Equites Property Fund has published its interim results ended August 2022, highlighting a 4.1% growth in its interim distribution per share to 81.58 cents, Net Asset Value (NAV) per share up 0.8% to R18.77, and a fair value of the group’s investment property portfolio (including assets held-for-sale) which increased by 2.3% from R25.7 billion at 28 February 2022 to R26.3 billon at 31 August 2022.
“We are pleased with the strong set of operational and financial results. Our performance was underpinned by compelling, long-term external trends such as the importance of supply chain optimisation, growth in e-commerce and consumers’ demand for faster fulfilment, as well as by Equites’ own internal strengths, which include robust property fundamentals, disciplined capital allocation and a strong balance sheet,” commented Equites CEO, Andrea Taverna-Turisan.
Taverna said Equites’ property fundamentals are exceedingly robust, with 0.1% portfolio vacancy, 97.5% of its revenue derived from A-grade tenants and a Weighted Average Lease Expiry (WALE) of 13.9 years, all providing a high degree of income certainty over a sustained period.
South African portfolio (62% contribution to the portfolio by value; 84% by revenue)
Its South African portfolio achieved like-for-like net rental growth of 6.5%, benefitting from the group’s robust in-force contractual lease escalation rate and exposure to A-grade tenants, who contribute more than 97% of revenue. While discount rates have started to increase due to rising interest rates, market rental growth has more than offset this increase, resulting in property valuations growing by 2% on a like-for-like basis over the six months.
Its contracted development pipeline consists of 228 000m2 of prime logistics space with a combined capital value of R2.7 billion.
The healthy underlying demand for logistics space is well-demonstrated by two speculative developments (20 000m2 Gross Lettable Area in total) recently completed by Equites’ development team which, in both cases, were 100% let before completion. Three more speculative developments are currently being rolled out with a total expected GLA in excess of 30 000m2, with one already let and the others in advanced stages of negotiation.
United Kingdom portfolio (38% contribution to the portfolio by value; 16% by revenue)
The UK logistics market continues to experience record levels of take-up, which against the lack of supply, is driving significant market rental growth. Take-up from non-ecommerce related retailers increased by 54% year-on-year. The national vacancy rate was 3.0% (1H22) compared to 6.7% pre-Covid (2H19), demonstrating that supply has struggled to keep up with demand over the last two to three years. Market expectations are for rental growth to exceed 15% on a national level for 2022.
UK property valuations are, however, under pressure with an increase in the prime yield from 3.25% at the start of 2022 to 3.75% at the reporting date, with a further 25 basis points yield expansion expected by the end of 2022. The repricing of assets is predominantly driven by higher interest rates and the associated debt costs. The UK like-for-like portfolio declined by 2.9% in sterling.
Equites’ UK development profits and valuation uplifts provide an attractive cushion against the re-pricing of assets on the back of yield expansion. The Equites/Newlands development venture (ENGL) completed the Evri (formerly Hermes) development in Barnsley, UK in July 2022, with a capital value of £107 million (R2.1 billion), equating to an independently valued fair value uplift of 43%. Evri signed a 20-year triple net, fully repairing and insuring lease which will afford Equites stable cashflows of £3.8 million (R76 million) per annum, with five-yearly (upward only) rent reviews. The increase in value from this asset has countered a large portion of the decline in the core UK portfolio’s value, illustrating the value creation through the venture with Newlands.
The UK portfolio is estimated to be under-rented by between 30% and 40%, with the embedded growth in cash flows to be unlocked over the next 36 months, as each lease reaches its five-year rent-review cycle.
Equites’ pipeline of potential development and acquisition opportunities in SA has increased substantially, comprising R3.7 billion across 329 788m2 of prime logistics space, with R2.5 billion of capital expenditure outstanding at the reporting date, to be disbursed over the next two years. These include agreements with Shoprite Checkers to sell and lease back two of its distribution centres (DCs) for R576 million and R165 million, respectively. The assets will be let to Shoprite on 20-year leases.
Notable ongoing developments include two developments for TFG: an extension to their facility in Lords View for a capital value of R185 million, as well as a new development in Riverfields with an expected capital value of R607 million. Equites also agreed commercial terms for a large-scale development in Gauteng for Shoprite, with a total expected cost of R1.2 billion. Further details will be provided to the market once the development agreement has been finalised.
In the UK, Equites currently controls 13 sites through its strategic venture with Newlands, with a gross developable area of more than 15 million ft2 (1.4 million m²). The group estimates the pipeline of development opportunities within ENGL to exceed £1 billion (R20 billion) over the next three to five years, providing it with an exceptional opportunity to build scale in the top-end of the UK logistics market.
ENGL is currently developing two DCs for Promontoria Logistics in Hoyland. The total funding commitment from Equites is approximately £24 million (R492 million) with an expected after-tax profit attributable to Equites of c. £5.0 million (R100 million), equating to an ungeared return on invested capital of 25%. The proceeds will be used as equity for further opportunities within ENGL.
In Basingstoke, ENGL has concluded two agreements, one with Lidl Great Britain Limited for the sale of 40 acres of land, with an agreement to implement infrastructure: and an agreement with Promontoria for the sale of 18.6 acres of land, with a development agreement for two DCs for Arrow Capital on a turnkey basis. The project is under review with the Basingstoke Council. The combined post-tax profit attributable to Equites from these two transactions is c. £31 million (R628 million).
As per the SENS announcement on the 4th of October 2022, ENGL has received a notice from Arrow cancelling the development agreement between ENGL and Arrow. In the cancellation notice, Arrow alleges that ENGL did not comply with the formal contractual notice requirements when it informed Arrow of the decision of the Basingstoke & Deane Borough Council refusing the planning application on the grounds of landscape and visual impact implications. ENGL is disputing the validity of the termination of the agreement and the parties have agreed to refer the matter to arbitration.
In the meantime, ENGL will proceed with the appeal in order to secure planning approval for the intended developments.
The Milton Keynes Council recently granted outline planning approval for a scheme situated at Newport Pagnell, estimated to deliver c.830 000 ft2 (77 109 m²) of GLA with a gross development value of c. £200 million (R4 billion) on completion. Equites is considering the optimal strategy to maximize shareholder value in terms of this opportunity.
Capital and funding
At 31 August 2022, the group had net debt of R9.1 billion at an all-in effective cost of 5.89%, and cash and undrawn facilities of R1.2 billion to fund acquisitions and developments. The group had hedged 86.2% of the existing term loan balances and 84.2% total committed future cash outflows.
Equites’ LTV ratio increased from 31.5% to 33.3% in the past 6 months, mainly due to development capital expenditure of R977 million (R614 million in SA and R363 million in the UK). The LTV remains well within its target LTV ratio of between 30% and 40%.
The weighted average debt maturity was successfully increased from 2.7 years to 3.3 years in two significant long-term funding transactions in the period. The purchase of DSV Campus in Gauteng by the venture between Equites and Eskom Pension and Provident Fund for R2.05 billion was facilitated by R615 million five-year debt funding provided by Absa Bank. Equites also demonstrated its ability to access long-term debt at favourable rates with the recent refinancing of its debt facility with Aviva, increasing the notional to £105 million, and extending the maturity to 2032, at a fixed rate of sub-4%.
To free up capital, the group disposed of six non-core assets in a statement 102 B-BBEE transaction for R190 million and is actively managing its existing portfolio to identify further capital recycling opportunities in both jurisdictions.
GCR recently affirmed the national scale long and short-term issuer ratings of Equites Property Fund at AA-(ZA) and A1+(ZA) respectively and revised the outlook to Positive GCR, noting the “strong access to capital,” “the quality of tenants” and “flexibility in structuring the development and funding thereof”.
Equites’ DPS guidance of between 4.0% and 6.0% for the current financial year remains unchanged. This guidance assumes no major corporate failures will occur, the GBP/ZAR exchange rate remaining materially unchanged and rising utility costs and municipal rates will be recovered from tenants.