Dipula Income Fund has published its financial results for the year ended August 2023 (FY2023), reporting increased property values, higher occupancy levels, and improved rental renewal growth.
The REIT reported increased non-core asset disposals of R190 million (FY2022: R56 million) with sales achieved at an aggregate 9% yield. Proceeds are being recycled into property revamps, repaying debt, and the roll-out of renewable energy and back-up power solutions.
Its leasing results reduced total vacancies from 10% to 6% with lease renewals concluded at a positive renewal rate of 1.1%, up from 0% in FY2022 and resulting in increased rentals and property income.
Net property income grew by 1.8% based on a 3% increase in revenue and a moderate 3.4% increase in property-related expenses, notwithstanding the current high inflation and higher-than-inflation increases in administered costs.
Dipula’s balance sheet strength was bolstered by its higher property valuations, and it concluded the financial year with debt levels stable at the R3.6 billion mark. Its low gearing of 35.7% and an ICR of 2.8x are both comfortably within covenant levels of 50% and 2x respectively.
The company had R178 million undrawn facilities (FY2022: R80 million) on hand at yearend and GCR Ratings affirmed Dipula’s credit rating of BBB+(za) long-term and A2(za) short-term with a ‘stable’ outlook.
However, South Africa’s significant increase in interest rates resulted in a 14.1% increase in net finance costs and it was the main contributor to a 6.9% decrease in Dipula’s distributable earnings to R514 million. The REIT declared 90% of distributable earnings as dividends.
Given Dipula’s successful capital restructure in June 2022 – its dual A and B share structure was consolidated into a single share structure, where all A shares were repurchased, and B shares (DIBs) became the company’s only ordinary shares – full-year distributable earnings per share of 56.96 cents cannot be compared to prior periods. Dipula’s capital restructure resulted in the number of DIB shares tripling and a more than 200% increase in liquidity this year.
After yearend, Dipula restructured its debt, concluding a R3.8 billion debt syndication programme that has diversified its funding sources, increased debt tenure and reduced funding margins.
“Dipula is strategically focused and defensively positioned to continue to deliver sustainable value for stakeholders. The first signs of economic improvement will immediately reflect in our performance,” reports Izak Petersen, CEO of Dipula Income Fund.
Improved occupancy is a stated management focus, and Dipula signed leases worth R1 billion in rental income. Of this, approximately R300 million were new leases and R700 million renewals. It also reported an improvement in its tenant retention ratio from 72% to 84%.
Dipula’s industrial property portfolio demonstrated a robust performance with a steady, low 2% vacancy. Its retail real estate investments benefitted most from new leases and vacancies improved from 10% to approximately 7%. Showing the most improvement, office vacancies were reduced from 29% to 15% during the year. Dipula’s residential portfolio comprised 716 rental accommodation units valued at R409 million, or 4% of rental income, with a stable vacancy rate of 7%.
Dipula’s portfolio valuation increased by 2.9% year-on-year. The increased value of Dipula’s defensive industrial (9.7%), retail (2.9%) and residential (5.6%) portfolios was somewhat offset by a decline in the office portfolio value (2.5%).
“As the improved occupancy in our office portfolio shows, better performance in this sector was evident during the year. However, a significant improvement in offices is highly correlated to economic growth. Businesses need to be doing well for office occupancies and rentals to increase,” notes Petersen.
The REIT dedicated R147 million to asset refurbishments during the year, funded primarily by recycled capital from asset sales, and has allocated a further R370 million for upgrades in the next 18 months.
While the expected slowing of interest rate increases is good news for much-needed market stability, Petersen says ongoing concerns include local economic weakness, high unemployment, lacklustre economic reforms, power shortages and deteriorating logistics infrastructure as well as the impact of global events. Considering the high volatility being experienced in the economy, Dipula’s board has decided not to provide guidance for FY2024.
“With scant economic growth of 1% and 1.1% expected by the SARB for 2024 and 2025 respectively, Dipula will remain focused on keeping occupancies high, making our properties attractive for rental, unlocking value from our assets, keeping a tight grip on costs, and rolling out our energy strategy. The higher occupancy levels and lower funding margins already in place will support us in tough trading conditions. We are well placed to navigate the expected economic headwinds and poised to benefit from any economic improvement,” Petersen concludes.
