Vukile Property Fund has reported 3.5% growth in dividends to 80.84 cents per share for its half-year to 30 September 2019 in line with its market guidance.
Vukile is a South African retail REIT with R35 billion of property assets of which 48% are in Spain through its 82.5% held subsidiary Castellana Properties SOCIMI SA. Its unique investment proposition in the South African market is providing stable, predictable and growing Rand-denominated income streams for shareholders generated from property assets in one of Europe’s strongest economies.
Laurence Rapp, CEO of Vukile Property Fund, notes that the half-year results reflect an incredibly strong performance from its Spanish portfolio together with a continued solid showing from its South African shopping centres even in a stalled economy. Vukile’s half-year results extend its track record of unbroken growth in dividends for investors into its sixteenth year.
Rapp comments, “Vukile’s clear strategy, retail sector specialisation and strong operational emphasis is paying off, and the positive outcome can clearly be seen in this standout set of results”
The robustness of Vukile’s funding, financial, and business models was affirmed by GCR Ratings upgrading the national scale issuer ratings for Vukile to AA-(ZA) and A1+(ZA) for the long and short term respectively, with a stable outlook.
Vukile’s inbuilt diversification means its assets and future earnings are split almost equally between Southern Africa and Spain. With its employment growth and an A-grade credit rating with stable outlook, Spain is contra-cyclic to SA. This makes Vukile a solid Rand-hedge property company.
Now the eighth biggest REIT in Spain by market capitalisation and seventh largest retail landlord by gross lettable area, Castellana is well established as a substantial player in the Spanish market. Castellana increased its EPRA NAV by 3.1% and saw good deal flow and growth opportunities. Its proven business model continues to grow base rentals and scale up value in an environment that isn’t over-retailed.
Castellana is consolidating Spain’s fragmented retail property market. Its assets topped EUR1bn after the accretive acquisition of the 30,000sqm dominant, modern Puerta Europa shopping centre in Algeciras, Cadiz. It also invested EUR37m in El Corte Ingles big-box units and is redeveloping them. The 12-month project at Los Arcos, Bahía Sur and El Faro shopping centres is already over 80% pre-let and should be completed in September 2020. It will further add to the dominance and the value of the centres.
A strong operational performance in Spain reduced vacancies to 1.4%, with positive rental reversions up 6.7%, and 21% rental growth on new leases. Portfolio retail sales increased by 3.1%, double the 1.4% national benchmark. Similarly, shopper numbers grew 5.3%, well above the national index of -1.2%.
Vukile’s Southern African portfolio of shopping centres delivered another strong performance despite a distressed operating environment. “The defensive nature of our grocery-anchored shopping centres, which mostly sell everyday goods to everyday South Africans and have a mix of retailers that offer necessities and value-driven items, is serving us well,” confirms Rapp.
Operationally, Vukile’s tight focus and new internal structures helped to buck the trend and reduce vacancies to 2.8%, retain 82% of retail tenants and gain impressive like-for-like net property income growth of 6.1%. It’s internalised leasing team is building closer relationships with retailers and, actively engaging second-tier nationals, it introduced 92 new brands to the portfolio in six-months thereby enhancing the overall customer experience through expanded choice.
By providing profitable trading space for retailers, like-for-like trading densities increased 3.5% in the portfolio, well ahead of national averages, and with the Vukile team’s asset management interventions making a significant contribution, trading density growth improved by nearly 5%. It lowered its rent-to-sales ratio to 5.9%, which supports the ability to attract the best retail tenants for its shopping centres.
The net cost-to-property revenue ratio tightened to 16.9%. Vukile cares for its properties to ensure they are efficient, compliant and enjoyable for its customers and tenants. Sustainable energy and water management is a significant factor in this. Adding science to the building maintenance process, Vukile completed a comprehensive portfolio-wide building assessment to produce a five-year capital expenditure plan that will see it investing some R70m per annum in maintaining its SA assets.
Vukile’s R516m acquisition of Mdantsane Mall in the Eastern Cape, which transferred in November, extends its geographical footprint and its foothold in South Africa’s high-density township retail market with another dominant asset.
Vukile collaborates with retailers to provide exceptional experiences for the people who shop at its nodally dominant centres. Understanding customers is at the heart of this. Vukile has invested heavily in installing fibre at its centres and has various customer-centric pilot programmes in both South Africa and Spain, which enables it to understand customers better. “This insight helps us to manage our shopping centres better, which leads to better customer experiences, retailer trading and results for our shareholders,” notes Rapp.
With this in mind, a strategic priority for Vukile is investing in skills around customer-centricity. Developing these capabilities internally is a key success factor for its shopping centres going forward.
Transformation is at the forefront of Vukile’s business sustainability. In another real commitment to transforming the property sector, Vukile has partnered with AWCA Investment Holdings (AIH) to form a black-women-owned and -managed property asset management company, which will start by managing Mbako Property Fund. Mbako has acquired Vukile’s R700m remaining non-retail property assets as its initial portfolio.
Rapp concludes that Vukile will maintain its position as a high-quality low-risk retail REIT invested in defensive low- and mid-income retail centres in SA while capitalising on Castellana’s strong and growing market share in Spain.
“Vukile is in a confident position as a well-diversified business with strong cash flows that offer predictability and ongoing growth for its shareholders.”
Vukile reaffirmed its guidance of between 3% and 5% dividend growth in FY20.