Octodec Investments Limited (OCT) Earnings Call Transcript & Summary

Good morning, and welcome to the pre-close update with the management team of Octodec Investments just ahead of their financial results for the year ended 31 August 2025. Representing Octodec, we have the CEO, Jeffrey Wapnick; Deputy CEO and Financial Director, Riaan Erasmus; as well as Chief Operations Officer, Charlene Conradie. Just some housekeeping. [Operator Instructions] Octodec did release a pre-close trading update yesterday, which Jeff will give just a high-level overview on it, and then we'll jump straight into questions. With that, I hand over to Jeff. Thanks, Jeff.

Good morning, Ridwaan. Thank you for this opportunity, and thank you for hosting us. To the rest of you, a warm welcome to the pre-close operational update. This year, we are doing it in a slightly different format. We've issued a pre-close SENS announcement. And we're now giving you the opportunity or allocating slightly more time to formulate your questions and ask the questions to the management team. It'd be interesting to find out whether you guys -- how well you guys respond to this. So I want to start off by giving perhaps a high-level summary of how I -- perhaps we as the management team see things going forward. Things are -- like everybody is reporting, things are looking a bit easier for Octodec. I think a little bit early in the game, but our early indications are that things are going a little bit easier. Let me go through the various sectors in which we operate and reflect perhaps on something else, which I think is important in our business now and that is sales afterwards. Let me start off with -- by saying that all our divisions in which we operate are showing positive results, and we will go through each one separately. The one that is perhaps of a concern to me is that of residential. I am concerned in the sense that South Africans are struggling and how to extract bigger rentals out of these people is difficult. However, I still believe that one of the biggest problems facing this country is accommodation and how to reduce our vacancies by bringing in more tenants. I think that's the challenge that the management team has. It's not going to -- in other words, it's not going to increase distribution or the contribution to distribution by increasing rentals per unit, but rather reducing vacancies. I think that you will all know by now, we did a pilot project called Yethu City, which for those of you that don't know, was a project where we didn't want to reduce quality, but we tried to produce a reasonable quality, but it's certainly at a reduced price. And that trick absolutely worked. Within 1.5 months, I think it was, we let 200 beds. Never before. I've been doing this for 37 years, never before have I seen that kind of uptake of a product. It is telling me very clearly that there is accommodation shortage, but we need to supply it at a better price. And perhaps we don't need some of the stuff that we provide in our normal place offering, something of a lesser offering, but at a lower price. That works. Added to this is we watch very carefully our number of people that apply for our units. And the demand that we are applying that are offering -- sorry, that are inquiring is very high, very high number of people asking for our flats. In the months of January, February, March can get anything somewhere between 5,000 to 7,000 inquiries a month. The problem that we have identified is that only 8% -- there's only an 8% conversion rate on these big numbers. And so how do we deal with it? You see if we take 8%, we left with question, what do we do with the other 92%. Let's assuming I round down and half it and I get to 40%, and half that again, I get to 20% and half that again, I get to 10%. In other words, if we can just catch another 10%, which I don't think is impossible. We just have to figure it out. We have some ideas how to do it, 10% of the 5,000, the low end of the bracket that I just quoted, it's 500 units per month, 500 units times an average rental, let's go lower and let's go at ZAR 4,000, that's ZAR 2 million a month. ZAR 2 million of additional rental income makes a big difference to the contribution put forward by residential at the moment. But our Residential stock, Charlene will talk, I think, in a little bit more detail, but it's in good condition. And strong demand, but not converted. And that's a question we need to deal with. Industrials, like we reported, we've done well on our kind of Industrial. I haven't previously in the past mentioned to you that the one area that we're concerned about was Pretoria West. You will see when we release results, sales have gone a lot better for us than they have in the past. And a lot of it happened in the area that I was very concerned about and that's Pretoria West. Pretoria West hasn't received the attention of the council. And so it is becoming a little bit neglected and we've got rid of most of our Pretoria West stock, which is something I'm very happy with. The stuff in the East, however, is performing well, specifically our Tannery, we struggled with the bigger -- some of the bigger units. We fixed some of them and pleased to report that vacancies are acceptable. Offices is an interesting one, a lot of reporting on Offices. Our offices are different, and it's important that the newcomers to Octodec are aware of it. Our offices are different and that we're not looking for corporates. The corporates have left the CBDs, and we don't have -- in the main, we don't have offices outside the CBDs of both Johannesburg and Pretoria. But what we do have, certainly in Pretoria are those offices that are used for a new type of location, new use. And that is a commercial use. So by way of example, for those of you that haven't seen them or don't know about them, hair dressers, tailors, dress makers, debt collectors. And interesting to note that of this category, we have buildings that we've just simply full -- we've converted into hair dressers and office blocks, some of them, not all of them, two or three of them have now become full. So you want to go into them previously showing big vacancies, they're now full. A word of caution is that this is a fairly recent development. And so, we don't have 12 months of this rental in the numbers. But certainly in the new year, we hope to have it in the numbers. So that's offices associated with offices is obviously, which is approximately 50% is government, still have a lot of government work in that tough market to be in, tough market to get out of, not as exciting, but certainly, from a payment point of view, fairly stable. Shopping Centers. All our Shopping Centers are performing exceptionally well. All the renovations are now completed, all doing very well, save, obviously, for Killarney Mall, but Riaan is paying a lot of attention to Killarney Mall, will perhaps talk about that one. Street trading, it's tough. I want to mention two things in the Johannesburg CBD. The big blow was the gas explosion on Lilian Ngoyi. Pleased to report this time that we are very close or council rather is very close to fixing the road. I was never worried, although it took a long time and the length of time hurt us, but that's now virtually over. I wasn't worried about that per se. But what I was worried about was the fact that trading patterns, footfall, would the people continue to return on the same walkways as they did in the past, because they were carefully selected walkways. Will they come back to the same walkways? Only time will tell. We don't know yet, excepting to say is that the roads are now very close to completion. They're not paving -- they're not tearing them. They're now paving them. We all hope that the quality of the paving is good. What hasn't yet happened, but I don't think it's going to take very long is the walkways are still bordered up for safety. They haven't released the fences between the road and the shop front. Once that happens, we will have a better indication of -- and the roads open with a better indication of what's going to happen. But I remain a lot more confident about this than we have in the past. That really completes -- well, Pretoria some thoughts there. Pretoria's retail has even through the tough times that we all went through in the better areas of the CBD, still very strong trade. If you come through to Pretoria if anybody wants to and we take a walk through the prime locations in the Pretoria CBD, where Octodec is predominantly invested. You will see the people. You will see the feet. So nothing of concern now. Lastly, about the sales, we've gone through some extremely tough sales, a tough period during which sales were very difficult, if not impossible to achieve. I think the sales team has done well, and we have done a lot more selling this year than we have in the past, in fact, ever done in the past, which I'm very happy. I think that what I would like to mention at this stage is that we all as property people believe in -- maybe it's not all of us, but a lot of us still believe in -- we're saying location, location, location, which is all good and well. But what they don't teach you is that location sometimes changes. And so when we had to go through -- I think, it was primary COVID, we realized that Octodec no longer can afford to hold these assets that were showing either big vacancies and/or where rentals were not growing. I mean, I've been at this a long time and without doing deep analysis at all, I knew in my mind that for the last, I don't know, 7, 8 years, some of the rentals in these buildings at best remain the same, if not going backwards. And I think that, things have even eased up a little bit, and we are selling a lot better. The -- added to this is, we haven't been in a situation that Octodec had to go enter into any forced sales of quality stuff, because we still own that quality stuff, primarily in the retail or the CBD, primarily in the Industrial, the eastern side of Pretoria and the southern part of Johannesburg, which is also performing well for us. And the Shopping cente,r, say for Killarney Mall, which Riaan will talk about. So I'm very happy that we have been able to keep those and dispose primarily those assets or virtually exclusively only those assets that have definitely underperformed, which talks, I think, to the future sustainability of the Octodec balance sheet. I'm starting to have more discussions now with Riaan, do we have yet the firepower to go out and maybe do some acquisitions? Yes. But I think that perhaps reflects my change on positivity. I'm a lot more positive that there are -- that Octodec certainly has an opportunity to get into one or two other assets that we know can perform for us, but it's all predicated on the sale of a reasonable number of those smaller underperforming assets. And with that comment, I want to hand over to Riaan for his commentary. Thanks. Riaan, over to you.

Thank you, Jeffrey. Good morning, everyone. I'll just -- so Jeffrey has given a nice update on what's happening on the ground and what the market sentiment is. So I'll keep mine a little bit shorter and then I'll hand over to Charlene afterwards. So just speaking to the balance sheet. So for the 11 months to July, we've sold 15 properties at the total proceeds of ZAR 130 million. These assets were sold at a discount to book value of 6.6%. So we're very happy with that. Subsequently to July, we've also sold another asset, and we're expecting another one or two assets to transfer before the close of the year-end, small assets, but nonetheless, I think the one thing for me that's important about these assets that we are selling is that they are also contributing to the reduced vacancies we see. So it's not all of the vacancies are sold. It's a combination of improved letting. That's happening. But it's important for me that the assets that we sell are those not problem assets for us, and we do not see that we will be improving the vacancies in there. In terms -- perhaps just in terms of Killarney, I know the market is quite interested to find out where we are. We are negotiating with a couple of parties. One party we are quite far along down the line in terms of a legal agreement. There's a couple of clauses we need to clear up, but we will make an announcement as soon as that gets over the line. Alternatively, if we end up speaking to someone else, we will also update the market. But it is progressing, and we're working hard at it. On the debt side of things, year-to-date, we've refinanced ZAR 1.1 billion of debt and all of those facilities were refinanced at improved margins. We've also just signed the refinance of the ZAR 650 million in net bank facilities that we have that was going to mature at the end of August. So that just -- those agreements have been executed and the transaction will be implemented. And then in terms of our hedging, so we've started improving or increasing our hedging position. So given where the interest rates are, we've taken the view that it's time to increase it. So our target has been moved back from the 50% to 60% to the 70% to 80%. So as of the end of July, we're sitting at 67%. We've also entered into a couple of forward starting swaps, about ZAR 1.3 billion. And the first one will take effect at the end of August. And then the last one in that list will become effective on the 28th of February 2026. And then, I think lastly, between the improved letting, we've had the City of Tshwane and then our one tenant at Talkar, they were meant to vacate their notice earlier. They have stayed longer, and Charlene will speak to that, but they've stayed longer than what we anticipated. And then, with the reduction in the interest rate, the disposal of some of these assets and the reduction in debt as a result, that has supported our earnings growth. So we have revised our distributable income growth to 3% to 6%. So if anything changes, we'll advise the market accordingly, but that's a positive move for Octodec. Thank you. Over to you, Charlene.

Thank you, Riaan. Thank you, Ridwaan, for hosting us today, and hello to everyone on the call. So I think Jeffrey and Riaan gave a full overview of the pre-close update, but I will just highlight a few things from my side. The first thing, I think, is that it's very positive that our vacancies have decreased. And as Riaan said, it is a combination of selling an asset, specifically in Johannesburg, which had quite a big vacancy, and that contributed in the office sector to a large extent to some of that decrease in vacancies. What is also very positive is that the rental growth, because of the decreased vacancies, these rental growth in all the sectors, and I think part of it is, as Riaan said, is City of Tshwane, who was going to vacate at the end of May, still hasn't vacated, and we anticipate them to vacate in full by October. That's the latest news that we have. Transform in our Talkar building, they will vacate at the end of the financial year at August, but we are already looking at potential new tenants for that particular space. Also just coming back to where City of Tshwane will be vacating, we are already exploring how can we repurpose this building, what are the different options available that we have for this -- to fill the vacancies. In terms of Residential, as Jeffrey said, vacancies remained fairly in line with last year. It did go through our normal seasonal trend. It didn't improve as we anticipated due to the reasons that Jeffrey mentioned. However, I think if Lilian Ngoyi is repaired like it's supposed to at the end of August, that will have a positive effect on our residential vacancies in Johannesburg specifically. In terms of the Office vacancies, as I've said, the main contributing factor there was the sale of the building in Johannesburg. The other thing that also contributed there was we converted Yethu City, which was an office building, into the Yethu City co-living accommodation, which also assisted in decreasing the office vacancies there. In terms of Retail, Industrial and Retail Shopping Centers, the improved occupancy there is mainly due -- it's not a specific tenant or a specific space. It is, in general, just letting of spaces that were previously vacant, some of them to bigger tenants, some of them to smaller tenants, but it all contributed to improved occupancy. In terms of Collections, as we've reported, also stable, and in line with previous year and the reason for the slight deterioration there has been mentioned in the pre-close. And I think that's all that I want to highlight, and I'd rather then hand over to you, Ridwaan, so that we can maybe answer some questions.

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

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

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

Yes. So I think for me, I don't look at necessarily to say I have to sell ZAR 100 million or ZAR 200 million worth of assets on an annual basis. I think, as a starting point for me is, we've got 218 properties where we sit today. And I think we probably could say we need to sell at least another between ZAR 70 million and ZAR 100 million assets, sorry. And then once we get to that point where we've rationalized the portfolio, I would then say we need to now move to dispose of the bottom performing assets and add and replace them with assets that obviously improve our yield enhancement. So then, I would basically look at the bottom 10 and replace them with better performing assets. So that's our -- that's my thinking and how I see it going forward.

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

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

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

So I think for us, we want to pay out around the 77.5%. We want to maintain that payout ratio, but it will -- I think in the short to medium term, we'll keep the 75% to 80% range of payout. I think until such time that our interest cover ratio gets to about 2.5x and the LTV reduces to around 35%. We'll keep that payout ratio at that level, because our portfolio needs capital, and we need about ZAR 100 million on an annual basis consistently for -- to reinvest into our portfolio.

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

Yes. So in terms of -- for me, the disposals, if I can just start there, if you take the, call it, non-performing assets out of the equation, if it's going to cost me more -- if I sell it, if I could put it that way and make more money by just putting the money into debt, then I'll definitely look at selling the asset. Of course, if it's -- I want to call it an anchor asset, I don't necessarily want to dispose of the specific asset. In terms of investing and redeveloping, it has to make sense from a feasibility point of view, it has to increase our earnings. It might be earnings negative or neutral in the first year or 2. But if we don't see it in the long term improving or contributing to the bottom line, then it doesn't make sense to invest. We'd rather sell the asset. And I think that goes for the whole approach in terms of that.

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

So on Capital Towers, yes, I mean, it's 12,000 square meters of vacancies that's going up. It is a difficult let, because it's in the CBD. So to relet that to any other large office tenant is going to be very difficult. So the financial impact of that in terms of rental is about ZAR 15 million per annum. And then there's some recoveries in there that we will lose out on. But yes, I think we do have plans in the medium term to look at converting that asset, most likely into residential or Yethu City #2. So yes, there is plans in the pipeline to address that vacancy, but the positive impact will only be felt in the longer term, of course.

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

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

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

So we have with DPW expired leases and there is more coming up for renewal. So unfortunately, from the minister's office, there's still a moratorium on concluding renewal lease agreements. So we haven't had any update on when we can expect our lease agreements in terms of the renewals. But we are staying close with them. We are contacting them on a regular basis, following up to try and see when those can be concluded. So -- but they remain in tenancy on a monthly basis. And annually, there's a 6% escalation that gets implemented. So at the moment, that is the status quo.

And maybe just a question on Residential. Any indication from NSFAS regarding allowance in the upcoming year?

Unfortunately, there's no updates from NSFAS in terms of the new allowances for the following year. They normally only announce it quite late. We are still getting paid to the university. So that seems to be continuing, and we're expecting it to continue for next year, which is positive. And that's unfortunately all the updates that we have at this point. But we are also -- we are staying close to NSFAS and the relationships that we've built there to make sure that as and when information are becoming available that we can stay on top of it.

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

So I think, I'll take that one. So in terms of the councils, we are definitely more concerned about the Johannesburg Council. The infrastructure and the service delivery there is of lesser quality than we have in Tshwane, firstly, because of the unrepaired damage to Lilian Ngoyi, there's constant power and water outages in the CBD in Johannesburg. So what we've done to mitigate against that is, we have mobile generators that we bring in, which we connect especially on the residential side, we've already implemented connection points. So it's just a matter of bringing the mobile generator in and connecting it to the buildings. We've got common area generators permanently, which powers the common area amenities. We've also got water connection points. So we go and we buy water and bring in those tanks and we put it into the building up to our water tanks at the top of the buildings to supply water to our tenants. We are also continuously looking at solar installations where we can in terms of our roof space and where we've got high demand power buildings. We are also looking at water saving initiatives. We are drilling bore wells. So it's definitely something we continuously invest in. I think in terms of Tshwane as well, we have been in the past more successful in building relationships with Tshwane's council and up until the recent change in leadership there. So we have the ability to build relationships and therefore, our influence that we can impact is Tshwane is better than in Johannesburg. We are also engaging with stakeholders like [ Jose ] to see how we can contribute in terms of the initiatives to improve the Johannesburg CBD in partnership with them. So that's also some of the things that we do. I think, I hope, Ridwaan, I've answered everything that you've asked.

So you have. The next question on the chat. Can you please provide more color on repairs on Lilian Ngoyi? What will be completed by the 31st of August? Will the Street be fully operational?

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

And then the second phase?

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

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

No, the second phase, I think, from what we hear, will take a number of months. So it will only be completed in the next financial year, somewhere.

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

Sorry, Ridwaan, just on the balance of the payout.

Okay.

Sorry, I'm just asking...

Yes. The balance.

Okay. So, I mean, it is a continuous engagement with the underwriter and the loss adjustment, because the claim is almost broken into two parts being one, the disruption; and two, providing relief or rental relief to certain tenants, especially those retail tenants. But yes, we've got ZAR 16 million left on our policy that is meant to be paid out. So we -- it's a continuous engagement that we expect to receive the full amount as far as we are concerned. I think it's just in terms of the timing, it's difficult to say when you'll get this. I bank it when I see it in the bank account. But I'm expecting a full ZAR 16 million to be paid out.

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

So in terms of what we are negotiating is more or less book value, not marketing at a significant discount. I think if we're going to go out and market it at a significant discount, then I might as well keep the asset and go spend an enormous amount of CapEx. So we're trying to achieve the book value, and we believe that the book value of ZAR 416 million is still the appropriate value. There is certain nuances in the income statement when we do negotiate with buyers that they don't -- you can't just take the net property income and say, divide that by the book value and get to a yield. You need to look at what would not normally be there when you put it in the hands of someone else. So in terms of the yield, I mean, we're still looking at about 9.5%. So that's more or less what we, yes...

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

Yes. I mean, it's funny because, I would say 3, 4 months ago, I felt I was at 90% complete, because you're on a couple of clauses. I still feel the same. But it's not to say that, that doesn't mean you actually concluding the deal. But we feel that we're at least over 70% comfortable.

And then the next question, you spoke a little about Yethu City. Just run us through the learnings from the shared accommodation space so far. And you can remind listeners of the cost to develop or retrofit and yields on offer. And then the follow-up question is how many assets in your portfolio can be converted or and have you seen risk of cannibalization from Yethu City or other city prop assets nearby?

Charlene, do you want to take the first one or Jeffrey?

I'll take the first of it.

I'll take the second one, Riaan. And that is -- there is cannibalization, but it's minimal. There are going to be people in financial stress who want to move out of our building and they came into Yethu City. But the numbers were, I think, very, very minimal. I think the demand, like I said earlier on, for reasonable quality at affordable prices. That demand is absolutely enormous. As I said earlier on, I think that a reasonable accommodation is chronic shortage in this country, and that certainly provides -- answers that question, added to the fact that the areas that we have available that Octodec already owns is really well located. From a number of different perspective, it's close to various educational institutions. It's very close to shop. It's very close to municipalities. We know the areas. We know them well. Because we have other assets, residential assets close by, and these are assets that are in demand. It's also very close to -- Pretoria has established for itself in the CBD, an area that has -- that's occupied primarily by private schools. And those private schools, that little, small little hub, they are very close to the area we want to develop for Octodec as a Yethu City. I want to say this, we referred to -- I've referred to it, I think Riaan referred to it and that's improving the Octodec balance sheet to develop a lot more, I think that, that would be yield enhancing from day 1. But Octodec does need its balance sheet to be improved a little bit more. I think Octodec would be prepared to joint venture or partner anybody out there that still has a positive outlook on the country and property specifically, because we think that there are opportunities to please contact us. We would enter into discussions immediately. We have done some preliminary discussions, and we think that there are opportunities for building these areas. Once again, it's not just development opportunities, but also it's a way of -- for Octodec of taking assets that are not well developed. The big vacancies in there and neutralizing and putting quality stuff into these unoccupied vacant buildings.

And then just on the question, how many assets in your portfolio can potentially be converted? Have you earmarked any for conversion or thinking about converting? And then maybe just on the yield...

Yes. So I think there are two types. The one type is that I don't think it's capable of conversion. I think it's just demolish, smash down and rebuild. There are others in the portfolio. I think there are two or three. One of those would be Capital Towers that we spoke about earlier on. That's capable of being done. The yields we've done -- started working there, the yields are around about 10%. But this is -- it's fairly high level. A lot more work has got to be done into working out how to -- whether Octodec wants to take on a development at 10%, which asks begs the question as to what extent we think that there's growth given that we're still in an environment where there are rising costs. Can we provide this market with an asset where we're going to enjoy rising rentals? It's been a long time since we've had that in Residential. And the total value of this investment is roughly -- we worked out about ZAR 1 billion. So there is a lot of opportunity out there for a serious investor who believes in this kind of stuff.

Sorry, I think the number we got is about 20 assets that you can look at either convert Yethu or demolish. But then, if you demolish and rebuild, then the value might change that you need depending on the size that you go after.

Okay. And then, the next question was around the disposals. What were the fees or movement costs paid to the Manco on disposal? Was this included in the 6% discount disclosed?

No. So in terms of the proceeds, the ZAR 130 million is, of course, is the gross proceeds that we received. So we pay commission based on the APMA. So an asset below 12% attracts a 5% commission. If it's above ZAR 12 million, it attracts a 3% commission. If there's an outside broker that we use, we normally split the fee 50-50 between an external and then the manager.

And then the next question was around potential share buybacks. Just given that Octodec does trade at a discount to NAV, is this something that the management team would look to address? Is share buybacks potentially one of those mechanisms that can be used?

So I think, it's definitely a mechanism that can be used. But where Octodec finds itself and the capital it requires, not something we're looking at in the short term. As I said before, we would -- our target is to get the LTV down to 35%. I need my ICR to get to the 2.5x on a sustainable level. And then, if you reach those target metrics, then it's definitely something you can look at if you don't have an alternative investment that will contribute to the earnings of Octodec.

Another question is coming back on the Lilian Ngoyi disruption. Cost checked against the ZAR 20 million insurance provision. How has these costs tracked against it?

Yes. So I think in terms of, while we've calculated our claim, our claim far exceeds the ZAR 20 million. Our last estimate was about ZAR 34 million in terms of between lost income and bad debts and all those things. So that's why I think we're also very comfortable that we should get paid out the balance of our insurance. But now when I say, this -- the cost of this being ZAR 34 million, that is obviously over the whole period of disruption and not in one financial area.

And then maybe from my side, Charlene, can you just talk to the rental growth potential in your portfolio, maybe splitting it out retail office, industrial and residential. And then maybe just the lease renewals or reversions that was achieved thus far?

So Ridwaan, we will be finalizing the rental increases, reversions at the end of August. So we need a full 12 months to analyze it and compare it to the previous year so that we can give you a like-for-like figure. So that will come in now closing. In terms of rentals, I think we still need to finalize the year-end and the financials before we can say to the market what our rental growth would be in the different sectors.

But if I can ask maybe a simpler question, is it up or down on the rental growth? You don't have to give a number, but just an indication.

It's up.

Because of escalations.

Well, and the decrease of vacancies.

100%. And then maybe on the retail portfolio, are you still seeing strong demand from national retailers that are looking still to expand into the CBD locations? Or is the mix -- are you seeing a change in the mix for your retail portfolio?

So in the retail street shops, we are still seeing demand from national retailers and interest. We've placed, for instance, Burger King in the Pretoria CBD recently during this financial year. So there's definitely still retailers looking, especially also people are starting -- the nationals are starting to look at Lilian Ngoyi, because they also anticipate that road will have a positive effect. It's a high traffic. It was in the past before the damage. It was a high footfall traffic area. So now that we're close to the street being repaired, they're starting to look for space.

That's good. And then maybe on collection rate, you did give corporate percentages in the trading update. 97% slightly lower than the 99% that you normally print. Is that just around timing? Or is there any concern around your collection rate?

So some of that relates to the retailers that we have at Lilian Ngoyi Street that's been affected and part of our insurance claim. And then, there's one tenant that's currently under business rescue. So his payment patterns are not as it should be in terms of billings.

And then Riaan, you talked about your hedging expectations or the target moving and certain debt that was renewed. Can you just elaborate on the margins that you're seeing in the market for Octodec as well as potential rate cuts coming through? Do you look to take advantage of this, let's say, later on and then increase the hedge ratio or pricing starting to make sense now?

So, yes, I think in terms of maybe just on the debt side, all the refinances have been done at improved margins. I think -- and it's one of those things that we target to do every time is, we need to get the margins down and improved both in the DCM space as well as our funding. On the hedging side, I think like I said, we've entered into ZAR 1.3 billion worth of forward starting swaps, because we believe that it's -- the time is right to start increasing the hedging position. Do I think there's going to be more opportunities? The swap curve moves up and down, and we can see that it can be quite volatile. Do I think there will be more interest rate cuts? Always difficult to say. I think we have the long-term real rate at the moment, but with the swaps new target on the CPI, there is a potential. But I think we need the country to work together politically as well and the economy in order to make that work. So I think, time will tell us to see what will happen. But my view is, I think, we are at a fairly flat -- we'll be at a flat level now for a while, before we see any further cuts.

And then maybe just a last question to end off. When you look at all four sectors, which sector do you think surprised you on the upside in this period and which ones probably you feel more encouraged going into 2026? It's a bit of a curveball, but it's nice to see your opinions or answers.

Who wants to go first?

So I will go. I think on the Residential side, in terms of rental income growth, we would have -- we expected better than I think where we are going to end up. In terms of rental growth on the flip side, I think offices surprised us compared to -- which was surprising in terms of the rental growth. But obviously we'll unpack that at the close.

But I think Jeff and Riaan, you can choose one sector.

I'll say, I was surprised about the office growth. Yes, it's done better than what I expected. But it's nice to see that there's been activity. There is more demand for small office spaces. And yes, that was my surprise.

And Jeff?

Well, I did start the residential a long time ago and really disappointed. And so at first pass, I'm concerned about residential. But having said that, I think that residential is on off a very low base, because we haven't had increases for a long time. I'm repeating myself on that, but I still think that there's big demand. And I think if we can find a way to improve our conversion rate something that still happened that's quite big in resi. I've always been a convenience shopping center kind of fan and I have done one, whether they've got -- and the work is being done now, whether there's scope for it to continue running other than just enjoy the increases that are coming through on reversions -- not reversions, on escalations. That's good, but it's not exciting stuff. I think the excitement are going to find that additional first somewhere else. It could well be in smaller industrial as well, because we've sold our difficult ones. And now focus on -- and there's a reasonable amount of churn in the industrial where we can push rentals a bit. I think that there's opportunity there. So that's probably the one I will go for.

Perfect. Thank you. Yes, and we reached 11:00. So thank you to the Octodec management team for allowing “Nedbank to host the call. Thank you to the attendees for dialing in, and have a great rest of the day. Thank you.

Everyone, thank you very much.

Thank you, Ridwaan. Bye, bye, everyone.

Thank you, everyone.