Equites Property Fund Limited (EQU) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Equites Property Funds Interim pre-close presentation. Management, obviously very excited to share a few insights as to the first 6 months of this year with you, leading up to our interim results in October. I trust that you find the presentation interesting and obviously look forward to some of the questions post the presentation. So let's maybe start with the period that's just gone by and some of the highlights that we'd like to share with you. So in terms of our development spend, we've currently spent about ZAR 600 million during the course of the first half of the year on the Tiger Brands development. TFS has just been signed. So bulk earthworks underway there. DHL in Boksburg, the platforms are being produced as we speak. In Benoni, we bought a meat plant, which Shoprite operates out of and doing some extensions to that. And then the final part of the jigsaw for the first half of the year is the FMCG -- Premier FMCG extension at Lords View. The expectation here, obviously, is there's a few more deals coming through the system in there and also the spends on those particular developments should ramp up during the course of the second half of the year and then into 2028 -- financial year '28. Speculative developments. We obviously have had a measured approach to this and have been releasing some product into the market. And this is also the consequence of the fact that we've been running almost 0% vacancy in the portfolio for a while. And hence, we're able to deploy some capital into this. On the positive front, the 2 speculative developments that sort of were completed earlier in this year have now been let, technically not let in the period as leases are both commencing actually on 1 September. So but obviously very pleased that those have been let and let at good rentals and to sort of high-quality tenants as well. Level of activity in the rest of the we'll talk a little bit later on. U.K., obviously, the highlight of the period was the sale of the -- what we called in South Africa, the Aviva portfolio, what was branded in the U.K. as the SpringBox portfolio. That obviously went in May and the proceeds of those sales, we will talk about later. And then the other positive sort of process that sort of come through the U.K. is the rent review with DHL has finally been agreed. And obviously, that's given quite a bit of uplift to value of that particular property. And we wouldn't be able to leave out our treasury department that obviously ably led by Laila, and she'll talk about this in a bit more detail later. The activity in the debt capital markets has been fantastic, and we seem to have gone and beat our previous sort of record in terms of where we were able to raise. I obviously extremely pleased with that. And then Laila will also talk about the fact that sort of everything is now migrating to ZARONIA from JIBAR. Operating environment. So SA, there's no question that the sector is buoyant. The open market returns for the sector seem to be outperforming everybody again, 10.5% total return for the period, obviously performing better than bonds and equities for the period. And the return for the next 12 months is probably slightly better than that at sort of somewhere between 12% and 14%. Vacancy levels obviously are very low in the sector, the consequence of which obviously is assisting landlords in driving rentals. And we are seeing the demand levels, obviously, from supply chain optimization, onshoring and e-commerce penetration improving the sector sort of month-on-month almost. The modern sort of what we define A-grade logistics facilities, certainly commanding sort of rentals in the 90s, probably 90-plus even. What we're seeing in the Western Cape and sort of in the greater eThekwini area that those rents probably need to be north of 100, and that's a consequence of a real shortage of land in those 2 locations. And there seems to be a little bit of resistance to breaking that 100, but developers are obviously very reticent to put anything onto the market unless they're getting those returns. So it's going to be interesting to see how that plays out in the next sort of year, 18 months as the demand drivers don't seem to be abating. The level of vacancy even in maybe some of the lesser product is at an all-time low. And a lot of people are almost going to be stuck between a rock and a hard place. So that will be very interesting. Johannesburg, the greater Johannesburg, obviously, has got a little bit more supply on the land side. And I think building costs generally due to just the scale of the operations up, they tend to be slightly cheaper. And what we're seeing is that, that 90 level is certainly sustainable and has been achieved by ourselves and most of our competitors. What is this demand being underpinned by? Obviously, the FMCG guys are looking to improve their operations and consolidate operations into lesser and more efficient and more technologically advanced holdings processes. E-commerce obviously is taking everything to another level and the penetration obviously is growing. And these things together with, I suppose, a consolidation into ever-evolving technology in the sector, which is enhancing the deliverability of product to an ever more fickle customer base that has expectations of being -- of receiving the product that they want to buy in an ever quicker process, if you like. Too far there. SA update in terms of what we're doing, just a bit more detail as to be unpacked from what we showed in the update earlier. Obviously, the 89,000 Tiger Brands facility up in Johannesburg on the R21 at Riverfields, very exciting for us. I mean, progressing extremely well and looking forward to seeing that finished sort of middle of next year. And obviously, that in the joint venture with the Tridevco team, which is a partnership that has worked extremely well for Equites, and we're very pleased with it. We've recently concluded a lease with TFS on a new 10-year lease. And again, that's on an adjacent piece of land to the Tiger Brands development also in the Tridevco joint venture and the first of our sort of deals with the broader Takealot team and obviously very excited to be part of that and hope to be able to do a lot more deals with that team in the future. We also finally managed to do our very first deal with DHL in South Africa. We've done several deals with them in the U.K. First deal in South Africa, and this is unpacking a piece of land in Boksburg adjacent to the Colgate manufacturing facility in which DHL have undertaken a third-party logistics contract with Colgate, and we are developing the facility to go there and which Colgate -- which DHL sorry, are letting from us. So really pleased with how we use some pretty good innovation in terms of how to structure a deal with DHL. They were extremely pleased as we are. And obviously, I think it's -- in this case, this really is a win-win scenario. We acquired the Benoni meat plant within RLF. This meat plant was is was owned by Massmart as part of the Cambridge Foods acquisition that Shoprite made a few years, they inherited it. And the plant has performed exceptionally well for Shoprite, the consequence of which is that they decided to buy it or they wanted to buy it on the basis that they needed to expand it and improve the technology and manufacturing capability of the facility. And we agreed to put that into the RLF joint venture with Shoprite. And obviously very pleased with that deal and that expansion is currently underway. We continue to obviously engage with landowners across the 3 main, I suppose, markets, which are Gauteng, eThekwini and the greater Cape Town area. In Gauteng, obviously, we do have some supply of land, which is fostering the ability for us to continue to deploy capital meaningfully eThekwini and Cape Town, a little bit more challenging, but notwithstanding that, we continue to engage, and we hope to be able to secure a couple of pre-let funding deals on some portions of parcels of land in which we are showing great interest with the landlords. In terms of the pipeline, the Equites sort of process has really always been one to drive pre-lets. We continue to do that, but we've also introduced a measured amount of speculative developments into the process. And the reason for that, obviously, is we've had the great benefit of running very, very low vacancy. And what we're seeing with very low vacancy across the sector, the level of demand through the building process is significant, and we have been quite successful in terms of letting these facilities either during the build or very soon after PC, which obviously has encouraged the investment committee to continue on this path. And as we continue to renew leases and have very few vacancies in the historic buildings, and Riaan will talk to that in more detail in his part of the presentation. We are pretty confident with that process for now. Obviously, Tiger Brands and TFS are 2 new tenants into our portfolio. And obviously, that's great for us because, obviously, strong tenants, but also what it does is also diversifies our portfolio away for a little bit from Shoprite. And whilst obviously, we're very pleased with the Shoprite deal, obviously, the level of concentration in that portfolio as a total of the entire portfolio would want to be managed and mitigated. Riverfields remains, in our opinion, probably the premier logistics node in the country, the level of interest that has been shown in that area, not just for Equites development, but there are 2 other counterparts that are developing in that area. And we know and can see from the market intel that we have that the level of interest that they've got in their product is also very high. And I'm sure they are also going to do extremely well as we have done. Pre-lets remain premier speculative is there, as I said. And that really is there to capture some -- sometimes some poor planning in the marketplace. We recently captured a 3PL at one of our speculative developments at Riverfields that was successful in capturing a very substantial third-party logistics contract for a major online retailer and the consequence of which is that we've got the facility was ready to go and really had no competition in the marketplace, and we were able to achieve a very good market rental as well there. Premier FMCG, I reckon probably talks best to our world around -- we've often spoken about repeat business, obviously, often being the cheapest and the best business. And I think there's no better example than Premier FMCG. This is the second extension that we've done to their original facility and obviously, to work with a very, very strong management team like the Premier FMCG team are and their success obviously is rubbing off also on us. So really pleased with that. I won't go through all the deal flows there, but obviously, a bit of detail for you all. The pleasing thing is that in all of that, that I'd like to share with you as well is that the construction inflation concern that we had at the beginning of the year, especially after the incursion into Iran by the U.S. and the Israeli forces and the consequential impact on oil prices, the inflationary pressure on construction has been muted. I'm not saying there hasn't been any, but it has been muted. It's been a lot less than we anticipated. So that's been very pleasing from our point of view. U.K. So as I said earlier, really pleased with the sale of the Aviva portfolio. We realized a net position of about GBP 95 million. And as we announced to the market, I think, at year-end in May, we decided to invest a portion of those proceeds into some U.K. REITs, consequence of sort of rather than repatriating the funds and unfortunately not having enough capacity in our debt program to park those funds, we felt that this was the best place to park that money. And I suppose I'd love to claim that we knew that Prologis was prowling for SEGRO. And we've been the beneficiaries of being on the right side of that transaction, which obviously is very pleasing. And sometimes, yes, I suppose you need to be brave to be lucky, I suppose but anyway, that has been fantastic news. The rent review at DHL has gone well. We were hopefully hoping to do a little bit better than that. But I think at that level at GBP 9.17 coming off a base of GBP 6, I think it has added significant value to that property. And we have already started the process of looking to dispose it. There's about 9.5 years left on the lease. And I'm sure it will garner significant interest. Obviously, August in the U.K., not necessarily a good month to be talking to the market as most people are on holiday. So we are expecting things to ramp up there from sort of next week and as people start -- well, as kids start going back to school and people start coming back to work. As for the 3 remaining sites within the sort of the historic Newlands partnership, Coton Park, I'm really pleased to sort of say is literally on track and September closeout of all of that position is basically on track and will happen. So by the time we come to interims, we will be able to unpack the detail of our position in there and our exit. Thrapston proving a little bit more challenging in terms of the drawdown, combination of the Newlands funder taking a sort of maybe a little bit more cautious approach, but also more importantly, I think it's the vendor needing to sort out some internal processes, which are occasioning certain costs that they do not want to incur. So we wait with bated breath to be able to announce a certain date of drawdown on that. The positive thing, obviously, is that the planning has been consented and the location obviously is an exceptional location. So we'll, at the appropriate time, garner the interest that it needs. And then the final part of the jigsaw Basingstoke, I think we spoke that we were negotiating with a user to take up about half of the site. We have signed that agreement with that particular user in terms of them committing to the site on the basis of planning. We have resubmitted or we haven't actually finalized the resubmission of the -- the resubmission of that plan should go in, we are expecting it towards the back end of September, and then that process will need to follow its internal process. And we are hoping -- I mean, optimistically, we are hoping for something potentially this side of Christmas, but realistically, I think more likely to be a sort of January, February hearing with the committee. What we can attest to, though, is management is fully focused on maximizing shareholder value, and that really is guiding our primary principle of negotiation in terms of the strategy of the unwind in the U.K. So nothing will happen here in terms of us just wanting to leave. We will do it in a sense and measured way. I'm going to hand over to Riaan now who's going to take you through the operational update and some of the stuff that keeps the existing portfolio ticking over nicely.

Thank you, Andrea. On the first slide, I'm going to take you through some leasing activity over the past period. And then the second slide, we'll look at the vacancies as at the end of the period and also over the next 24 months. During the period under review, we signed 2 renewals, both of them were in respect of properties located in our Meadowview Precinct. They were concluded at a weighted average positive reversion of 3%. As for new tenants, we signed 3 leases with new tenants. One was at the -- was TFS, the new development that Andrea talked about in the Riverfields Precinct. And then we had 2 tenants depart and we replaced them with high-quality new tenants in the Meadowview Precinct. And we also had one disposal during the period under review, we disposed of the Digistics Waterfall facility for ZAR 117 million. This slide talks about our vacancies. Firstly, at the end of this period, which is 31st of August, we will have 4 buildings vacant with a total GLA of 93,000 square meters. excuse me, the 4 vacancies with a total GLA of 29,000 square meters. Now bear in mind, our total portfolio is ZAR 1.5 million and we've got 60 buildings in them. So the vacancy at the end of the period is still well below 2%. Also important to note is that during this period, we signed 2 further leases in respect of the 4 buildings. And as of 1 September, which is next Tuesday, we will only have 2 vacancies totaling 14,200 square meters. For the rest of the financial year '27, we have no leases expiring. And looking forward for FY '28, we have 8 leases expiring with a total GLA of 93,000 square meters. Looking at these 8 leases, we've commenced negotiations on several of them, and we expect an average negative reversion of around 9% for these leases. On the right-hand side, we have plotted those reversions. And you can see on the third line, I mean, Gauteng and under, those are buildings that are not -- that are older buildings, not in secured parks, and they tend to have more negative reversions than those who are located in our park environments. I think in conclusion, it's fair to say that our portfolio continued to perform very well. And I think our strategy of focusing exclusively on building and developing top-end facilities in sought-after locations and Secure Park is certainly paying off. Over to you, Laila. Thank you, Riaan.

Okay. So from a balance sheet management perspective, I think we've done incredibly well over the last 6 months. At the reporting date, we expect to have ZAR 2.8 billion in cash and undrawn facilities and an ICR of 3.1x, well in excess of our lowest covenant. I think that investors would recall that a while ago when our development pipeline was significant. This ICR tended to be fairly close to 2% or mid-2s. And so we really have worked quite hard in terms of reducing our cost of debt and reducing that interest expense. And so we see that benefit coming through in our interest cover ratio improving significantly. Our weighted average debt maturity is 2.9 years. And what we're especially proud of is the continued reduction in the cost of debt, which I'll speak through in the next slide. And then from an interest rate hedging perspective, 87% of our debt is hedged, and we have an interest sensitivity of 27 bps to every 100 bps change in the rates. So we are relatively shielded in a rising interest rate environment. And I think where we are right now, it seems to be a bit of a rising interest rate environment or at least the sentiment expresses or seems to express that. And then our LTV is forecast to be around 30% at 31 August, following the U.K. disposal in May 2026. And we'll chat through just a little bridge in the next slide. Okay. So as Andrea said, the most significant event in the last 6 months has been the conclusion of the Project Springbox or Aviva portfolio disposal, which was concluded in May. And if you just look at the LTV bridge, the impact of that disposal was a reduction in LTV of 10.6%, which is significant. How were those proceeds deployed? There was developments during the period, Tiger Brands, some of the speculative developments and then an acquisition during the period, which was the DHL Boksburg one. And so combined, that increased our LTV by 1.3%. And then when we disposed of the Aviva portfolio, we had the capital allocation decision as to whether we were going to bring it all back to South Africa to repay debt. Unfortunately, we didn't have sufficient capacity to do that, and we did leave some of the equity in the U.K. And that deployment of equity into the U.K. increased the LTV by 4.3%. So we split out those 2 lines just so that you can see what the impact was of those 2 actions discretely. And then valuations, there is a small movement in terms of valuation uplift. We've just started getting in those valuations now. And once again, we can see that, that has a positive impact. And so that we expect to reduce the LTV by about 0.4%. And then FX, because we've disposed of the Aviva portfolio, the impact on FX is a lot smaller than we've historically experienced it. Also between 28 Feb and 31 August, there hasn't been any dramatic movement in the rand. Actually, it's remained reasonably constant. So we don't expect there to be a large impact on the LTV as a result of FX. And so where we expect our LTV to be is around 29.6% at 31 August. Okay. So if we look at our cost of debt, our cost of debt is 8.2%, which provides us with an exceptional base in which to compete in very competitive RFPs. So this really underpins a lot of our success and how we're able to put forward our best foot in terms of bringing product to market at rates which are still competitive. We have an 87% hedge ratio, as I said earlier, and that means that there's a 7 basis point change for every 25 bp movement in the base rate or in interest rate movements. Something which we're especially proud of, we had a listed debt auction in June of 2026. We listed a 3-year note at ZARONIA plus 90 basis points and 5-year note at ZARONIA plus 103 basis points. Now ZARONIA is 16 basis points higher than JIBAR. So this replaced the 3-year ZAR 300 million note at JIBAR plus 129. So that's actually a 45 basis point tightening on the new debt, which we think is phenomenal. And our treasury team does an exceptional job at remaining active in the market as well as placing debt when there are opportune moments. And then just a significant portion of our debt and derivatives. So about 1/3 of our book has already transitioned to ZARONIA. And then as I said earlier, an ICR of 3.1x provides us with sufficient headroom to be able to execute quite a significant development pipeline. And then just the graph, again, we like showing this graph. We haven't showed the U.K. cost of debt because it's not relevant anymore, but now we have the SA cost of debt. And again, just to show that despite JIBAR increasing over the last 6 months, our cost of debt has not increased proportionately due to us renegotiating or refinancing facilities, which are rolling off at lower margins. Okay. So I mean, we'll give a lot more detail on hedging ratios on our cost of hedges as well as our cost of debt at interims, but this is just sort of what we can disclose at this point. And handing over to Andrea.

Awesome. Thanks, Laila. So just in concluding, I suppose, from an operational point of view, the ESG update. I mean solar, I think, only contributed a very small amount to our numbers during financial year '26. We're expecting that to ramp up in financial year '27 and I think to really start contributing nicely in financial year '28. So we have -- we're in the process of installing significant solar. And obviously, these pretty large developments that we've undertaking at the moment will all come with solar platforms on them, which will obviously benefit the bottom line for Equites. We started -- I mean, I think we've spoken about this for the last few presentations. The water security stewardship initiative, obviously, has been quite important to us. We don't see it as a significant moneymaking machine. However, what we do see it as is something that affords our clients, our tenants the ability to carry on operating at times when water sometimes can be switched off not for hours, but for days. So the intention is to continue to try and recycle as much of that water as possible and ensure that all the non-potable operations at our sites can use recycled water rather than fully fresh and potable water, thereby allowing the potable water to go much further in those facilities. Also quite nicely, we're starting to see more and more the social impact of our developments in the various communities in which we are delivering these projects. A recent engagement has resulted in a significant level of employment of staff that have got no need for any specific educational or practical skill and just, I think, needed a metric was the demand. And then over and above that, there was also a demand for bringing in a third party to feed the staff in this particular facility, and we were able to introduce a local food kitchen, if you like, from the local community who has won that contract and obviously really pleased for the lady concerned who will now be feeding sort of 600 mouths every day at this particular facility. So great outcome for all involved. Our community liaison officer, obviously doing their work spectacularly and our ability to continue to show the local communities the value that we bring is really a win-win for us all. And then obviously, the final part of the jigsaw, obviously, is as these facilities conclude and need post-construction labor, which is obviously more permanent for the area, these opportunities abound within the local communities around our parks. And I think that's about it in terms of what we wanted to share with you today. Obviously, it's been a hell of an exciting 6 months, the sale of Aviva, the signature of a couple of very strong pre-lets, the signature of some lettings in the speculative builds and also the renewal of some important leases in our portfolio. As Riaan alluded to, we don't have anything coming up in the second half of the year, but we've got a few coming up during the course of next year. And I think already at the October interims, we'll be able to speak maybe a bit more detail to that with some of the negotiations that are undergoing there. And we are massively optimistic in the shape of our portfolio and what it continues to deliver going forward. And that obviously then leads us into our guidance. Obviously, we're really pleased to reaffirm our position. Everything is obviously -- is going as planned, very few surprises, both in the negative and the positive. And the business keeps on building. Obviously, coming out of the U.K. and the sale of those -- the portfolio and now the DHL that will probably happen within the next 6 months or so will result in the amount of property stock that we actually own being reduced and this massive pipeline that we talked to, hopefully, will bridge that gap within the next sort of 12 to 18 months, and we can then continue to grow from there. And yes, in a nutshell, we're confident of landing within our guidance as stated above and look forward to the rest of the year and actually financial year '28 with great, great optimism. And that is the presentation. I think we're going to -- Laila has got the iPad there with some questions. I see there are a few for us. So yes, I think fire away, Laila.

Okay. Cool. So there's been a couple of questions just on -- can we give some clarity on which equity -- which U.K. equities we invested in. Andrea, do you maybe just want to>

I think we invested in the 3 equities that were in our sector. So that would have been LondonMetric, Tritax Big Box and SEGRO.

And then there are some questions about what's our position now. And I think we'll wait for interims to just give some further disclosure on what those actual positions are. Just -- yes, we want to close up reporting, and then we'll be able to report on those. And then there's a different question just on our geographic split. So Mweishö is asking, which eThekwini nodes are you looking at specifically? Are you going to be buying more land in the area? Is Equites aiming to benefit from the rail network improvements between KZN and Gauteng? Would this be a catalyst?

I think we are being introduced to various pockets of land for pre-let developments. I think it would be a miss of me to sort of say which pockets, but what I can say, we are looking at various pockets. Some are obviously more attractive to us than others, but everything will be guided by a process of trying to secure the tenant first. So what we've seen is we've seen this joint venture model that we've executed on R21 work extremely successfully for us, where it doesn't burden us with a massive landholding, which obviously occasions various consequential impacts such as the capitalized interest issue and also just having non-income-producing sort of property on our balance sheet. So we are looking to try and maximize our ability to use those processes where we have the security of knowing we can do a deal on certain land without potentially having to commit inordinate amounts of capital to it. So there is a measured approach to it, but it's literally from the new airport all the way up through Pinetown, New Germany, up past Marianhill and all the way up to Cato. So that whole node has obviously got several land developers that are bringing significant pieces of land to market. In the Western Cape, a bit more challenging. Land parcels are few and far between, and they tend to be pretty far from the existing and the desired nodes that have historically always fed the Cape market, but we're seeing more and more people sort of being willing to go that bit further with a view to executing those pre-lets. So interesting to see how that will play out in the Cape. And obviously, in Greater Joburg, the R21 remains a key node for us and we are exploring opportunities in other nodes as we speak, where we've been very successful is Meadowview, potential to do a bit more in that node and potentially also looking further north sort of around the sort of what they define as the sort of [ Lilardus ] Centurion area potentially could provide some opportunity for us as well. But we are very close to a lot of significant tenants that may have certain requirements, and we continue to be driven to locations by the demand metrics of the market.

Mweishö was also asking, are you positioning your balance sheet for a hiking interest rate environment or cutting cycle? What is our expectation? So, where should we be guided by our treasury policy, which says that we have to hedge at least 80% of our debt that matures in or that's longer than a year. What the [ pricer ] are currently pricing in there's probably one rate hike in the calendar year or to the end of the calendar year 2026. And so we see that. But we do look longer term. And so we are looking to just put on the best possible hedges. It has become more expensive. We were chatting yesterday. And historically, we could take our protection around 6%. That's now become 7%. But we do look for opportune moments in which we can hedge the rates and not just looking at what's going to happen in the next 6 months, but looking through the cycle. There are 2 questions, Riaan, maybe just on the rentals that we've achieved on our spec builds and if we were pleased with the levels at which we were able to conclude those leases.