Equites Property Fund has published its results for the half year ended August 2023, highlighting its distribution per share (DPS) of 65.37 cents. With its South African and UK property portfolios performing in line with expectations, driven by strong like-for-like net property income growth, record-low vacancy rates, and an uptick in property valuations, the REIT’s investment property portfolio increased by 4.8% to R28.2 billion with its gross lettable area (GLA) having increased 5.8% to 1.45 million square metres during the six months.
“We are pleased with the strong momentum generated in our portfolio optimisation drive during the period. We divested R1.9 billion of non-core assets and reinvested into world-class logistics campuses and state-of-the-art distribution centres that are tenanted by blue-chip tenants on long-term leases This will further reinforce the quality and durability of the portfolio. A notable example of the value created through the process has been the disposal post-period end of the Tesco tenanted property in Hinckley at a 16.2% premium to book value, releasing R710 million in equity for the Group,” commented Equites CEO, Andrea Taverna-Turisan.
The company’s portfolio, fully let with only one remaining vacancy in the UK, produced a weighted average lease expiry (WALE) of 13.7 years and 97.3% of rental income derived from A-grade tenants.
Equites has R14.5 billion in debt facilities with a weighted average debt maturity profile of 3.3 years and R2.1 billion in cash and undrawn facilities. At period end, it had hedged 84% of debt maturing within one year. The adjusted loan-to-value (LTV) ratio (including property disposals contracted but expected to complete post-period-end) remained broadly unchanged at 38.1%, with a targeted LTV ratio of 35% by year-end.
It continues to receive strong support from lending institutions and debt capital markets in South Africa. Equites raised R750 million in 3-year and 5-year notes at its most recent debt auction in September 2023, which was 3.3 times over-subscribed. A tightening in credit spreads was achieved, with the average spread of 135 basis points for the two notes considerably below the 3m Jibar+205 bps cost of the 3-year R600 million maturing debt which the new notes replaced. This will notably reduce the funding cost for Equites going forward. GCR Ratings affirmed the national scale long- and short-term issuer ratings of Equites Property Fund at AA-(ZA) and A1+(ZA) respectively in July 2023 and revised the outlook from ‘Positive’ to ‘Stable’.
Equites’ development pipeline
The total pipeline of development and acquisition opportunities in South Africa amounts to R2.5 billion across 192 609m² of prime logistics space (Equites’ share). The R1.2 billion of capital expenditure outstanding at the reporting date will be disbursed over the next 18-month period. The Group’s investment opportunities are focused on pre-let development agreements in South Africa, with no substantial development expenditure anticipated in the UK.
The R591 million state-of-the-art TFG Witfontein development was completed in August 2023. Equites also completed two speculative developments with a total GLA of 26 000m2, which attracted new tenants such as Emirates Logistics and Ricoh. RLF, a subsidiary of Equites, is progressing well with the development of two world-class logistics campuses, located in Canelands, KwaZulu Natal and Wells Estate, Eastern Cape, which will both be let to Shoprite on 20-year leases. Equites is also progressing with the construction of a campus for Shoprite in Witfontein, Gauteng.
The Group is constructing a second facility for Cargo Compass SA with a capital value of R142 million and a development for Normet Group with a capital value of R82 million in Jet Park. The Group concluded a development agreement with SPAR Encore (a subsidiary of The SPAR Group Limited) for a 17 066m² facility with a capital value of R189 million.
It is undertaking a R6.3 billion property disposal programme for FY2024, to recycle capital, optimise its portfolio, and lower its LTV ratio. In addition to the disposal of non-core assets, Equites has rightsized its land holdings from 8% of the portfolio at year-end to 5%, driven largely by the contracted sale of land at Newport Pagnell, UK, and land development for TFG, Shoprite, Cargo Compass SA, SPAR Encore and Normet Group. Equites also concluded the disposal of its Hinckley property to Relif UK I B.V., a Realterm Europe Logistics Income Fund company, for a total consideration of £29.75 million (R710 million) in September 2023. The Group continues to engage with interested parties regarding the 10 sites on the ENGL development platform in the UK and expects to conclude a transaction in the second half of FY2024.
Several more disposals are being targeted by year-end. In line with previous guidance, the Board expects that the Group will achieve a full-year DPS of between 130 and 140 cents per share.
The national vacancy rate for A-grade warehousing space in South Africa is below 1% and demand continues to be strong. Market rentals have increased by more than 23% from R65 per m2 in 2020, to at least R80 per m2 in 2023. Equites continues to experience market rental growth in lease renewal negotiations with existing tenants, as well as lease agreements for new builds with new tenants. This should continue to support property valuations.
In the UK, given the under-rented nature of Equites’ portfolio, the reversionary yield on the portfolio is estimated to be 6%, above average prime distribution yields of between 5% and 5.25%. This bodes well for property values in the future. The impact of rental uplifts on property valuations was evident from the recently concluded rent review at the GXO-tenanted property in Coventry, where the rental uplift of 39% corresponded with an increase in the property’s value by 14.3%, in pound terms.
The Group had closed all CCIRS positions by the 31st of August 2023. These instruments were settled on maturity and as indicated at year-end; the net interest income received of R94 million has not been included in distributable income. Going forward, shareholders will benefit from improved growth in NAV per share through long-term Rand weakness.
Over recent months, the Equites share price has traded at levels that made share buybacks attractive. The Group has to date repurchased 10.3 million shares in the open market for a total value of R143 million. Careful consideration is being applied to the impact of the buybacks on gearing levels.
“The Group remains confident in its ability to drive sustainable value creation for shareholders over time, underpinned by an impeccable property portfolio as well as structural tailwinds in the sector. Our track record of developing world-class facilities for our clients continues to unlock opportunities for the fund to grow,” concluded Taverna-Turisan.