Equites Property Fund has published its full-year results ending February 2023, highlighting a 4.1% growth in annual distribution per share to 169.60 cents and declaring a final gross dividend of 88.022 cents per share.
“We are pleased with the resilient set of operational and financial results in a tough environment. Equites’ strategic focus on long-term leases with A-grade tenants and low vacancy continues to provide a high degree of income certainty over a sustained period,” commented Equites CEO, Andrea Taverna-Turisan.
The REIT reported that 97.8% of its revenue during the period was derived from A-grade tenants with a weighted average leasing expiry (WALE) of 13.8 years.
The most notable feature of its operating environment during the second half of the financial year was the sharp increase in interest rates which caused substantial cap rate expansion in the UK logistics property market with prime logistics yields shifting outwards by 175 basis points to 5%. Although market rental growth cushioned a portion of the negative impact of rising property yields, Equites’ UK portfolio value declined by 21% on a like-for-like basis, in sterling. Its SA portfolio’s value performed in line with expectations, increasing by 4.3% on a like-for-like basis.
The reduction in the UK portfolio value, as well as development capital spent, increased the group’s loan-to-value (LTV) ratio from 31.5% to 39.7% as of February 2023, which is at the top end of the target LTV ratio of 30% to 40%. To unlock capital and execute on the development pipeline in SA, the REIT has commenced a strategic property disposal process centred on optimising the portfolio through the disposal of non-core SA and UK assets. The recycling of assets will achieve several key capital management outcomes: the funding of the development pipeline without the need to access equity markets, a reduction in LTV to below 35% and an improvement in portfolio quality through the replacement of older properties with Equites best-in-class developments. It has already successfully concluded five property disposal transactions with a combined transaction value of R2 billion post year-end. A further portfolio of approximately R3.3 billion is being considered for disposal in SA and the UK by February 2024.
Following several expressions of interest in the UK platform, Equites has decided to explore strategies to unlock value from its shareholding in ENGL. The partnership with Newlands Developments has successfully completed several developments and retains an expected development pipeline of c.£2 billion (+R44 billion), over the next seven years. Its board believes that it is in the group’s best interest to explore the sale of its stake in the development platform and has appointed Rothschild & Co as its corporate advisor to facilitate a transaction. The stake in ENGL will only be sold if the board believes the offer will maximize value for shareholders.
Given the change in market fundamentals in the UK, Equites has noted that its primary geographic focus for acquisitions and developments will shift to SA where it continues to witness unabating demand for warehousing space, driven by national retailers and third-party logistics companies optimising their supply chain networks. Equites is currently capitalising on this opportunity, given its strategic land bank, specialised focus on logistics facilities and track record of delivering a world-class product to its clients. It experienced rental growth of approximately 20% for A-grade warehousing space during the period, driven by a record-low national vacancy rate for modern distribution facilities, an increase in construction cost inflation and substantial warehousing requirements across various types of occupiers.
Equites’ pipeline of development and acquisition opportunities in SA amounts to R3.7 billion across 304 228m² of prime logistics space which includes three development and sale and leaseback agreements with Shoprite to the value of R3.3 billion, with twenty-year lease terms. Other notable ongoing developments in SA include the state-of-the-art TFG development, a second facility for Cargo Compass SA, a development for Normet Africa and a development for Spar Encore (a subsidiary of Spar Limited).
It is also prioritising the utilisation of existing land holdings in SA. Over the last twelve months, it has transferred R651 million of its existing land parcels in SA to properties under development, unlocking the full value of these land parcels. UK land holdings are expected to be included in an ENGL disposal. The Group is targeting a maximum of 5% of its total asset base being land holdings by FY25.
Highlights for the year include the conclusion of a new ten-year £105 million facility at a fixed rate of 3.92% with Aviva and a successful second public debt auction of R1.25 billion off the JSE-listed DMTN programme that was 1.9 times over-subscribed. The debt auction was instrumental in lowering the credit spread for the Group across the curve and led to an increased diversification in lenders, with 29 financial institutions invested in the group’s listed debt along with seven bilateral funders. The weighted average debt maturity profile has increased to 3.4 years. No equity capital raises were undertaken.
Equites has embarked on several strategic activities which are central to the operations in the upcoming year. The potential disposal of the ENGL platform is the largest of such activities. As the process is still in the preliminary stages, the quantum and timing of the disposal are still to be finalised and both will have an impact on the earnings for FY24.
Further to the planned restructuring of the UK platform, it is planning to replace approximately R1.5 billion of GBP-denominated debt with ZAR debt, to rebalance the LTV ratios in the two jurisdictions.
Furthermore, CCIRS income will be excluded from the calculation of the FY24 DPS. The Group will, however, continue to distribute 100% of its distributable earnings. The board, therefore, expects that the group will achieve a distribution per share of between 130 and 140 cents for the next financial year.
“The compelling external trends that point to buoyant long-term demand, combined with our track record of developing world-class facilities for our clients continue to open up a wealth of opportunities for the fund to grow,” concluded Taverna-Turisan.