Octodec Investments Limited (OCT) Earnings Call Transcript & Summary

Apologies for the technical error to our guests and for starting a bit late. I'll just switch off my camera given issues that I'm having. So good morning, and welcome to the pre-close update with the management team of Octodec Investments Limited ahead of their financial results for the year ended 31 August 2024. Just representing Octodec, we have our Managing Director, Jeffrey Wapnick; Financial Director, Anabel Vieira; Financial Executive, Riaan Erasmus; and Chief Operations Officer, Charlene Conradie. Just some housekeeping, all guests will be muted. To ask a question either use the Q&A box or raise your hand, and I will unmute you. With that, I hand over to Jeffrey, who will take us through the presentation. Thank you, Jeffrey.

Good morning, everybody. My name is Jeffrey Wapnick, the CEO of Octodec. I will handle the start, just a basic introduction, some high-level thinking around Octodec. I'll then hand over to the rest of the team, who will deal with various sections of this presentation. Once again, thank you to all for making time to attend this presentation. Right. Octodec at a glance, I don't want to focus too much over here. Safe to say for those of you that are new to Octodec, Octodec is a -- in our opinion, a well-diversified property portfolio with exposure to all sectors within the property sectors. However, we do restrict our operations to that of Gauteng. Our expertise and experience together with our core understanding of the communities in which we operate, provide us with the competitive advantage that we so need to drive a portfolio like this. The strategy overview, I want to start off by saying that we -- South Africa is going through some very tough times. However, I still think that our strategy is in place, and to an extent, we've kept to our strategy fairly well. The only thing where I am personally disappointed is perhaps performance relating to the disposal of a number of nonperforming assets. This has the effect of having a small impact on our distributions, but perhaps more importantly, prevents the growth in the portfolio. The operating environment, as I mentioned earlier on in my opening remarks, the local economy remains under pressure with increasing levels of unemployment, high inflation and interest rates impacting on consumers. Despite these challenging times, I do think that 1 or 2 of our sectors in which we operate have performed well, showing good resilience. Perhaps the outstanding performance comes from our residential department, but Charlene Conradie, who will follow me, will talk a little bit about that afterwards. But it's worthwhile mentioning, it's not only residential, but 1 or 2 other properties -- 1 or 2 other sectors have performed well. I think at this stage, as an overall statement, I'm happy with the performance, say for what is happening in Johannesburg. Johannesburg has been very hard hit by Johannesburg CBD, in particular, by the -- not so recent anymore, the recent gas explosion that happened in the old Bree Street, now called Lilian Ngoyi. Information that I can report back to you is that, as we stand today, there are no contractors on site to fix this explosion. Those that are in contact with the council are advising us that they anticipate January, February of next year to be able to fix the damage caused by the explosion. But of noteworthy significance is the fact that a number of nongovernment institutions recognize the importance of saving the Johannesburg CBD. And so we have a number of groupings that are now being formed, powerful groupings, I think, that are starting to operate independent of council. So by way of an example, we have something [indiscernible], which is staffed by some senior South African businessmen, who are pulling together a lot of initiatives, positive initiatives. Some of those -- these initiatives are starting to show results. We have a fairly big listed -- one of the listed funds weighing in and agreeing to fix some of the parks and create new parks within the Johannesburg CBD. And we have the brick producer, Corobrik, who has now, I understand, agreed to supply bricks at cost to anybody wanting to fix the Johannesburg pavements. In addition to that, I think Johannesburg has issued a blanket wayleave so that we don't have to go through the rigmarole of having to apply for permission when we decide to fix up these pavements. And I will come back to try to give some insights into the way forward and how we're seeing things. But right now, I'm going to call on Charlene Conradie to talk about the various sectors in which we operate. Over to you, Charlene.

Thank you, Jeffrey. Thank you, Ridwaan, for asking us. Well, hello, everyone. Good morning. In this slide, as you could see, you can see an overview of our vacancies in the residential portfolio. Our vacancies remain stable compared to August 2023, and our vacancy trends also remains in line with the previous year. We have seen a significant improvement in occupancy in our Hatfield portfolio. This was mainly due to the announcement by NSFAS at the beginning of the year in terms of the increase in the accommodation allowance. This positive was unfortunately offset by a slight increase in our vacancies in the Johannesburg and the Tshwane portfolios. The increase in the vacancies is mainly due to tenants' affordability, which is under pressure due to the rising cost of living. And in addition, as Jeffrey explained in his opening remarks, the Johannesburg portfolio is also impacted by the gas explosion on Lilian Ngoyi, and there was also several water and electricity outages due to the repair works on the road. How we are mitigating against these power and electricity and water interruptions will be mentioned later in this presentation. We are also running some no-deposit specials on selected units to attract prospective tenants and ensure that we can manage our vacancies. It is important just on this slide to note that based on the leasing inquiries that we continuously receive, we still believe there is strong demand for residential accommodation, although tenants' affordability remains the concern. So we envisage that our new residential concept called Yethu City, which we will also talk to later, will address this concern and will be well received in the market. Next slide, please. So The Fields is Octodec's largest asset, and it is also situated in a very competitive student area of Hatfield. Although The Fields was on the residential portion, not a purpose-built student accommodation, we have totally transformed our accommodation to enhance student living and to cater for our students' needs. We have created shared and furnished units with a kitchen, lounge and bathroom. We have also added various amenities to ensure that we can build and support the student community living at the Fields. As mentioned in the slide, we created an event space, which can be seen in the photograph. There, we hold student wellness workshops, social activities. We also have acquired rooftop space, there's a photo later in the presentation, for students to relax in. We have a student center where students can study or work in groups. As previously reported, we also have a 24/7 cashless laundry facility in the precinct. And we have a gym as well as retail, which allows for convenient shopping for our students in the precinct. Lastly, to note, during the month of July, NSFAS announced that they will be taking over the payment of the accommodation allowances from the University of Pretoria with the deduction of a 5% administration fee. This will be subject to accreditation with NSFAS, for which we already received an A grade accreditation with NSFAS. To date, however, NSFAS hasn't taken over the payment from the University of Pretoria yet, so we are still being paid by the University of Pretoria, which is positive for Octodec. Next slide. Okay. In this slide, we can see an overview of the commercial portfolio. I'm just going to touch on a few points. The increase in vacancies in the office sector was mainly due to a large office -- college that vacated during the period. The strategic conversion of HealthConnect and Yethu City, we believe, will assist in addressing some of the vacancies in the office sector. We also anticipate that 2 office buildings will be transferred towards the end of the calendar year, which will further reduce the vacancies in this office portfolio. In terms of the government's tenancy, we are encouraged by the comments made by the new appointed Minister of Public Works, who commented that they believe that government departments should remain in the CBD. So this will bode very well for Octodec and our diversified portfolio and the ecosystem that we have in the CBD. In terms of the slight increase in vacancies on the shopping centers, this was mainly due to a movement of tenants. And this was done to improve the overall tenant mix and to result in better rental income going forward. Industrial, as previously reported, the small increase is due to a few larger tenants vacating our Silverton portfolio. Our industrial portfolio is a small portfolio, so the movement in 1 or 2 larger tenants does have an impact on our vacancy percentage. We are, however, confident that the vacancies can be let in the short to medium term. Next slide, in this slide, we listed our material leases that has been concluded in the recent months. This is just to provide you with an update on the leases that was previously reported as being close to expiry date. I want to draw your attention to the bottom to leases. These are new leases that's been concluded in terms of previously vacant space, which was difficult to let, and it has been vacant for a number of months. So as these leases, unfortunately have only been concluded recently, the benefit of rental income will only materialize in the new financial year. Next slide. And then as per our normal presentations, you can see a list of the material leases that will be -- that have already expired or will be expiring in the short term. The tenants remain in occupancy at the moment and on a monthly tenancy. And we only think that the Transpharm lease is of a risk to the business. And that concludes the overview on the operational environment. I'm going to hand over to Riaan to take us through some of the other updates. Thank you, everyone. Thank you for your time.

Good morning, everyone. Thank you, everyone, for having us. Yes, this morning, I will just discuss the impact of the gas explosion on Octodec and what we are doing about it. So I think at the time when the gas explosion occurred in mid-2023, it was very difficult for us to assess what the impact of this explosion would have on Octodec and the portfolio. And to date, we now can more quantify as to what that impact is and the severity thereof on our portfolio. So we have 14 properties that are directly impacted by this gas explosion. And if you're on Lilian Ngoyi Street, you basically can identify all our properties as you move down this area where the explosion occurred. The gas explosion in itself, of course, has had the consequence of pushing up our vacancies, returns are really more on the commercial side, more vacating as a result of the failures in their businesses. And where the tenants are remaining, we receive continuous requests for rent reductions. A lot of our tenants are really struggling with their businesses and the disruptions they do so. We are experiencing a higher level of bad debt provisions or write-offs in this portfolio, so much so that we are currently providing roughly about 11% of rent drop that we charge. We are -- we do have business interruption insurance in place. And the cover we have is for 36 months, but this is limited to ZAR 20 million for the EBIT. We do believe that in quantifying our loss that it would exceed this ZAR 20 million, that we would, therefore, obviously, anything over and above the ZAR 20 million, we would not be able to recover. The insurers have accepted liability of the claim. And so there's no dispute with that, but we are working with the loss adjusted in quantifying the loss. Currently, we're expecting a loss to run into the mid-ZAR 50 million by the end of December 2025, which is the date that we expect that the road repairs will be complete, assuming the timelines are being -- if the contractor sticks to the timeline. And I think, as Jeffrey also alluded to earlier, with the change in the contractors, the December 2025 deadline might not be achievable. We are working with tenants in the near term to try and retain them. So with their request of rent reductions or credits, we are looking at post-repair period so that we can retain these tenants as -- when the road is repaid, we do believe that it will take some time to attract new tenants if we let all these tenants simply fail. Of course, this does come at a rental cost to us. The positive news, of course, for us is that despite the turmoil, the difficult environment and the interruption in the area, we still have national retailers interested in the area, wanting to conclude leases and secure spaces for post the daily work. Next slide, we've got collections, and I think it's -- this graph illustrates that collections are relatively stable within our wider portfolio. We are still collecting over 99% of overall rental income. And we are despite the tough economic conditions and tenants continue to pay their dues. Next slide. In this slide, we discuss our financial sustainability. So a little bit about the treasury and workings. And so for the year, we have refinanced ZAR 350 million with our facilities with ABSA. This was refinanced in January and for a period of 5 years. We also settled the corporate bond of ZAR 50 million at the beginning of the financial year, and we issued a new corporate bond of ZAR 100 million to institutional investors in Anchor and Prescient. For the year, we're expecting our LTV levels to be maintained at around 40% levels. And obviously, the objective for us is to mainline it below this level in the longer term. We are currently busy with the refinance of a number of facilities. So we've got 2 facilities maturing in June 2025 of -- totaling ZAR 970 million, so we're finalizing the refinancing of that, and it will be at a lower cost of funding to us. We are also in the process of negotiating the refinance of ZAR 650 million, which is at the end of our financial year, and we are progressing well with that. And -- so we should be able to conclude that early in the new financial year. Then, just on our interest rate swaps, so currently, we are hedged at 69% of our interest-bearing borrowings. And we have expanded a number of interest rate swaps by 12 months from their respective maturity dates, and the total value of that is ZAR 1.2 billion. So that really moves our weighted average maturity profile by 1 year as of the end of July. So in taking out new interest rate swaps, that's continuous engagement with our lenders in the swaps. And we obviously take into account the interest rate cycle, and even though we've got a policy grades between 70% and 80% of our interest-bearing borrowings, we do take into account the interest rate curve when considering each of the transaction. With that, I'll hand over to Anabel. Thank you.

Thank you, Riaan, and good morning, everyone. So now that Riaan has refinanced all these facilities, I'm going to take you through what we've done with the funds that he's refinanced and raised. So in terms of the deployment of capital, we -- as previously noted, we were busy with the conversion of this office space into HealthConnect, a medical facility. That has been completed at the end of February at a total cost of ZAR 57.7 million and is now being let. Then we've also begun with the construction of our new residential concept, Yethu City. My gosh...

What's wrong Anabel?

My computer has just died, my screens. if you can hear me, I will keep on talking. Is that fine?

Yes. That's fine.

All right. I've just got black in front of me, but I've got a piece of paper. So apologies for that. Right. So this new concept, Yethu City, it's a different type of a residential product that we are planning to launch. It is really, I can say, meant to -- yes, I need a new computer. Thank you. It's meant to increase the market with a rental entry point at a lower level compared to our normal places, which are really fully furnished units, et cetera, a normal standard flat. It is positioned to attract the younger aspirational market. So it's really not suited for families with children, et cetera. It's a very different type of concept. It does, however, provide for the high-quality shared accommodation, which our tenants are used to. And that is really renting a room, which you can rent for yourself or you can share it with your partner or a friend if you want to reduce costs. We also provide high-quality shared communal spaces. So all these rooms will then be able -- the people living in these rooms will be able to share the common spaces, which will include kitchens, lounges, workspaces, play areas and entertainment areas. In line with all our other buildings where we have launched our cashless laundry facilities, we're also intending to do that over here. And in line with our priority to address the solar installations and ensure that our buildings are really off the grid, we are also providing for a solar power here with a combination of heat pumps in order to reduce the reliance on the council. But this is also very important because how we are trying to market this product is with a fixed rental cost, which includes the cost of utilities. So this also will go in a long way in terms of reducing our input costs into the operating cost of the property. We do anticipate a very different type of market occupying this building, different to the current market that we cater for. So in order to deal with this, access control and technology is going to play a big role in terms of maintaining and controlling the tenants in our buildings. I think we want to create right from the beginning the right ethos in terms of communal living. So we don't want to deal with issues afterwards. We want to try and preempt that. And why we chose this building as our first pilot is because it is so well located near -- it's very close to transport routes, and also, we are all -- a lot of the CBD workers drop from their taxis. They either change over, taking taxis to up to the Northern, Eastern and Southern suburbs of Pretoria where they work. So this is really almost a hub where people exchange transport, or otherwise, where they work in the CBD. So it's really catering for this market where you have got to leave very early from home and arrive home very late and spend a lot of the hard earned money in transport costs. So we're hoping to really assist this community with an affordable type of property that they can live in. Right. So that is basically the concept of Yethu City. We are confident that this product is going to work. We believe that the market out there for this kind of product is a lot bigger than the current market that we are servicing at the moment with our Places concept. So we are confident that this is going to be a success. Right. So over and above Yethu City, we've also -- as is normal, we generally take 1 or 2 residential buildings, and we do a complete refurbishment of the common areas, plays areas, et cetera, to try and make them relevant, feel fresher, et cetera, and attractive to our tenants. So in the current year, we've completed Ricci's Place in Johannesburg. This came in at a cost of ZAR 7.4 million. And in a much smaller property in Pretoria Corner Place at a cost of ZAR 2.2 million. I must just emphasize here that this is the total cost. But obviously, this is a combination of repairs, a little bit of an upgrade, et cetera. So some of these costs have been expensed, and it is affecting our distributable income. Right. We've also completed a minor upgrade at our Waverley Plaza shopping center ensuring that the shopping center remains relevant. And this goes hand in hand with reorganizing the tenants and trying to get a better tenant mix, as Charlene alluded to in the previous slide. Right. And then obviously, in response to the challenge that we've had in Johannesburg with the gas explosion and also even outside of the gas explosion, all these electricity and water outages that we've experienced, we've tried to address the problem by providing generators to these properties as well as water inlets. So to date, we've installed 13 fixed generators at our buildings and 1 mobile generator that can be moved from building to building wherever the outage is, and this came in at a total cost of ZAR 16.6 million. And we've also provided at a far lesser cost, obviously, 14 water inlets into our buildings so that it enables the water tankers to come and provide water when there is a water outage. So this goes a long way in trying to assist our tenants, sort of pleasing our residential tenants when they go with these long periods without electricity and also enabling our commercial tenants to trade despite the difficult conditions that they find themselves in. Right. So over and above our capital commitments into our buildings, it has been Octodec's strategy to run solar installations at buildings that are suitable for solar installations and where obviously the return is yield enhancing. So we started this a couple of years ago, completing The Tannery and the Waverley Plaza, and that was really a no-brainer when we saw the return on our investment. So this year, we've completed Woodmead Value Mart, completed Blaauw Village and Sildale Industrial Park shopping center that came in at a total cost of ZAR 23.1 million, and we are currently busy with the solar installations at The Fields, Silver Place, Odeon Forum, The Park and Kyalami Crescent. And that's also coming in at a potential cost of ZAR 32.5 million, which will be for the financial year 2025. Yes. So important to say that out of this, we've now completed 4 out of our 5 shopping centers. So the only excluded shopping center here is Kyalami for various reasons. And also, once we've completed all these installations, we've basically covered 13% of our total GLA. Right. Next slide, Ilona. Thank you. Right. So it's also important not to just invest in ourselves and in our shareholder and for the benefit of our shareholders, but also to invest in our communities. So we continue in partnership with our NGOs to invest in our communities and with a focus, obviously, on education, nutrition, and more recently, healthcare. So in 2023, we partnered with Cotlands to address the need for the high-quality ECD centers in our vicinities, and we refurbished a floor at one of our buildings to accommodate the ECD Centre, which includes a toy library with educational toys, offering a paid service of exceptional quality. So to date, we are catering for 42 children in our buildings, most of them are tenants in our -- in that building or the surrounding buildings. And also interesting is that our toy library provides other ECD owners in the areas to upskill them -- with skilling opportunities and access to resources to enhance children's education. Right. We also obviously offered a free Kibooks online platform for our younger readers residing in our buildings to keep them entertained, also to the children of our staff members. And this is obviously to promote a culture of literacy and learning among the children in our communities. We do know that we do lack education in this country. And I think that's very important to start them from an early stage to learn how to read. Right. And more recently, we have partnered with Dis-chem to launch a Community Clinic in Tshwane to provide accessible and affordable healthcare. This clinic is performing well and above the normal routine services that it provides. It also offers the basic eye screenings as well as female health screenings. And to date, while within these 4 months, a total of 430 consultations have been concluded, which proves that the clinic is really doing well. And as far as nutrition is concerned, so this is something we've been involved in for many years. We have participated with feeding programs to feed a large number of children who go to bed at night without a meal. And in May '23, we did become an official partner of a nationwide initiative dedicated to providing meals to preschool children in need across South Africa over the course of the year. So those are 4 of our bigger initiatives that we've carried out in the current year over a number of all the other smaller things that we do. And with that, I'm going to hand over to Jeffrey to deal with the priorities and look at the outlook. Thank you, everyone.

Thank you, Anabel. I think I'd like to say a few words about Yethu City. I'm very excited about Yethu City, the sense that it enables us to attack or service a market which previously may have been ignored. And that's somebody who wants, can't quite afford to get into our entry-level buildings, but here we provide an opportunity for somebody to come into our buildings at an entry point of approximately ZAR 3,000, all in. The design and the configuration of these buildings that we are looking at enables us to show positive yields. And given current interest rates where they are with the possibility of them reducing in the hopefully not-too-distant future, there are a lot of opportunities. The consequence of this is increasing our topline, but also, I mentioned earlier on, I am concerned at the rate at which we have been able to dispose of our buildings. If this works out, and I'm sure that the pilot project will, I think it provides us an opportunity to utilize this previously unutilized building and simultaneously deal with assets that currently we are not able to sell. I think one of the problems that we've experienced with regard to the sale of these properties is the fact that the banks are not giving funding to those people that potentially could want -- could be interested in buying these buildings. Yes, very interesting at the next presentation, which will be sometime in November, December, we hope to be fairly far advanced with the building with an estimated completion time at the end of December to pick up on the rush on accommodation, which will happen in January, February. I think that Octodec has now established relationships with our solar suppliers. And we seem to be quite comfortable in rolling out solar, which has done a lot of good in terms of our recovery -- the cost of power, it reduces our cost of power, and it's -- there's enough being done in Octodec to impact those costs positively. I mentioned the next point -- sorry, Ilona, could you swap to the next page, please? Thank you. Investigating alternative leasing strategies. Well, it's really difficult when you got property that is old and potentially not capable of being let. But it is projects such as this Yethu City, which has already commenced. I think somebody in our presentation, we previously mentioned HealthConnect, which was a vacant building that we converted into a doctors' room facility, which is connected to our Louis Pasteur Hospital. You can see visuals of that on the -- behind me of [indiscernible] over there as well as getting rid of some properties, some big leasing units that were difficult to use because in the current format, there was no demand. So over here, a good example of this would be a Nedbank building, which was previously occupied for many years by Nedbank. We all know that the banks reduced the large formats. They haven't left the CBD, but across the board, they have reduced the size of their footprint, and we managed to do a deal with, I think it's, Jet for approximately -- I don't have that figure in front of me, but it's approximately 1,000 square meters of retail space that we are converting a bank into a -- I think, a fairly high-end quality retail store in the middle of the Pretoria CBD. It was mentioned earlier on a lot of these deals that we are talking about now are successful and proving that they will be successful. Unfortunately, in the results up-to-date -- that won't be included in the results up-to-date because of the fact that they have been recently concluded. However, for the next upcoming financial year, we will have, hopefully, close to 12 months' worth of income from these lease opportunities. We will continue actively to focus on the alternatives for disposing on these properties. I don't want to disclose too much at this stage, but we will continue to find alternative ways to dispose of these properties. As to the outlook, the political landscape has brought about an expectation that South Africa's trajectory will change, paving the way for economic growth. This together with the expected reduction in interest rates could have a positive effect on Octodec. I want to draw your attention to the fact that Octodec has a low level. So when this change happens and it's meaningful, I think that Octodec will pick up on this change, especially in residential. The residential rentals have, in my view, anyway, been far too low for far too long. That's really all I want to say, but I'm happy to advise, I think, that we've come through an exceptionally tough trading period and want to use that opportunity to thank the team that I work for. It's tough out there. The nature of this portfolio requires a resilient operator, you can't give up, and they haven't given up. But despite these challenges experienced in the current financial year, Octodec anticipates to pay a dividend of between ZAR 1.22 to ZAR 1.30 per share, which represents a payout ratio slightly in excess of 78%. I further -- just maybe a little bit of admin, historically, Octodec -- Ilona, could you change the screen, please? Thank you. Historically, Octodec has released reviewed results at the end of October and subsequent to the audited results at the beginning of December. The finance team, however, believes that it is more efficient to release audited results, 1 set of audited results instead of 2 sets of results. Consequently, Octodec will release its first audited financial results on the 26th of November, and no reviewed results will be released in October as originally anticipated. That concludes the presentation for today. And I, however, together with the team, make ourselves available for some debate or some questions that some of you may have. Thank you.

Thanks, Jeffrey and team, for the presentation. Just a reminder, if you'd like to ask questions, please use the Q&A chat box, and we'll go through it. So maybe the first question, I'll just kick it off is around maybe the vacancy rates. It has picked up a bit. Can you just give an indication, has this been the case for most of the second half or maybe towards the end? And then the basic tone is then is it temporary and should you expect a reduction in the first half of '25 given that you seem a bit more upbeat, given your increase in payout ratio?

I'm going to give you a very high-level question -- answer to that question. And that is there are so many moving parts. With regards to residential, I think it's become a very -- not only is it competitive in Johannesburg, but we've suffered the setback, as previously discussed in some detail, with regards to the explosion in Lilian Ngoyi Street, but I am confident that should the much anticipated reduction in residential -- in interest rate have a very positive influence on vacancies. In Pretoria, I think we are far more in control of the market. However, we recognize the increase in competitors to Pretoria. And I think that certainly at a personal level, I don't want to lose that competitive edge that we have. And so we have to fight back with fantastic products like Yethu City. With regards to commercial, I do want to say this, I think it's been commercial in the recent few months. We have been concluding big deals. I've mentioned a few of them, but there are others, including 1 or 2 big renewals. And this level of bigger deal hasn't been present in the portfolio for some time now. So I'm happy that, that is now starting.

And then maybe on the slide deck, you talked to the lease renewals that you've achieved during the period. Some of the escalation rates were around 5%. Maybe a question for Charlene. Can you just talk to or provide more insight into the lease negotiations that are currently happening? I would expect it to -- escalations to be closer to the 6% mark. Or is it -- or just, let's say, 1 or 2 leases that brought the average down? Or is that where leases escalation rates are heading to?

Ridwaan, are you referring to commercial or residential? Just want to make sure...

I saw 5% quickly. I'm trying to think. I think it was either residential or commercial.

Okay. So let me talk to both. So on the residential side, we did increase our market rentals towards the end of last year. And we also -- when tenant comes up on lease expiry, they revert back to a monthly tenancy. And we do, however, increase their rentals around 6% more as well. Unfortunately, in terms of the overall rental growth, some of this rental increases will be offset by the increase in vacancies that we've experienced. So that would be the situation on the residential portfolio. In terms of the commercial portfolio, we're going to run the reversion numbers now the end of August, and then, we would look at it very closely to see because we've got such a granular portfolio, 1 or 2 big reversions can impact the numbers. So we will -- when we close, we will give you proper feedback on what the achievement was in terms of rental reversions. By just what we see on a deal-by-deal basis, we are achieving increases, and it depends on where the retail shop is located or how long the tenant has been in lease. So we are also experiencing 1 or 2 bigger reversions where tenants have been long-standing, so -- but overall, we do achieve rental increases. I hope that -- explains it.

If I may add something to that, Ridwaan. We are coming out of very tough times. One of the markers -- time markers, I don't want to use that terrible word, and that was COVID, where we do rent reversions. And we are -- the team are now recognizing that there were reductions that were given. And now, the trick is how do we revert back to pre-COVID rentals? So whether you've got a 5% or 6%, I don't like it when I hear the team talk like that. I think it's more appropriate what is market rental, what would that -- and I'm not necessarily talking about residential, I'm more on the commercial space now. What should that rental be? Those retailers are aware that they got away with murder, in my opinion, during the COVID period. And yes, we all suffered during COVID, but let bygones be bygones. We have to -- and we are putting together a nice team now, which have the job and will be incentivized to bring back those rentals to pre-COVID levels.

Question from Evan. You have stated that you disappointed with the lack of material sales. Please describe the efforts that were taken and the processes involved in driving this project. And with that, why do you believe it hasn't worked? Lastly, do you feel that you are reasonable in the prices considering the share price and the ability to utilize the capital for a buyback?

So very difficult question to answer, but I'm going to have a shot at it. The -- if you had to ask me to go -- if you were to ask me to go sell Woodmead Value Mart or you were to ask me to sell The Park or if you had to ask me to sell 1 or 2 other of our retail assets or if you had to ask me to go sell some of our residential assets, I think it would be as easy as falling off a log. My comments were to the early -- were not to those assets. They are always available for sale. But once we sold, then they're gone. We'd have got those as prime growth assets and I think will continue to be such. And so once you sell an asset like that, what happens to the rest of Octodec. My comments are related to a number of small buildings in and around the CBD, an average value of, I don't know what it is, ZAR 2 million to ZAR 10 million, somewhere around there, and there just are no buyers. And we are in continuous communication with auction people, with agents to try flog. And we have to do it. We have to keep looking until we find a way to sell them. Just 1 small word of caution. In certain of those assets, we don't want to sell these assets to undesirable future landlords because then we got a real mess on our doorstep. So we need to get our heads around is that a risk we wanted to take. As to the pricing, I think that we have a fantastic financial team on Board and now conservative people. And if they suspect that there's weakness, they're going to write it down. But in the greater scheme of Octodec, even if we further write it down below the book value, as determined by the financial team, I have no problem with it. It's not a question of price. I just don't think that there are people out there, proper buyers, that are willing to invest in the CBD. It requires a special team. It requires -- yes, it's a tough thing to do. In Johannesburg, however, there's people from north of our borders. Excuse me. They are buyers. Johannesburg is bigger, and we've lost -- we've sold properties to these guys because there's no risk of those assets influencing the bulk of rest of the assets in Johannesburg. We do have a number of assets in land where they are very close to a point of sale, and hopefully, the sales that will be reflected in the second half of this financial year will be materially better than those that we currently will have achieved. The other thing that's impacting on most of that seems to have been something new to us, is they are not getting finance from the bank because the insurance people don't want to finance these kinds of assets in the CBD. And so really, this thing that I spoke a little about, the Yethu City, the possibility exists of incorporating these, some of them anyway, into high-growth, cash-generating assets. And that's part of the model that the residential was eventually based on, but those that don't have the ability to be converted into residential or outside the residential zone, we must get rid of them virtually at any price. I hope I've answered your question, Ridwaan.

No, I think you did. We just have a few more questions to go through in the interest of time. We've got quite a few coming out on Killarney. Can you just give us an update on Killarney? As the budgeting on CapEx process completed and just where we stand at the moment?

So I think we are getting very close to finalizing the sale of Killarney. But it's not an easy asset to sell. But we're getting very close, I can tell you that.

Can I ask for time?

Is there -- are there any more, Ridwaan -- any more questions for the team?

Question from Zinhle. Please, can you quantify the changes in vacancies and rental levels before and after the gas explosion for the affected assets?

Charlene, I'm going to leave that difficult question to you or to somebody from the finance team.

Riaan, I don't know if you've got the numbers, if you.

Yes, I do. So basically, the impact on our -- call it, our distributable profits, if you will, you're looking at about ZAR 20 million for the current financial year from that 14 buildings when you compare it to the prior year. So yes, that's the impact. And I think the biggest number that goes in there, and so even though we're charging the revenue, we've got a bad debt sitting at about ZAR 12 million. So that makes up the, yes, 60% of your estimated drilling at the end loss.

A question from Yesh. I note the high and stable collection rates, also noting the potential interest rate cuts, could ease pressure on tenant pockets. However, what measures are being taken to mitigate tenant credit risk?

Charlene, I'm going to leave that one to you because I'm sure most of that question relates to resi.

Yes. So we do our normal credit checks in terms of the normal references, employment, ITC, TransUnion, TPN, those type of credit checks. We do the setting. We also do the affordability test. And so that will continue. However, we do take risk as well in terms of if there's a default judgment, depending on the circumstances or we could charge double deposits if it needs to be. So we do assess it. We -- a tenant, there is possibly a concern around the credit, and then, we get a manager, and we assess it on -- based on merit. That's how we do it in residential.

And just another question here. You talked about the improvements on refinancing of debt with regards to pricing. Can you just give some indication of what level of improvement you're seeing? And then a follow-up question on that is you're going into an environment where interest rates are coming down giving a hedge book around 69%. How are you looking to position Octodec ahead of the current interest rate cycle?

Yes. So, I think on the funding cost itself, you are looking at about 30 basis points on average cut or reduced pricing for us now on margins and then in terms of the hedging. So we're currently sitting at 69%, but we do have over ZAR 800 million worth of swaps maturing in the early part of our next financial year. So that matures, we're dropping close to 50%. Of course, that's how we look at the interest rate cycle as well. So in considering taking out new swaps, we definitely -- when we receive the pricing from our lenders, we look at whether we would be out of the money given what the market is expecting to happen in the next 12 months. So -- and I think that's what I also alluded to our policies. Our policy is to hedge between 70% and 80%. But we're not going to stick to it if we know that interest rates are going to come down. Yes.

And last question from my side. I see insurance claims or concerns around insurance was read quite a few times in the call. Just given where we are with the portfolio, have you seen a material increase in insurance premiums so that it negatively impacts your property operating expenses? And just can you give some insight into that?

So insurance premiums have increased significantly, double digit, I mean, just over 10%, but it's not because of our claims history. When we look at our claims history, because of our excess of loss levels, our actual claims is quite low when you look at our history, so -- but the increase in the premiums is more because of increase in our replacement cost, valuations of our properties as well as the covered period that we ensure for business interruption. So -- usually, we cover for 36 months, so that together with your increase in the valuation of your properties, the replacement costs increase and drives the premiums into the moment.

Thank you. That's all that seems to be all the questions we have from our side. Jeffrey, over to you for any final comment.

Yes. I just want to deal with something I think we haven't spoken about. And that we spoke about the negativity in Johannesburg, primarily associated with the gas explosion, which is true. In addition, what is plaguing Johannesburg, but I think in potentially many property owners, and that's the lack of service delivery, which is throughout Octodec. But I want to make the following comment, in that, we haven't made much -- many inroads, much of an inroad into the Johannesburg city council to try get assistance as one of the bigger landlords. But certainly, in Pretoria, we've done quite well in working with council, and we found them to be quite cooperative. I think they recognize the need of working with us or at least talking to us. And so some of our long outstanding issues are slowly but surely being addressed. So I don't think that service delivery is equally as bad as Johannesburg -- in Pretoria as it is in Johannesburg. And that's really all I wanted to say. Once again, I do thank everyone, including you, Ridwaan, for Nedbank hosting us. And once again to thank you for the team for doing what they have done for Octodec and have done for Octodec for many years. It's tough out there. It's not easy, but we are -- yes, it's a tough job, so thank you to all of you. That's all. Thank you, Ridwaan.

Perfect. Thank you, Jeffrey. Thanks. So yes, thanks to the team, and thanks to participants who have dialed in. Enjoy the rest of your day. Goodbye.

Thank you, Ridwaan. Bye.

Thank you. Bye, everyone.