Octodec Investments Limited (OCT) Earnings Call Transcript & Summary

To start off, I want to introduce you to our team. First up, I want to welcome Anabel Vieira, who is our new FD, who will be presenting the financial results as an FD for the first time in her career. At the same time, a goodbye, and thank you to Anthony Stein, who retired from his position on the 31st of August. Anabel started -- took up the post on the first of September of this year. Anabel has been in our office for a good number of years. And so the transition from Anthony to Anabel, now starting to work with Anabel, I can assure you, has been fairly seamless in the transition. Secondly, I want to introduce you to our team. Let me start off with Charlene Conradie. Charlene Conradie will do the presentation on the residential sector. Daniel Swimmer, he'll do the presentation on the commercial sector. And I have with us Stephanie, who will talk about -- who's our risk person. So for those of you that have any concerns about the risks that we've identified, we will pass those kind of questions on to Stephanie Ainsworth. All right. So let's get into it. Just before I do, however, just a little bit of housekeeping. [Operator Instructions] If we move along to the agenda for today, I will handle the Octodec at a glance. I've seen the list of names of attendees, and there are some new names, some old names. And -- but for those new names, I think it's worthwhile that I spend a little bit of time talking about what Octodec is. I've allocated a part of -- to COVID. It, perhaps, is a bit hackneyed talking about COVID. But I do think that COVID, like any business today, has had a severe impact on the results. And so we'll talk about what happened during this period. I will talk about an overview for this period. With regards to the performance of Octodec, I'm going to ask the experts to come in and talk about their respective sectors. Results and capital management, I'm going to ask Anabel to talk about. And then I'll come back and try to give you a few words as to the outlook. And hopefully, there's time allocated after that for some question and answers that you guys would have submitted to us. Right. And so without further ado, let's get into the actual presentation. Octodec at a glance. Octodec is a Johannesburg-listed REIT with a diverse inner city focus comprising of 267 properties located in both Johannesburg and Tshwane here in Victoria. I'm not going to dwell too much on this slide, except to say that Octodec has created an ecosystem of tenants. In other words, we deal with the residential tenants, we deal with Octodec -- with office tenants, we deal with government tenants, we deal with retail tenants. And these tenants all interact. And provided all these tenants are present in the CBD. It is our belief that the market for our kind of properties will remain strong. Octodec at a glance. Octodec distributable income, FFO for the year was ZAR 401 million, down approximately ZAR 19 million, which represents a 4.6% decrease in distributable income. However, like all of us, consideration has got to be given to the strengthening of our balance sheet. The biggest lever that Octodec can pull is a reduction in dividends. And so because we reduced our dividend, there is a tax consequence there, too, which to a large extent has been shielded by Octodec's assessed losses that it has picked up as a result of previous UDZ allowances that have been granted in the main. And so we paid tax of -- normal income tax of 42.7% (sic) [ ZAR 42.7 million ], that -- which enabled us to reduce our taxable income on which our 75% minimum requirement to maintain our REIT status was based. And as a result of all of this, our distribution has been reduced to ZAR 0.50 per share. This enabled us to reduce a substantial amount of money in the Octodec balance sheet to help strengthen the balance sheet. On a like-for-like basis, the rental, before COVID, was down 7.3%. All of the sectors in which we operate were down, and I can give you that breakdown. It was as follows: residential, down 10.6%, and that's an important one, and we'll talk about it a bit later; retail, that's the shops, down 4.9%; shopping centers, down 1.3%. It's worth mentioning over that with the shopping centers, the bulk of our shopping centers performed extremely well. But when aggregated together, it's down 1.3%. Our offices, down 4.7%; industrial, down 1%; and special, which comprises of motor, churches, schools, educational, gyms and motor, down approximately 15%. I'm not going to deal with the next slide on our approach to COVID, save for the last one, which I think I've already touched on the final distribution decision, considering -- sorry, [ Yulona ], just go back. Thank you. Final distribution, considering the strengthening of the balance sheet, conserving cash and, at the same time, maintaining our REIT status. With regards to our leasing activity, I think I'd like to spend a few more minutes here without taking away the thunder of our next presenters. But let's talk about residential, leasing in residential. I think it's worthwhile noting that at this time last year, our residential vacancy sat at approximately 17%. Our vacancy factor in residential now sitting at 15.9%. We further -- we are seeing a number of positives in the month of September, the month of October. Rentals are indicating a stabilization of renters. Historically, during this time, this has been -- even in good times, these were the bad months. This is when students, for example, decide to call their university studies quits and just generally has been a time when vacancies have been tough or rather on the increase. However, we're seeing a slightly, I think, a slightly better improvement in the vacancy factor. Part of the reason may be that the universities are starting to open up. It is understood that certainly, 3 universities that I've heard of, namely UCT, Rhodes University, Potch and, I understand, Tuks as well are indicating that in the new year, it will be no vaccination, no entry. For me, the interpretation of that is that universities are accepting the fact that the return to university must be -- is something on the cards. I think this is relevant because in the same way as Octodec's pain that it suffered over this COVID period, to a large extent, was caused by residential, I think the reverse will happen. As COVID comes under control and the improved vacancy factor will bring significant upside to Octodec's results. With regards to the commercial sectors I alluded to the shopping centers. Well, they've all traded well, and we're very happy with progress thus far. With regards to industrial, I think that we took 1 or 2 big hits from 1 or 2 of the bigger tenants, but things are very much under control. And Daniel will deal with this when we talk about the CBD. What has happened is that there's been a rebasing of our rentals. Remember, Octodec has this very low well and, accordingly, rentals being charged at the moment in our books by Octodec represent current rentals. We don't anticipate further much reduction in gross rentals going forward. And this is evidenced or borne out by the fact that the leasing team are doing deals. I think what is significant, and I've said this in this kind of presentation before, in that the property people are not the smart people. Rather, the retailers are. Why do I say that? Because the retailers are closely connected to the ground, where they're doing the turnovers. And we, as property people, if we can follow or listen rather to the retailers, we know we're in the right place. We've got property that's well located. In this regard, we have done a number of what I consider to be big deals. Shoprite Checkers were a major renewal of approximately 4,000 square meters at very fair rentals. We have fashion people, like Mr Price coming to the market with 1,600 square meters of new store. But -- yes, new store, which opened last Thursday. I understand from the team that they had a particularly strong opening to the market. So the market has received them well. You have OK Furniture opening an 800 square meter store also in the heart of the Johannesburg CBD. And we have The Foschini Group opening up some new stores in the newly acquired Jet brand. And that gives me the confidence, as well as our discussions with the retailers themselves, that they still -- the CBDs of both Johannesburg and Pretoria are still alive and well. And it's a place where they are happy to make significant investment. Next, let's move over to the overview for the period. And whilst I know myself, I sometimes talk to my book, obviously, and sometimes talk things up. However, I acknowledge -- the team acknowledges a very tough leasing environment, which resulted in increased vacancies and rising costs. However, I don't think -- when we look at the figures that we've been able to achieve, I think we -- Octodec has withstood some of these tough times exceptionally well. So core vacancies moved slightly upwards from 16.2% from a 15.8%, an increase in -- a slight increase in ratio of cost to revenue, which is a bit worrying for me, a movement from 34.1% to 37.9%. To a large extent, this was caused by what we term administered costs. These were costs normally associated with council. A lot of work is going on with councils, primarily the one in Pretoria, where we're establishing -- reconnecting with council. And this process, slowly but surely, is starting to bear fruit. Larger projects, historically, during this period, we've stayed away from in our attempt to preserve cash and not allow our LTV ratios to run away from ourselves. However, in our kind of portfolio -- I guess, like other portfolios as well. But can't stand still. One still has to do things. I spoke about our investment in the center, Pretoria CBD, ZAR 55 million going into installation of a Shoprite Checkers, 4,000 square meters. There's been a lot of work, albeit on the drawing board, to make sure that when we do upgrade our residential plots, thereof anyway, that this is done in the correct way to make sure that we maintain our position as the supplier of quality accommodation. And I think our new designs that are coming off the drawing board at the moment make sure that our products are relevant and exceptionally contemporary. We -- during the reporting period, one of these such buildings was completed, that was Leo's Place, and was very happy with the results that came out. Weakening -- there is a weakening in the property fundamentals. There's no 2 ways about it. However, interesting to note that our reduction in -- sorry, yes, a reduction in valuation, in the first half of the year, first 6 months of the year wasn't quite as big as it was in the second, which would indicate to me a slight improvement in conditions during the second half of this financial year. But the big one that, due to the uncertainty, although I myself, together I think with the management team, are starting to see those green shoots that I spoke about at our pre-close session. That these green shoots are starting to grow and are starting to result in better trade and better revenues. The future is so uncertain as a result of this. I think it would be prudent for us -- it is prudent for us to not threaten our balance sheet and start investing now, but rather to contain and conserve cash as much as we can and, hence, the reason for the reduction in dividend to ZAR 0.50. I just want to emphasize this point that there are 2 separate issues at play here. The one issue is our results, and I think a 4.6% decrease in funds from operations from ZAR 420 million to ZAR 401 million, to me, indicates a fairly robust portfolio. It's an indication of Octodec and its ability to generate strong cash flows, albeit slightly reduced by the extent of 4.6%. I'm happy with that number. However, more concern to us in the property sector, and I think you're going to hear from this from the rest of the sector, the preservation of one's balance sheet, avoiding having to have tough negotiations with the banks where the breaches of the covenants happen. I think that the reduction of our dividend to preserve cash within the business is the correct one. And hopefully, going forward, we can return to previous distribution, some of the previous distribution that was experienced in the past. A little bit about our portfolio. For those that quite don't know Octodec well yet, 30% residential, slightly down previously from last year. Retail, these are shops, 23.4% -- 22.8%, previously, 23.4%, slightly less. Retail, shopping centers comprised approximately 10%, now at 11.8%. Offices, 16.3%; industrial, 7.4%; specialized, 11.4%. Specialized is a category that was brought about at the insistence of the Johannesburg Stock Exchange, where we were required to report on all sectors. This sector is a, call it, a hodgepot of different smaller sectors. These include motor showrooms, churches, which typically one finds in the CBD. Schools or educational institutions, this would include technicals, high schools as well as places of eating. This sector is worthwhile noting because most of these subsectors within the specialized sector had and still, perhaps, go through tough times. But pleasing to note now that as we -- as South Africa opens up, the school kids are returning to their schools. Hopefully, the churches will be able to bring in more people than previously that they did. And we will start earning revenue from this at the moment. As mentioned, this sector suffered a lot with a reduction in revenue of approximately 15%. And so that concludes my presentation. I will come back at the end to give you some thoughts on how we see the future opportunities and the future of Octodec. But at this stage, I'm going to hand over to Charlene Conradie, who will talk about the residential sector.

Thank you, Jeffrey. Good morning, everybody. So as Jeffrey has mentioned, the residential portfolio for 30% of Octodec income. And we have 68 properties and just over 9,300 apartments. As you can see from this slide, our residential income like-for-like decreased with 10.6%. And the main reason for this was the increase in the vacancies as well as the subsequent pressure on our market rentals. At the end of August, our vacancies decreased marginally from the previous period to 15.9%. However, vacancies first increased significantly towards the end of 2020 and up to February. The reason for this was the impact of COVID on our tenants where our tenants couldn't afford to pay their rent anymore due to retrenchment, salary reductions and the loss of income to small business owners. Normally, our vacancies start to normalize from January, February when students and young professionals returned to the cities to start the academic year and their employment. However, this year, because of the lockdown at the beginning of the year, the students and leasing activity only started to improve from March onwards. And this had a negative impact on our income overall. We also had to decrease our market rentals to attract prospective tenants and to ensure that we could fill our vacancies. Currently, all indications are that next year's academic year will return to normal, with schools starting in January and the University of Pretoria opening in February. If there are no further lockdowns at the beginning of the year, we feel confident that this will have a positive effect on our vacancies when compared to this year. Just the last remarks on the vacancy, specifically. We have a building, Kempton Place, which is situated in Kempton Park. It's a mixed-use building and in terms of residential clients, a big asset with about 465 apartments. This building had high vacancy throughout the financial year due to the low activity at the airports and the lockdown in terms of the travel industry. We have seen now from September, October, only recently that activity has picked up quite a bit. And some tenants have returned to Kempton Place. So we are seeing a small decrease in vacancies month-on-month. And this will also help in terms of our vacancies and the positive impact on income going forward. In certain areas, we are continuing to operate in a very competitive environment. So we are focusing on improving and adding value-added services to our tenants in order to retain our market. For example, we have implemented furnished and shared offerings at The Fields, which is our biggest asset in the Hatfield student area. We have also implemented a cashless laundry. And this laundry is open 24/7 to students and the public. And from the photograph in this slide, you will be able to get an idea of the type of quality of the laundry service that we provide. We are also continuing with the rollout of Wi-Fi to all the buildings in our portfolio. Wi-Fi is becoming increasingly important in their online studying and working-from-home environment. We are also using technology to improve the way that we can connect and transact with our tenants to improve customer service overall. For instance, we have rolled out online portal, whereby prospective tenants can search apartments, they can apply and conclude the lease process online. We believe that all these initiatives contribute to making our apartments more competitive, and it also provides value for money to our tenants, which also speaks to the affordability concern of our tenants. In this slide, as Jeffrey also mentioned, you can see a photograph of Leo's Place. This is a building where we made a capital investment to upgrade the common areas and the amenities. We added a soccer field, a braai area, outside generally to the roof. And the previous braai area, we turned into a quieter green space with a play area for small children. Currently, the occupancy at this building is now a lot better than some of the other buildings in our residential portfolio. We have, therefore, similar refurbishment plan for 2 properties in the Joburg portfolio. We want to make those 2 buildings more attractive to prospective tenants. And we want to ensure that these assets remain relevant, current and in demand. And then lastly, the affordability of our tenants still remain a concern. And we are addressing it with the initiatives, as I've mentioned. However, we are currently exploring solutions whereby we can provide a more affordable rental option to tenants, but still within the quality accommodation that we are well known for. And that concludes the residential sector update. I'm going to hand over to Daniel Swimmer, which -- who we will take us through the commercial portfolio. Thank you.

Good morning. Thank you for joining our online webcast. This morning, I will, once again, be sharing some insight on the commercial sectors of Octodec's property portfolio. Just before I run through the next few slides, I'd like to clarify a recurring theme as I won't be dwelling on it in each slide. As some of you may know, we allocate our sectors GLA according to its current usage. So for example, when a large portion of offices is leased to a college, we reallocate that GLA to the specialized education sector GLA. So although there are a few movements from some small disposals that occurred in the previous financial year, a large chunk comes from the reallocation between the sectors, which also impacts our vacancies as well. I'd also like to further clarify that we've split our retail portfolio into 2 separate sectors. The total retail portfolio makes up for 34.6% of our income. However, 23% of this income is related to our notedly dominant high-street CBD retail, and the balance of 11.6% comes from our shopping centers in the portfolio, which I'll report on separately. Let us have a look at the retail shop portfolio, which I mentioned excludes our shopping centers. So during the year under review, rental income decreased by 4.9% on a like-for-like basis to ZAR 329 million. This decline was mainly driven by reversionary lease renewals concluded. We have reset many of our rentals and I'm not anticipating much further falloff of rentals. You may recall that in our previous result presentation, I mentioned that there were 2 large pockets of space becoming vacant, not related to the pandemic, and these have, obviously, impacted our vacancies. Our retail vacancy percentage has increased from 14.8% to 18.4%. Although the movement is negative, there has been significant leasing opportunity in -- leasing activity in recent months. The portfolio generally displayed a direct correlation between the level of lockdown restrictions and trading performance. We experienced an uptick in the CBD each time the restrictions reduced and the reverse when restrictions were implemented. We remain cautiously optimistic of the continued upward trend in the CBD, pending no further increased restrictions. As a whole, rentals do remain under pressure, but we are not holding any vacancies in prime areas in the CBD. Besides for the national tenants who occupy the CBD retail space, there's a large component of independent retailers who have proven quite resilient over time. I also believe by trading in the CBD, they enjoy the higher footfall trade than if they were placed in a large shopping center. It is extremely encouraging to notice that our national tenants, the likes of [ Pepco ], Mr Price and TFG are all still expressing interest and a healthy appetite in the CBD. More recently, we've had some opening, both in Johannesburg and Pretoria. We're currently finalizing a couple of new tenancies with them, respectively. We have said over the years -- sorry, just I haven't -- sorry, [ Yulona ], if you can move back. Thank you. We've said over the years that these retailers are key indicators for us. If they are shopping for space, then surely there must be opportunity. They do like the Johannesburg and Pretoria CBD. However, they're pushing to rebase their rentals as their cost of occupancy over the years has increased substantially. With constantly increasing municipal costs, their turnovers more recently have reduced. All of this is negatively impacted the stores growth in the current environment. We are looking forward to the upgrade, as Jeffrey mentioned earlier of the Shoprite building in Pretoria, where we'll reconfigure the Shoprite space, and Shoprite will upgrade their store. This will further create opportunity to add additional tenants in the building, and works are likely to begin in the beginning of the New Year. Last time we reported, we were in the midst of finalizing tenants for the Edcon space. I'm pleased by the speed at which we were able to conclude deals for the space and have since completed the works where we have placed a Mr Price combo store, which Jeffrey touched on earlier. They took a little over 2,000 square meters; and an OK Furniture occupying slightly more than 800 squares. They commenced trading at the end of last week. What is further encouraging is that Mr Price have a substantial lease just -- with Octodec, just 3 blocks away from this new store they recently opened, and they've already concluded that renewal for a future period. We have also placed a new -- a first, I should say, a first Jet Home in the Johannesburg CBD. This is obviously under the new ownership of TFG, and we are in the midst of finalizing the same in the Pretoria CBD. We can move on to our retail shopping centers. Our centers are proving their defensive nature during the economic downturn. It is clear that consumers have a preference for convenience centers. Our team is focused on ensuring a relevant tenant mix, and convenience remains key to achieving customers' needs. Generally, we did experience some like-for-like income growth at the various centers. However, on the whole, we are down 1.3%. In Pretoria, if we could move on to the next slide. In Pretoria, at The Park shopping center, we continue to show some healthy growth at 5.6% rental growth since the center's renovation. We are pleased that the renovation took place, and the center continues to remain almost 100% let. We are currently undergoing -- while we're currently renovating the old fruit and vegetable shop, where we're placing a new grocer at the center together with an upgraded Meat World. Based on our shoppers' feedback, it's going to be well received by them, and we are also replacing the post office that was in the center with a new [ post there ]. The Waverley Plaza shopping center had a positive 3.8% rental growth and the center remains well occupied. We are awaiting final council approval to break ground on building a new KFC drive-through at the center. We have completed the first -- well, not the first, the second new PV solar installation at Waverley at a total cost of ZAR 5.2 million. We proactively continue to seek opportunities in the portfolio. And we believe that in time, as the battery power improves, we'll be able to then introduce PV into our residential portfolio. Currently -- I mean, residential generally would be use their power in -- or their electricity in the evenings. Woodmead continues to perform well and remain a dominant value outlet center in South Africa. We experienced rental growth of 2.9%, and this is having a couple of vacancies during the period where we were placing new tenancies to further improve the offering at the center. Killarney Mall showed a decline in rental income of 9.6%. The decline was a combination of things. We had the loss of the Killarney Toyota income, and there were some tenancies that, due to COVID, had to vacate. This is the likes of a flight center, [ Bidvest Bank ], [ Tal Bureau of Exchange ] and a couple of other smaller tenancies. And there were also some larger rent reversions with our nationals in the center. At the same time, though, we have added some promising tenants that will further improve the mix in the center. That's PNA, Tiger Wheel & Tyre and Urban Hardware. The newly revamped Woolworths grocery extension has been completed. We'll continue to focus on strengthening our tenant relationships and further understanding our customers' behavior at all the sectors. Our commercial office portfolio consists of 2 types of users. We have 53.7% of our office income is let to government and quasi-government, which has increased from 51% at previous year-end. The balance of our office income is made up of smaller, medium-type operators, professionals or start-ups. Our core vacancy remains fairly stable with a slight increase to 23.6% from 23% at prior year-end. This positive considering what the office sector is experiencing in our constrained economy. We do have an element of churn in offices. However, replacing them timeously is achieved. Our offering remains relevant, it's affordable and it's well located. Overall, our office sector has performed consistently during the period, and I'm confident the same will remain in the coming year. Our reduction in rental income largely comes from spaces which were previously occupied by larger tenants and 1 or 2 government lease reversions. A highlight in our government portfolio was the awarded tender for a quasi-government tenant, who we placed in 1,600 square meters and have been the premises -- have been in the premises since May. The deal came at a total capital spend of ZAR 5.5 million. Government rental makes up roughly 9% of the Octodec portfolio, and we'll continue to foster relationships with the various government departments, which benefits us when dealing with challenges in these areas. We have been working with government for many years, and our team knows how to manage them and manage this portfolio well. We are hopeful that these departments will have all their staff return to offices in the new year, as they're still operating at 50% capacity. And the additional feet in the city will further boost the CBD's ecosystem that Jeffrey touched on. There's no question that a lot of tenants remain under pressure. However, we are not anticipating any further substantial vacates in the sector. We can move on to industrial. Our industrial sector, although only making up a little more than 7% of our rental income, our industrial sector remains resilient. Our core vacancy has reduced from -- has reduced to 11.7% from 12.8%. However, the rental achieved -- the rentals that we are achieving are flat. As a whole, the portfolio's rental -- the industrial portfolio rentals remain stable. At our Silverton industrial park, our team had to undergo a major cleanup of tenants. At the beginning of the year, these tenants were -- no matter what we have done for them, there was no -- there were no -- I mean, with reduced rentals, et cetera. they were no longer able to remain in occupation. So this cleanup increased our vacancies to half -- 23% by April this year. And I'm happy to report that those vacancies have subsequently been relet, and the vacancy is now at 12%. The secure industrial park remains relevant. It's high in demand, and we're hopeful that Ford's investment in the nearby area will further bring business and add value to our industrial plot. Our specialized and other sector. Here, we have a breakdown of certain properties that have been aggregated into segments within the portfolio. So the sector as a whole makes up 11.4% of Octodec's rental income. The sector's rental income has reduced by 15.4% year-on-year. And the tenant sustainability in the sectors like education, you'll see it on the next slide, like education, places of worship, remain under pressure, although post year-end, we have seen some positive inquiries from both sectors, be it education and places of worship for potential deals. So this is another sign towards recovery. If we could move on? Thank you. So just to go through some of the sectors briefly, the hotels in Hatfield have impacted our rental income negatively and unfortunately, to date, haven't really shown any sign of recovery. They are really dependent on government utilizing this space, and we remain close to them on a weekly basis. Health care facilities, our Joburg building, the Lister Medical building, had a difficult year, a difficulty of trade where people were not really visiting those doctors. They were hesitant by the pandemic, et cetera, with all the restrictions in place, and we had to assist many tenants in the building. Education and places of worship continue to feel the impact of the last 18 months. We have assisted where possible, and they are likely to be a few more casualties. But these sectors do only make up 3% of the total Octodec income. If we could move on to the vacancy sector. So this slide presents an overview of the vacancies per sector. Vacancies, including properties held for development or, I should say, held for redevelopment increased by 1.1% to 22.8%. While our core vacancies increased marginally by 0.4% to 16.2%. I touched on the vacancies in some of the previous slides. Overall, the core vacancies as a portfolio are well contained. In the thick of COVID and the context of the last 18 months, our portfolio has held up really well. This is bearing in mind the increased competition in residential, our tenant's affordability and a handful of larger vacates, which were known before pre-pandemic. Our lease expiry profile. There's a perceived risk in our expiry profile. However, historically, it's always remained the same and is yet to be -- has yet to be proven detrimental to our vacancies. Our internal leasing team managed to renew leases timelessly. And I do feel having these shorter leases keeps our rentals more realistic and our team more engaged with our clients. If we could move to the next slide. As I mentioned in the previous slide, this is in line with our historical trends and expectations. Our national tenants are still entering leases ranging between 3 and 5 years. And the average stay with our residential tenants is 18 months, up from 15 months in the prior reported period. Our major leases that are above 3,000 squares, that are either expiring in the coming financial year or have already expired. At high level, these numbers are manageable. There's no outright concern on these large expiries. There may be some reduction in GLA. However, we have this under control. The Shoprite lease at the Shoprite building will be renewed with an upgrade, which we touched on earlier. Lindsay Saker at the McCarthy Midrand are in the midst of purchasing the building. We have obtained a rental increase at least expiry until transfer takes place. And we are working closely with Virgin gym on securing a 3-year lease renewal with the option to extend that to 5 years. The balance of -- are generally the government departments, which reflect on the slide. And on the whole, it's got to do with their processes how long it takes to renew their leases. If they've been in the premises for a long time, they tend to have to go to market and get new pricing. They use the runner report, et cetera. So it is time consuming and these leases don't really get renewed timeously. We do, however, renew them on monthlies with increases, et cetera, which are negotiated on shorter terms. But on the whole, there's no real -- we're not concerned about any of these departments leaving our portfolio. So just in conclusion, Octodec's concluded roughly 2,200 new and renewal deals covering over 430,000 square meters. So these numbers are at similar levels to our pre-pandemic year, which shows the relevance and fair demand of our offering. I would like to close off with the following thoughts. We remain quietly optimistic about the future of our well-diversified portfolio. In the medium to long term, there will continue to remain pressure on our revenue. However, the portfolio is resilient due to its locations and our target market. The pandemic's, obviously, still full front. It still remains front of mind across the world, let alone South Africa. We've seen how each occurring wave halters our forward movement. But shortly after the wave and the restrictions reduce, we've seen how quickly things begin to pick up. And as the vaccines continue to gain momentum, this will generate more normalized operating environment in the medium term. So in challenging times like this, it's our experienced management team, who's experienced through the rough times and who will play a role, a central role in sustaining our performance. We'll continue to focus heavily on our key metrics, and -- which would obviously be dealmaking,, the vacancies, our cash collections, et cetera. And on that note, I'd like to thank the team that I worked with on a daily basis for yet another difficult period. We've embraced the challenges that we've been confronted with. And hopefully, this will set us in better light as we move forward. If there's anything else that I could possibly provide lights on, feel free to post in the Q&A. And I'll now like to hand over to our new FD, Anabel. Thank you.

Thank you, Daniel, and good morning to everyone. So based on all the presentations that have been made up to this moment, I'd now like to take you through a simplified income statement that really reflects our results for the year. So there, you can see our turnover that is on a contractual basis, down 6% compared to the prior year. And our COVID-19 rental discounts are fortunately much lower than in the prior year, around about 30% of the quantum in the prior year. And that is really a result of the lockdown. Last year, many of our tenants were impacted by the hard lockdown. This year, only a few tenants in certain sectors were impacted. That leaves us a revenue after the COVID-19 rental discounts, 2.5% down on last year. Our property operating costs have increased to 3.7%, ZAR 975 million on the prior year. And that is really on the back of high administrative costs. As Jeffrey mentioned earlier, our assessment rates have really increased significantly. And with high vacancies and pressure on rental income, it's not always possible to recover this on our top line. Also, our repairs and maintenance were impacted in the prior year. Due to the lockdown, we couldn't carry some of our initiatives and those had to be carried over to '21. And that is reflected in that increase in ZAR 975 million compared to the ZAR 940 million. We have, however, tried to manage all our other expenses efficiently. Our credit control department's been working very hard at collecting our debt. Jeffrey has mentioned our good recovery throughout the year. And we've contained our bad debt. It's at 2% compared to the 2.5% in the prior year. So that all happened to -- helped to cushion our increased costs. That leaves us with net rental income from the operations at ZAR 863 million and a total 8.7% down on the prior year. Our administrative and corporate costs have also been reduced. That was mainly due to some once-off expenses in the prior year. We've also benefited nicely from the successive outcome of the REITs ruling that enables us to claim a little bit more of the VAT that's due. And in our -- net finance costs have reduced by 10.8%, down from ZAR 436 million to ZAR 388 million, and that is really on the back of lower interest rates. I just need to point out there that Octodec hasn't been able to really benefit for the entire interest rate decrease. And that is mainly due to our high levels of hedging. I will touch on that in the next slides. So that gives us net income after finance costs or before tax of ZAR 401 million compared to the ZAR 420 million, down 4.6% on the prior year. And as Jeffrey has mentioned, the Octodec Board has made the decision to reduce the dividend so that Octodec can retain some cash and prepare streams in the balance sheet and prepare it to navigate this period into another growth period. This has, unfortunately, resulted in a little bit of tax expense to the group of ZAR 42.7 million. We have tried to limit this exposure by making use of our assessed losses in prior years in our subsidiaries and, in effect, our tax rate. If we take the distribution into account, it's 16% compared to the 28% normal tax rate. So after tax, our net distributable income is ZAR 358.4 million or ZAR 1.346 per share, and that's a 14.1% decrease on the prior year. Okay. If we can move on to the statement of financial position. So our assets are represented by the property portfolio. Property portfolio has been valued at ZAR 11.1 billion compared to the ZAR 11.8 billion in the prior year. And the decrease is simply due to the revalue -- the negative revaluation of our investment portfolio of ZAR 641 million. Our investment in our joint venture has gone up slightly by ZAR 2 million, and the interest in this joint venture is represented by a convenience center. And that sector, in particular, has done pretty well in the Octodec portfolio. Our current assets have increased by ZAR 74 million. ZAR 88 million of that increase actually is represented by an increase in accounts receivable. That is a little bit under pressure. So it now represents 5.4% of our gross revenue compared to the 4.2%. However, out of that ZAR 88 million increase in accounts receivable, about ZAR 30-odd million was due from government. I'm happy to say that subsequent to our year-end, we've received all those funds, and it's brought our debtors a little bit more in line, but the payment patterns of the tenants has changed. Where in the past, they pay us in advance, normally in 1 month payment in advance for the next month, they are now paying in the current month and sometimes even rolling it over into the next month. So that brings us to total assets of ZAR 11.5 billion. Looking at our liabilities, it's really represented by interest-bearing borrowings. It looks like a big decrease under noncurrent, but the current portion, together with the noncurrent, is only ZAR 9 million lower than the last year, there's been no significant movements in that category. Other financial instruments have decreased. In total, they've decreased from ZAR 325 million to ZAR 200 million where the current portion being included under our other current liabilities. And this is really the result of an increase in the interest rates of our swap curve, which is narrowing the margin between our fixed and our variable rates. Right. And then under other creditors, it's basically represented by the short-term derivative instruments of ZAR 114 million. Included in that figure is also about ZAR 82 million of tenant deposits and ZAR 18 million, which is rent paid in advance for the month of September. So all those tenants who pay us in advance is reflected under other creditors, with the balance really being the accruals for the normal operating costs. The biggest one in there being our municipal accounts. Right. And that gives us an LTV of -- a net asset value of ZAR 23.2 per share, and our LTV is at ZAR 43.2. Just providing a little bit of insight into the valuation of our investment portfolio. So as you can see there, our valuation for the whole year came down by ZAR 641 million. Of this, as Jeffrey has mentioned, up -- at the beginning of the presentation, ZAR 500 million had already been recognized up to February 2021. So the impact -- the increase now is really as a result of slightly lower rentals, but none of the other factors really had a direct impact on our valuation, okay? Our valuation process is done twice a year. So we value our entire portfolio in February and in August. And also in line with the JSE listings requirements, we have our properties externally valued. So in the current year, 73 properties out of a total of 267 were externally valued. That represents about 48% of our portfolio. And we had no significant or material differences between our external valuers and ourselves. So valuing our properties every 6 months keeps us very near our market rates. We know what's going on in the market, and we don't have significant differences in our property values when we're doing an external valuation. And we still expect a little bit of uncertainty in the market. So it's very difficult to predict what our valuations are going to be next year. But hopefully, we are seeing the bottom of the curve, and we're hoping to -- for figures to stabilize now. Yes. So in this slide, we give you a small little table, just basically reflecting what our inputs are in the evaluation. These are the variables. And obviously, any change in those variables will have an impact on the ultimate outcome of the evaluation, our capitalization rate, our vacancy effect and our expense ratio are really the key inputs into the valuation. And any little movement in that can have a substantial impact on our valuation. And as you can see from that, compared to the prior year, there's been a smaller uptick in our cap rates from 9.7% to 9.8%. Our vacancy factor also in the -- on the back of increased vacancies, it increased from 7.7% to 8.2%, and our expense ratio from 28% to 29.4%. Also, if you look at the number of buildings, most of our buildings or more than 50% of our buildings are really sitting in the bracket of 10.25% to 11.5% of our cap rates. So all the other buildings, some of them better ones with a slightly lower cap rate, but that's really where all our buildings are centered. Next slide, [ Yulona ]. This is a summary of our cash flow for the year ended 31st of August '21. So you can see from here that we started the year with almost ZAR 9 million in our bank account, but we've generated strong cash flows from our operations of ZAR 758 million. From that, we've paid ZAR 400 million in interest expense. ZAR 266 million we've paid back to the shareholders in February '21. That's as a result of our 2020 financial year. We've also employed ZAR 71 million into the refurbishment of our properties. That includes Leo's Place and a couple of other smaller projects. And we've also been able to sell some small properties in the current year. That totaled ZAR 36 million. And together with a small movement on our long-term borrowings, it has left us with ZAR 58 million at the end of the year. Right. So then looking at our capital management and our borrowing, we've got borrowings from banks, which are sitting at ZAR 4 billion. And also, our DMTN program has an average of ZAR 674 million, consisting of both unsecured and secured notes. And the total cost of our borrowings is currently at 5.7%. And as I said, our interest -- we haven't really benefited in our interest rate because we are quite heavily hedged. And the cost of that hedging came in at 2.8%, giving us a total cost of borrowings of 8.5%. However, I'd just like to point out that we've been quite successful and looking at trying to manage our capital and our LTV. So we have -- the Board, in their decision to hold back some cash as well as the expected proceeds from the sale of certain properties, which we estimate will go through in the current year, we should be looking at lower LTV ratios. So currently, at 43.2%, but we're looking at reducing these to below 40% in the medium to long term and possibly somewhere closer to the 40% in the short term. And if we had to exclude our derivatives from our LTV calculation, we're sitting at 41.4%. So I've said our interest rate hedging is quite high at 96.1% of total borrowings. We've been watching the interest rates and also the cost of terming our -- unwinding some of these interest rate contracts. And we've been very successful since the year-end to terminate some 3 contracts with a notional value of ZAR 1 billion, and this has helped us reduce our hedging to about 74%. And it's got a, how can I say, a very positive impact on our finance costs for the year where we estimate that will save around about ZAR 20 million in interest for the rest of the year. And that, in itself, also has a huge impact on our ICR. So ICR came in at 2.07 for the reporting period. But if we take these factors into account and what we've been doing since year-end, we should see a good increase in our ICR into more comfortable levels. All right. And then at the year end, we had some unutilized banking facilities of ZAR 359 million, up to date, ZAR 419 million. And we are currently, obviously, renegotiating our short-term debt and refinancing it with our banks. Okay. Right. Okay. So that's a small analysis of funding -- of our funding split throughout the various funders that we're using. So in the past, we were heavily weighted towards 2 funders. We've tried to diversify this by reducing a little bit of funding from Nedbank. And since year-end, we've also raised an additional ZAR 250 million from ABSA, which we've used to repay a loan that's maturing in 2020 from Nedbank. Right. There's also been interest in our -- from our DCM investors. All the notes that came up for -- that were maturing towards the end of the year and subsequent to the end of the year, we've successfully refinanced those, although it's slightly higher rates. But we continue to pursue that -- and to see how we can extend and diversify our funding also including the DCM market. Right. Okay. Then looking at our expiry profile, so our interest rate derivatives, the expiry profile is 2.7 years, same as the prior year. But if we had to take into account the fact that we've now termed out 3 contracts, our '23 expiry has fallen away. And so we're left with the '24 and the '25 expiry contracts. And that represents 28% in '24 and 72% in '25 -- 2025. Right. Our loan expiry is at 1.6 at the end of the year. However, I'm happy to say that we've refinanced that loan from Standard Bank. And we've also raised a loan from Nedbank to repay a maturing net that's coming up. And taking all these things into consideration, as we speak, we've increased our expiry profile from 1.6 to 2 years. Right. Okay. So on that note, I'd like to hand over to Jeffrey, who is going to deal with the outlook and a short preview into the 2022 year. Thank you very much.

To do in the outlook in such uncertain times is a very difficult thing to do, given that none of us have a crystal ball that's going to give us good answers. However, having said that, I think that there are definitely early signs of an improved trading environment and renewed tenant interest across all the sectors at which we work. Of the benefit of seeing results for both September and October, and albeit a fairly short period, they're definitely signs of these green shoots that I've referred to in the pre-close session. Residential is the one that I am personally expecting to improve the biggest. I think that the team has done well to pivot and to try and reinvent ourselves and maintain our position as the premium supplier of quality accommodation. We recognize that South African people that typically occupy our flats are under severe economic pressure. And so we have to work out a way to bring to the market something that accommodates a quality -- tenants seeking a quality product, but at a slightly lesser rental. Value add. It's not only our group, but all the other groups are doing it as well. But I think we've done well to develop these and start rolling them out at a reasonable pace, at reasonable costs within the portfolio. These include Wi-Fis, upgrading of common areas, installation of playgrounds for kids, furnished and shared accommodation. What is particularly important to me is that over the last 10 years, we've built up in the residential section, a very -- residential sector, a very strong brand that's well-known amongst all inhabitants and would-be inhabitants of our team. And I think that's something that us, as a management team, need to continue because it served us well in the past. Retail shopping centers in the main are trading exceptionally well. Demand for the CBD is from large-scale retailers, Daniel has discussed it, given you the detail. I'm very pleased to see that we are still able to attract the cream of South African retailers into the CBD. It's a point -- I want to make a point that I think I've made before. And that our -- brief -- up to date, we've never acquired portfolios. When you acquire a portfolio, one acquires a majority of the assets that you're after, but coming with it are a number of potential dogs. Octodec has never acquired or very seldomly acquired portfolios. And as a result, I think the bulk of our assets, especially those that occupy the CBD, are very well located and poised for growth post COVID. However, we remain cautious on the outlook of the 2022 financial year given the uncertainty around subsequent waves of infection as well as the extent of economic and socioeconomic impacts on our tenants. Going forward, we will continue to take proactive steps to mitigate the reduction in earnings, optimize working capital and preserve cash flows to improve liquidity as well as our balance sheet. Future distribution earnings and our ability to pay dividends will depend on our macro recovery, our capital requirements and liquidity, overall performance and proceeds from the sale of investment properties. We unfortunately are not in a position to provide guidance for 2022, given the current uncertainty. However, having said all the above, I think that we are well positioned for growth. Our rentals have been rebased. And with our resilience, underpinned by our simple structure and focused strategy, our diversified portfolio with exposure to certain, more defensive segments within our country, and the intimate knowledge and expertise within our -- within our portfolio, all bode us well for a recovery sometime into the future. And that concludes my little presentation. I wish I could be more certain as to where we're going. But I do think that things are looking a lot better than this time last year. I'm very grateful for that. And I'll now leave it to you guys for some -- for a question-and-answer session.

The first question is from Charles Boles of Titanium Capital. The question is, in terms of residential, I would have thought that government employees would be stable in the residential portfolio. Has this been your experience thus far?

Charlene, do you want to handle that?

Yes. Sure. So if you look at the stats that we provide on government employees, we provide the statistics as a percentage of the number of applications we have in a year. So year-on-year, if you look back 2019, 2020, 2021, the average government applications that we've received over a year period is about the 27 -- 26 year -- percentage, sorry. So it does seem that the government employees in our portfolios are remaining fairly static. Although, I understand government hasn't been back in full to the cities and the offices. They still do have work from home and rotational practices that they follow. But in terms of our portfolio, it seems like it is stable in comparison to previous years.

I just want to -- if I may add to that, Charlene. It is true that a lot of the government employees are working from home, some of them working from our flats within the CBD. We know that. But some of them have moved back home, as I mentioned earlier on in the presentation. As government -- which I think that they are busy doing, that's what our intelligence is telling us. As they move back into the flats, this not only improves residential, but obviously has an impact on retail below those very same flats.

The second question is from [ Johan Fave ] on behalf of [ Sanlam Investments ]. [ Johan ] asks or says, asset managers are required to provide proof of investments in socially responsible projects. Student accommodation and upliftment of inner cities, which are done by Octodec are examples of these. How can Octodec increase public awareness of these actions and initiatives as it might also result in increased and cheaper funding.

I think, [ Johan ], you're absolutely correct. I think the opportunity does exist for us to improve our reporting. I think the hard work has been done. The building of student accommodation, the providing of accommodation to people that previously perhaps would not be able to afford the kind of accommodation that we would -- that we are able to supply, that has happened. Perhaps where we've fallen short -- and moves are afoot to change this, we have to improve our reporting there, too. We have engaged with a number of people involved in this kind of reporting to make sure that going forward, we can improve our reporting.

And there is a third question from [ Hazim Samsaden ] of Investec. What was the cost of canceling the swaps after year-end?

Anabel, I'll leave that one to you.

Yes, look, as you know, the interest rate curve has been increasing. And as a result of this, it narrows that margin. And the cost of the swaps is cheaper to terminate at the moment, right? So in order to terminate this ZAR 1 billion of swaps, we've paid ZAR 16 million in order to decrease that cap. However, the ZAR 16 million is really just a reduction of the liability that I mentioned earlier and will have no impact on our distributable income in 2022, if I'm answering your question.

At this stage, there are no further questions, but let's just give it a few more seconds. Perhaps there might be another question if anyone would like to make concluding remarks. But we'll give it a few more seconds for further questions. It seems that there are no further questions. Jeffrey?

Thank you. Thank you, [ Brian ]. I just want to take this opportunity to thank the management team that I work with. This has been yet another very tough, demanding and trying year, but we haven't given up. And I -- whilst the results may not be great, I think we've come through with flying colors given the current tough economic conditions, which we currently find ourselves -- well, not ourselves, but the entire world, more than the country. It's tough out there. And thank you for attending. And thank you for making time to hear our story. And lastly, to those people that don't know Octodec, included in the presentation are Anabel's and myself, we've put our contact details. I do think, given the very specialized nature of our portfolio, please contact us, and let's make arrangements to meet either in Johannesburg or Pretoria to see -- to really see some of the work that we've done. I think most of you will be pleasantly surprised. Thank you.