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

Good morning, ladies and gentlemen. Apologies for the delay. We were waiting for the SENS to be released. Welcome to our interim results for the period ended 28th February 2022. We've come out of a challenging period -- the COVID period, but we're seeing some good things happening in the portfolio. In our retail shopping centers, we've seen customers returning to the shopping centers. We've seen our trade intensities growing by 7.4%. Our sales growth is about 11.5%, and the footfall is growing at 14.5%. So at most of our shopping centers, we're experiencing what our peers are experiencing where we're seeing a lot of customers coming back. On the debt front, we're working closely with our funders. They've remained very supportive, we managed to renew close to 98% of our expired debt. With regards to lease renewals, we are quite pleased with our progress there. We've renewed close to just under 100,000 square meters. The majority of it being in the sovereign place where we've seen some very good renewals there. We've renewed Department of Justice at SALU. We've renewed the Department of Defense at Lisbon on a 5-year term. We've also renewed Department of Water Affairs at 189 Schoeman, 17,000 square meters. And in the inner city in Johannesburg, we've renewed mishumo house, Department of Labor on a 3-year lease. With regards to the retail sector, we've done 15,000 square meters. The majority of which is in Hemingways in the Eastern Cape. Woolworths, we signed up a 5-year lease and -- for 5,000 square meters at Hemingways. And also at Hemingways, we renewed Truworths on a 5-year 2,200 square meters. At Baywest, we renewed UFO, 634 square meters was renewed there. With regards to new vacancy lettings, we did just under 10,000 square meters. The majority of it been predominantly on the retail side. At Forest Hill, we managed to replace the old Edgars box with F&K, who signed a 10-year lease for 4,500 square meters. At Hemingways, we had HiFi Corporation, take up 778 square meters. And at Baywest, we managed to get Rochester taking up 655 square meters there. At Baywest, we also managed to get a deal of 422 square meters. We're also quite pleased to say we're working with some of the new brands like [indiscernible] which are good brands that have come into the country. We've got them taken up space in some of our shopping centers. It remains business as usual. In terms of our debt obligations, we continue servicing our debt. We've managed to apply some CapEx to our portfolio, spending just under ZAR 30 million on CapEx. Most of it been about ZAR 10 million of that being accretive and the other ZAR 20 million being just to keep the buildings in good state for our tenants. Our total assets have remained pretty flat -- you will remember at last report with ZAR 18.1 billion. They've come down to about ZAR 500 million to about ZAR 13 billion, emanating from our retail portfolio, predominantly affected by Forest Hill shopping center. With regards to our portfolio WALE, we've seen it -- it's sitting at 2.4 years. Retail is sitting at 3.2 years, our commercial is sitting at 1.9 years, but we're busy with a lot of lease negotiations, which should see that number ticking up. And then -- where we've lost some tenants on our commercial portfolio. And Cape Town GrandWest, we lost Department of Education, 20,000 square meters. And Batho Pele in the inner city in Johannesburg, Social Development, moved out and that was 11,500 square meters. We had also lost in 28 Harrison, Johannesburg Water, but we're busy with tenders to replace those tenants. In Pretoria, we've got the 3 buildings -- 2 buildings, that we reported on last time around, 373 Schoeman and 174 Visagie, where we lost the City of Tshwane. But those buildings we're looking to convert into student accommodation given their proximity to TUT, and that is progressing quite well on the front. And then with regards to the big transaction, the disposal that we're busy with. You'll recall when we started off a couple of months back, it has taken long and it is something that is keeping us wide awake as a management team. And together with the Board, we're looking at that quite closely. When we announced the transaction, it was ZAR 6.3 billion. We have 32 buildings in the portfolio that we've been acquired. That number is will down to 25. Seven big buildings have fallen off. And they've fallen off primarily because of the buyers were looking for buildings with minimum lease periods of 5 years. So some of the buildings, the 3-year leases and those fell off -- and then they've also taken off the buildings where there's high vacancies. So the number has come down from 32 to 25, but the value has also come down from [ 6.3 to 3.3 ], which we've announced in the public domain. In terms of the value, we're still looking at a yield of about 9.5% through. So it's a reduction in the number of buildings, but not so much a reduction in value. And that is progressing. We're happy to report that the buyers have received a term sheet from 1 of the financial institutions. We have weekly meetings with them as we try and help them to get to closure. We have given them an extension up to the 22nd of June, and we are watching that closely. And we know that they're talking to a couple of pension funds to get the funding in place. But as a management team and as a Board, we remain watching that actively and to ensure that we get to closure on that as we don't want to keep extending. And any extensions beyond this will come with financial penalties. And having said that, we will continue as the management team to look at other plans in the unlikely event of the deal not proceeding. Then I move on to the business environment. While the business environment remains challenging, we talk about the office disposals. So that transaction, when it concludes, will help improve our liquidity position. It will help us -- the proceeds will primarily be applied to reduce the debt levels. And then in terms of COVID, we've seen a diminishing number on the COVID. We've granted more relief of about ZAR 6.3 million and -- primarily to our restaurants and hospitality sector on that front. We were pleased to say that we are seeing a higher demand for space in our retail centers. We've got people that are looking. Some of the retailers, like in Sunnypark. We talk into the lives of The Foschini Group, who want to take up 2,200 square meters, and we're quite advanced with that process. We continue working on reducing our operating costs. We've renegotiated the bulk of our security and cleaning contracts, and we've made some good savings on that. In terms of ICR, we've seen a slight -- it has remained constant at 1.3. But as we continue our leasing activities and getting tenants, that matrix will hopefully move in the right direction. In terms of the leases as reported. DPW, we've made significant progress, and we have another 80 -- we've done 80,000 square meters on that. We have another 70,000 square meters where we're quite advanced. 11 Diagonal in the inner city, 33,000 square meters. We're talking to Department of Infrastructure. We're looking out there for a 5-year lease agreement at a pretty decent rental. In Pretoria, we're talking to Department of Defense in the Bank of Lisbon, and we're quite advanced with that renewal. So between those buildings will add another 70,000 square meters, which will see our office renewals moving up to just under 150,000 square meters. On the retail front, we continue making pleasing progress, we've done 15,400 square meters, which has been concluded. And we're working on another 12,000 square meters, where we're quite advanced, primarily around our problem child, which is Forest Hill. We're working on Forest Hill. We've got 12,000 square meters where we want to introduce a medical facility. We're quite advanced on that progress. And also in Forest Hill, we're looking at other initiatives of bringing in logistics and other things to turn around Forest Hill. We've also engaged the services of a property expert, 1 of the most respected in the country, retail specialists, that we are talking to, to come up with a turnaround strategy for Forest Hill, and we'll report back as we progress on that. And I think with that, I'd like to hand over to Asathi to take us through the financial review.

Thank you, Otis. Good morning, everyone. I will be taking us through the financial review for the period ended 28th February 2022. We'll start off looking at our distributable income statement, and that is on Page 5 of this presentation. Our property income, excluding straight lining for the current period was ZAR 829 million, and that is a ZAR 38 million decline from the prior year. And this is because of an increase that we've seen in our office vacancies as well as income that was accounted for in the first part of last year on the sale of Medscheme and that income we no longer have in this current financial year. Our property expenses have come down slightly, and this is due to improvements of cost containment measures, which Otis has alluded to, especially around our cleaning and security costs. Our corporate and admin cost is ZAR 76 million. You would recall that last year, we recorded an additional cost around our deferred payment liability, and that's why we are seeing a ZAR 94 million in the prior year. Finance costs have gone up slightly, and this is mainly due to the increase in the prime lending rate, our swaps were ZAR 11 million in the current financial period. Our swaps have since been winded up, and therefore, we only reported interest in the first quarter of the year. Other interest expense relates to our deferred payment liability, and we, therefore, closed off with a total distributable earnings figure of ZAR 73 million compared to a ZAR 71 million loss in the prior year. Moving on to our normalized distributable income statement. So on this slide, basically, we take out any abnormal cost or income or other one-offs that we see in our portfolio. So we start off with the same property income as the previous slide of ZAR 831 million. And from there, we then take out the effect of our rent concessions as we have seen the impact of COVID in the current financial year has not been as dire as last year. We had ZAR 14 million in rent concessions in the prior year, and it's much lower in the current year. Then the net effect of those is a property income, excluding straight lining of ZAR 832 million. It's still 5% lower compared to last year. However, like I said, it is due to the vacancies that we've seen in our portfolio. Our property expenses were ZAR 302 million. And from there, we exclude the impact of provisions on both years as well as any expenses that were -- or adjustments that we had put through in the books in the current year. The net effect of that is then a ZAR 281 million. We have net property income on a normalized basis of ZAR 556 million compared to ZAR 584 million in the prior year. The 5% is due to the drop in income. Our corporate and admin costs of ZAR 76 million, as I've referred to in the previous slide, we had a once-off deferred payment liability of ZAR 29 million in the prior year. Net finance costs at ZAR 322 million. Interest swaps, ZAR 11 million, as mentioned. In the interest line, we did put through a deferred payment liability interest of ZAR 22 million as well as interest on land, which is just under ZAR 1 million. This leaves us with a normalized distributable earnings figure of ZAR 128 million versus a normalized position in the same period last year of ZAR 184 million. Then moving on to our summarized balance sheet. Our net debt has dropped to ZAR 9.4 billion versus a period last year of for ZAR 9.46 Billion. Our property assets are sitting at just ZAR 13 billion versus ZAR 13.1 billion, so there's a slight drop in valuation there, which leaves us with an LTV of 72.8% compared to 72.2% in the same period last year. Our interest cover ratio is 1.6. And our debt profile, maturity profile is just under a year. Our hedges have since expired. So we have no majority on the hedging side. We'll then hand over to Otis to continue the presentation. Thank you.

Thank you, Asathi. Yes. Moving right along to our operational highlights. We touched on the GLA that we've renewed, just under 100,000 square meters, which is predominantly in the sovereign space. The majority of those leases have been 5 years, and there's 2 that are 3-year terms. And as I said earlier, we've got another 70,000 square meters that we're quite advanced. In terms of the escalations that we're seeing on our new lettings, on the retail, we're seeing escalation sitting at 5.4%. In the office sector, they're coming up at 6% per annum. Our office WALE is currently sitting at 1.9 years, but on successful conclusion of the 70,000 square meters that we're working on, that metric should continue moving in the right direction. Our commercial vacancies have gone up quite significantly. And that's attributed to the buildings that we've lost tenants, Grand Central in Capetown, 20,000 square meters. We lost Department of Education, as I said earlier. And then Batho Pele in the inner city, we've lost some -- Department of Social, but we're working on those buildings. And then in the Pretoria CBD, we've got the 2 buildings, 373 Schoeman and 174, where the City of Tshwane moved out and we're looking to potentially convert those into student accommodation. And then we've also commenced discussions with the City of Tshwane to potentially, say, they're moving into that building back in and to potentially buy 1 of the buildings. So we continue trying to market them aggressively to reduce the vacancies. On the retail front, the [indiscernible] is predominantly affected by Forest Hill. But as I alluded to earlier, we're working on reducing the vacancies at Forest Hill and have engaged in the services of a retail specialist to help us with the turnaround strategy. So we're hoping that at the next report, all of the tenants that we're talking to, the medical facility and others, will have taken tenancy and that number will be moving in the right direction. Our WALE at 3.2 years is moving in the right direction. We're quite happy with that. And our trading densities, as we indicated earlier, are sitting at 7.4%. So overall, the portfolio WALE is sitting on an average of 2.4 years, and that should go up as we conclude the commercial leases that we're looking at. The next table just shows the property fund metrics. From a valuation point of view, retail makes up just under ZAR 6 billion of our portfolio. The commercial 1 currently sits at ZAR 7 billion. And when the transaction goes through, that will reduce to almost half. And the small industrial property that we have is sitting at ZAR 108 million, giving a total value on our portfolio of ZAR 13 billion, made up of the 41 properties. We've got the 5 shopping centers, which is Bloed and Hemingways and Sunnypark, and the 35 properties that we currently own. There is now with the disposal, there will be -- there'll be 13 properties left when the disposal goes through. From a GLA point of view, retail makes up 36% of our portfolio. offices make up 61% and industrial makes up 2.4%. You can see on the next row that our retail WALE is quite pleasing 3.3. The office 1 is sitting at 1.9, but we're bullish that when we conclude the 3, 4 big leases that we're working on, that number should move in the right -- move up in notch. In terms of the average value per -- retail is sitting at 20,000, which is in line with our competitors and peers. Our office is evenly balanced at ZAR 14,000 per square meter. And then in terms of vacancies, unlike with the rest of the country, the office sector is sitting quite high at 25%, but given the initiatives that we're working on and the potential conversion to student accommodation, that number should move down in the right direction. The next slide just shows the turnover growth like-for-like compared to financial year in 2020, where with COVID, we're looking at a 0.5% growth. And if you compare it to last year, coming off a low base, again, related to COVID, there is a growth of 11.5%. The retail performance is reflected on the next slide. We can see that Hemingways is 1 of our top performing centers. The trading densities there are growing and currently sitting at 3288 and showing growth. Sunnypark is coming off a low base, but is showing good growth. And Bloed Street is also showing good growth. All our centers are showing trading densities moving in the right direction, which is reflective of what you said in the opening, that we're seeing our consumers coming back to our shopping centers. The next slide depicts the trading performance. And as can be seen from the -- across the line there, our Food-Supermarket continue to trade very well. Our departmental stores and apparel is doing good numbers. We see that the jewelers and the specialty stores are not doing so well, but all the other sectors are moving in the right direction. Related to the work from home, you can see that electronics is performing well. And the other food services started picking up quite nicely. In terms of renewal management, retail, we renewed 15,000 square meters. We did take a bit of a reversion, but it was related to our retention strategy. We did reduce our rentals, but the overall impact on the portfolio was only 0.1. So it wasn't too big an impact on the portfolio. While in isolation, it was hoping for. Similarly, with our commercial portfolio, to renew the government leases, we had to revert. You'll recall that most of our leases were sitting higher than the market rentals. And we took some reversions to get the 80,000 square meters across the line. But again, the overall impact on the portfolio was not so significant on that. And then vacancies. The retail vacancies, we started off with 9.8%. We've lost some tenants, again, predominantly at Forest Hill. But given the initiatives that we're working on, we're hopeful that we'll reduce the 12.9% in the -- by the time we report at next reporting. In terms of the commercial, vacancies are in line. It's sitting at 21%. We've got some initiatives that we're working on, including the student accommodation. We do have a couple of tenders that we put in the Pretoria in the Johannesburg CBD, which are looking quite good, the likes of SASSA, the likes of CCMA, and those are quite advanced. And so that should see our office vacancies coming down when those are concluded. Going to the overview. I think we remain -- our rental collections despite the challenging market conditions are looking good. We're sitting at about 101. We -- you'll recall sometime in December, the Department of Public Works took a decision to not pay rentals, where there was month-to-month leases. Rebosis together with [indiscernible] and the rest of the industry have taken on that with the DPW, and we're happy to say that they've now come to a decision where they continue paying. So that affected our collections during January and February, where our collections came down, but we're happy to say that subsequently, we back DPW has now started paying our rentals, and we're back to well over 100% in terms of our collections. In terms of CapEx, we spent ZAR 26 million. We watch our CapEx band very closely. But we also try to make sure that our buildings are well maintained. Of the ZAR 26 million that we spent, ZAR 6 million is yield accretive and the rest was operational CapEx. The retail trading activity has increased, as we reported earlier, we're seeing consumers coming back and spending time in our shopping centers, and we've seen them spending money in our shopping centers as well. In terms of operating costs, we're looking at our cleaning and security, and we managed to renegotiate those as we reported earlier. We do have pressures on the vacancies and obviously to fill them up, we will continue negotiating and where necessary will look at giving slight reversions to make sure we retain our tenants. With DPW's focused on clearing the backlog of month-to-month leases, we believe that most of our leases will be renewed, and that's a good, good, good outcome for us. We continue from a fund level, focusing on reducing our corporate costs year-on-year. We're focusing on improving the ICR and continue speaking to our funders, who we meet almost monthly, and who've been very supportive in terms of getting our debt facilities extended on a longer-term basis. The office portfolio continues to be a challenge. Grand Central, we lost the 20,000 square meters. But we've got a couple of small tenders that were put in there. SASSA for 5,000 square meters. We're also looking at the potential of converting Grand Central into micro apartments, and we're investigating that possibility. In the Johannesburg CBD, Game Building, where we lost Department of Safety and Security, we are engaging with Department of Infrastructure to potentially look at getting some tenants to move back into those buildings. And then with regards to the 2 Pretoria buildings and the 1 in Johannesburg, we continue focusing on trying to convert those into student accommodation given their proximity to the universities. The [indiscernible] transaction will result. I mean, it has been publicly announced. It's now reduced to an amount of ZAR 3.3 billion. We're looking forward to the conclusion of that to improve our liquidity position. And we have weekly meetings with the team where they keep us abreast and we remain hopeful that we will get to the end and conclude given the 22nd June deadline that we've agreed. From an outlook point of view, we continue working on reducing our LTV. We, again, as I alluded to earlier, we'll continue talking to our funders to get our debt facilities renewed on a longer-term basis. And -- we will focus on the student accommodation conversions in the buildings that we're looking at. The focus remains on reducing the LTV. And we continue looking at alternatives and we'll be engaging most of the shareholders in the next couple of days on one-on-ones, exploring ways and how we can realize shareholder value. In terms of our negotiations with DPW, we remain bullish that given their pressures where they want to renew all month-to-month leases, we should get to a speedy conclusion on the leases. And that should result in our way moving in the right direction. In terms of COVID, I think we've seen the worst of it. The fifth wave was not so severe as initially thought. And so the outlook for COVID is that we believe that we will [indiscernible] on that. The rising interest rates continue to be a worry for us, and we continue watching that closely. Any disposals that we do, will use to reduce our debt levels. We remain worried, obviously, about the macroeconomics where fuel costs and the rise in inflation have an impact on our retailers and potential spend that is available to us. And I think with that, we open it up for questions. We'll take questions in writing, and we can take them. Thank you.

The first question is from [indiscernible]. He is asking, would you be open to any larger -- sorry, let me rephrase that, are there any larger companies that are interested in acquiring the [indiscernible]? And would you be open to such approach?