Emira Property Fund reports strong rental income growth

Geoff Jennett, CEO of Emira Property Fund.
Geoff Jennett, CEO of Emira Property Fund.

Emira Property Fund has declared a final dividend of 66.65 cents per share, taking the dividend for its full financial year to 30th of June 2021 to 118.65 cents per share – up 13.7% on the previous year.

The REIT’s full-year distributable earnings of R649.1 million was 3.2% down from the previous year and the company declared a cash-backed dividend based on its demonstrated strong balance sheet and liquidity position.

Emira also reported that it has delivered on its key objectives for the year despite an unprecedented operating environment. It provided a further R33.6 million in rental remissions to ensure that as many of its tenants – mostly operating in personal healthcare, hospitality, and entertainment – could endure the Covid-19 imposed lockdowns. The company optimised its net income, selectively recycled an asset, upgraded its core properties, maintained above average occupancy levels, improved its liquidity, and extended its debt expiry profile.

Geoff Jennett, CEO of Emira Property Fund, attributes the company’s strong performance to its diversification of assets, tenants, investment methodologies, and funding.

With a balanced portfolio of diverse office, retail, industrial, and residential assets, Emira has 77 directly held properties valued at R9.7 billion in South Africa and its equity investments in 11 grocery-anchored, open-air convenience shopping centres in the USA represents 13.6% of its asset base. Its total portfolio is diversified across property sectors and internationally in a combination of directly held assets and co-investments with its partners.

“The diversified nature of Emira’s business model has proven defensive and our pre-pandemic portfolio rebalance has served our stakeholders well. We are pleased with how the portfolio and the business has performed this year in a tough environment, which is an excellent result, all things considered” comments Jennett.

Outperforming SAPOA’s average results, Emira closed its financial year with a 6.4% vacancy level in its direct portfolio. It increased its tenant retention rate to 82%, achieving monthly collections of 99% of rent billed, and collections of 95% of deferred rentals during the April, May, and June 2020 period. Arrears decreased by R9.5 million over the year to R63.8 million.

Like-for-like tenant turnover in Emira’s urban retail portfolio, which comprises 38% of total property asset value and is 95.9% occupied, increased by 6.4% year-on-year. Its industrial properties, which are 96.5% occupied and make up 14% of the overall Emira property portfolio, have held up well and there is an increase in demand for space with relatively favourable rentals being achieved. Office properties, which comprise 24% of total property assets and are 83% occupied, have the furthest to go considering shifting working habits and the trend of downsizing and consolidating office space. Emira’s sole directly held residential property with co-investors the Feenstra Group, The Bolton, Rosebank, had an occupancy of 94% at the end of June, demonstrating good demand for well-run, well-priced, quality accommodation.

Emira is still under contract to acquire the multitenant Northpoint Industrial Park in Cape Town for R103 million, but transfer has been delayed and is expected to take place by October 2021. It disposed of the Steiner Services property in Gauteng at a 17% premium to book value and an exit yield of 8.0% and currently has three assets, valued at R224.3 million, held for sale.

To maintain and improve its directly held assets, Emira invested R150 million in projects across its portfolio. “While there is an argument to limit capital expenditure in times of uncertainty, Emira’s view is that continual reinvestment into our portfolio is paramount to ensuring our properties remain relevant and attractive. Projects focused on making Emira’s properties more sustainable remain a priority, particularly those that improve energy efficiency and water conservation,” notes Jennett.

This aligns with Emira’s short-term focus. It has prioritised containing and reducing vacancies in the face of oversupply and fierce competition. It is also expediting projects for alternative energy, water harvesting and back-up power in the face of utilities supply disruptions and continued above-inflation increases of rates, taxes and utilities costs that pose major risks for the entire property sector.

Emira also has indirect exposure to the residential rental property sector, with a 34.9% stake in specialist JSE-listed REIT Transcend Residential Property Fund. Transcend’s total property portfolio is valued at R2.5 billion, and it contributed R37.8 million to Emira’s distributable income for the year.

Through Enyuka Property Fund, a dedicated rural and lower LSM retail property venture with One Property Holdings, Emira invests indirectly in 24 shopping centres valued at R1.66 billion, which continued to perform well. Enyuka contributed R83.7 million to Emira’s distributable income for the year.

Emira’s international investment strategy in the US with its partner, The Rainier Companies, saw the successful acquisition of its eleventh US shopping centre asset this year – the 336,907sqf Newport Pavilion power centre on the doorstep of the world-class Cincinnati CBD.

“This is a great asset that meets every measure of our investment strategy and strengthens the quality and value of Emira’s equity investment portfolio in the US. We are pleased that Emira’s strong balance sheet, with cash on hand to deploy, enabled us to pursue this acquisition. Our investment strategy facilitates capital recycling and allocation into more resilient environments that can act as a buffer against South Africa’s constrained economy with US$-denominated returns,” says Jennett.

Emira’s equity investments in the US now total R1.7 billion ($118.9 million) and its after-tax income from equity co-investment in the US totalled R258.8 million of which R125.5 million is distributable and contributed R96 million to Emira’s distributable income for the year. A portion of income has been retained at property level in the US to ensure cash reserves remain bolstered.

The US economy rebounded more rapidly than expected after its sharp 2020 contraction, and Emira’s grocery-anchored dominant value-orientated convenience retail centres in robust markets in the US performed better than enclosed malls and lesser quality properties in the context of Covid-19. They are geared towards communities, provide essential goods and services especially with grocer anchors, focus on the popular value retail segment, have quality tenants, and offer open-air environments where people feel safe. In rare instances where rental relief was given to select tenants, it was generally in return for lease extensions and deferred payment. The portfolio has a weighted average lease expiry of 6.2 years. Payment of deferred rentals for most agreements began in January 2021. Rental collections for the year to end-June were strong, and in line with pre-pandemic levels.

Vacancies in the US portfolio moved up from 5.2% to 7.1% but improved from the half-year high of 8.5%. Leasing momentum accelerated in the second half of FY21 as retailers rebounded and resumed their expansion plans. Overall, leasing activity was solid considering the many early renewals negotiated in late 2020, and agreements were concluded with positive rental reversions.

The value of Emira’s local properties reduced by net 5.7% to reflect current market prospects. Emira’s net asset value decreased 0.8% to 1 518 cents per share because of the reduction in property values, however this was offset by a decrease in net derivative liabilities and an increase in its equity-accounted investments in the US. Emira reduced its loan-to-value (LTV) ratio from 43% to 40.9%, giving it ample debt headroom and bringing it closer in line with the long-term LTV target of below 40%.

Global Credit Rating Company affirmed Emira’s corporate long-term credit rating of A(ZA) and short-term rating of A1(ZA), with the outlook given as negative, in May 2021. The REIT continues to benefit from diversified sources of funding and has facilities across all major South African banks. It has access to undrawn facilities of R829 million and cash on hand of R96.9 million.

As a responsible corporate citizen committed to genuine transformation in South Africa, Emira again improved its B-BBEE rating, this time moving from a Level 5 contributor to Level 2, with verified effective black ownership of 76.68%.

In the current uncertain circumstances, Emira said it was unable to provide earnings and distribution guidance. However, in line with its transparent disclosure, it has noted that its management KPI target for distributable earnings is 114.65 cents per share for the year to 30 June 2022 and that it expected to continue with its policy to pay out the cash backed portion as dividends to shareholders.

“We are confident in the strength of Emira, but our tenants need a growing economy to thrive, and until this is achieved in South Africa rentals will remain under pressure as landlords strive to contain rising vacancies. The strong recovery in the global economy is encouraging, but although some positive signs have started to emerge locally, the South African economy is slow to bounce back, which is a concern. In contrast the USA economy is growing again and returning to near-normal. The recovery of the US economy will provide a buffer for Emira and confirms for us that being diversified into an economy with different fundamentals is a good risk mitigation strategy. We will continue to do the basics of our business excellently, look after our assets well, and ensure we are strongly positioned for future opportunities when conditions eventually improve,” Jennett concludes.