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

Good afternoon, ladies and gentlemen. Welcome to the annual results presentation for the year ended 31 August '21, Rebosis results. It's great to have you, and this will be telecast, and we will welcome any questions in writing, and we'll respond. I will be seeing everybody else after the presentation in the next few days. So just to kick off on the second page of our presentation, the key aspects in the reporting period. We've maintained our portfolio valuation, which attests to the fact that our valuations had bottomed out in the previous years. We have granted a smaller relief to tenants for COVID-19 impact. So that we've seen that diminishing over time. We have had a milestone transaction disposal of the office portfolio at ZAR 6.3 billion, which will change the metrics of the company, strengthen the balance sheet. We'll cover this later. We've seen a good trading density growth on 2019 trading density of 4.2% across our centers. We have been able to renew all the expired debt of 98% for ZAR 9.3 billion. We have had quite a high rental collection in this period of 103.9%, which attest to the fact that we've really had a very strong, robust underlying portfolio in this time. The new vacancy lets have been about 18,074 square meters. All of this has happened on the backdrop of solid property fundamentals. We've been able to meet all our debt obligations, business has been usual. We've continued to spend CapEx and maintained surplus cash in the business. From an overview perspective, we have been able to achieve some lettings on the retail side, about 11,962 square meters of new lettings and renewals of 12,122. We have on the office side, been able to renew 20,994 square meters. And we've had new lettings of about 6,101 (sic) [ 6,111 ] square meters. From a corporate action perspective, we've announced the transaction of the disposal of the office of ZAR 6.3 billion, which will effectively reduce our debt, or the proceeds will go towards reducing the debt and the loan-to-value of the company. We do talk about this more later. The -- one of the key aspects is the fact that we've been able to -- we've seen a good turnaround on the retail side. The retail has improved much more ahead of our expectations, which started in the previous reporting period, and we've seen it continuing in this current period with the diminishing COVID-19 [ relief ] to tenants who are trading much better, and we've seen a renewed demand for space on the retail side by tenants. We also completed the Medscheme sale transaction and transfer. And business continues despite the impact of COVID-19 and the high loan to value. All of this we've been able to do on the backdrop of macroeconomic picture, which was very challenging, of a constrained environment with uncertainty continuing under COVID-19, rising unemployment rate, increase in fuel costs, pressure on consumer spending and low business confidence. And at a micro picture, we've seen as a sector rising vacancies and work-from-home culture having a negative impact, especially in the private sector office market, declining rentals in the retail space because of pressure that the retailers have seen with the rand depreciation in particular and the higher logistics costs, especially from China, and diminishing dwell time in our retail centers and in general, and continuing increases in municipal costs that are above inflation. I'll hand over to Asathi on the financial review. Asathi?

Good afternoon, everyone. I will be taking you through the financial review, starting with the distributable income statement. Our property income for the year was ZAR 1.6 billion, and this is showing a drop from last year of ZAR 81 million. And this is as a result of COVID relief that we've granted to our tenants and losses that we've seen on the properties that we disposed where we saw a higher income in the prior year versus the current year as well as rental reversions on our portfolio. Property expenses have come down by ZAR 100 million, and this is mainly due to better provisions as well as the write-offs. Our corporate and admin costs have come down by ZAR 64 million, and this is really because of an adjustment or adjustments that we've made on operating costs relating to the deferred payment liability. Our finance costs have improved, and we're showing lower finance costs compared to last year, and that's attributable to the repo rate cuts that we've seen coming through. Other expense line for the current year includes interest that has been accrued on the deferred liability. So our closing distributable income for the year is a loss of ZAR 129 million. If we look at the very same position, however, normalizing it and taking out the impact of one-offs, we then -- from a property income point of view, we would start with the same position and take out rental concessions because that is not in the normal cost of business as well as the income on the disposed property where we would have seen income coming through for a full year in the prior year versus the current year. And this then shows us a revision of 6% on a property income basis, which means for the current year, we see an amount of ZAR 1.66 billion. We then, in the same breath, adjust our property expenses for one-off items. In this case, that would be bad debt provisions and write-offs as well as expenses on our disposed properties, and our property expenses then become ZAR 519 million. Our net property income for the current year is ZAR 1.1 billion and this is a drop of 8% when complete to last year on a like-for-like basis. Our corporate and admin costs include adjustments made to the deferred payment liability, which we then strip out to normalize our position as well as our net finance costs, which are ZAR 802 million, stripping out interest on the deferred payment liability of ZAR 111 million. This then results in a normalized distributable earnings position of ZAR 83 million in the current year. Moving on to our group financial position. I will just highlight items in the balance sheet. Our interest-bearing borrowings have dropped by about ZAR 90 million, and this is because of the disposal of Medscheme for which we used the proceeds to pay down the debt. Our cash reserves at the end of the financial year were better than last year at ZAR 126 million. We then close off with a net debt position of ZAR 9.3 billion versus ZAR 9.5 billion in the prior period. Our property assets are ZAR 13.1 billion and this includes noncurrent assets held for sale. If you look at the same position last year, last year's number includes the Medscheme property, which, of course, is no longer in our numbers in the current year. We then close off with a loan-to-value percentage of 71.4% and 28% of our debt is hedged. Going further down our debt profile is 0.5 years. Our main -- most of our debt is expiring by February 2022, and our financial risk is hedged purely from interest rate swaps. Looking at our net tangible asset value bridge on the REB shares. We start off with a position of ZAR 4.55. Then we look at what has caused an increase in our net asset value position following by the orange bars, which look at what has caused a decrease in our net asset value position. Highlighting the main aspects of it, our interest-bearing borrowings have given us an uptick of ZAR 0.11, and that's because we've paid down some of the debt. Our derivative instruments are closing out, and we've paid out a big portion of the derivatives. Our cash reserves, as I previously mentioned, were higher in the current financial year. And our REAs had dropped when we compare them to late -- to last year, which would then give a bigger distribution to the piece. Looking at the negatives or what has caused the drop in our NAV. Our investment property has decreased slightly because we no longer have Medscheme in our books. Because we are not paying a distribution in the current year, we are now eligible to tax, and that has caused an increase in our liabilities. Our trade and other payables have also gone up, and that's mainly because of income received in advance that is inflating that number. Trade and other receivables have come down mainly because of the provisions that we've processed, and we've got our deferred payment liability having increased in the current year. This then closes our REB shares on a tangible net asset value basis at ZAR 4.51. I will then hand over back to Sisa.

Thank you, Asathi. Continuing with the property portfolio overview, we'll start with operational highlights. The retail WALE at 3.5 years, really just testimony to the listing [indiscernible] we've been able to achieve on the retail space as and when they come up. The retail trading density at 4.2% that is on 2019, which really just was a year which was not affected by COVID. And despite 2021 having been affected by COVID, we are now seeing real growth on our retail portfolio and it's pleasing to see the numbers that the consumers are back to our shopping centers, shopping and increasing the spend and turnover of retailers. Our portfolio WALE is 2.2, affected largely by the office WALE, which is currently at 1.3% on the extreme right side of the presentation slide. And that's largely because given the disposals that we've done, we deliberately did not renew some of the DBW leases that came up because the buyer would be entitled to longer-term leases. We are in the process of concluding that. And hopefully, those leases, with the advanced stages of negotiation, should conclude before the calendar year. The total vacancy has gone up on the office side to 21%, and that's largely because of 3 properties. One is 373 Pretorius, where the city of Tshwane vacated and consolidated at their new big Munitoria building; 174 Visagie, city of Tshwane as well, they consolidated into Munitoria. And we've also had the Department of Education Western Cape at Grand Central in Cape Town that also vacated with just over 20,000 square meters there. So that did shoot up our office vacancy. We'll talk about our plans, but our plans for the 2 Pretoria vacant buildings is conversion to student accommodation. They're very close to TUT campuses and within walking distance to the campuses. They are parts and parcel of -- those 2 buildings are part and parcel of the disposal that we have concluded, and the feasibilities are underway. They actually just been concluded and the whole redevelopment process has started on that. If you take that into account, that vacancy will come quite -- down quite a bit. The retail vacancy has notched up at 9.8%. We've seen renewed interest in the retail, and we'll continue to conclude deals on the retail side. Total GLA renewed in this period was about 33,000 square meters. We do break it down later. So we'll talk about it. New letting escalations, retail at 6.6% and the office, which is a very small component, at 8.1%. So this is just the makeup of the entire portfolio with the breakdown at the first row of the valuation, ZAR 6 billion for the retail, made up of the 5 shopping centers, and the ZAR 7 billion of the office made up of the 35 properties. A big part of those, about 31, have been now disposed and we'll talk about the transaction, but that would now no longer be part of our portfolio on successful conclusion of that transaction. The industrial being 1 property at ZAR 108 million, making up a total of those 3, ZAR 13.1 billion, which we said at the outset remains flat from the previous reporting period, which is made up of 41 properties. The GLA is about 799,000 square meters, made up of 291 retail and 489 of the office and 18,000 of the industrial. So the other important thing to note here is really just the average escalations of retail at 5.7% that compares to the 6.6% we're achieving on renewals now, which will give an uplift on the average escalation and the office at 7.2% and the industrial at 7%, which gives us an average of 6.6% across the portfolio. So talking about trading density on Slide 12. So the bar charts, the bars are the actual trading density, which is the average across the retail, the 5 shopping centers, those are actual numbers of the trading densities per month for each year. And the line represents the comparison on each month in that year to the previous year's respective month. So just very interesting graph to see that if you look at the line, take, for instance, December 2020 and 2019, that was down by 5%. And due to COVID, there was a semi-lockdown, I think we were on level 3 at the time, and that consumer spending was quite constrained. And you can see that on the trailing density, which represents profitability. And that rose up from January through to about April on the previous period. And I think it's also noteworthy to see that April was much higher than 2019 -- sorry, 2020 because of lockdowns that happened in 2020 and so on. Next slide, Page 13, turnover growth. The -- again, the bars just represent the growth -- the turnover growth for the respective month on the previous year month effectively. And then the arrow is the trading density. So the lower your turnover growth, the higher your rent to sales. A classic example, if you see in Apple 2020, the turnover growth was down because of lockdowns at minus 16%. As a result, your rent to sales shot up to 21% and so on, that's how to read that slide. And then Page 14, retail performance, trading densities. So it's a very interesting slide. This is trading densities per shopping center. As you can see, 3,100. That's the trading density per month of Bloed Street, average over the period. Compared to 2019, it was down at 7.8%. And Hemingways in the Eastern Cape, you can see the coastal cities have done exceptionally well from a growth perspective of that trading density, Hemingways at 6%, Baywest at 8.8%. And Sunnypark was also down by 10.8%. Though in the Gauteng Center that was up, it was Forest Hill at 9%. [indiscernible] also through a low base having been a center that's got the most vacancies for us. So that gives you an average for the Eastern Cape growth on 2019, which is the normalized year from a trading perspective against 2021 of 7.4%. And Gauteng being negative at minus 0.2%, giving us an average for the portfolio of 4.2%. On Page 15. Just again, these are the categories of the trading performance within the shopping centers. So on the left, if the percentage growth and down below it is the trading density growth. So you can see that the electronics are right at the top. They're outpacing. I think people sitting at home, they buy a lot of electronics and then download music, et cetera, followed by homeware, which is quite an interesting one because people sitting at home, again, they are looking after their homes. And we still see that the food supermarkets are still very positive. They contribute the highest turnover at about 26%, followed by unisex apparel at about 20% and still growing positively at about 5%. And then on the negative side and the big ones, they start with the departmental stores, then with the other categories. I think noteworthy is the food service, which is around negative 20%. That food service is really just the restaurants and the fast foods, et cetera, they're still enduring a lot of pain. If we move over to Page 16, this is the renewal management in the portfolio. On the retail side of the expired GLA of 16,000, 12,000 was renewed. It was on a negative 11.5% conversion, and it had 0.7% -- a minus 0.7% impact on the portfolio. And the outstanding GLA is 2,000 and nonrenewals were 2,494. And as we said, the new escalations were 6.1% and that made up of 53 leases. On the office side, the expired GLA was 85,000, 20,994 was renewed. The reversions were pretty much flat at 0.2% negative. There was no impact on the portfolio. And the outstanding GLA is 64,097 and this is where the bulk sits with the leases that we'll be concluding before. We closed the year which are part of the transaction of the disposals that we've made. We've had 672 square meters of nonrenewals and the new escalations of 7.2% with 10 leases that made up those renewals. If we move over to Page 17, this deals with vacancy. The vacancy start was a -- totals 73,000 square meters made up of 26 in the retail and we closed with 28,000 in the retail. So it's moved from 9.1% to 9.8%. The leases that terminated and expired were 14,000 square meters and the new vacancy lets on the renewed take-up of space was 11,962 square meters. On the office side, we had 47,000 square meters. And with the lease terminations of 69,000 square meters, less the vacancy lets, new vacancy lets of 6,100, we end up with a vacancy of 110,000, which is quite high. And those are 3 -- largely the 3 properties that I spoke of to which are under redevelopment of student accommodation and the Grand Central building in Cape Town, which even though we have tenders that would fill up the space, we are deep into the feasibility of converting that to micro apartments in Cape Town. So that gives us a total of 17.3% across-the-board vacancy. Thank you. Page 18. Just then moving over to overview and outlook. We continue to operate quite a robust business with positive rental collections despite current market conditions, which are very challenging. Rent concessions, we've seen them diminish. We pretty much by the tail end of -- year-end August was a little provisions that are taken up on rental concessions. The retail portfolio, as we said, continue to do much better than our expectations and in general expectation across the sector. Secondly, from a debt obligation perspective, we've been able to reduce the corporate costs year-on-year, and we continue to positively restructure the balance sheet and the current transaction talks to that. From an office portfolio perspective, what we've seen is outstanding leases that have been held back on the back of the transaction and now in the process of being concluded before the calendar year. The continued pressure on municipal rates increases, continue to constrain the office sector as the government tenant doesn't pick up the rates increases or the rates at all. And the increase in the office vacancy, as I said, is the 2 buildings in particular in Tshwane, for the city of Tshwane and the Western Cape Education at the Grand Central building. And we are in the process of redevelopment to convert a student accommodation, the Tshwane buildings and the Grand Central into micro apartments which are all accretive to the portfolio. And lastly, from an overview perspective, the commercial portfolio disposal of ZAR 6.3 billion will give quite a positive outlook for the fund, which effectively makes and renders the current results academic in the context of where we're going. And where are we going? So let's look at the outlook. The successful completion of the commercial portfolio disposal will give rise to a restructure of our balance sheet and will strengthen the balance sheet, reduce the loan to value in line with SA-listed property market around the 40s mark -- 40% mark and will improve our interest cover ratio. We'll achieve our long-term debt renewal with the financiers. And simultaneously, with some of the properties that have been disposed being repurposed to student accommodation in the micro apartments. The fund will then refocus and be a retail-focused fund, and we've now, going forward, going to focus more on vacancy fill-ups, especially in our retail space, which has the potential upside for us on the back of renewed interest in the retail sector and shopping center space, more particularly Forest Hill shopping center. The office outstanding leases I spoke to will be concluded shortly, which will improve the WALE of the office, which is being disposed currently. I think from an outlook, again, perspective, the COVID-19 impact that continues to bring uncertainty, more particularly the imminent fourth wave with this variant that may impact festive season trading and any further lockdowns would adversely impact the retail turnaround in the business. We do have a lot of [indiscernible] that break down a lot of detail in this presentation, and we do encourage you to please go through them in detail. And we thank you for your time and listening to our presentation. As I said at the outset, if you have questions, please do transmit them to us. We'll answer them. We will be going around to see on virtually through Teams and Zoom, a lot of one-on-one with investors. And on that note, I want to say thank you.