Octodec Investments Limited (OCT.JO) Earnings Call Transcript & Summary

Let's start. So good morning, and welcome to the pre-close update with the management team of Octodec Investments, just ahead of their financial results for the year ended 31 August 2025. Representing Octodec, we have the CEO, Jeffrey Wapnick; Deputy CEO and Financial Director, Riaan Erasmus; as well as Chief Operating -- Chief Operations Officer, Charlene Conradie. Just some housekeeping. So all guests are muted. If you'd like to ask a question, you can just use the chat box or raise your hand, and I will unmute you. Octodec did release a pre-close trading update yesterday, which therefore gives just a high-level overview on it, and then we'll jump straight into questions. With that, I hand over to Jeff. Thanks, Jeff.

Ridwaan, thank you for this opportunity and thank you for hosting us. To the rest of you, a warm welcome to the pre-close operational update. This year, we are doing it in a slightly different format. We've issued a pre-close since announcement. And we're now giving you the opportunity or allocating slightly more time to formulate your questions and ask the questions to the management team. It'd be interesting to find out whether you guys, how well you guys respond to this. So I want to start off by giving a perhaps a high-level summary of how I we as the management see things going forward, things are like everybody is reporting things are looking a bit easier for Octodec. I think a little bit early in the game, but early indications are that things are going a little bit easier. Let me go through the various sectors in which we operate in and reflect perhaps on something else, which I think is important in our business now, and that is sales afterwards. Let me start off with -- by saying that all our divisions in which we operate are showing positive results and will go through each 1 separately. The 1 that is perhaps of a concern to me is that of residential. I am concerned in the sense that South Africans are struggling and how to extract bigger rentals out of these people is difficult. However, I still believe that 1 of the biggest problems facing this country is accommodation and how to reduce our vacancies by bringing in more tenants. I think that's the challenge that the management team has. It's not going in other words, not going to introduce the distribution or the contribution to distribution by increasing rentals per unit, but rather reducing vacancies. I think that you will all know by now we did a pilot project called Geto City, which, for those of you that don't know, it was a project where we didn't want to reduce quality, but we try to produce a reasonable quality, but it's certainly at a reduced price. And that trick absolutely worked within 1.5 months, I think it was, we led 200 beds, however, never before, I've been is for 27 years, never before I see that kind of uptake of the product. It's telling me very clearly that there is accommodation shortage, but we need to supply it at a better price. And perhaps we don't need some of the stuff that we provide in our normal place offering something of a lesser offering, but at a lower price that works. Added to this is we watch really carefully a number of people that apply for our units. And the demand that we're applying that are offering that -- sorry, that are inquiring is very high, very high number of people asking for our flats. In the months of January, February, March, can get anything somewhere between 5,000 to 7,000 inquiries a month. The problem that we have identified is that only an 8% conversion rate on these big numbers. And so how do we deal with it? You see if we take 8% and we left with a question of what do we do with the other 92%. And let's assuming a round down in half in and I get to 40 that again, I get to 20%. And I have that again going to get to 10%. In other words, if we can just catch another 10% which I don't think is impossible. We just have to figure it out. We have some ideas how to do it, 10% of the 5,000, the low end of the bracket that I just quoted. It's 500 units per month, 500 units times and average rental is going lower. And let's go at ZAR 4,000. It's ZAR 2 million a month. ZAR 2 million of additional income mix, a big difference to the contribution per for by residential at the moment. But our residential stock, Charlene will talk, I think, in a little bit more detail, but it's in good condition and strong demand, but were not converted. And that's a question we need to deal with. Industrials, like we reported, we've done well on our kind of industrial. I haven't previously in the past mentioned to you that the 1 area that we're concerned about Respiratory West. You will see when we release results, sales have gone a lot better for us than they have in the past. And a lot of it happened in the area that I was really concerned about in the petri West. Victoria West hasn't received the attention of the council. And so it is becoming a little bit neglected. And we've got rid of most of our Pretoria West stock with something I'm really happy with the stuff. In the East, however, is performing well specifically tenor. We struggled with the bigger -- some of the bigger units. We fixed some of them up. I'm pleased to report that vacancies are acceptable. Offices is an interesting one, or reporting on offices. Our offices are different, and it's important that the newcomers to opted are aware of it. Our offices are different in that we're not looking for more. The corporates have left the CBDs, and we don't have -- in the main, we don't have offices outside the CBD of both Johannesburg and Pretoria. But what we do have, certainly in Pretoria, are those offices that are used for a new type of location in the new use. And that is a commercial use. So by way of example, those of you that haven't seen them, I don't know about them, hair dresses, tailors, dress makers, debt collectors. And interesting to note that of this category, we have buildings we've just simply full we've converted into hairdressers and office blocks, some of them, not all of them, 2 or 3 of them have now become full. So we want to go into them previously showing big vacancies were now form. A were of portion is that this is a fairly recent development. And so yes, we don't have 12 months of this rental in the number. But certainly, in the new year, we hope to have it in the numbers. So that's offices associated with offices is obviously which is approximately 50% is government still has a lot of government work in that a tough market to be in a tough market to get out of not as exciting, but certainly, from a payment point of view, fairly stable. Shopping centers, all our shopping centers are performing exceptionally well. All the renovations are completed. All doing very well, save obviously for Killarney mall, but Riaan is paying a lot of attention to Killarney mall will perhaps talk about that one. Speed trading it's tough. I want to mention 2 things in the Johannesburg CBD. The big blow was the gas explosion on Lilian Ngoyi. I'm pleased to report this time that we are very close or counsel rather is very close to fixing the road. I was never worried, although it took a long time and the length of time hurt us, but that's now virtually over. I wasn't worried about or about that per se. But what I was worried about was the fact that trading patterns, footfall, would the people continue to return on the same walkways as they did in the past because they were carefully selected walkways. Will that come back to the same walkways. Only time will tell, we don't know yet, excepting to say is that the roads are now very close to completion. They're not paying, they're not towing them, they're now paying them all hope that the quality of the paying is good. What hasn't yet happened, but I don't think it's going to take very long is the walkways are still boarded up for safety. They haven't released the fences between the road and the shop front. Once that happens, we will have a better indication of -- and the roads open with a big indication of what's going to happen. But I remain a lot more confident about this than we have in the past. That really completes -- well, Pretoria some thoughts there. Pretoria's retail has even through the tough times that we all went through in the better areas of the CBD, still very strong trade. If you come through to Victoria, if anybody wants to, and we take a walk through the prime locations in the Pretoria CBD, where Octodec is predominantly invested. You will see the people. You will see the feed. Nothing of concern now. Lastly, about the sales, we've gone through some extremely tough sales a tough period during which sales were very difficult, if not impossible to achieve. I think the sales team has done well, and we will not have done a lot more selling this year than we have in the past, in fact, ever done in the past, which I'm very happy. I think that what I would like to mention at this stage is that we all, as property people believe in -- maybe it's not all of it, but a lot of us still believe in saying location, location, location, which is all good will. But what they don't teach you is the application sometimes changes. And so when we had to go through. I think it was primary COVID, we realized that Octodec no longer can afford to hold these assets that we're showing either big vacancies and where rentals were will not grow. I mean, I've been at this a long time and was that doing deep analysis at all. I knew in my mind that for the last or some of the rentals in these buildings have at best, remain the same, if not going backwards. And I think that things have even eased up a little bit, and we are selling a lot better. The added to this is we haven't been in a situation that to go enter into any for sales of quality stuff because we still own that quality stuff, primarily in the retail or the CBD primarily in the industrial, the eastern side of Pretoria and the southern part of Johannesburg, which is also performing well for us. and the shopping center say for planar, which we will talk about. So I'm very happy that we have been able to keep those and dispose primarily those assets or virtually exclusions only those assets that have definitely underperformed, which talks, I think, to the future sustainability of the Octodec balance sheet. I'm starting to have more discussions now with , do we have yet the firepower to go out and maybe do some acquisitions. Yes. But I think that perhaps reflects my change in on positivity, I'm not more positive that there are -- that Octodec certainly has an opportunity to get into 1 or 2 other assets that we now can perform for us, but it's all predicated on the sale of a reasonable number of smaller underperforming assets. And with that comment, I want to hand over to Riaan for his commentary. Thanks. Riaan, over to you.

Thank you, Jeffrey. Good morning, everyone. So I'll just -- so Jeffrey has given a nice update on what's happening on the ground and what the market sentiment is. So I'll keep mine a little bit shorter and then I hand over to shorten after it. So just speaking to the balance sheet. So for the 11 months to July, we've sold 15 properties at the total proceeds of ZAR 150 million. These assets were sold at a discount to book value of 6.6%. So we're very happy with that. Subsequently to July, we've also sold another asset than we're expecting another want assets to transfer before the first of the year end, small assets, but nonetheless. I think the 1 thing for me that's important about these assets that we are selling is that they are also contributing to the reduced vacancies we see. So it's not all of the vacancies that are sold. It's a combination of improved leasing and that's happening. But it's important for me that the assets that we sell are those problem assets for us, and we do not see that we will be improving the vacancies in them. In terms -- perhaps just in terms of Kilani, I know the market is quite interested to find out where we are. And we are negotiating with a couple of parties. One party we are quite far along down the line in terms of a legal agreement. There's a couple of clauses we need to clear up, but we will make an announcement as soon as that gets over the line. Alternative, if we end up speaking to someone else, we will also update the market. But it is progressing, and we're working hard at it. On the debt side of things, year-to-date, we've refinanced ZAR 1.1 billion of debt and all of those facilities will refinance that improved margins, we've also just signed the refinance of the ZAR 650 million in net bank facilities that we have to us going to mature at the end of August. So that this -- those agreements have been executed and the transaction will be implemented. And then in terms of our hedging, so we've started improving or increasing our hygiene position. So given where the interest rates are. We've taken a view that it's time to increase it. So our target has been moved back from the 50% to 60% to 70% to 80%. So as at the end of July, we're sitting at 67%. We've also entered into a couple of forward starting swaps, about ZAR 1.3 billion, and the first 1 was take effect at the end of August. And then the last 1 in that list on effective on the 28th of February 2026. And then I think lastly, between the improved letting, we've had the city of 20 and then our 1 tenant at Taco they were met to vacate their notice earlier. They have stayed longer and Charlene will speak to that. But they've stayed longer than what we anticipated. And then with the reduction in the interest rate, the disposal of some of these assets and the reduction in debt as a result that has supported our earnings growth. We have revised our distributable income growth to 3% to 6%. And so if anything changes, we'll advise the market accordingly. But that's a positive move for [indiscernible]. Thank you. Over to you, Charlene.

Thank you, Riaan. Thank you, Ridwaan for hosting us today, and hello to everyone on the call. So I think Jeffrey and Riaan gave full overview of the pre-close update, but I will just highlight a few things from my side. The first thing I think is that it's very positive that our vacancies have decreased. And as Riaan said, it is a combination of selling and assets, specifically in Johannesburg, which had quite a big vacancy and that contributed in the office sector to a logic then to some of that decrease in vacancies. What is also very positive is that the rental growth because of the decreased vacancies, these rental growth in all the sectors. And I think part of it is as we have said, is City of Turner, who was going to back out at the end of May still hasn't vacated. And we anticipate them to vacate in full by October. That's the latest news that we have. transform in our talc building. They will work out at the end of the financial year at August, but we are already looking at potential new tenants for that particular space. Also just coming back to the city of 20 will be back citing. We are already exploring how can we repurpose this building? What are the different options of anal that we have for this to fill those vacancies. In terms of residential, as Jeffrey said, vacancies remained fairly in line with last year. It did go through our normal seasonal trend. It didn't improve as we anticipated due to the reasons that Jeff mentioned. However, I think if Lengo is repaid, like it's supposed to at the end of August, that will have a positive effect on our residential vacancies in Johannesburg specifically. In terms of the office vacancies, as I've said, the main contributing factor there was the sale of the building in Johannesburg. The other thing that also contributed there was we converted to city which was an office building into the year to city co-living accommodation, which also assisted in decreasing the office vacancy fee. In terms of retail, industrial and retail shopping centers, the improved occupancy there is mainly due -- it's not a specific tenant or a specific space. It is in general, just letting of space that were previously baked and some of the to bigger tenants, some of them to smaller tenants, but it all contributed to improved occupancy. In terms of collections, as we've reported, also stable and in line with previous year and the reason for the slight deterioration there has been mentioned in the pre-close. And I think that's all that I want to highlight, and I rather then hand over to you, Ridwaan, so that we can maybe answer some questions.

Perfect. So thank you for the update. [Operator Instructions] Yes. So let's kick off. So maybe the first question from my side would be around distribution growth and Riaan you provide some clarity there. Lower interest rates, lower vacancies were the reason for the uptick in guidance. I'm just trying to get my head around the sustainability of the growth going forward, low interest rates should be well received. But with regards to the lower vacancies, can Octodec coal onto these numbers or see further improvements over the next 12 months?

Yes. So I think, Ridwaan, I think in terms of -- I think the first and most important thing here is we need to let the vacant spaces, our game is leasing. But importantly for us, we need to sell the assets that are not performing that we do not see a future for and that's costing us money. So on the 1 hand, we need to fill those if we can. There's vacant spaces and the other, we need to let the assets go that no longer fits our outlie. So I think -- and then with the reduced interest rates, it should support not only our balance sheet, but it should also support our tenants in terms of their business and for parity. So, do I think we will see an annual growth of 6%, for example, it's very difficult to say. But I think we -- by doing all these things that we need to do in terms of executing our strategy and we can definitely see a more sustainable level of distribution.

And then maybe just to touch on the disposals. Is there a specific target or I don't say a specific target, but something that you look to from a quantum perspective, look to achieve on a yearly basis, maybe around ZAR 100 million to ZAR 200 million a year. Is that something how you look at it? Or how do you go about the disposal process to determine what assets or a sale? And let's say, being a bit more aggressive in rotating the portfolio.

Yes. So I think for me, I don't look at necessarily to say I have to sell ZAR 100 million or ZAR 200 million worth of assets on an annual basis. I think as a starting point is, we've got 218 properties where we sit today. And I think we probably could say we need to sell at least another -- between ZAR 70 million and ZAR 100 million -- assets, sorry. And then once we get to that point where we've we rationalized the portfolio I would then say we need to now move to dispose of the bottom-performing assets and add and replace them with asset setting obviously improved our yield in margin. So then we basically look at the border and replace them with better performing assets. So that's my thinking and now as we are going forward.

And then maybe on the discount to NAV that was achieved on these disposals. Is that a fair reflection of all 15 assets that were sold? Or is there maybe 1 or 2 assets that weighed on the number I still think 6% discount to NAV is good in this environment.

So some -- it depends on the assets, but some of the assets we do better than book value. And in this instance, for example, Lester, which has been a problem for us, generate it's location, the tenant, the vacancies. We actually sold at a higher net port value, which contributed nicely to that overall discount for sure. But we try not to give away the assets. If it's 10% or 15%, I'll definitely look at the tear and especially when it's your ZAR 10 million in smaller tire assets. Yes. So if you had to ask me if I have to sell all 200 assets, I think I'm comfortable that it's a fair reflection. And I talk to the asset valuation of the portfolio.

Just going to the Q&A. We have a question around the payout ratio. What's the -- how does the company look at payout ratios considering the cautious optimism?

So I think for us, we want to pay out around the 7.5%. We want to maintain that payout ratio, but it will I think in the short to medium term, we'll keep the 75% to 80% range of payout. I think until such time that our interest cover ratio gets to about 2.5x, and LTV reduces to around 35%. We'll keep that payout ratio at that level because our portfolio needs capital, and we need about $100 million on an annual basis consistently for -- to reinvest into our portfolio.

Okay. And then maybe just on the LTV, you mentioned that it's slightly below 40% coming to the 35% target range. I'm just trying to get a sense of how you balance reinvestment disposals and then CapEx. Do you can just give more information on how you structure or how you think about those 3 pillars?

Yes. So in terms of -- for me, the disposals, if I can distort day, if you take the good nonperforming assets out of the equation, if it's going to cost me more -- if I sell it, if I could put it that way, and make more money by just putting the money into debt. They're not deflate selling the asset. Of course, if it's -- I want to call it an anchor asset, I don't necessarily want to dispose of this disciplined asset. In terms of investing and redeveloping, it has to make sense from a feasibility point of view of a task to increase our earnings. It might be earnings negative or neutral in the first year or 2. But if we don't see it in the long term, we improve or contributing to the bottom line, then it doesn't make sense to invest in a draw and sell the asset, nothing that's useful to approach returns on active.

And then maybe just to touch on the capital towers vacancy next year. Question coming through around the financial impact. Can you just give some insight into that one?

So on capital towers, yes, I mean, it's 12,000 square meters of vacancies that's gone up. is that we got late because it's in the CBDs to relate that to any other large office tenant is going to be very difficult. So the financial impact of that in terms of rental is about ZAR 15 million per annum. And then there's some recoveries in there that we will lose our time. But I think we do have plans in the medium term to look at converting that asset, most likely into residential or yet to city number 2. So yes, there is plans in the pipeline to address that vacancy, but the positive impact will only be felt in the longer term of those.

And that was my next question around the potential to relet the space when you're talking to the conversion perspective, for example, I'm not going to only to it, but the costs that are involved in doing a project like that, what are the opportunities? Is it maybe worth cutting up the space if you can't find a taker for the whole box? Just how you're thinking about reletting that specific asset?

Yes. I think we look at various options. So if we've got a sizable space like that, it's definitely an option to see if you can cut it into smaller spaces. Can you move tenants around? Does it -- and obviously, it doesn't make sense to do that. In the absence of that, it's only if I'm going to see that, that doesn't work look at, okay, I need ZAR 100 million or whatever that number is to do a conversion. I think first price is always to really a supposed to try to cut space is.

But at least conversion is an option. Maybe the next question will be for Charlene around the lease expiry profile, maybe for next year. Is there any other -- is there other concerns other let's say, leases that are expiring that you're concerned about similar to capital towers or not really?

So we have with GPW expired leases, and there is more coming up for renewal. So unfortunately, from the Minister's office, there's still monitor concluding renal lease agreements. So we haven't had any update on when we can expect our lease agreements in terms of the renewals. But we are staying close with them. We are contacting them on a regular basis following up to try and see when those can be concluded. So -- but they remain in tenancy on a monthly basis. And annually there's ZAR 0.06 escalation that gets implemented. So at the moment, that is the status quo.

And then maybe just a question on residential. Any indication from Naspers regarding allowance in the upcoming year?

Now unfortunately, there's no update from past in terms of the new allowances for the following year, they normally only announced it quite light. We are also getting paid through the universities. So that seems to be continuing, and we expect it to continue for next year, which is positive. And that's unfortunately all the updates that we have at this point. But we are also -- we are staying uses fast and the relationships that we've built there to make sure that as and when information are becoming available that we can stay on top of it.

The next question would be around Octodec ESG road map, particularly around energy efficiency and water infrastructure. So the question is on the municipal service delivery, power and water outage perspective, which city are you more concerned with? And what plans do you have to address these issues?

I think I'll take that one. So in terms of the consoles, we are definitely more concerned about the Johannesburg Council. The infrastructure and the service delivery there is of lesser quality than we have in any firstly, because of the unread damaged lining is all this constant power and water outages in the CBD in Johannesburg. So what we've done to mitigate against that is we have mobile generates that we bring in we've connected, especially on the residential side, we've already implemented connection points. So it's just a matter of bringing the mobile in and connecting it to the buildings. We've got common area generators permanently, which powers the common area amenities. We've also got water connection points. So we go and we buy water and bring in those tanks, and we put it into the building up to our water tanks at the top of the buildings to supply water to our tenants. We are also continuously looking at solar installations where we can in terms of our roof space and where we've got high demand power buildings. We are also looking at water saving initiatives. We are drilling more rolls. So it's definitely something we continuously invest in I think in terms of the as well, we have been, in the past, more successful in building relationships is with Johannesburg Council, up until the recent change in leadership there. So we have the ability to build relationships and therefore, our influence that we can impact in Johannesburg better than in Java. We are also engaging with stakeholders like Jersey, -- my Jersey to see how we can contribute in terms of the initiatives to improve the driver CBD in partnership with them. So that's also some of the things that we do. I think -- and I would want to answer everything that you've asked.

No, you have. The next question on the chat. Can you please provide more color on repairs on Lilium and going? What will be completed by the 31st of August? Will the Street be fully operational?

So from what we can see is that the Street is -- they're making good progress in terms of paving the Street, which is out of Phase 1. Phase 2, which would take a number of months, of course, is to widen the pavement and the pedestrian walkways, which will be if they can to it well, it will be very good for that street because it is a main therapy from East to West through the city. So that is the plan, and it looks like the paving might be done August, September, at least the first phase.

And then the second there...

Obviously there's going to be disruption to our retailers that's on the street in terms of when they do the extension of the walkways and the paving. So there would be a little bit of disruption during the second fares as well.

Is there something that will be completed by this year? I know it's not in your control.

The second phase, I think, from what we hear, we'll take a number of months. So it will only be completed in the next financial year, somewhere.

And while we are on the subject regarding the insurance payout, you already received ZAR 4 million. Just what's the expectation around what you think is achievable?

Sorry, Ridwaan. Just on the balance or the payout? Are you -- sorry, I ask the [indiscernible].

Yes, the balance.

Okay. So I mean, it is a continuous engagement with underwrite and the loss adjusted because the claim is almost broken into 2 parts being one, the disruption and to providing relief or rent or relief to certain tenants, especially the 3 tenants. But yes, we've got ZAR 16 million left on our policy that is meant to be paid out. So we -- it's a continuous engagement that we expect to receive the full amount as far as we are concerned. I think it's just in terms of the timing, it's difficult to say when you look at my bank it when I see it in the bank account. I'm expecting a ZAR 16 million to pay out.

And then maybe on another question around expectation on your bank account, the potential disposal of Kilani. I know you talked about it in the introduction question around the valuation that you could look to achieve on disposal. So if I can read it out Kilani value declined to ZAR 416 million for FY '24 from ZAR 518 million year-on-year. Is the FY '24 a fair reflection of what that mall is being marketed at? Or is there a risk of another leg down? And then what is the yield on the more based on FY '24 valuation?

So in terms of what we are negotiating is more or less book value. There's not marketing at a significant discount. I think if we're going to the open market at a significant discount, then I might as well keep the asset and the spending and almost a lot of CapEx. So we're trying to achieve the book value, and we believe that the book value of ZAR 416 million is still a appropriate value. They set new answers in the income statement when we do negotiate with buyers that they don't -- you can't just take the net property income divide that by the book value and get to a yield. And if you look at what would not normally be there when you put it in an or someone else. So in terms of the yield, I mean, we're still looking at about 9.5%. So that's more or less what we have.

And then maybe just -- I know there's always a risk to a deal, you can't -- you have to kind of get excited until it's signed. But from a scale of, let's say, 0 to 10 or 0 to 100 , where are you in the process of disposing Kilani? Is it around 50% to 60% complete, closer to 95%? Are you still starting?