Equites Property Fund has announced distributable
earnings for the six months to the 31st of August 2020 of 74.44
cents per share, consistent with the distribution of 74.43 cents per share in
the prior year.
Net asset value per share increased by 0.4% to R17.44. The
fair value of the property portfolio increased by 19.7% to R16.2 billion at the
31st of August 2020 with most of the growth in the property
portfolio attributable to pre-let developments in South Africa and the UK which
were completed over the last twelve months and, the impact of foreign currency
fluctuations over the period.
“The last six months, falling squarely within periods of
lockdown both in South Africa and the United Kingdom, have been the most
challenging in our trading history. While the logistics asset class remained
resilient relative to other asset classes, the impacts of the lockdowns in both
jurisdictions could not be escaped in totality” commented CEO, Andrea
“Against this adversity, our portfolio strategy of targeting quality assets on long-dated leases (Equites’ WALE is 10 years) with a strong predominance of A-grade tenants (94.6%), as well as our low vacancies (3.8%), continued to support a high level of income predictability and low risk of default on our rental streams. In addition, strong in-force escalations provide us with stable and predictable growth for the duration of the leases.”
The only specialist logistics REIT on the JSE with a market
capitalisation of R11 billion and sixty-three properties under management,
Equites’ portfolio has been carefully curated to bring together some prime
logistics assets in the most desirable locations, let to blue-chip covenants on
long dated leases.
Equites is currently included as the eighth largest company
in the FTSE/JSE SAPY index (by market capitalisation) and the REIT has cemented
its ranking as a fixture in this and other indices. The logistics asset class
has been proven to outperform in key markets over time and through careful
acquisition and development activity, Equites has managed to unlock significant
These factors have contributed to a strong appetite and
support from equity capital markets and it has allowed Equites to generate
market-beating returns for investors since listing.
In the past six months, the slowing growth in the UK’s
economy has been exacerbated by the pandemic. The economic risk presented by a
depressed economy as well as the uncertainty relating to Brexit is, however,
largely offset by the large-scale adoption of e-commerce and the demand drivers
which has been propelling the investment case for logistics properties. The
pandemic has further accelerated e-commerce penetration, with UK internet sales
as a percentage of total retail sales surging from 19% in 2019 to 26% in the
first half of 2020. As a result, intensifying occupier demand for new A-grade
logistics facilities is evident, with a 48% increase in the space take-up in
the United Kingdom in 2020.
Equites expects online retailers to continue to drive the
demand for logistics facilities, especially in respect of last-mile facilities.
While e-commerce penetration in South Africa remains relatively low (1.4% in
2019), research suggests that online sales could comprise more than 5% of total
retail sales this year, accelerated by lockdowns during the pandemic. The
strongest driver of occupier demand in the South African logistics market,
however, continues to stem from supply chain optimisation, with a notable trend
in the retail space on investing in digital transformation and online
platforms, these typically being supported by additional warehouse space.
Equites’ diversified blue-chip tenant mix further strengthened the naturally
defensive nature of its portfolio.
Rental collection rates remained between 98.1% and 100.0%
over the lockdown period, both in South Africa and the UK. R30 million of
rental deferrals were granted in South Africa and £326 000 in the UK, most of
which is expected to be recovered within the current financial year. Equites
also conducted a thorough Covid-19 credit risk assessment, which resulted in an
expected credit loss of R3.7 million across the portfolio has been recognised
as an impairment loss in profit or loss. Total direct Covid-related costs for
the six months to August 2020 amounted to approximately R29 million. The costs
include, inter alia, the funding of tenant deferrals, the cost of holding cash
on money market and in reserves to prevent any liquidity issues, providing
contractors with once-off grants to continue to pay the lowest income earners
on site and ensuring the protection of their employees.
The more lasting Covid-19 impact on its operating performance will however be in indirect costs in respect of delays in construction, delays of rental inflows from new developments, postponement of expansion plans and the loss of development leases due to delayed investment decisions for a post-pandemic environment.
During the period, Equites completed three developments in
South Africa, with a capital value of R107 million and two developments in the UK,
valued at £25 million.
Equites also has ongoing developments of close to R1 billion
in Gauteng and Western Cape and £12 million in Leeds, UK, which should be
completed in the current financial year.
Equites’ strategic partnership with Newlands, a local
logistics developer, provides them with the opportunity to unlock value on land
holdings in the UK in the coming years, and to grow the portfolio by developing
assets at a discount to market value.
Equites and Shoprite concluded a joint venture to own and
manage a portfolio of distribution centres and associated undeveloped bulk land
in Brackenfell in the Western Cape and Centurion in Gauteng, which was
announced in February 2020. Post period end, all conditions precedent was met,
and transfer of the distribution centres are imminent.
Equites continues to make significant progress towards
increasing the frequency of external valuations and have externally valued over
75% of its income producing portfolio between February and August 2020. The pandemic
and prevailing macroeconomic climate has caused uncertainty regarding
valuations, however, both in South Africa and the UK, high quality logistics real
estate has proven to be resilient. Both discount rates and exit capitalisation
rates have remained relatively flat for prime logistics assets, with a slight
moderation in discount rates for more specialised assets and certain low
Prudent balance sheet management
Equites believes that a robust treasury policy is a
cornerstone from which to maximise stakeholder value. The optimal mix of debt
and equity is continuously evaluated to minimise their cost of capital wherever
possible. Equites’ loan-to-value at 29.5% remains well within its target of
25%-35% over time. On the 31st of August 2020, 95.6% and 86.9% of
the existing term loan balances and total committed future cash outflows were
hedged, respectively. The group has reduced the all-in cost of debt in South
Africa and the UK by 93 bps and 4 bps, respectively, over the past six months.
On a fully hedged basis, its all-in cost of debt is 6.05%,
with a weighted average debt maturity profile of 3.5 years. Given its exposure
in the UK, it continues to manage foreign exchange rate risk to provide
short-term stability in the growth in distributable earnings but to gain from
the hard currency appreciation over the medium and long term.
Equites has established several diversified sources of debt
funding both in the UK and in South Africa and now have debt facilities of R6.0
billion across term facility agreements, unsecured listed and unlisted notes
and working capital facilities. They issued a significantly oversubscribed R600
million, 3-year, unsecured floating rate note at an interest rate of 3-month
JIBAR + 205bps during September 2020. Post period end, it also concluded a
first-of-its-kind in the South African REIT sector, R1.6 billion facility
agreement, linking the all-in cost of debt to its ESG risk rating score.
Equites has more than R1.0 billion of undrawn available
facilities and cash and short-term deposits, enabling them to execute its
development pipeline while providing the necessary flexibility to execute on
any further opportunities should these arise. Their robust credit metrics have
culminated in GCR affirming Equites’ national scale long term rating as A+(ZA)
and the short-term rating at A1+(ZA), with a change in outlook from stable to positive.
Their conservative financial profile has enhanced the robustness of its balance
sheet in a turbulent economic environment.
Sustainability and transformation
Equites’ continued efforts towards sustainable value
creation have reduced its environmental footprint through green building
techniques, provided significant community upliftment through their social
programmes, reduced energy costs for its tenants and lowered its funding costs.
Its transformation initiatives have also earned Equites a
level 4 B-BBEE rating for the third consecutive year, with a verified black
ownership of 51%.
“While the effects of Covid-19 are still unfolding, we
are confident that we have effectively managed the first-round impacts of the
pandemic and have amassed a portfolio which will continue to be resilient in
the face of adversity. For this reason, the board expects that the company will
achieve full year dividend growth of 2% – 4%. Equites has established itself as
a leading owner and developer of high-quality logistics assets in South Africa
and the UK, an asset class that is expected to continue to outperform over
time. The disruptive impact of e-commerce is creating profound structural
tailwinds which makes this market increasingly desirable and Equites is
strongly positioned to benefit from this trend” concluded Taverna-Turisan.
Source: Propertywheel.co.za | https://propertywheel.co.za/2020/10/equites-attributes-portfolio-growth-to-pre-let-developments/