Dipula Income Fund posts robust half-year results despite macro-economic pressures

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

Dipula Income Fund has published its results for the financial half-year ending February 2023, reporting an increase of 3% in contractual rental income to R556 million (HYFY22: R541 million) with net property income tracking slightly ahead of the prior period at R447 million (HY1FY22: R441 million). Property related expenses, which were limited to a below inflationary 3%, increased to R239 million (H1FY22: R232 million).

Our portfolio of mainly convenience, rural and township retail centres continue to prove defensive, notwithstanding a deterioration in the domestic macro-economic environment, with rising interest rates and unprecedented levels of load shedding. Our strong financial performance is underpinned by diligent asset management initiatives and a consistent focus on cost containment,” commented Dipula CEO, Izak Petersen.

Despite the REIT’s operational performance, distributable income for the period contracted by 7% to R257 million (H1FY22: R276 million), mainly due to a 3.25% increase in interest rates on a like-for-like basis.

Distributable earnings per share were recorded at 27.72 cents, with dividends per share of 25.85 declared, representing a pay-out ratio of 90%. Distributable earnings per share and dividends per share are not comparable with the prior period due to Dipula simplifying its A- and B-share structure into a single ordinary share with effect from June 2022.

Dipula concluded 99 new leases (excluding residential leases) with a total gross lettable area (GLA) of 20 825m2 during the period, amounting to a lease value of approximately R120 million at a weighted average escalation of 7.3% and a weighted average lease expiry (WALE) of three years.

137 lease contracts (excluding residential leases) representing a total GLA of 63 897m2 were successfully renewed, representing gross lease income of approximately R387 million over the WALE of three years.

“We are especially pleased to have achieved an average 4% positive rental reversion on renewed leases for retail and 1% for offices, although lease reversions for the industrial portfolio contracted by 2% on average.

“Management’s focus on attentive tenant service across all sectors is bearing fruit, with an impressive overall 91% tenant retention rate, compared to 78% in the prior period,” added Petersen.

Non-residential vacancies increased marginally to 9.9% from 9.3% previously, mainly due to structural changes globally in the commercial office sector following Covid-19.  

“We are working hard at lowering the group’s vacancy to between 6% and 8% in the next 18 months,” Petersen commented.

“We will reduce retail vacancies primarily through re-tenanting of highly lettable space vacated by Game at Gillwell Mall, as well as the completion of the Atrium @ 45 mall redevelopment and various other strategic letting interventions. In addition, we have seen encouraging demand for office space in recent times.”

At period end, Dipula’s residential portfolio comprised 712 apartments valued at R387 million with an aggregate vacancy of 9% (H1FY22: 18%).

As at 28 February 2023, Dipula’s portfolio was valued at approximately R9.6 billion (H1FY22: R9.2 billion) driven by revaluation increases at the end of August 2022. The portfolio comprises 179 properties (H1FY22: 186 properties) with a total GLA of 915 243m2 (H1FY22: 925 251m2).

We are pleased to have grown our NAV by 7% period-on-period to R5.9 billion (H1FY22: R5.5 billion),” he said.

Lower growth in office rental income and some diesel costs under-recoveries impacted Dipula’s cost-to-income ratios negatively. Although still competitive relative to industry norms, Dipula’s cost-to-income and administrative cost-to-income ratios were 40.4% (2022: 38.5%) and 5.3% (2022: 3.9%) respectively. 

The group invested approximately R63 million in refurbishments and redevelopments during the period and disposed of 16 properties with a book value of around R180 million. The aggregate disposal amount was higher at R183 million, and at an average yield of 9%. Proceeds from the sales will be used to settle debt and recycled into strategic value enhancing refurbishments as well as the roll-out of renewable energy and back-up power across the portfolio.

During the period, Dipula successfully renewed debt of R711 million at a weighted average margin of 2.1% above three-month JIBAR, for a weighted average period of 3.6 years. A new three-year, R100 million facility was raised during the period at a margin of 2.03% above three-month JIBAR and post period-end, another R100 million facility was raised for a one-year tenure at a margin of 1.6% above three-month JIBAR.

As at 28 February 2023, Dipula’s blended average cost of debt was 8.74% (H1FY22: 8.13%) and the company had total debt of R3.7 billion with a weighted average debt expiry rate of 2.8 years. All debt is Rand denominated and 73% (H1FY22:78%) of the group’s interest rate exposure was hedged.

The group loan-to-value (LTV) ratio was stable at 36.9% (H1FY22: 36.7%), well within its lenders’ LTV covenant level of 50% with its interest cover ratio (ICR) at a comfortable 2.9 times, compared to the lender limit of two times.

Dipula shareholders will be offered an election, in respect of all or part of their shareholding, to re-invest the cash dividend of 25.84695 cents per share in return for shares (the “re-investment option”).

By electing to participate in this re-investment option, shareholders will be able to increase their shareholding in Dipula without incurring dealing costs. In turn, the REIT will benefit from an increase in the value of shareholders’ funds available to support its growth initiatives.

Further details regarding the re-investment option, including the manner in which the number of shares to which a participating shareholder is entitled, and the action to be taken by shareholders in order to participate in the re-investment option, will be set out in a circular to shareholders to be issued on 17 May 2023, and an announcement in this regard will be released on SENS.

Going forward, Dipula believes that the office portfolio will show improved performance after having stabilised from challenges over the past number of years, whilst demand for good space by retail tenants wishing to expand will drive positive performance in the retail sector. Management believes that the industrial sector will remain relatively robust, whilst affordable residential apartments are expected to record high occupancies in the short term.