Dipula Properties Limited (DIB) Earnings Call Transcript & Summary

Good morning, investors and stakeholders, and welcome to our pre-close for the upcoming end of financial year. Sudesh and I will be doing the presentation. I'll do the lion share of it. And then because it's a very brief sort of update sort of run through everything. And then I think that there's finance-related questions that sort of thing, Sudesh will then deal with those. Please do submit your questions, and we will deal with all of them at the end of the presentation. Basically three parts of this presentation. Just a general business update that we start with, and then we go a little bit deeper into the portfolio, and then we chat a bit about how the sort of short-term future looks like. I was just reflecting a bit because this year is our 20th year in operation. So earlier this year, we had a very exciting sort of change of name, basically, a very small update to the name really, where we changed from Income Fund to Properties. We changed logos. Everything is looking a lot fresher. So 20 is looking like 1 year in terms of what we've done to our brand and logo and so on. So we're still growing into the logo, very, very exciting, and we're doing exciting things with it. So I think besides paying a lot of attention to the properties and making them look fresh from time to time, it was also time to make our company look fresh. 20 years is a long time. I mean, I'm sure some of your own asset management businesses are not that age yet, but we've obviously seen a lot over the years. And we basically started with a tiny little portfolio. It wasn't the most ideal portfolio, but we played the cards we were dealt. There's been a tremendous transformation of business over the years. It's a business that started with 2 people. And now we employ close to 100 people and probably thousands of people indirectly. So thank you very much for your loyalty over the years. You've definitely made a difference in the life of ordinary South Africans because that's exactly where our properties are located and where some of these people are employed. We don't always think about the impact that some of our investment decisions is making. But yes, I think by investing in Dipula, you're also impacting many lives. Dipula is still one of the few founder-run listed property companies, and we're very proud of that. We've been here from inception, still there. And I don't look at the Dipula as 160 individual properties. I look at it as a company with systems, processes, people, many, many stakeholders and our employees depend on us. Lots of little start-up businesses that do the painting at our properties, that fix the broken taps. I mean, some of these guys get their first opportunity from us. And basically, they can also get to service some of our tenants that are in our shopping centers. And we spend a lot of money on CSI, and we give a lot of our own time to CSI. We encourage our staff to actually just be out there and give of their time. So if you think about whether it's a powerful tool for us to actually position the brand out there, especially with a huge amount of volatility in South Africa in terms of how communities sometimes react and we simplify things like construction mafia and all of the things that people often get up to. A lot of the times, it's desperation. It's people wanting a piece of the pie because it is tough out there. So we're trying to understand that and not be too overcritical of these things happening and saying to ourselves, how do we actually navigate those challenges. So it's more than just managing a property, you're managing lives. And I think in our case, it's also the people that are probably most vulnerable. I mean, I often say it to my children, I mean they are fairly successful sports people, I say to them, if your cousins and nephews that live in those communities had similar opportunities would probably be 1,000 times better than you. And that's really what you need to think about when you think about the impact you're making by investing in companies like our own. And I think we often judge management teams by sort of short-term failures here or there. But I mean, if you have a 20-year stint, I think it means that you've seen a few cycles. You've made a few good decisions, you've made a few bad decisions, but you've managed through those decisions. You've had a few rocks thrown your way by COVID. If you think about all the things that's happened to us, the riots, navigated our way through those. And yes, and I think I can confidently say that our team lives in the markets that we invest in. So it's not a market they're completely separated from us. We can relate to it. We can touch it. We can feel it. We -- when you speak about what's going on in the township, it's not a theoretic thing that we had written some book that was written by someone. We know it. I had a very funny story not too long ago where investors were taken to one of these locations that don't always feel safe for all of us. And within a minute, they asked to be put back into the bus, driven back to Sandton because they felt too unsafe there. That's where we go. That's where we live. That's what we do. And I think, please don't take that for granted. And I think over the years, Dipula has made sound capital allocation decisions. And with the limited resources that we've had, just to give you a context, I mean, since the start of the business, we acquired 290 properties since inception. I mean -- and of the 290, we sold 130. So we're holding about 150-something properties now. Selling 130 properties over a period, again, I'm saying that's not a small thing, and it's -- we've seen it all. Strategically, I think we started with holding 10% of your dividends. Not everybody likes that. But I mean, you cannot run a sustainable operation without putting CapEx back into the business. And that money has been recycled into CapEx situations. It's been recycled into sustainability initiatives. Some of the properties that we've applied at those proceeds towards are in a much stronger leasing position now that they also -- they look great, they look nice. Tenants are happy to be in them. So one will continue to do that sort of thing because we want to be around for the next 20 years, if not 50 or 40 or 50. I think we'll continue to sell where we can, but the market is also now changing for the better in terms of being able to acquire, as you would have seen that we've announced some acquisitions. And I think from an ESG point of view, I mean, we take ESG very serious. You'll see on the slide here, I mean, some of the things that we did this year -- between this year and last year as we started doing proper background checks on every single person that works here, including our Board and the management teams checking their qualifications, making sure that no one is falsifying qualifications and that sort of thing. We called in GIBS. They did the ethics barometer, where they measured us against companies in South Africa. There's big names that do this ethics barometer. And we came out tops there. So I think I can comfortably say that not my own opinion, but the opinion of an independent party saying that you invested in an ethically-run company. We're currently busy with the Phase 2 solar, around 9-megawatt peak. That's progressing quite nicely. Last year, we rolled out about 7, which is performing to expectation at the moment. Obviously, lots of debugging. I mean it's not -- you don't put it on and it works. So we're busy sort of cleaning up whatever needs to be cleaned up there. And we're looking further into sort of other sort of energy optimization and energy security strategies, which we will share with you as we go. But that's -- it's an exciting space. I mean if you think about -- we spent about ZAR 500 million to ZAR 600 million on energy alone. So any saving there, any optimization, any sort of margin that one can drive out of that, that should be very interesting sort of value propositions that one can unlock going forward. Very excited to report that our BEE rating went from 4 to 2. And for next year, we're targeting a Level 1 BEE rating. And Sudesh is going to have to work very hard to making sure that, that's achieved, but things are looking great. We're also embarking on various water efficiency, water security and sustainability initiatives. This is not just language anymore. I think at some point, the guidelines come out, people are excited, ESG is a buzzword. ESG is getting integrated into our business as a way of doing business, and we're drilling that into the minds and hearts of our staff at the moment. And most importantly around ESG that S, that social is you cannot sustainably operate in these markets unless you pay attention to the social side of things. And we do a lot of work in that space. I mean, we'll share quite a lot of that with you when we put out our integrated report for 2025. Just briefly on the numbers. LTV has stayed constant at about 36%, since our last report, and ICR is also sort of at a very healthy 2.7x. It was about 2.8. I mean, obviously, by year-end, that should actually gravitate back towards that level, even get to about 3. So I mean, balance sheet is strong and performance is good. Our cost of capital is still sitting at about 9.3. I think what we're seeing on average, including sort of hedges and things like that. Obviously, there's some great hedges that rolled off that were struck at very low levels. But even with that in mind, we've actually managed to actually keep that cost of capital at 9.3. And I think, obviously, we're constantly looking at ways of bringing that number down. But new debt at the moment is coming in much cheaper than the old debt even on the margin side of things. So I expect that as we include new debt for expansion purposes that should also actually bode well for what this number looks like going forward. So really, really positive, the attitude of funders, the availability of liquidity in the market is great. I'm sure you guys are seeing the same thing. So yes, that's very exciting. It feels like a few years ago when we were on the rapid expansion, again, where conditions were just conducive to doing things. And as I was saying to you now, older, wiser, so some of the things that we're going to be doing are probably going to be better than some of the things that we did in the past. Our interest rate exposure is hedged to the extent of almost 70% now at the moment. We were at 62%. Again, I understand that number in context, like there are hedges that fell off, hedges that came to expiry, they were replaced with new hedges. And even with that, having been done, our cost of capital haven't gone up. But remember, swaps are actually much higher than where some of these swaps were when they were first fixed. We've been very prudent in how we're managing that whole situation. Disposals, year-to-date, ZAR 165 million. A few other scenarios that we're busy with that of potential disposals at the moment. And of the ZAR 165 million, ZAR 115 million has transferred. I think if conditions are improving for us to acquire, conditions are also improving for everybody else to acquire. So recycling and selling should become more feasible going forward also. To date, we've spent about ZAR 164 million in CapEx. It's both sort of value-enhancing or income-enhancing CapEx and defensive CapEx. I made the point in my opening remarks about how important that defensive CapEx piece is. And since our last report, we haven't raised any new debt facilities and our average collections are at a healthy 99%. Just briefly into the portfolio. Vacancies are at exactly the same levels as what they were in Feb. And the CapEx that I was referring to. If you compare that to where we were in Feb, so we had spent about ZAR 117 million. So we're now sitting at ZAR 164 million. So there's been another ZAR 50 million that's gone into CapEx. And the portfolio-wide reversion is at a positive 1.2 at the moment on a year-to-date basis. And we're achieving escalations of 6% on renewals on average and 7% on new leases at the moment. If you think about where inflation is, that's actually still quite good, especially considering that there's a flight to quality in terms of the tenants that we're bringing into the portfolio at the moment. So residential vacancies have reduced very nicely from 9% to about 6%. I will provide a little bit more color in a later slide on that. And our tenant retention rate was at 83% compared to about 79% at the interim period. Just numbers, 45,000 square meters or so of new GLA let, and value that is about ZAR 202 million at an escalation of 7.2%, and renewals, we did 94,000 square meters year-to-date. Value of that is ZAR 550 million approximately at an escalation of 6.4%. When you look at retail specifically, vacancy has dropped from 6% to 5%, and our tenant retention ratio has gone up from 83% to 86%, and trading densities on a year-to-year basis, June to June, 7% up. So portfolio is trading well. And that should bode well for where we renew leases going forward. And in that particular portfolio, we did about ZAR 165 million worth of new leases at escalations of 6.5% -- sorry, 6.8% and renewals of 56,722 square meters, lease value of about ZAR 470 million, escalations of 6.4%. Office vacancy is slightly up by 2% from '19 to '21. A few deals that we're working on that hasn't come through yet and that sort of thing. We still feel that the market is better. It does take a bit longer. It is hell a competitive, but tenants are out there. I mean there's traffic on the roads in Johannesburg like mad. You go downstairs to the shopping center, it's packed with people, I mean, better to find parking. I think this should just continue to improve going forward. That's definitely my sense because there are pockets where we're full and where we don't have space for the demand. So specific nodes are definitely more sought after than others. And there's certain other nodes that are still not necessarily preferred or where there's oversupply and that sort of thing, but there are other nodes that are oversubscribed with tenants at the moment and that sort of thing. And in those nodes, we're full and rentals are growing quite nicely. We did about 4,000 square meters of new leases and about 16,000 of renewals. Most of our renewals in this portfolio, obviously, was done last year. So as you would expect, you're not going to see a huge amount of renewal activity. Industrial portfolio, stable at about a 4% vacancy, good fundamentals still here, 75% retention ratio, it was 55%, but there are many units in the portfolio. So I mean, we churn near where we can, again, flight to quality and that sort of thing. So the bigger boxes, stable, longer term. The smaller boxes, obviously, there's a huge amount of activity. There are about 17,000 -- almost 18,000 square meters of new tenants coming into the portfolio and renewals about 21,000 square meters. And the new leases that we've done with escalations of 7.5% and renewals at about 6.3% escalation. Just another closer look at the residential portfolio. I thought -- I mean, you don't really speak GLA, you speak number of units to really gain proper context of what's going on. So we've got 1 studio vacant at the moment, and we've got 14 one-beds vacant across the portfolio. We've got 17 two-beds vacant. And basically, Palm Springs, where we had quite a sticky vacancy for a very long time. We've only got 17 units in total -- sorry, we only got 22 units in total at Palm Springs that are vacant at the moment. That's a huge improvement. And that as a percentage is 5%. I mean, obviously, the concentrate -- the other 2 smaller properties, even though it's like a few units, they look more severe on a percentage basis because it's a smaller number of units, but Palm Springs is really where you need to pay attention. There you can see that, that property has actually improved tremendously from an occupancy point of view. Just very briefly on the acquisitions that we announced. Protea Gardens, exciting opportunity for us. We think that there's quite a bit of asset management sort of value adds that we can make to the property, brilliant location, densities, well-located property. And basically, that's coming across at a yield north of 10%. And the current average lease period is about 2.4 and it's anchored by Shoprite, Cashbuild and Boxer. It's not too far from our other Protea property, very location that we're extremely familiar with. So we're not going into anything that's not familiar, very nice size at about 24 [ enclosed ] mall and yet conveniently located. And then we acquired the adjoining center at Gezina. 2 years ago, we spent a huge amount of money just upgrading Gezina. It looks amazing. We've got some local artifacts there and that sort of thing we're going there and statues and very nice artwork that we've actually incorporated into the property. Tenants are happy. We've got a waiting list of tenants wanting to come into the property and hence, our decision to buy the neighboring one because that comes with a bit of bulk and we can sort of add to this and upgrade the property a bit and integrate it into our own property. That's an additional almost 5,000 square meters of existing GLA. But there's, as I said, opportunities there to bulk up. It's coming at a nice yield and the opportunity is obviously retenanting here, lease period is short, but that's exactly why we're buying the property. And then we bought a piece of land at adjoining Tower Mall. I mean this particular slide just give you a sense of how dense the townships are that we're servicing. I mean that entire township area, which is almost the same size as the town of Klerksdorp, only has one shopping center, which is the shopping center here. And it will cost you at least, I think, about ZAR 35 one way to get into town. It's about 12 kilometers away from the shopping center. So that's a big amount of money. I mean the average basket size for supermarkets for this market segment is ZAR 120 per basket size. So if you're going to pay for you and your wife and two kids about the amount that you pay for basket size, just one way going into town. It's a hell of impactful from that point of view. So that's why I think this asset will continue to grow. And next to it, has been basically -- that's an old Google picture, but I mean, it's all built up to the left of the property there to the front of the property. What government offices, there's a SAFA stadium that they intend to build around this property. So very exciting prospects for this property going forward. This piece of land is about 2 hectares -- sorry, 1 hectare, and there's about 7,000 square meters of bulk, possibilities here. I mean picking up at a decent price. The last property is a New DC, for [indiscernible] reason, I can't give you too much color on this one until it transfers, but it's an exciting opportunity. It comes at an initial yield of 9.75, a purchase price of 134, brand-new 10-year lease, blue-chip international tenant. So very, very exciting for us. Last one is basically Airborne Business Park. You can see the property sandwiched between these major routes here, R21 and 12. Massive, massive outdoor advertising opportunities here. There's a road reserve on the property that will in all probability never be used. So we'll, in all probability, apply to actually get it relaxed and buy that at agricultural prices and then add to this property. So there's proper value-add opportunities here for us for this particular property. Just reflecting on how we move forward, I think continue to make wise capital allocation decisions that are strategic, value-adding, improving our business. We're looking at interesting acquisition pipeline, all what angles in terms of some of the things that we can do. Sustainability initiatives are definitely going to add to the bottom line and at the same time, make impactful friendly, environmentally friendly, socially friendly impacts in the business. And we'll continue to try and sell what no longer meets our investment criteria and sweating our assets is definitely something that we are well capable of. I mean, being an in-house run company in all respects and having a stable team. And yes, we welcome the recent interest rate reductions, both on the short end, sort of JIBAR and sort of the long end, sort of that 3 to sort of 4 year is looking much better than what it was looking and that sort of thing. So when you swap out, it's not as painful as it was if you thought about the same thing about 6 months or a year ago. And we're keeping the guidance that we had given to the market of between 4% and 6%. Our big excitement is definitely about what we see going into 2026 in respect of what these numbers are going to look like. I thank you, and we will now deal with the questions if there's any. But yes, thank you once again for your time.

Sure. Start off with some questions. [ Tyoso from Meago Asset Managers ]. In terms of CapEx spend so far, could you please break down the percentage split between solar yield in defensive CapEx? And will you maintain the split going forward? Second, in terms of the office portfolio, how much of it is made up of government-tenanted offices?

Sudesh, do you want to tackle the first question?

Sure. On the first component, the solar yield in is around ZAR 53 million of the ZAR 164 million CapEx. Our yield enhancing, which includes solar and other yield-enhancing is around 57% and defensive is around 43% of our total CapEx spend.

Yes. And in terms of whether we'll maintain the split, I mean, I think -- it all really depends on the opportunity set at a given point in time. But I mean, to spend about between ZAR 80 million and ZAR 100 million on sort of CapEx on the portfolio, I think that's normal.

And the second was our office portfolio, how much of it is made up of government-tenanted offices?

Approximately 50% is government, and most of that is running through on 5-year leases at the moment.

Moving on, [ Chris ] from All Weather Capital. Please comment on the funding plan for the various acquisitions announced.