Rebosis Property Fund Limited (REB) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to our interim results presentation for the 6 months ended 28th February, 2021. We've seen the lockdown levels being less in the reporting period, and it's been quite tough operating environment. And you'll see that through, we've got some good that's come through it, and we'll walk through page by page. And I'll hand over -- I've got my team here with me. My name is Sisa Ngebulana, the CEO of Rebosis. I have next to me, Asathi Magwentshu, who's the CFO, who will be doing the presentation together. And then I have the support of the team, the executives who will handle any questions at the end. So we'll have questions in the end and answers, and we'll continue then to see one on one thereafter. So let's kick off on Page 2 of the key highlights. I'll just walk you clockwise on these highlights. First of all, I spoke about the COVID. We've seen reduced COVID impacts in these relaxed lockdown levels, and the numbers were better than expected. We expected, and we had assumed the worst on the retail, and we've seen a better impact than we anticipated. We'll walk through that later. We managed to renew all expired debt in the period of about ZAR 6.4 billion. Our vacancy did notch up to about 11.2%, we'll walk through that later, largely due to 1 building with City of Tswane, which vacated. We have managed to retain all the tenants, 96% in tension record in the worst operating cycle, arguably. And our net property income is down by 12.8% in this period due to a tough economic environment. The total assets remained at about ZAR 13.6 billion. Our portfolio WALE also more or less the same at 2.7 years. Business has been usual. We've managed to meet all our debt obligations. We've continued to spend money on CapEx in the business, upgrading all our properties. We've maintained surplus cash throughout the period. And we'll remain with good, solid fundamentals, which have managed to weather us through the storms of COVID in this period. And lastly, we made an announcement on the corporate action, and that corporate action really just designed to assist us in achieving an optimal loan-to-value level, better ICR and a stronger balance sheet. We'll walk through that later. If we move on to the next page, Page 3. Again, on a clockwise, we announced -- these are really just -- this is a review of some of the key aspects of what happened in the 6 months. We announced the corporate action. We continue to trade under the cautionary. We made positive progress with local and offshore institutions, mainly pension funds who are putting an investment into the company. And as I said earlier, the aim is to optimize the loan-to-value, the ICR and the balance sheet strength. We don't have much to share. We'll talk about it towards the tail end on this, but we've had very good progress and significant progress made. We've had improved retail turnaround, as I said, better than we had expected given the lockdowns that happened due to COVID 19. We've had a very good high collection rates on our retail. Specifically, we highlight that of 97%. We'll walk through month-by-month later on the slides to show that. We've also seen renewed interest and higher demand for retail space since the relaxation of the lockdowns, based really just on performance of the retail in the shopping centers. We completed the Medscheme sale and transfer. The business has continued despite COVID-19 and our high LTV, which obviously gives rise to lower ICRs. However, we've also seen an improvement on the ICR on the back of low interest rates, et cetera. We've made progress on lease renewals, albeit it was a small portion, 2,000 of the GLA and some 53,000 that's outstanding, which is well progressed. And I'll walk you through this later, it's mainly 2 buildings. Those negotiations have been very positive, and those tenants are not terminating, they're renewing. They're staying in those properties. On the retail side, we've had renewals of 11,760 square meters, and it's about 2,400 that remains there. This is all against the backdrop of -- from a macro level of an unstable economy with a negative outlook for our consumer and business confidence, declining consumer disposable income, adjusted lockdowns, increased job losses and the highest unemployment rates that we've seen. From the micro level, we've seen declining rentals, especially on the retail side; market adjustment of office rentals; and all the headwinds on the private sector and the office space yet to be seen; and the consolidation that will be seen there and repurposing of private sector office buildings; reduced consumer spend; rising vacancies; property rates increases, which is something which, at some point, needs to be arrested with the municipalities, pushing up our operating costs; and the COVID-19 loss of rental income and long-term tenants sustainability. So that's really just from a macro and microeconomic issues, which we operated under in this last 6 months. Turning to the next page is the financial highlights. And I will hand over to Asathi to take you through, and then I'll come back on the operational matters right through to conclusion. Thank you.

Good morning, ladies and gentlemen. I will be taking you through the company's financial performance and position for the period ended 28th February, 2021. You might recall that in our year-end results, the disclosure of a contingent liability was put through, for which we reported the company was engaged in a dispute resolution process regarding amounts of claims owing to Billion Group relating to the original pledges of Forest Hill and Baywest City. This process has since been concluded, and the amount agreed upon have been recognized in our financials. The company has also recognized ZAR 42 million relating to land acquired from Billion Group in 2016. Taking you through the distributable income statement on Page 5. The property income in the current period, excluding straight lining, is ZAR 867 million. This is a drop of ZAR 80 million when compared to the same period last year, and this is because of the COVID rental relief provided by tenants, of which impact did not have in the prior year as well as rent reversions on our portfolio. Our property expenses have gone up when compared to last year by ZAR 22 million. This is largely because of the bad debt write-offs as well as provisions that we provided for in our numbers. The interest paid on secured loans has decreased by ZAR 169 million, and this is due to interest rate cuts from the South African revenue services. Interest paid on swaps is ZAR 42 million. In our swap, we have one interest rates for ZAR 2.7 billion, which is maturing in October 2021. And because it's coming to an end of its life cycle and as a result of the decrease in interest rates, we've seen that swap to be out of the money. We recognize an interest paid on the deferred payment liabilities, which I alluded to in the introduction to this financial overview. We recognize an amount of ZAR 154 million, which is a once-off, an accumulation of interest over the period as an interest paid on land of ZAR 17 million. This takes us to a total distributable earnings loss or rather total distributable loss in the current period of ZAR 71 million when compared to ZAR 22 million in the same period last year. Turning the page, we then look at a normalized distributable income statement. And this is really the same income -- attributable income statement you're seeing on Slide 5, however, we've adjusted this version for once-offs in our portfolio. Property income is ZAR 867 million, and we've adjusted that for rental concessions that we've granted to our tenants to the value of ZAR 14 million as well as income from disposed properties in the current year. Our property expenses have been adjusted for bad debt write-offs as well as provisions to our bad debt, which gives us a net or a like-for-like property income compared to the same time last year of ZAR 584 million, which is a decline of 12.8%. Our corporate and admin costs are ZAR 94 million, and this ZAR 94 million includes ZAR 29 million which relates to the deferred payment liability. If we were to exclude the ZAR 29 million from the ZAR 94 million, you would actually see that our corporate and admin costs in the current year has come down when compared to the same period last year. Our net finance costs are ZAR 511 million, and therefore, we've adjusted that number for interest on the deferred payment liability as well as interest on the land, which leads to a normalized distributable earnings amount of ZAR 184 million. Moving on to the next page. I will take you through the salient features of our financial position as at 28th of February 2021. Our net debt is ZAR 9.5 billion. It slightly come down when compared to the same period last year because of the disposal of Medscheme, which Sisa has alluded to. And this is -- the proceeds from that disposal have been used to settle some of our debt. In a similar manner, our property assets have come down slightly because we've derecognized Medscheme from our books. Our loan-to-value is 72.2% in the current period, and we have hedges for 28.4% of our debt. The net cost of debt including hedges is 7.1%. However, if we exclude the impact of historical hedges, that number then drops to 6.2%. Our interest cover ratio is 1.3x. Debt profile for the company is 0.6 years as well as the hedge profile to maturity. We currently don't have any interest rate caps in the portfolio. However, we do have a ZAR 2.7 billion interest rate swap. Moving on to Page 8. I will now take you through our group tangible net asset value bridge for the REB shares. At the 31st of August 2020, this number was 4.55. I'll take you through the factors that have caused an increase to the net asset value and then take you through what has caused a decrease to the net asset value and close off with the balance at the end of 2021. Our trade and other payables have come down when compared to the previous year, which then causes a ZAR 0.12 increase to that value. Interest-bearing borrowings, as previously mentioned, have also come down slightly because of the settlements and used against the proceeds. Our derivative instruments are maturing, and that's why that value has come down in the current year, impacting our NAV by 0.6 -- 0.06%. The A shares have come down when compared to August 2020. And they sit -- the share price was ZAR 0.6 at the end of 28th February, 2021. And because they've come down, they've then created an accretive and NAV for the B shares. The other numbers are small, but I want to make reference to investment property, which has decreased by ZAR 0.0. And this is because we've derecognized Medscheme from our books. We've also brought in the recognition of a deferred payment liability of ZAR 178 million, and this has caused the decrease to the NAV number, closing the fifth 2021 NAV bridge for the REB shares at ZAR 0.0458. I will then hand over to Sisa.

Thank you, Asathi. Let's then carry on. So we're going to walk through the property portfolio overview, and then we'll look at the outlook thereafter. So turning to Page 10 and running clockwise. So we've had about 13,798 GLA renewal, as I stated before. The new lettings escalations, retail at about 6.1% and the office is 8.3%. So that office is quite distorted a bit because it's small tenants, as you'll see. It has a small GLA. So it doesn't really represent what our big tenants in the office space would do, which generally is about 6% -- between 6% and 6.5%. But what's pleasing is that at least we still have escalations above inflation across the portfolio in the toughest economic cycle. The office WALE is about 2.1 years, and that's really just on the back of what needs to still be concluded in the office, given the backlog we have of leases that we're about to contribute there. Vacancy in the office has notched up to 12.1%, largely as a result of a property, 174 Visagie of 13,500 square meters in Pretoria, which has led to the City of Tswane. We did mention this at our last results as well. City of Tswane had moved into a new building, which they have constructed and it's a slow process. And these tenants moved to their new premises where they consolidated the entire City of Tswane. The retail vacancy, 9.5%. The vacancy schedule is on Page 30. So -- of the annexes, so the presentation has the annexes as usual, and you'll find the detail of that retail breakdown there. It gives us the average of total vacancy of 11.2%. The WALE on the retail is a healthy 3.6 years, and we continue to renew all the leases as they come up on the retail side. We'll walk through that later as well. Retail trading density in the -- arguably the toughest economic cycle we've seen has come down by 3.1%, despite all the hard lockdowns and severe lockdowns we've seen. Again, we'll break it down later, walk through it. And portfolio WALE of 2.7 years. Turn to Page 11. This really just gives you a synopsis of our portfolio in terms of the number of properties, the value for each sector and the GLA per sector and the weighted average lease expiry profile sector and the average rent per sector. Interestingly, our office is now higher than our retail at ZAR 134 average rent. And the industrial asset has reset itself at ZAR 47 per square meter, which gives us an average of ZAR 129 per square meter and average net cost-to-income of 19.9% and average contractual escalation of 6.5%across the sector. Turn to Page 12. This gives you an idea of the trading density compared to the period prior, which had no lockdowns and had no COVID-19. So you've seen that we've seen about 4 positive months in the reporting period, which is May, August, October and February. I think it's very pleasing to see the trajectory turning in February for positive into the future. I think the one uncertainty going forward is whether we'll have a third wave, which may give rise to further lockdowns, which obviously would affect that trajectory going forward. But where we've had hard lockdowns, you could see, in April last year, we're down by 16.2%; and in the month of June, 10.7%; month of July, month of September and again when those harder lockdowns were reintroduced around November, December, we had more negative trajectory there. So it doesn't really follow the harder lockdowns. If we turn to Page 13. Again, this is just turnover like-for-like, comparing the pre-lockdown year prior to the lockdown years. And you've seen just how had -- has the lockdown has been in retail. Turning to Page 14. This is really just the retail performance, which include the rent concessions that are made in the period. And again, just a repetition of how trading densities have been affected during the lockdown periods. We've, however, seen the outperformance by Forest Hill at 7.9%, and Bay West at 0.9% and I think, as expected, the other retail centers following the negative trajectory because of the hard lockdowns. If we turn to Page 15. This really just illustrate the different categories within the shopping basket in the different shopping centers averaged out of what's the best performer. We see that electronics and photography, et cetera, performed very well in the centers. And I suppose people are home, and that became quite an entertainment thing when people are staying at home. I think if you look at the basic products that people buying food continued averaging just between 5% and 10%. Health and beauty, also within that category and so on. And I think the rest of the retail being in a negative territory. Again, COVID-19 lockdowns are just the severity of what you've seen. Now turning to Page 16. This is the renewals management page. So starting off with retail, we have 16,000 square meters of GLA that came up, and 11,000 was renewed, 11,700, and we've seen reversions of about 13.3% negative with an impact overall in the portfolio of just under 8% -- 0.8%. There's still an outstanding GLA of 2,400 and some nonrenewals of about 2,490, so call it 2,500. The new escalations, we spoke about this before, is about 6%, and that was 49 leases in that 6 months. And on the office side, 56,000 square meters expired, of which 2,000 were renewed. The other 53,000 on that page is mainly 2 properties, which is the Liberty Building and the Bank of Lisbon building leased to [ DBW ] with the military in Pretoria. The negotiations are underway. They're very positive. No one is leaving the buildings. It's really just a matter of concluding those discussions. That's in the main, those 2 buildings and then just some smaller tenants across. The reversions on the small space that you've seen is really just a minus 1%, but it's not really just a reflection of where we'll be with the larger tenants. And so there's no impact really on the rental portfolio. So that just gives you the total of 73,000, of which 13,000 was renewed, 56,000 outstanding and nonrenewals standing at 3,100. So if we move on to Page 17. This is vacancy management. Again, I make the point, the vacancy schedule for the retail is on Page 30. But just kicking off with the retail, there's 26,300 square meters of vacancy, which is 9.1%. And we've had terminations of 3,300 and vacancy lettings of 2,000, with new contracted escalations of 6.1% on vacancy. This is opposed to renewals. This is take-up of new space effectively in the 6 months period. And in that 6 months, the office side, we've had 15,000 of lease terminations, largely it's because of the building that we spoke about, the 174 Visagie and -- which increased the vacancy effectively to 61,000, which is 12.1% of the portfolio. That's really just what gives the averages under total at the bottom of 11% vacancy. If you turn to Page 18. This slide really just, again, just gives you the profile of our income, where it comes from. So the first is the national retailers of all our income is 35%; followed by a national government at 26%; followed by the provincial governments at 25%; followed by the private sector at, call it, 9%; followed by local government at 2.1%; and lastly, government agencies at 1.5%. Turning to Page 19. We spoke about the different months of our collection history. We had announced this prior -- as a pretty close end as an update to market. The hard lockdowns of April, we collected 73%, and that's largely because of the office shields that we have in our portfolio. And May also saw 78%, continuing and rising all the way to 110% by the end of February. Obviously, 110% includes the historic collections during the months that we didn't collect 100%. This is a total collection expressed as a percentage of the total billings for that particular month. So if you go to Page 20, we then leave the property overview, and I encourage everyone to look at the Annexures. And perhaps before our meetings and questions, we can just look at those Annexures. There's more detail around vacancies, around segmentation, around each property, et cetera, and provincial segmentation, et cetera, in terms of our exposure. If you then move to Page 21, I'm going to start with overview and then finish out on the outlook. From an overview perspective, we continue to operate a robust business, and we'll continue to fulfill all our debt obligations. We've retained over 96% of our tenants despite a tough operating environment. These are the ones that came up for renewal during the period of 6 months. And we continue to attract new tenants, as you saw on the vacancy take up, more particularly in the retail space. Secondly, we continue to see favorable escalations on lease renewals and on new lettings. Thirdly, we've seen that the reduction of interest rates has impacted us very positively over the 6 months period, with about ZAR 196 million benefit. That's on the back of some of the historic caps and swaps that it expired. And we've seen that we're able to renew all our expiring bank facilities that came up as we spoke about earlier. We've also seen on the back of low interest rates, improve ICR, which has improved currently from 1.2 to 1.3. And post the existing swap, which expires in October, that goes up to 1.5. We've seen in the 6 months from an overview perspective, strengthening the Board with diverse new solid skills that have come both from skills perspective and experience in strengthening our Board, more particularly where we're going into the future. And it's really been pleasing to work with a good solid board. The COVID-19 continues to affect our retail on the back of our office being a very solid sovereign sector, which has shed the retail through the toughest cycles of hard lockdowns. The retail turnaround has been ahead of our expectation. We've see seen improvement on the food and beverage sectors and the services sectors. The entertainment remains a challenge. I think with the increasing numbers of infections in the country, I think entertainment is the first to be affected again, but we haven't really see a recovery on the entertainment, more particularly movies and entertainment like ice rinks, games, arcades and things like that within our centers. The further lockdowns would certainly affect the retail turnaround that we've seen more adversely. Just talking about the outlook. So we've seen positive progress with all the institutions that we are talking to. And again, just to reiterate, the investment objective, and this is what we want to see for the next set of results that would come back to market with. We result in a restructure and strengthening of our balance sheet. We'll also see a lower loan-to-value of below 40%, in line with market expectations. It should be good from investment-grade of the company. Will be -- it would lead to an improved interest cover ratio of about above 2.5x, which will solidify and strengthen our balance sheet. And we're hoping and are negotiating to achieve more long-term debt renewal once that is all closed. And we're hoping that by the next set of results, we would be there. We continue to trade under cautionary until this transaction is concluded. From an outlook perspective, our portfolio continues to enjoy the defensive nature of the office portfolio, which will continue to mitigate the risks of the low growth in the country and the impact of COVID, more particularly, there's another wave, which should give rise to hard lockdowns in the country. We'll continue to accelerate our focus on lease renewals, especially in the office sector, which is our top priority. And also, I think one important thing, we've been able to redesign, repurpose our vacant buildings in the CBDs that were attractive for student accommodation. And we'll continue that visibility, and we'll continue to be our focus going forward. So that we can earn income on those vacant properties. Ladies and gentlemen, on that note, we conclude our presentation to you. There are Annexures, which we encourage you to look at. We would have, after this one-on-ones with various investors on our counter, and we'll open the floor for question. And Morne will moderate the questions. And if we can just have all the questions and then they're listed, and then we can have a session to answer them, and then -- we'll then close the session thereafter.

There are no question today, Sisa?

Well, on that note, thank you, Morne. I suppose then we will be seeing one-on-one. And thank you for attending the webinar and this session and the rest, have a good week.