Octodec Investments Limited (OCT) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Octodec's pre-close updates for the 6 months ending 28th February 2025. My name is [indiscernible], and I'll be your host for this webinar. [Operator Instructions] Joined here with me is Jeffrey Wapnick, CEO of Octodec; Charlene Conradie, Chief Operating Officer; and Riaan Erasmus, Deputy CEO and Financial Director. Before I hand over to Jeffrey, just some few house rules. Everyone will be muted during the course of the webinar just to maintain peace and order and we'll take questions towards the end of the call. I encourage everyone to utilize the chatbox to post all questions and post advice that we keep them short and precise. Otherwise, Jeffrey, please take center stage or should I say, virtual stage. Jeffrey?

Good morning. Thank you very much. Morning to all of you, and welcome once again to the Octodec pre-close February 2025. I will do a high-level overview of how we see things evolving within the business. And then I'm going to hand over to Charlene Conradie, who will talk about the operations of the business. And then after that, I'll ask Riaan to come in on the financial side of the business. Next page, please. Right. I think like many of us, we are still experiencing a local economy that's under pressure. However, having said that, we are seeing signs of recovery. The metrics that we normally use to assess such as vacancies, the levels at which we are renewing leases, the collections, these seem to have all been moving in a positive direction. If I have to either identify a problem that's still within the business, it's got to be the Johannesburg and the Johannesburg CBD. We are affected by a lack of service delivery as well as the unresolved issues surrounding the repair to the Lilian Ngoyi Street gas explosion. Insurance is -- we do have a claim in there, perhaps Riaan will talk about it. We continue with that, but progress appears to be slow. Pretoria CBD as a comparison seems to be a lot better, a lot more easy for our business. Perhaps the highlight of our business for the full 6 months to date was the completion of Yethu City pilot project, which I'll come back and give you some more detail later on. That's certainly providing opportunities for the business. I certainly hope that the Government of National Unity is able to resolve the recent tobacco regarding the 2% VAT increase. But on that note, I want to hand over to Charlene Conradie to take us through each sector.

Thank you, Jeffrey. Good morning, everyone, on the call. Okay. So let's start with the residential portfolio. As we normally do, you can see an update on the vacancies that we are experiencing in the portfolio, particularly at the end of January, our vacancies were 14.8% compared to the prior year. You will see there's a slight increase in vacancies in the Johannesburg and Tshwane portfolio. And the main reason for this is that tenant remain under pressure in terms of affordability because the cost of living do remain high. And then as Jeffrey mentioned, the Johannesburg portfolio is further impacted by the unrepaired damage to Lilian Ngoyi Street. We are, however, even currently doing a lot of deals as we normally do as tenants' perspective, hence in the market look for quality accommodation and the students also start the academic year in February. So we anticipate from February, March that our vacancies will decrease as they normally do and then they normalize towards the end of the year, as you can see in the graph on the right-hand side. Although there is still uncertainty around the final approved NSFAS allowance, we are comfortable with our letting and our intake of students at The Fields and the vacancies in Hatfield and at The Fields will materially decrease. Next slide, please. In this graph, you can see the trend of the leasing inquiries that we've received during the year. And I think this is just a good indication of the continued demand for our accommodation. The increase in January that you see there compared to the prior year is mainly due to an increase of inquiries received for The Fields. And this is just testimony to the impact of the value-added benefits that we've rolled out at The Fields over the last couple of years. It is just important to note that this growth does not include any inquiries received on year-to-date. Next slide, please. All right. So here you can see an update on the commercial portfolio, specifically the vacancies. There was a slight decrease in vacancies in the office portfolio, which was mainly due to the letting of a long-standing vacant office building in Centurion as well as the office space at Yethu City of which has now been converted into co-living accommodation. As Jeffrey mentioned, we are particularly excited about this pilot project because if it is successful and we believe that it will be, then it gives us a lot of opportunity to roll out more of this type of product to some of our other office vacancies in the portfolio. It's also important to note that we have experienced an increase in requests for tenders from government departments for office space, which is positive. The shops in the core CBD that we operate in continue to attract the interest from retailers. And the main vacancy decrease there has been, as I previously reported that Jet who took occupation at one of our buildings, which was previously vacated by one of the larger banks. Our shopping centers also still continue to perform well in terms of vacancies. As you can see at the end of January, it was at 0.5%. The industrial portfolio is a smaller portfolio and it consists of smaller warehouses and light industrial, which remain in demand. However, because it is a smaller portfolio, if there is tenant churn due to economic challenges, then it does impact on the vacancy levels. Next slide. Okay, here, we list our material leases which have already expired, which is in excess of 5,000 square meters. The first one there, the City of Tshwane remains on a monthly lease, and we still don't have any confirmation of when they will be moving to their own building. The next lease the Centre Walk is also on a monthly tenancy. And unfortunately, there is no further information or confirmation on when they will be moving and what space they will give up at this stage. The last 3 leases are with the DPW and we are waiting the final lease agreements, signed lease agreements. We do understand that currently there is a backlog with the minister wanting to review all these agreements. Next slide. Lastly, in terms of our collections, you can see the trend there. Our collections are stable and it is in line with all historic trends. And I think that concludes the operations overview. I will give over to Riaan, who will take us through some of his slides in terms of the financials. Thank you, everyone.

Thank you, Charlene. Good morning, everyone. I'll just give us a bit of an update on the treasury side of things. So starting with the borrowings. We've got ZAR 4.4 billion worth of outstanding borrowings as of the end of January. Our maturity profile on our borrowings is about 2.6 years and the current weighted cost of our borrowings is about 9.5%. And we have hedged our borrowings at just under 52%. To date, we have refinanced ZAR 970 million worth of facilities with tenors up to 4 years and the margins that we've agreed with the banks has also decreased a little bit and our LTV, we're expecting to maintain that at around 40% in the short term. We've also got a revolving credit facility with Nedbank that's maturing in August, and we are in the process of finalizing the terms on that. And we are comfortable that, that will happen before August. On our corporate bonds, we've got ZAR 200 million there that's maturing as of the end of February. We will be rolling about 75% of that into a new note with the balance that will be refinanced through existing facilities. Just on the rates -- the interest rates we could get over the margins is a little bit lower with the existing facilities. On our interest rate swaps, so we continue to monitor the swap curve for opportunities to enter into new interest rate swaps or extend our current swaps. Year-to-date, we've extended one swap of ZAR 250 million and by 18 months from the original maturity date. So that particular swap matures in November 2026. Next slide. So on this slide, just talking to our capital allocations. So on the asset recycling, so to date, we've sold 8 properties for ZAR 46 million net of commission. I think it also talks to the tail end of the properties that we are trying to dispose of and so a lot of them are small assets. On the Killarney Mall sale, we continue to actively pursue the disposal of that property as we've previously told the market. There is interested parties that we talk to. So we'll update the market when there's an actual sale being concluded. On our deployment of our capital, we've got a couple of capital projects that's ongoing. The first one there, we've got our solar projects at the fields, at the parks, shopping center, Odeon Forum. And then we've also got a solar project at Yethu City, but that's part of the total Yethu City project redevelopment costs. We are undertaking somewhat security measures that will cost us about ZAR 3 million. Then the next item, which we expect to spend about ZAR 110 million on tenant-related upgrade work at our buildings. So these are where we've got tenants and the buildings they occupy most of the buildings, and we need to spend some money to upgrade the buildings to renew the leases. And there's quite a number of them. So the number looks large. but it's also more for longer leases. Then we've got the Yethu City project there, ZAR 50 million that we all are aware of, which includes the solar I've mentioned. The next one there, we've got Tshwane upgrade. So the Tshwane property, we've got a long-standing tenant there who wishes to expand these operations within this property and consolidate all the sites into this particular site. So that will come at a cost of ZAR 70 million, which will also include solar. This will be a project that we will undertake in the next 12 to 18 months. And then the last item there, we've got our future projects. We estimate that to be about ZAR 180 million and that is really our normal annual spend, but it includes upgrades of buildings for tenants. It also includes items where we believe there's conversion opportunities. The last item there, redevelopment opportunities there. During the Yethu City project or redevelopment that we've undertaken, we've also looked at a number of other assets within the Pretoria CBD mainly. These assets are well located. They are properties that we see that can be converted into residential or retail assets, but that will attract or require capital investment in excess of ZAR 1 billion. Next slide. Here, we're just illustrating 3 of our solar projects. There on the left, you can see the fields. It's quite a complicated solar project that we've undertaken. We expect that project to be completed by around July of this year. And then to the middle and the right, we've got 2 solar projects at the parks and Yethu city. They are pretty much complete. We're quite excited about these solar projects and based on our experience, the payback period is about 5 years the solar installations. And with that, I hand back to you, Jeffrey. Thank you.

Thank you, Riaan. I just want to spend a little bit of time to tell everybody about Yethu City a little bit more about Yethu City, why we are so comfortable or so happy with it is the fact that it opens up possibilities for us. We're able to -- we're now bringing to the market, which is -- was completed. It was completed on the 15th of February this month. And initial indications on the success of this project are very strong. So in about 5 working days, we have leases for 83 tenants, 62 of which have taken occupation in the building. Never before have we experienced such a demand for this kind of accommodation. This is not our normal place. And what this place -- this accommodation attempts to do is to tackle the market just below our traditional places. So we can give the market a flat at a cost of an entry level cost of just over ZAR 3,000 a month, which will include all utilities. The bulk of Yethu City's utilities, specifically water and electricity are off grid, not entirely, but the bulk certainly is. We provide the occupant of this product with a basic flat unit, but without any kitchen and/or bathroom facilities. This is all provided on a communal basis together with learning spaces for students to study and to swat in as well as lounge and similar recreation areas, both indoors and outdoors. The -- a lot of attention in this scheme has been given to the quality of the product. We are known, I think, in the market to deliver a fairly high-end quality, both in terms of the physical asset. But more importantly, sometimes, I think in terms of the quality of the management. And we think we've got it right. It is still early days. We'll see how that pans out. But why strategically, I'm excited about it, although I did have a bit of a missed 1 or 2 heartbeats when I heard that there was a possibility that, that would have increased by 2%. That was very worrying for me for us. But assuming things continue like they do, like they have, we have a product, we think that's a winner. And this will help us solve get rid of our tail. In other words, we can go into the tail, those are underperforming assets, not easy to sell and convert them into Yethu Cities. Riaan disclosed the value or the opportunity of doing this is approximately ZAR 1 billion. Obviously, don't intend doing this all in one shot and would obviously have to come to the market for equity to finance it. So that's all I want to say about Yethu City. I think it certainly breathed some life into Octodec, given us something to chew on properly with a view to moving this business forward. And with that, I wish to end my presentation and remain here with my team to field any questions should there be any.

Thank you, Jeffrey and the team. Maybe just to kick off the Q&A, I see we don't have much questions as of yet. Maybe you can just talk to us about your current exposure to Boxer, if you have any? And maybe have you guys had any opportunities for Boxer to grow within your portfolio? And maybe on that note, you can talk to us about your experience in terms of Pick n Pay performance and Shoprite as well and maybe other food retailers that you have in your portfolio over the last 6 months?

So I don't have any boxes in the Octodec portfolio. With regards to Pick n Pay, I don't want to kick a dog when it's down. We are in contact with them. We are working together. And on the 1 or 2 that we're working together, there have been definitely there's been an improvement in the store and its turnover. We've seen quite a dramatic improvement in its store, which is good to know that there are people there now in Pick n Pay who are taking the turnaround seriously. Whether they get it right, you see conflicting reports, some say it's going to succeed, others say not. I don't know. I'm not certainly not in the inner circle there, but we are in contact with Pick n Pay and hope for everybody's sake all us land with the Pick n Pay through it and work out a way to deal with the troubles.

And you also mentioned that you've been seeing some improvement in the Pretoria CBD. Maybe what are your thoughts with regards to activity levels, infrastructure spending on PTA CBDs. Have you guys seen any notable trends differences? And maybe which CBD would you like to allocate more capital towards over the next 5 to 10 years or so?

There's a big difference now, and the gap seems to be widening. Pretoria has gone through tough times. It started getting tough in Pretoria around about COVID times, but it's recovering. Anybody who walks through the Pretoria CBD, I'm talking about the heart of the CBD, will notice that there are no vacancies. Things on the surface seem to be good. I think without getting political, I was very happy with the previous mayor. I thought he was doing a fine job. It took us a while to get to where we did with him in terms of him communicating with us, which he started doing eventually. We haven't had that much success with the new mayor, but I'm sure with time, given time, these things do take time, we would be able to open up our communication with the new mayor. With regards to Johannesburg, Johannesburg is a tough, tough place. And I think there are 2 buckets of problems. The one is a lack of service delivery, a general service delivery. A lot of people think that it's a shortage of water or power outages. That may be true, but I don't think that's the primary cause. I'm now led to believe that the primary problem there is the, the theft of cables within the Johannesburg's CBD. And so when cables go down, there's obviously no power to some of our buildings and that one of the consequences of that is that there's no water because the pumps that are needed to distribute the water to the buildings are now not operational. So that's a big problem that I think us as landlords, we need to get involved. And I'll talk maybe a little bit about that. But the other bucket is the problems surrounding Lilian Ngoyi the gas explosion. I think we have up to 14 buildings in that area. It has affected the pipes. It has affected the electricity. But perhaps more importantly, it's affected foot patterns. People that previously walked past these areas have had to alter their foot patterns. And there's hope and pray that once it is fixed and the latest information we have, that it will be repaired at least for foot traffic by the end of August. Whether that happens or not, I don't know. Our response there too, obviously, we have insurance that cover a portion of it. But the other thing is we have to get together as landlords and the various role players within the city and start taking strong action in the CBD. There really are a number of people, a number of organizations that are there at the moment behind the scenes talking. And I think that it would be smart for us not to just go in and become another one of these people agitating for change. But we need to get together as a united front, tackle the Johannesburg Council. That's got to be done sooner rather than later. In terms of capital allocation, given what I've just told you, it must be towards Pretoria CBD rather than Johannesburg CBD, prepared to maybe if we can sell a few more assets, we have now got this opportunity that I've spoken about called Yethu City. But the team strategically are saying maybe we need to work just outside the CBD as well. If you have a look, for example, at our retail outside the CBD, it's exceptional in the way we're trading. I think we have a strong team there. Vacancy factor of 0.5%, probably with 1 or 2 deals that are still to happen, it will be performing exception, exceptionally well. The increases that we're getting there are almost double digit in some instances, not all, but in some of them.

Awesome. And talking about Yethu City, we've got a few questions on the chatbox. First one, how does the return or yield on capital at Yethu City compare with your place offering? Another question, have you identified a potential buyer that could add value at Killarney Mall? Another question on Yethu City. Are there opportunities to bring in financial partners to redevelop product into Yethu City? Maybe let me take another question that's not related to Yethu City, and this is from Nazeem. What is your cost or rather what is the cost of a 3-year and 5-year swap currently? And how does that compare to expiring swaps?

Okay. Right. Let's go through one by one. I think your first one was the yield. The yield is -- I want this Yethu City to settle down before we start quoting actual yields. I think it's going to finish off somewhere between 11% and 12%, which I think in today's market is exceptionally high. I think there's a lot of demand from a tenant at this level. We haven't tapped into it yet. On a normal places, we will -- I think our entry level with utilities is about ZAR 4,500 to ZAR 5,000 a month. So this is substantially less but once again, the -- and you can see some of the images behind me, that's Yethu City. You can see we've -- the team that have worked there have put an enormous amount to make sure that the design is hip-hop and happening. And I think we've got that right. If anybody wants to come visit, certainly, please speak to instinctive and we will gladly take them on a tour. With regards to -- yes, if we've been quiet in our residential department in terms of new stuff because the yield on a place to build, we're estimating it to be 8%. We can't -- the cost of money where it is today, we can't afford to do that given that the rental growth is at the moment and has been for good years now has been subdued. With regards to Killarney Mall, we are -- we have identified some buyers, potential buyers and the team is hard at work to finalize it sooner rather than later. With regards to looking for partner, Octodec can't afford to spend ZAR 1 billion worth of equity. It must go to the market and look for capital, to look for equity. Whether this then is done within Octodec or outside Octodec, that's something we need to debate strategically. Personally, I'm probably open either way. Both have got the pros and cons and different issues that need to be debated. But certainly, we will be looking to look for probably some fresh players out there that want to take an investment where we do have a product that's actually working. It's now there. Numbers are now becoming available for everybody to inspect that, yes. We are busy now dealing with 1 or 2 urban designers to make sure that we work out where to put down the next Yethu City. In Yethu city around -- the area around Yethu City, certainly is a concentration of Octodec buildings, all of them form part of the tail. Very interesting to see this urban renewal program working. The leasing team, they couldn't -- the commercial leasing team couldn't let any retail space. That's how serious it had become. All of a sudden, when you walk there now, it's a completely different field. There are a total of 11 commercial shops available. And I understand that we have applications in on 5 of the 11, 8 months ago, no ways could we have expected this to happen. And with regards to the cost of the swaps, I'm going to ask Riaan to deal with that one, please.

Thanks, Jeffrey. So in terms of the swaps we are looking at, so currently, they are pricing for 3 years between 7.55%, 7.60%. We don't really enter into the 5-year swap range. So we don't really request that. How does it compare to our current swap? So our weighted average rate for our swaps in place is just below the 7.50% mark. So we have about 30 basis points better off than what the current market price.

I think you've spoken about Killarney Mall. And maybe just to give an overall update on your held-for-sale properties other than Killarney Mall, considering the backdrop of improving market conditions such as lower interest rates over the last few quarters, stabilizing inflation and an increase in property transactions. Has this maybe translated into more buoyancy in terms of your disposal program?

Riaan, do you want to handle that one, please?

Yes, sure. So in terms of held for sale assets, with the 8 properties we've sold, most of them have sold at the approximate value that we had at year-end. If we think we need to let the property go simply because it's not core to us or it doesn't really add profit to the business, we will let it go at a discount. But for most of them, they approximate the value that [indiscernible] at year-end. I think what we can see is that with the elections happening last year, the positive outcome of that together with the reduction in the interest rates and the stabilization of the inflation, there's definitely more demand to buy properties, especially the smaller ones where you have a lot of cash buyers coming in. So yes, I think there's definitely more optimism and we can see that the disposal process is picking up speed.

Thanks, Riaan. Just monitoring the chatbox and it appears that we don't have any more questions. Maybe I can just wait a few seconds just to see if we've got more questions. Okay. I see we've got a question coming up here.

I see there is a question from Luqman about the VAT on residential. Maybe if I can just answer it on [ rebates ] no Luqman. So that on residential accommodation, we don't charge that. It's not a vertical supply. So in terms of income, there won't be an effect. However, on the cost side, you can also obtain that so and that would mean on the cost side where the cost is directly attributable to the residential income that you would -- there would be a 2% increase. What helps, of course, is if you have a mix building, then for certain shared services, there's that appropriation between commercial and residential. But on a one-on-one basis, it will increase the cost of 2% that we won't catch. But on the income, it's not applicable.

Right. Awesome. We've got another question here. How should we think about assessing the merits of internalization of the business? City Property earned ZAR 233 million in fees in the last financial year. Applying a reasonable multiple that would imply a sizable liability that would push LTV to unsustainable levels. Talks or evaluations of a potential internalizations makes the investment case difficult to evaluate until there is some sort of finality on that, has there been any further progress on assessing the merits of an internalization?

I think the Board of Octodec, including myself has heard there are a number of you that want to have internalization. We are fully aware of probably the own, maybe another one that companies, management companies sitting outside the holding company. And I simply can't leave this request unanswered. To this end, we one of Riaan, the new FD, one of these jobs is certainly to investigate thoroughly from within the business, is this something that is worthwhile for Octodec to do. There was a question earlier on about that and the consequences of that with specifically resi. And so that -- I don't think it's enormous numbers, but certainly would help solve some of those problems. I am very open-minded. I've invited somebody in who is now employed full time by Octodec to come and have a look, and let's start that debate. So am I serious about this? Absolutely. But my concern -- my first concern is always going to be -- always good for Octodec. But this receives a lot of attention at the Board Riaan is we've set up weekly -- we will be setting up anyway shortly biweekly meetings to start talking about them. I think we already had one. But this will continue for the next few months and report back to the Board once we have made up our mind as to what should happen there.

All right. Cool. Question from Charl. At your August '24 financial results presentation in November '24, guidance for financial year 2025 was growth of 3% to 5% distributable income. Is this guidance still what you expect for the FY '25?

Riaan, if you could handle that one.

Yes, sure. Thanks, Charles. Yes. I think I mean, we've made a couple of assumptions as we've put out, obviously, the interest rate plays a role, inflation plays a role and all these things. But at this point, based on what we calculate, the 3% to 5% distributable income guidance still applies. I must just say that this guidance is for the full year of 2025 and not for the interim period.

All right. Cool. Thank you. I've got some more questions on my e-mail now. I'll just go through these questions and see if we haven't answered them. Okay. I think we've answered all the questions that have come through. Yes, it should be all. Thank you, team for the wonderful session. And maybe let me just hand over to Jeffrey just to give some concluding remarks.

Thank you to Anchor for hosting us. Thank you to all those that have taken time out of your busy schedules to attend this webinar. But I think a special shout-out must go to the team that I'm working with. We do hard work. It's tough out there on the street, but we're doing it. I am seeing a lot of green shoots that are starting to appear. Hopefully, they can blossom into something that's meaningful. To a large extent, it comes from serious commitment from a number of our staff at all levels. So you guys know, a lot of you are watching, and thank you and hope to be able to come back with our half year results and put a smile on some of your faces without making any promises. Thank you.

All right. Thank you, Jeffrey. Everyone. Bye.

Thank you, everyone.

Thank you everyone.