JSE listed REIT Octodec Investments Limited has announced a satisfactory set of results for the half year to 29 February 2020, against a rapidly degrading economic environment which translated into a slight reduction in distributable earnings to 97 cents per share.
The board opted not to declare a dividend for the period in order to bolster Octodec’s cash position as it prepares to face very uncertain circumstances, exacerbated by Covid-19.
Total rental income grew by R29.6 million or 3.0% compared to the prior year despite recessionary conditions placing strain on tenants. The core portfolio, represented by those properties held since the previous comparable period, with no major development activity, reflected like-for-like rental income growth of 2.2%. Property costs increased mainly as a result of escalating repairs and maintenance costs necessary to ensure Octodec’s quality offering. The Park, a community shopping centre in Tshwane, received a fresh modern look, attracting new tenants including Pick n Pay Clothing, Ackermans, Gadgets Galore and an improved food offering.
Jeffrey Wapnick, Managing Director of Octodec explained: “We are satisfied with the Group’s reasonable performance given the recessionary environment and difficult trading conditions faced. Some pleasing progress was made towards certain strategic objectives that were set for the period; particularly the reduction of commercial vacancies, completion of value-enhancing smaller upgrades, recycling of capital through the sale of non-core or underperforming assets, and successful negotiations for the signing of our government leases, with 18 concluded just post period end”.
“The emergence of COVID-19 has brought many challenges, chief among them being uncertainty. The fast evolving situation required swift responses from management, led by our COVID-19 task team, to ensure business continuity. In addition to the health and safety measures which have delivered as planned, we have refocused our strategic objectives around strengthening our balance sheet and bolstering our cash resources. To this end, we have decided to retain distributable earnings but also halt new projects and expenditure on existing upgrades.”
Occupancy levels were stable during the period, with total and core vacancies of 17.9% and 11.7% respectively. Reduced vacancies were achieved across all of the commercial sectors with the most notable being in the industrial and shopping centre portfolios on the back of recent successful refurbishments which attracted new tenants or higher rentals. Occupancy levels in the residential sector, which were impacted by reduced tenant affordability and increased competition in the Johannesburg CBD, are a key focus with various value-adding marketing initiatives introduced to improve uptake in the later part of the first half. Wi-fi is in the process of being rolled out to most residential buildings and furnished accommodation is being offered at The Fields on a trial basis.
Octodec disposed of nine assets during the period valued at R145 million, at a combined premium to book value, validating the quality of its assets. Such asset sales are a key part of Octodec’s strategy with proceeds used to pay down debt and support strategic upgrades.
“We have always taken a prudent approach to managing our capital and took advantage of attractive interest rates to increase our hedged position and reduce interest rate risk during the period. We also proactively addressed short term loan expiries and entered into discussions with alternative funders to diversify our funder profile. Post period end, we successfully secured loan facilities with Absa totalling R450 million”.
“We are actively managing headroom and flexibility and continually engaging with all of our funders. Our cash resources and undrawn banking facilities total more than R600 million and we are comfortable with our liquidity position based on a number of stress tests that we have run” commented Anthony Stein, FD of Octodec.
The ongoing uncertainty and socioeconomic impacts of the global pandemic are expected to weigh down on Octodec’s performance for the remainder of the year, although it is too soon to effectively quantify the impact on earnings. Any future guidance provided on distributable income and pay-out ratios will depend on the impact of these factors, Octodec’s capital requirements and future performance as well as proceeds received from the sale of properties.
“We will continue to take proactive steps to protect Octodec by optimising working capital, preserving cash flow and maintaining liquidity whilst mitigating the reduction in earnings. Strategic stakeholder engagements are ongoing to support the broader value chain, including industry level discussions to ensure the sustainability of the industry.
“Octodec has been around over 50 years and survived through many difficult cycles. Whilst the challenges faced by individuals and businesses, big or small, are unprecedented, we will leverage all the experience available across our business to navigate the challenges ahead,” Wapnick concluded.