JSE-listed property developer Equites Property Fund remains on track to deliver on its dividends per share (DPS) guidance of between 5% and 6% growth for the 2022 financial year.
For the same period, Equites is also targeting a positive net asset value per share (NAVPS), which will be supported by the development pipeline within the Newlands venture, in the UK.
The logistics and warehousing-focused real estate investment trust (Reit), therefore, expects to achieve a double-digit total return for the 2022 financial year, which is a function of its distribution yield on NAVPS, as well as the growth in NAVPS.
Meanwhile, Equites on October 5 reported 5.3% year-on-year growth in DPS to 78.38c for the six months ended August 31, with its NAVPS up 2.2% to R17.63. Both measures now exceed pre-Covid-19 levels.
The fair value of the group’s investment property portfolio increased by 9.4% to R21.1-billion as at August 31.
Equites CEO Andrea Taverna-Turisan said the group’s strong performance over the past six months was underpinned by resilient property portfolios in South Africa (SA) and the UK, and that it was further enhanced by the “attractive development pipeline of logistics properties in the top-end of the UK logistics market”.
The portfolio quality is evident in the weighted average lease expiry (WALE) of 14.7 years and that 97% of revenue is derived from A-grade tenants. Combined, Equites said, these aspects indicate a high level of income predictability and low risk of tenant default.
The group’s SA logistics WALE has more than doubled over the last year, from 7 to 15 years with a portfolio vacancy rate of just 1%. A robust in-force contractual lease escalation rate generated like-for-like net rental growth in the SA portfolio of 7.5%.
Rental collection rates of 99.6% in SA and 100% in the UK were achieved over the period.
With 96% of the portfolio comprising logistics assets, Equites continues to benefit from the outperformance of the logistics property market globally. Supply chain optimisation, the growth in e-commerce and consumer requirements for faster fulfilment continues to drive strong occupier demand for warehousing space, said Taverna-Turisan during the virtual presentation on October 5.
However, while the UK portfolio has been steadily expanding, the group is still an SA-focused Reit and continues to focus on growing the domestic portfolio through acquisitions and developments.
Equites invested R1.2-billion in its UK and SA development pipelines during the six-month period.
The civil unrest which plagued SA in July only impacted one property in the portfolio, with damages estimated to be less than R1-million, which is fully recoverable under South African Special Risk Insurance Association (Sasria), according to the group.
Meanwhile, the 2.2% increase in the NAVPS was driven by progress on two major UK developments, namely Hermes and Amazon, which resulted in a R348-million uplift in value, along with the completion of pre-let developments in SA.
The UK portfolio’s value increased by 5.1% on a like-for-like basis, supported by the compression of prime distribution yields in the UK during 2021, in Pound sterling.
In line with its policy of externally valuing each property at least once every 18 months, Equites externally valued 74% of the SA portfolio and 100% of the UK portfolio at the end of the period.
In SA, the Covid-19 pandemic and prevailing macroeconomic climate resulted in the moderation of property valuations as at February 28, which remained steady over the six months to the end of August.
In the UK, property valuations have reached an all-time high, driven by the structural changes in the logistics space and resulting in strong demand for this asset class. Higher property values are also being supported by strong rental growth in all key logistics nodes in the UK.
The occupier market in the UK logistics market has reached record levels, with the take-up of warehousing space now 50% higher than pre-Covid-19 levels and the national vacancy rate decreasing to 4.4%.
As a consequence, national market rents are estimated to grow by between 5% and 7% for this year.
Average land prices in England have demonstrated a yearly increase of 40%, while the demand for construction materials has driven an increase in the average cost to build a warehouse. Capital invested into the UK industrial and logistics market more than doubled in the first half of the current financial year to a record £6-billion.
Against this strong investor appetite, the prime yield for UK logistics properties decreased by 75 basis points over the last 12 months to 3.25%, making it unfeasible for Equites to acquire new product in the open market.
Equites’ decision to partner with a best-in-class development team, Newlands Property Developments, affords Equites the opportunity to expand in the premium sector of the UK logistics market at a discount to open market values.
The UK portfolio delivered a 5.1% uplift in value over the six-month period, in local currency terms.
Equites’ first development in the Newlands venture reached practical completion on September 15, post-period end.
The development is a world-class last-mile distribution facility in Peterborough, with a total development cost of £35-million (about R694-million) at a 5.68% yield on cost. The facility will be let to Amazon on a 15-year triple-net, fully repairing and insuring lease.
The development for Hermes on Hoyland Plot 1 is on track to be completed in February. The total development cost is estimated to be £72-million (about R1.4-billion) and Hermes has signed a 20-year triple-net, fully repairing and insuring lease.
The combined valuation uplift on these two developments is estimated to be in excess of R500-million, creating significant value for Equites shareholders.
Equites Newlands Group (ENGL) entered into agreements for development of two distribution centres or Promontoria on Hoyland Plot 2, with a total funding commitment to Equites of about £24-million (R492-million) and an expected profit attributable to Equites of about £6-million (about R120-million), equating to an ungeared return on invested capital of 25%.
The proceeds will be used as equity for further opportunities within the Newlands partnership.
The group estimates the pipeline of development opportunities within ENGL to exceed £800-million (R16-billion) over the next three to five years, which will provide Equites with an opportunity to build scale in the top end of the UK logistics market.
Despite the poor macroeconomic conditions prevalent in the South African economy, the logistics sector has proven its strength over the past 18 months, with robust demand for A-grade warehousing space and numerous national and multinational tenants expanding their warehousing footprint.
Online shopping is gaining momentum in SA, comprising 2.8% of total retail sales in 2020 (about R28-billion), with expectations that this could reach 5% of total retail sales in 2022 (about R50-billion).
Equites is of the view that the focus on supply chain optimisation and growth in e-commerce will be strong tailwinds to the logistics property market in future.
During the period under review, the group concluded an agreement with fellow property developer Attacq to buy two logistics properties, as well as an undivided half share in a development opportunity in Waterfall for Cotton On, for R511-million.
The weighted average lease expiry across all three properties is about ten years, with weighted average acquisition yield of 8.5%. The Waterfall Logistics Hub is regarded as one of the pre-eminent logistics parks in SA.
During the last six months, Equites completed a R291-million distribution campus for Sandvik, a global mining and excavating company, let on a ten-year triple net lease.
Equites also secured two development leases for a total value of more than R450-million, of which the first is a R198-million extension to the Foschini Group warehouse in Lords View, which will include the installation of a solar photovoltaic (PV) system and additional upgrades to prepare the facility for an Excellence in Design for Greater Efficiencies (EDGE) certification.
The lease term will be ten years and will run coterminous with a lease extension on the existing property to 2032. The second agreement is for the development of a R256-million flagship distribution facility for Cargo Compass SA in Jet Park on a ten-year lease.
Equites maintains a conservative capital structure, which is reflected in the recent upgrade of its credit rating by Global Credit Ratings to AA-(ZA).
The group raised R1.3-billion in equity over the last six months, which decreased the group loan-to-value to 28.6%.
The group refinanced over R1.2-billion of debt facilities during the period, while maintaining a weighted average debt maturity of three years.
Equites’ listed domestic medium-term note (DMTN) programme was updated and increased to R10-billion during the period.
Equites issued a R300-million three-year floating rate note off the DMTN at an exceptional margin of three-month Johannesburg Interbank Average Rate plus 165 basis points per share.
The pricing of the note is reflective of the strong financial standing of Equites in the SA debt capital market, the company said, noting that the listed debt pricing also positively impacted on recent refinancing of new and existing debt facilities and allowed Equites to further reduce the cost of debt from 5.44% to 4.97% over the past 12 months.
The updated programme also enables Equites to issue sustainability-linked notes funded by SA banks and other financial institutions, allowing the group to continue to be a leader in environmental, social and corporate governance (ESG) in SA.
ESG has become one of the group’s key strategic areas of differentiation and Equites aims to be at the forefront of green building developments.
Equites has qualified for a higher level of EDGE certification and has obtained EDGE certifications for all new developments in the last 12 months. The group has also recently completed the refinancing of several facilities with SA banks that incorporate various forms of sustainability metrics.
The South African government’s increase in permitted renewable energy generation without first applying for a licence will allow Equites to deploy capital towards increasing the solar PV at properties above the current 1 MW level, with Equites’ tenants being the direct beneficiaries.
Further, Equites had cash and committed undrawn facilities of R1.6-billion at the end of August, allowing sufficient capacity to execute the development pipeline, while providing the necessary flexibility to execute on any further opportunities, should these arise.
Equites has a total pipeline of current opportunities of R4.2-billion, with R2-billion of capital expenditure outstanding at the reporting date.
The pipeline will be funded from the cash and debt facilities, debt raised against completed developments, new listed debt instruments and several equity sources — including dividend reinvestment programmes and the potential sale of a property in the UK.