Octodec positions itself for sustainable value creation


Octodec Investments Limited have announced its full year results which were impacted by pressure on rental income growth, the lag effect of the let-up period at recent developments and competitive pressures. A distribution of 203.4 cents per share was declared for the period. 

“The operating environment remains challenging however our portfolio is robust and delivered a satisfactory performance in this context.  Our approach during the period was to focus on core property fundamentals and position ourselves to provide sustainable value creation.

We achieved some rental income growth and kept the increase in operating costs relatively low while bad debt write-offs were maintained at acceptable levels. Residential vacancies which saw significant competitive pressures, specifically in Johannesburg CBD and Hatfield, was a key focus area for us. Marketing efforts and an enhancement of the tenant offering resulted in a reduction in vacancies to 5.8% at year end” explains Jeffrey Wapnick, Managing Director of Octodec.

The group’s R12.9 billion portfolio comprises of 306 properties, realising like-for-like growth of 2.6% in rental income and it had a total core occupancy level of 88.4%. Total revenue increased by 3.1% whilst property operating expenses increased by 2.5%. The net operating costs to contractual rental income ration improved to 30% with bad debts write-offs and and provisions remaining low at 1.2% of total tenant income.

Finance costs for the period equated to R438.9 million, an increase of 7.4% compared to the prior period. This is in line with investment activity resulting in increased debt levels, as well as an increase in borrowing costs expensed in respect of the completion of the Sharon’s Place development, the group’s loan-to-value ratio at year end was 37.4% with the target being to reduce this to 35%.

Anthony Stein, Octodec’s Financial Director, commented:

“We have strengthened our balance sheet on reduced liquidity and refinance risk by lengthening our loan terms and ensuring that our exposure to interest rate risk is hedged.  74.5% of our loans carry fixed interest rates while our weighted average term of loans increased to 2.5 years and our all-in annual weighted average cost of borrowings reduced to 9%.”

Octodec continued to optimise its portfolio by focusing on the completion of certain developments and disposing of non-core or under performing assets.

Sharon’s Place, Octodec’s largest residential development consisting of 399 residential units, 5 647 square meters of ground floor retail, anchored by Shoprite and Clicks, and 289 parking bays was completed during the year. It is adjacent to the new Tshwane House municipal development in the Tshwane CBD and falls within one of Octodec’s key strategic nodes. The total cost of this development, excluding land cost, was R357.4 million.

 “This development received great interest with the residential portion fully let shortly after completion. The specially designed courtyard with greenspace and leisure facilities is a particular hit with residents,” commented Wapnick.

The group had several smaller projects under way including the upgrade of Nzunza House (formerly known as North City), an office block in Braamfontein, Johannesburg, and The Tannery, a multi-tenanted industrial complex in Silverton, Tshwane. These projects will not only improve occupancy levels and enhance the value of the portfolio but will also uplift Octodec’s key strategic nodes of operation.

Octodec acquired the remaining 50% of Gerlan Properties Proprietary Limited (Gerlan), at an initial yield of 9.25%. The property houses a Toyota dealership, situated in Gezina, Tshwane.

“While new and redevelopments are important to grow our rental income stream and contribute greatly to the rejuvenation of surrounding nodes, they require significant upfront investment and the phased take up of units creates a lag effect on returns in the short-term. The board has therefore taken the decision not to commence with any new major developments unless a hurdle yield of 8.75% can be achieved.  For the year ahead, management will continue to focus on improving the existing portfolio, retaining tenants and selling non-core assets with the proceeds used to pay down debt,” Wapnick explained.

Twenty non-core or under performing properties were sold during the period at a combined exit yield of 7.9% and a combined premium of 1.9% to book value. Ten of the sales transferred during the financial year for a total consideration of R61.6 million. A further two properties were transferred after the year end for a total consideration of R69.8 million. Transfer of the remaining eight properties for a total consideration of R92.1 million is expected to take place within the first half of the 2019 financial year.

Wapnick concluded: “The country continues to experience pressure from poor economic growth, increasing unemployment and higher costs of living. Strong demand continues to be experienced in our core CBD nodes for both retail and residential space however affordability remains depressed in the current environment.

Against this backdrop, we expect to deliver flat distribution growth in the 2019 financial year as previously guided. From our 2020 financial year, we should start to see positive growth again.

Our strategy remains unchanged and we continue to offer a safe investment option for our shareholders backed by an experienced management team, diversified portfolio, sound operating fundamentals and prudent capital management.”