JSE-listed real estate investment trust Octodec Investments recorded a solid performance for the six months ended February 28, against a backdrop of subdued market recovery.
Speaking to Engineering News on May 9, MD Jeffrey Wapnick said the period was tough, with Covid-19 and some restrictions, and the economy remaining very subdued.
However, he highlighted that conditions now seemed to be improving slightly, with moves away from lockdowns.
Of note to the company was the return of students to residential properties, which resulted in a considerable reduction in residential vacancies towards the end of April, Wapnick highlighted.
This had a knock-on effect, he noted, as demand for the company’s retail space and the ability of its tenants to pay, also improved.
While the fourth wave of Covid-19 infections from November 2021 to January had been expected to further slow down the local economy, only minor restrictions were placed on tenants' businesses, resulting in a limited impact on Octodec’s portfolio during the interim period.
Therefore, fewer rental discounts were granted to tenants over the period.
Revenue earned on a contractual basis after Covid-19 rental discounts increased by 5.1% to R944.4-million from R898.7-million in the prior interim period.
FD Anabel Viera told Engineering News the company had, from a very low base, an increase in revenue in the interim period under review.
At the same time, property operating expenses increased by 5.2%, mainly owing to increased administered costs such as assessment rates.
The group's bad debts remain under control at 1.9% of gross revenue compared with 2.5% for the prior period.
Wapnick said Octodec had managed to contain most property costs through hands-on management of the buildings, with a focus on maintenance management, ensuring the company’s buildings remained attractive to its tenants.
He highlighted a digitalisation drive, which included doing things in a more cost efficient way as well as systems being in place to gather the considerable data that the company gleaned from tenants, which was then used to manage the business.
There are also online portals for certain information for tenants, which reduces waiting times.
Wapnick also outlined initiatives such as the introduction of shared or furnished accommodation at mixed-used development The Fields in Tshwane, and value-added services such as Wi-Fi to tenants in various other buildings, which has contributed to the increase of Octodec's residential income by 5.6% on a like-for-like basis.
This, together with a focused marketing strategy to increase letting, has also resulted in reduced vacancies in the company’s residential buildings.
Residential vacancies decreased to 7% since February.
Subsequent to half-year, the occupancy level improved considerably at The Fields with students' take-up of shared or furnished accommodation, and at Kempton Place through the increased activity at OR Tambo International Airport, with both former and new tenants returning to take up occupation.
Over the last two years, Octodec's retail portfolio had been impacted by lockdown restrictions, and footfall has not returned to pre-Covid levels in the central business districts. Despite this, on a like-for-like basis and excluding Covid-19 rental discounts, rental income from retail increased by 4%.
Educational facilities and places of worship are experiencing increased student numbers and congregants, respectively. However, the period under review was characterised by challenging trading conditions and these institutions are only beginning to emerge from the pandemic.
Wapnick highlighted an improvement with new inquiries and collections from these two sectors.
Octodec’s office portfolio has also been adversely affected by the current weak economic climate. Moreover, the oversupply of office space has put pressure on occupancy levels, which is in line with the broader sector.
Although vacancies have remained stable, rental income has reduced marginally by 1.5% on a like-for-like basis and before Covid-19 rental discounts.
Octodec's industrial portfolio has performed relatively well. However, there have been negative rental reversions and a resetting of rentals.
As a result, rental on a like-for-like basis and before Covid-19 rental discounts decreased by 4.5%. Occupancy in the industrial sector has remained stable, with a number of the company’s industrial buildings 100% occupied.
As a percentage of gross lettable area, including properties held for redevelopment, vacancies have improved marginally to 22.6% compared with 22.8% in the previous interim period.
The residential sector reflected a considerable decrease in vacancies compared with August 2021. Despite pressure on rental income in the industrial sector, the vacancies have decreased from 11.7% to 9.9%.
Retail shopping centre core vacancies also improved from 7.3% to 6%, with Octodec’s convenience shopping centres being well let.
Octodec remains focused on its balance sheet optimisation and disposal strategies to pay down debt and refinance loans where needed.
Viera said active balance sheet management and liquidity planning shielded the business, resulting in an improved loan-to-value of 41%, compared with 43.2% from the previous six months.
With the lifting of Covid-19 lockdown restrictions, Octodec had seen an improvement in the conclusion of sales of properties previously identified for sale, with this having been tough to conclude previously, Wapnick explained.
As such, Octodec sold and transferred 12 properties for a total net consideration of R121.6-million.
Moreover, Viera informed that the company also had unconditional sale agreements for the disposal of further properties for about R120-million, which, if concluded as expected, would transfer before August.
Meanwhile, Wapnick said that, in the next few weeks, the company would undertake a major R58-million refurbishment project of Shoprite in the Pretoria central business district.
Octodec declared a cash dividend of 50c apiece for the six months under review.
However, given the broader economic and political uncertainty, the board would not provide any guidance on possible distributable income and dividends for the second half of the current financial year.
“Consumer confidence has risen in light of the cancellation of the lockdown restrictions, and there is a renewed energy in the Tshwane central business district. However, the local macro environment remains a cause for concern.
“With gross domestic product expected to grow at under 2% for the foreseeable future, we do not anticipate significant growth in rental income.
“In addition, inflation is also expected to increase, which will also impact our costs and ultimately, net property income. With that said, Octodec remains resilient thanks to management's intimate knowledge of the underlying assets in the portfolio and the broader property market,” Wapnick said.