Octodec positions its diversified portfolio to weather tough conditions

Jeffrey Wapnick, Managing Director of Octodec.
Jeffrey Wapnick, Managing Director of Octodec.

JSE listed REIT Octodec Investments Limited has announced its full year results, declaring a stable distribution of 200.9 cents per share, in line with guidance, and representing a marginal 1.2% decrease on the prior year against the prevailing poor economic and consumer environments.

Total rental income grew by R97.1 million or 5.1% compared to the prior year, supported by increased rental income from Sharon’s Place and consolidation of wholly owned subsidiaries. No major development activity was undertaken during the past year and the core portfolio, represented by those properties held since the previous comparable period, reflected like-for-like rental income growth of 2.0%. Property costs increased as a result of escalating repairs and maintenance costs. Bad debt write-offs and provisions remained stable whilst administrative costs remained tightly controlled, showing a decrease of 5.3% on the prior year.

Jeffrey Wapnick, Managing Director of Octodec explained: “The persisting weak environment continued to put strain on all our tenants leading to relatively muted growth in our rental income. Against this backdrop, we have continued to position our diversified portfolio to withstand tough trading environments to ensure that we are able to continue to provide shareholders with sustainable value in the long term.

“We have successfully navigated a challenging period through our active management focused on vacancies management, smaller upgrades of existing assets to unlock value and the recycling of capital through the disposal of non-core or underperforming properties.”

Occupancy levels were stable during the period, showing a slight decrease in both total and core vacancies of 17.9% and 11.5% respectively. The most notable reduction was in the industrial sector. Improved occupancy levels at Killarney Mall and Woodmead Value Mart reduced shopping centre vacancies significantly. The Park (previously Elardus Park) experienced slightly higher vacancies while the centre was being upgraded. The upgrade has already resulted in several national tenants signing new leases. While the decision was made not to undertake significant developments, several smaller projects are underway which will improve occupancy levels, enhance the value of the portfolio and contribute to the upliftment of the areas in which Octodec is predominantly invested.

“The disposal of 19 assets during the period valued at R213 million was concluded at premiums to book value. This process validated the quality of our assets and reflects our realistic approach to property valuations. The proceeds from asset sales will be used to pay down debt and support strategic upgrades. We have also continued to strengthen our balance sheet by reducing our exposure to interest rate risk and we are committed to reduce our LTV,” commented Anthony Stein, FD of Octodec.

A total of nineteen properties were sold during the period for a total value of R213 million. Eleven of these properties were transferred during the period for a total consideration of R129.2 million at an average combined exit yield of 5.7% and 2.6% premium to book value. Transfer of the remaining eight properties will take place in the first half of the new financial year for a total consideration of R83.7 million at an average combined exit yield of 12% and 2.7% premium to book value. In addition, Octodec has approved the disposal of  five more non-core properties with a carrying value of R125.6 million.

Wapnick concluded: “The way in which we manage Octodec provides us with a high level of control and is based on management’s experience through many cycles over the past 40 years. We continue to position our portfolio to be resilient in nature, underpinned by the diversity of the portfolio, large tenant base, sound operating fundamentals and prudent capital management.”

South Africa’s muted growth outlook is not sufficient to support a meaningful improvement in Octodec’s operating environment in the short term and future distributions are expected to remain in-line with the current period. As previously indicated, any meaningful improvement in the environment should provide the stimulus necessary for Octodec to resume distribution growth.