Gemgrow delivers full year dividend growth in tough conditions

Alon Kirkel, COO of Gemgrow.
Alon Kirkel, COO of Gemgrow Properties.

Gemgrow Properties has announced its annual results for the financial year ended 30th of September. The group delivered a dividend growth in line with guidance, against a backdrop of increasingly difficult operating conditions. 

Gemgrow increased A share dividends by 5% to 106.91 cents per share whilst B share dividends grew by 7% to 78.70 cents per share.

During the past financial year, the company executed its strategy to enhance the property portfolio with twelve accretive acquisitions to the value of R549 million which were concluded after accounting for the disposal of six non-core assets, capital additions and fair value adjustments which resulted in an increase in the Gross Lettable Area of the portfolio to 751 981 square meters (2017: 690 263 square meters) with the value thereof to R4.8 billion.

COO, Alon Kirkel commented:

“The past year saw us focus on reshaping and improving the defensive quality of our core portfolio through active letting strategies, refurbishments, disposals and yield-enhancing acquisitions of 12 properties”.

“Our portfolio now comprises 135 properties, reflecting a good mix of retail, office and industrial space mostly across key provinces. The more balanced income profile, from a geographic and property segment perspective, will enable us to navigate an increasingly tough operational environment requiring a very active approach to asset management.”

Following the reporting period, Gemgrow finalised further acquisitions worth R728.5 million. The acquisitions were funded through debt amounting to R578.5 million and the issue of A shares worth R150 million. Gemgrow was also very active in restructuring its loan book, refinancing existing loans totalling R575 million for 5-year terms.

Gemgrow’s CFO, Junaid Limalia explains:

“We are pleased with the refinancing arrangements finalised during the year. Our solid balance sheet, with debt fully hedged and LTV at a comfortable 26.8%, provides room for future opportunities in a tough, cash-strapped environment. In addition, we have also focused on cost containment measures across the portfolio and successfully disposed of non-core assets with non-sustainable income streams”.

The property sector has experienced a challenging year; vacancies in Gemgrow’s portfolio declined marginally to 7.6% (207: 7.7%) on the back of low vacancies in the industrial segment (4.4%).  Although the company was able to renew leases or re-let as much as 81% of the Gross Lettable Leases which ex

In what has been a challenging year for the property sector, vacancies in the Gemgrow portfolio declined marginally to 7.6% (2017: 7.7%) on the back of low vacancies in the industrial segment (4.4%). Although the company was able to renew leases or re-let as much as 81% of the Gross Lettable Area leases which expired in FY 2018, a weakening in lease renewals became apparent towards the end of the year, in line with the worsening economic conditions.

Looking ahead, the company expects to continue operating in an environment of weak property fundamentals marked by tenants coming increasingly under pressure and an over-supply of office space in most regions. The weakening in lease renewals in the latter part of the 2018 financial year appears set to continue in the current financial year. In instances where tenants have elected to renew their lease agreements, this has often come at a cost with rental reversions and higher tenant installation costs.

“We will continue to work hard over the next twelve months to deal with the market-related challenges ahead of us. Whilst the steps already put in place, including the strengthening of our asset management resources and leasing execution capability, will support us in a competitive environment where rental reversions and higher vacancies will continue to prevail, shareholder returns will come under pressure in the year ahead.

“In the longer term, we remain committed to mitigate risks as far as possible through our ongoing strategy to position the portfolio defensively to produce improved sustainable income with stronger lease covenants, an improved weighted average lease expiry profile and tenant demand”, concluded Kirkel.

The uncertain economic outlook, combined with the fact that a large portion of the company’s rental income is linked to leases that will be up for renewal in 2019, sees Gemgrow anticipate an increase of 5% in the A share dividend and a decline of 10% in the B share dividend for the year ended 30 September 2019.