Vukile Property Fund has increased its earnings (Funds from Operations or ‘FFO’) by 9.5% for the financial year ended March 2022, declaring a total dividend of 105.8 cents per share and retaining R308 million to fund growth.
“We are very upbeat with the performance Vukile has delivered in the past year”, commented Laurence Rapp, CEO of Vukile Property Fund. “We produced strong results from our South African portfolio and an even better performance in Spain. Property valuations have started to rise in both countries, which shows the excellent quality of the cash flows emanating from the assets. Our balance sheet is robust, and we delivered exceptionally well on our capital rotation strategy, jump-started our growth, and returned to business as usual, paying dividends and providing market guidance. Vukile really proved its mettle this year”.
Retail-focused, Vukile’s assets of R33 billion are held 46% in South Africa and 54% in Spain through its 89.6% held Madrid-listed subsidiary Castellana Properties Socimi. The fundamentals of both businesses are strong with highly diversified income streams across different macroeconomies provided by blue-chip retail tenants. Tenants in Spain and South Africa in all product categories are reporting good performance, with trading trending upwards across the board.
Its local portfolio delivered strongly with vacancies reducing to 2.6%, a 93% tenant retention rate and 100% of billings collected. Retail reversions rallied and shifted to growth in the value (+4.9%), rural (+3.2%), and township (+0.7%) markets. Turnovers have surpassed pre-Covid-19 levels with like-for-like trading density increasing by 6.1%. The rent-to-sales ratio is 6.1%.
On the back of positive trading, there is keen demand from retailers for space at Vukile’s centres. As a result, the reversionary rental cycle has turned, and Vukile’s South African property values increased by 4.6%.
“We operate in the sweet spot in the South African market, with significant exposure to brilliantly performing township and rural shopping centres, where trading densities are up 10.2% and 6.9%, and footfalls are up 106% and 104%, respectively. These assets, with a high percentage of essential services tenants, fortify the defensiveness of our portfolio,” noted Rapp.
Castellana delivered a market-leading performance with reduced vacancies of 1.6%, positive rental reversions of 3.1% and a rental collection rate of 98.7%. Retail sales exceeded 2019 levels. Footfall finally breached the pre-pandemic level in April, a month after year-end.
As part of Vukile’s active asset rotation, it sold R800 million of non-core assets in South Africa at or above book value. Vukile also received R700 million in cash proceeds from selling 64% of its shareholding in its Namibian property portfolio and sold around R500 million of Fairvest shares following the Arrowhead merger. Castellana also sold non-core office assets for €26 million in Spain, also ahead of book value. The combined proceeds were largely rotated into Castellana’s acquisition of a 21.7% shareholding in Lar España for some €100 million.
“This is a great investment that provides strategic optionality to further grow our market share in Spain,” said Rapp about Lar España. “Its portfolio complements Castellana’s and represents an outstanding investment return. They are both specialist retail property investors with high-quality, low-risk assets, but in different areas of the country giving Castellana exposure to the entire Spanish peninsula“.
Since year-end Castellana has increased its stake in Lar España to 23%, further enhancing optionality and taking advantage of the excellent value in the share price. “Vukile is engaging with Lar España to understand their strategies and explore ways to reduce its discount to net asset value,” says Rapp.
Vukile’s interest cover ratio (ICR) of 3.4 times highlights strong cash flow from its assets. It has a stable loan-to-value ratio of 43%. Vukile has a diversified funding base and has already repaid or extended 66% of debt expiring in FY23 and has increased its undrawn debt facilities to R3.1 billion.
Fitch Ratings assigned Castellana a first-time investment-grade credit rating complementing Vukile’s investment-grade rating in South Africa. Castellana also significantly de-risked its debt expiry profile by refinancing a syndicated loan into a new seven-year €185 million facility, which extended its average debt maturity to five years. Castellana’s balance sheet improvements added to Vukile’s strong financial position. The group is more than 75% hedged for interest rate risk and well-positioned for the rising interest rate cycle.
This year Vukile concluded its first use-of-proceeds green loan with Nedbank CIB – a significant milestone in its sustainability journey. It will fund 19 solar energy projects and energy-efficiency initiatives in South Africa, supporting Vukile’s positive environmental action, energy-efficient and cost-efficient operations, and reducing climate impact.
To date, Vukile has installed 14.2 MWp in solar photovoltaic (PV) power systems through 21 different projects, substituting 9% of fossil-fuelled energy consumed across Vukile’s portfolio with power from renewable resources and decreasing Vukile’s carbon footprint by about 20 500 tons of CO2. It plans to install another 7.4 MWp of solar by end-March 2023 and to increase its sustainable energy consumption by at least 50% over the next three years. Castellana is also preparing to add PV capacity across its portfolio.
“Our investment in solar energy is a key focus of our ESG strategy, for which we set the foundation this year,” reported Rapp. “We will strive to maintain the high ethical standards assessed through our participation in the GIBS Ethics Barometer as part of our continued good governance.”
With limited new retail centres recently added in both Vukile’s markets, and a low likelihood of this happening – especially in Spain, Vukile’s dominant market positions auger well for good income growth and the roll-out of its healthy growth pipeline of asset purchases in South Africa and Spain.
“Our strong operational results have proven that we can navigate through headwinds to deliver our clear strategy of driving operational excellence, keeping our balance sheet strong and recycling capital to deepen our core investment strategies. They show a business that is well-positioned to pursue future growth to support long-term sustainability. With good growth opportunities in our pipeline, it makes sense for Vukile to be investment ready. Keeping cash on our balance sheet supports the ability to grow and create value for all our stakeholders”, concluded Rapp.
At a similar payout ratio to FY22, and based on current forecasts, Vukile expects to pay both an interim and final dividend in FY23, with growth in FFO and dividend per share of 5% to 7%, and a full-year dividend per share of between 111 and 113 cents.