IPF delivers solidly under difficult conditions while managing its gearing positively

Andrew Wooler, joint CEO of Investec Property Fund.
Andrew Wooler, joint CEO of Investec Property Fund.

Investec Property Fund has released its financial results for the year ended March 2021, reporting a 33.8% decline in distributable earnings year-on-year to 97.08cps (March 2020: 146.64cps).

However, the fund reported a significant improvement in its gearing with its loan-to-value ratio having dropped to 38.3% from 47.5% in March 2020 which allowed the company to continue paying out dividends throughout the pandemic at a payout ratio of 95% of its distributable earnings – significantly higher than that of its peers.

A strong performance from its European logistics assets, for which distributable income increased by 9.2%, was offset by the performance of its local assets which saw a reduction in like-for-like net operating income of 21.2% due to Covid-19. 100 000m2 of leases were renewed locally during the reporting period, improving Investec Property Fund’s lease expiry profile at the expense of distributable income due to rent reversions on the renewals.

Despite facing Covid-19 related challenges in H1, the fund’s operational and cashflow performance metrics showed signs of stabilisation in H2.

The numbers reflect a divergent set of results, with the South African portfolio weathering a greater Covid-19 impact” comments joint CEO, Andrew Wooler.

Europe, however, saw further tailwinds with logistics demand and structural changes accelerating through the pandemic, underpinning the fund’s stability through the downturn. Despite unprecedented levels of global uncertainty and volatile operating environments, we made significant progress in delivering on our stated strategy. This included the successful completion of the de-gearing flightpath following the conclusion of the Pan-European Logistics (PEL) debt refinance in H2 and exiting of our minority positions in Australia, UK and PELI. This resulted in further strengthening of the balance sheet, which together with our simplified portfolio, contributed to a resilient performance from the fund.”

In response to the pandemic, Investec Property Fund committed to R62 million of rental relief to tenants, while achieving a 96% cash collection rate in South Africa. It concluded significant lease re-gears on c. 100,000m2 of space that, while contributing to the decline in Distributable Earnings Per Share (DEPS) and having a short-term impact of Net Profits Interest (NPI), served to improve the fund’s Weighted Average Lease Expiry (WALE) and promote long-term income sustainability.

Although performance in South Africa recovered marginally in H2, this has been offset by the lower accretion from the reduced ownership in PEL and the Belgium assets and no dividend income from the UK Fund. The fund also incurred higher costs linked to the refinancing and restructuring that occurred within the PEL platform during the year.

The European portfolio continues to perform well, benefitting from the acceleration of growth drivers in the sector because of global lockdowns, with strong rent collection rates (99%), low tenant defaults and high occupancy rates maintained through the period. The PEL portfolio delivered distributable earnings growth of 9.2%, largely driven by underlying rental growth, where the fund achieved 8.5% average positive reversions, together with the accretive nature of acquisitions concluded in FY20.

We are pleased with the performance of our assets in our core geographies of South Africa and Western Europe. South Africa remains a core focus for the fund, with the local portfolio comprising of ninety high-quality properties in strategic, well-located nodes. Despite an under-pressure economy, H2 saw a moderate recovery in the South African business, depicted by an improvement in the debtors’ position, stronger rental collections, recovery of rental deferral concessions previously granted and no insolvencies,” commented joint-CEO Darryl Mayers.

Investec Property Fund’s balance sheet now comprises of 44% of offshore investments, namely the strategic interest in the PEL portfolio, giving the fund exposure to the European logistics market. The diversified South African asset base makes up the remaining 56%. This sectoral and geographical focus has allowed Investec Property Fund to deliver returns throughout the cycles despite negative reversions in the domestic market.

“While the performance of REITs is impacted by the operating climate, it is the quality of Investec Property Fund’s underlying assets, hands-on asset management approach and strong balance sheet that will continue to hold the Fund in good stead,” added Wooler.

As such, the board resolved to declare a dividend of 47.71cps for the six months ended 31 March 2021, bringing the full year dividend to 92.23cps, representing a pay-out ratio of 95% of distributable earnings.

It is expected to take time for the property sector’s performance and growth to return to pre-Covid levels and risks to the fund persist, particularly in South Africa where the short-term economic outlook remains muted, and the low growth environment is likely to persist for the near term. Investec Property Fund’s focus in South Africa will be to maintain the stability and quality of the portfolio so that it is well-placed to benefit when the cycle turns.

Europe, however, continues to see structural tailwinds in the logistics sector with continued demand and lack of supply contributing to a positive outlook. As a result, positive momentum is likely to be sustained going forward with continued rental growth and yield compression expected, together with the roll-out of the development pipeline.

“The Investec Property Fund management team has been encouraged by the strength and resilience that the Fund has displayed through the turmoil of the last year, which resilience can largely be attributed to the quality of the underlying portfolios and strength of the Fund’s balance sheet” concluded Mayers.