Dipula Income Fund battles escalating office vacancy rate of 16%

Izak Petersen, Chairman of the SA REIT Association
Izak Petersen, CEO of Dipula Income Fund.

Dipula Income Fund has published its results for the year ended August 2021, reporting an increase of 23.5% in its distributable earnings to R552 million from R447 million in the prior year.

This resulted in A-share distributable earnings growth of 3.9% to 118.95 cents per share and a 64.7% increase in the B-share distributable earnings to 89.70 cents per share.

We are pleased with our performance under extremely challenging trading conditions”, commented Izak Peterson, CEO of Dipula Income Fund. “Our team pulled out all the stops and showed enduring commitment under tough conditions while our portfolio continues to demonstrate its defensiveness”.

Contractual rental income for the year increased by 8.4% to R1.089 billion (2020: R1.004 billion), while the group managed to limit property expenses to R444 million (2020: R423 million), an increase of 5%.

Net property income amounted to R866 million (2020: R858 million) following the R13.7 million (2020: R49 million) rental relief granted to tenants during the current financial year. Net finance costs reduced by 6.5% to R283 million (2020: R303 million) due to debt reduction initiatives and interest rate cuts.

The group’s cost-to-income ratio reduced to 36.3% (2020: 38%) with its administrative cost-to-income ratio reducing slightly to 3.1%.

Its portfolio value remained stable at R9 billion comprising of 187 properties (2020: 190 properties) with a total gross lettable area (GLA) of 926 765m2 (2020: 923 964m2). The residential rental component at year end consisted of 712 units (2020: 440), valued at R434 million (2020: R265 million) which amounts to 3% GLA (2020: 1%) and 6% by rental income (2020: 1%).

Property valuations on a like-for-like basis were 0.2% higher than the prior year, which contributed towards a 3% increase in net asset value (NAV) to R10.30 (2020: R10.00).

Dipula concluded new leases with a total GLA of 52 250m2, which translates to R238 million in lease value at a weighted average escalation of 7.3% and a weighted average lease expiry (WALE) of 2.9 years. It concluded renewals with a total GLA of 94 961m2 which amounts to a gross lease income of R398 million over the lease term with a WALE of 2.1 years.

The portfolio vacancy factor, excluding residential, increased to 8% (2020: 7%) driven primarily by the office sector. Vacancies by sector were retail (9%), office (16% – 2020: 9%) and industrial (4% – 2020: 3%).

With a tenant retention ratio of 72% for the year (2020: 78%), most of the vacated tenants had been replaced by yearend. Its portfolio average lease reversion rate was -2.6%.

However, the leasing, vacancy, and retention information above excludes residential vacancies which were 20% due to Palm Springs in Cosmo City which is still recovering from the impact of the pandemic-related lockdowns. Occupancies at Urban Villages Midrand, Bruma and Norwood were 92%, 94% and 100% respectively.

During the year under review, Dipula acquired properties to the value of R294 million at an aggregate capitalisation rate of 9%.

We acquired the remaining 49.9% of Shoprite Marikana and Marikana Old Church Street, for a purchase consideration of R63 million. We also bought an additional 30% of Palm Springs for R78 million as well as Urban Villages Bruma and Midrand for R153 million. These transactions were part funded from cash reserves and the balance with new debt facilities of R50 million,” noted Petersen.

Dipula spent R52 million on capex during the year and has budgeted a further R238 million over the next 18 months, of which R172 million is earmarked for portfolio improving refurbishments.

Disposals of R70 million were made during the reporting period at an aggregate yield of 9.3%. An additional R32 million of disposals were still awaiting transfer at the end of the year. 

Debt facilities of R987 million were renewed at a weighted average funding rate of 6.3%, for a weighted average period of 2.4 years. Debt facilities of R97 million have been repaid. On the 31st of August 2021, Dipula’s all-in weighted average cost of debt was 8.2% (2020: 9.0%). The company had total debt of R3.4 billion. The weighted average debt expiry profile was 2.0 years, and the aggregate hedge expiry period was 2.4 years. All debt was ZAR denominated and 67% (2020: 68%) of the group’s interest rate exposure was hedged.

Dipula had undrawn facilities of R272 million at year-end. Post year-end, the group concluded the renewal of facilities amounting to R1.2 billion at a weighted average cost of 5.99% for a weighted average period of 3 years.

We are pleased that our loan-to-value ratio has reduced to 36.5% by the end of the financial year. This provides us with a buffer to navigate these difficult times, especially with the looming risk of an increase in interest rates,” Petersen remarked.

The violent protest action during July 2021 cost the REIT more than R100 million and it was still busy with re-instatement work at year-end.

We hope that government realises the seriousness of the situation and the devastating effect that such events have on employment, economic development, further investment into the economy and the reputation of South Africa. As things stand, we expect steep increases in insurance and security costs amongst others. We want to contribute to solutions and invest more in South Africa to create much needed jobs,” said Petersen.

Despite the existing challenges, the group is still committed to investing more and growing in South Africa as recently evidenced in its announcement to the market that it has concluded formal agreements for a potential equity investment of R1 billion.

A condition for the transaction is that Dipula will create a single class share structure.

We expect that once this transaction is approved and implemented, Dipula shareholders will be aligned, Dipula will be positioned to unlock value for shareholders with greater investor demand for our share, the NAV discount will narrow, and it will result in much improved share liquidity”.

This should enable us to take advantage of potential consolidation and strategic opportunities within the property sector. We hope that all shareholders will be pragmatic in finding a compromise amongst themselves for the strengthening of Dipula in the interest of all stakeholders. This deal is for the sake of a sustainable, successful, Dipula,” Petersen stated.

Going forward, Dipula will continue to take advantage of market opportunities to capitalise.

Key for 2022 is to resolve Dipula’s capital structure and we are confident that we will achieve this and that Dipula will thrive as a single ordinary share REIT,” he concluded.  

Dipula declared a final dividend of 59.93 cents per A-share and 44.60 cents per B-share thus bringing the total A-share dividend and B-share dividend for the year to 118.95 cents per share and 89.70 cents per share, respectively.

Historically, except for FY2020 in respect of which no dividends were paid due to liquidity constraints, Dipula has declared 100% of its distributable earnings as dividends. Dipula returned to a dividend paying position in respect of H1 2021, paying 100% of distributable earnings as dividends. For FY2021, the board has resolved to pay out 100% of its distributable earnings consistent with its prior practice (and noting that Dipula’s retained earnings in FY2020 resulted in improved liquidity in FY2021).

However, from FY2022, in evaluating distribution decisions, the board will have regard to Dipula’s ongoing capital requirements which include debt reduction commitments, growth and capital expenditure programmes, with the result that a pay-out ratio will likely be prudent. As the board is of the view that the dividend entitlements applicable to Dipula’s dual share structure are premised on a full pay-out of its distributable earnings, the board is likely to consider that, while Dipula has a dual share structure, it may be preferrable to pay no dividend rather than to impose a pay-out ratio on the company’s distributable earnings. If Dipula no longer proposes to meet the distribution requirements of a REIT, it would become a property entity that ceased to hold REIT status under the JSE Listings Requirements. In these circumstances, Dipula would retain its earnings and, after meeting its capital requirements, would reduce its gearing over time.