fairly quickly. And that was mainly up. That increase in vacancy was concentrated to our 2 mini parks, Sifon Park and Bernie Street, not a big concern, not big sort of rentals that those -- that increase in vacancy is attracting. And we did about 5,700 square meters of new leases there. And renewals were about 2,700. Yes, I mean there isn't really -- this portfolio is stable. It's performing nicely. And I think that vacancy will trend more towards that 2 mark again. And we really got nothing negative or positive to say about this, but to say that stability escalation locked in and still able to actually negotiate very nice escalations or tenancy as you can see on both the renewal and the new lease side of things. Just looking at residential quickly. Residential vacancy decreased to 9% from 12%. We're making some changes there. We're changing property managers. We think we can be served a bit better by the new managers that we have recently appointed, which should drive performance even more in this area. And the rent asset that burned down last year will be reinstated. I mean, we're in very advanced sort of stages of getting that done. And we've got -- we've got some good interest in this portfolio for acquisition. And strategically, we definitely like to trade out of it. So, what we're looking at is in all probability selling the entire portfolio to a party and basically potentially also selling some of the undeveloped bulk either as undeveloped bulk or selling those units out on a turnkey basis. I mean, this area is -- I mean, there's a fair amount of funding coming into it, a fair amount of private players, not necessarily other REITs that are getting support from various pension funds and institutions and they can't build up stock quick enough. So, they're looking for existing assets and also development opportunities. So, take something like what we have down in the Cape, we'll probably trade that on a turnkey basis to some of these parties. And some of those conversion opportunities that we've told you about a few times also either on a turnkey, as I said, or best people south at Paarl gone today. And so strategically, we're not thinking of allocating all money on a long-term basis to residential going forward. Look at our sustainability efforts, basically Phase 1 of our solar for ZAR 50 million is complete. There's just one site that we, in fact, are still busy completing Ziyabuya because of those community issues that happened there. But other than that, everything else is operating and up and running. And we're busy with -- we've committed to Phase 2, 16 sites, 9 megawatts for a total cost of approximately ZAR 80 million. And we are also busy with very exciting water projects all over the place. And this is both solar and water initiatives that we are busy with is for both sustainability and they don't necessarily burn the pocket much. In fact, if anything, if we do it right, they do enhance our ability to strengthen the portfolio a bit more. And looking at our B-BBEE rating, we're sitting at a 4. And for this financial year, we're targeting a 2, which we think that we will realistically achieve. So, that's basically the sort of main thing that we are looking at on that front. And finally, as indicated, I think next 6 months or so, 6 months to 12 months, however, quickly we can pull up these things to trade out of that -- of the resi. We'll continue to reduce our office exposure and dispose of non-core assets for recycling purposes. And strategically, our focus is on industrial and retail, and we're not giving away the assets. And I don't think the market is really moving all that fast in absorbing a lot of what's potentially for sale. But, I mean, there's definitely opportunity for us to fill a fair amount of assets into the market for recycling purposes, and that's been pursued quite a bit at the moment. And we are rolling out a number of technologies to run our business more efficiently. And all effort is going into reducing our utility costs through tech utilization and maybe some of the sustainability initiatives that we're undertaking. Top line growth is obviously not always the easiest, but I mean, we're trying to push that through reducing vacancies and obviously getting reasonable terms on renewal and also controlling what is often more controllable, which is the cost side of things and ensuring that we shield our tenants also a bit from rapidly increasing utility costs and things like that. So, our teams are -- yes, our accounts are fully loaded and trying to drive growth through -- ensuring efficiency in how we do our business. We believe that interest rates are probably not going to come off as rapidly as initially thought. But I don't think we were too aggressive in our assumptions last year. And we're happy that we're still on track to deliver to the market what we guided. And that's our presentation, and we will now deal with questions. Thank you very much for your time.

First questions from Fabian. What elements of B-BBEE will get you from Level 4 to Level 2 this year? Fabian, basically, in the previous year, we dropped to a level because we didn't achieve the priority elements on few categories. We have implemented additional measures this year to improve the scoring where it will not only increase our points, but it will give us the subminimum required to not be discounted A level. So we believe by adding the additional points, it will get us an extra level and would not drop the level by being discounted. So, that's basically what we have envisaged. And similar is please share the yields achieved on the disposed assets and the trading density growth figure on the retail portfolio in the period?

Okay. So, most of what we sold here was vacant. I mean, the building park done was vacant. And we sold, I think, at about probably 10% higher than book. So, I can't really give you a yield number there. And then the rest was sold at between 9% and 10%, the ones that were occupied. Trading density numbers that I shared earlier on, we have indicated that our retail portfolio across the board turnovers December to December had shown a 5% growth.

Are you still in active discussion with Fairvest? Are you supportive of a possible merger if beneficial terms can be agreed?

Yes. I think that Fairvest buy-in happened sort of late last year. And we have to see what comes of that. We're open to exploring whatever needs to be explored. I mean, at this stage, Fairvest are normal shareholder. We are treating them as such. And I think, yes, that's about all that's unfolded since the announcement was made about the buy-in. If there's no more questions, you're more than welcome to give us a shout-out as always by e-mail or just pick up the phone and speak to us for more questions. But thank you very much for your time, and we will see you in May.