Octodec navigates difficult first half; expects full year distribution growth of 6%
Major projects in support of long-term value uplift progressing well
- Forecast distribution growth of approx. 6% for the year to 31 August 2016
- 3,3% increase in Net Asset Value per share to R28,60
- 86,6% of exposure to interest rate risk hedged
- Like-for-like rental income growth of 5%
- R278,6 million of R708,9 million spent on three major developments
Tuesday, 3 May 2016 – JSE listed REIT Octodec today announced a reasonable half year performance in a toughening business environment with muted economic growth. The period was marked by the successful upgrading of a number of properties which, together with a proactive approach to letting, resulted in an increase in rental income.
The portfolio comprising 324 properties realised like-for-like growth of 5% in rental income. This was achieved through Octodec’s hands-on management approach, tight cost controls and portfolio enhancements. Revenue increased 5,7% for the period mainly due to contractual escalations, improved letting and an increase in the recovery of utility and assessment rate charges.
Jeffrey Wapnick, Managing Director of Octodec, commented: “The portfolio performed in line with our expectations, delivering a 5,7% increase in revenue for the six month period. These results are reflective of the challenging economic environment and although we focussed our efforts on cost control, our first half earnings were muted by rising interest rates, the phased take up of units at Frank’s Place and investment in a number of projects. The benefit of these projects will be seen in the short to medium-term.”
Octodec’s continued focus on cost control saw the ratio of net property expenses to rental income decrease to 29,7% (31 August 2015: 30,4%) whilst bad debt right offs and provisions remained low at just 1% of total tenant income.
The mothballed Van Riebeeck Medical Building in the Tshwane CBD was acquired for R29 million and will be converted into 195 residential units at a cost of R110 million. In recent years, several other properties with high vacancies were acquired including Centre Walk, Fedsure and Re-insurance. These properties offer significant redevelopment opportunities, with resulting value being realised over time. To highlight this, Wapnick explained: “The recent redevelopment of Centre Walk in Tshwane saw us secure a 9365 m2 government office lease effective 01 March 2016 at a total monthly rental of R870 800.”
Octodec had three major projects worth approximately R708,9 million under construction during the period with R278,6 million spent by 29 February 2016.
1 on Mutual, a R152,7 million mixed-use development situated adjacent to Church Square in the Tshwane CBD will consist of 142 residential units, ground floor retail space and parking. This project is timed for completion in July 2016. “We are excited about the launch of this development as it offers tenants a more upmarket look and feel with excellent retail facilities anchored by Pick n Pay,” commented Wapnick.
Sharon’s Place (previously Centre Forum) a R380 million new residential development in the Tshwane CBD consisting of 400 units, parking and ground floor retail anchored by Shoprite, is situated adjacent to the new Tshwane House municipal development and set for completion in April 2017.
The Manhattan, a 180-unit residential development in Sunninghill, Johannesburg is progressing well. The total development cost of this 50%-held joint operation amounts to R80,9 million and completion is expected in late 2016.
“Continued investment in our portfolio contributes to the upliftment of the CBDs and positions us strongly to navigate challenging economic conditions as people increasingly look for value. We are also encouraged by the significant investments by government in infrastructure, including large offices and dedicated precincts that support our focus on the CBDs,” stated Wapnick.
The group’s loan-to-value ratio of 38% remained within the company’s target range and the all-in average weighted interest rate for all borrowings maintained at 8,9% per annum with 86,6% of borrowings fully hedged. At period end, the total Debt Capital Market (“DCM”) issuance was at R658,8 million, or 12,4% of the group’s borrowings.
Anthony Stein, Financial Director of Octodec, said: “We are in a strong financial position with sufficient facilities in place to fund our development pipeline. In addition, we also took the decision to protect our exposure to near-term interest rate risk by hedging 86,6% of our borrowings.”
The latest valuation confirmed a portfolio of R11,8 billion representing an increase of 1,4% or R158,8 million. This together with interest rate swaps contributed to Net Asset Value advancing 3,3% to R28,60 per share.
“We are in the business of unlocking value in living, working and playing spaces. Our experience gives us the ability to recognise value where others don’t see it through our innovative approach to upgrades and developments.
“Going forward we have adjusted our hurdle rates and will focus on higher yielding projects. These may include strategic partnerships that will support our growth and entry into new markets,” highlighted Wapnick.
The Board of Directors of Octodec has declared an interim cash dividend of 98,4 cents per share for the six months ended 29 February 2016. Shareholders will be entitled, in respect of all or part of their shareholdings, to elect to reinvest the cash dividend in return for Octodec shares.
“Challenging trading conditions and muted economic growth are expected to continue but we are confident that ongoing demand for well-located and quality spaces will see us continue to deliver long-term value for shareholders.
“Current indications are that full year distribution growth will be in the region of 6%,” concluded Wapnick.