JSE-listed specialist logistics real estate investment trust (Reit) Equites has announced it will sell its 60% shareholding in the Equites Newlands Group (ENGL) development platform, which will impact on earnings in the 2024 financial year.

CEO Andrea Taverna-Turisan pointed out that, given current market conditions and the group’s capital structure, Equites had resolved to no longer undertake large-scale developments in the UK, and rather extract maximum value from the sale of the ENGL platform.

As a result of the ENGL disposal, the company will not need to use cross-currency interest rate swap (CCIRS) and will, therefore, terminate its CCIRS positions and exclude CCIRS income from the 2024 financial year’s distributable earnings per share (DPS).

The company expects a significant impact on distributable earnings, since CCIRS contributed about 16% of DPS in the 2023 financial year.

DPS in the year ended February 28, 2023, was up 4.1% year-on-year to 169c for the financial year ended February 28.

CFO Laila Razack noted that, although the exclusion of CCIRS would impact on distributable earnings, shareholders would benefit from improved growth in net asset value (NAV) a share, as the rand weakened against the pound over the long term.

Taverna-Turisan told shareholders during a results presentation on May 9 that the level of interest in acquiring ENGL had been surprising, and that an interview process was going well.

He assured shareholders that the company would maximise value for them, since Equites had worked hard to build up the platform.

By selling the ENGL platform, Equites’ loan-to-value (LTV) ratio can be lowered by between 2% and 4%, from the current LTV of 39.7%.

Ultimately, the restructuring of the UK business will provide the group with a strong foundation for future growth, while still retaining some assets in the UK.

“The allocation of capital spend is skewed to South Africa, owing to more immediate opportunities available. The UK might become a better capital allocation opportunity in future, but, for now, the best allocation of capital is in South Africa,” Taverna-Turisan says.

He added that the year under review featured tough trading conditions, which were precipitated by turbulent financial and capital markets, and therefore necessitated a relook at the essence of Equites’ business.

For example, the UK portfolio value declined by 21%, in pound sterling, in the year, which led to a 2% increase in the LTV for the year.

The UK portfolio of ten assets was valued at £305-million.

In the period under review, NAV a share decreased by 10.5% to R16.65.

Taverna-Turisan said high interest rates had put significant pressure on property values in the UK and South Africa; however, in South Africa, market rental growth rates managed to offset some of the impact of high interest rates and capital spend.

In South Africa, the portfolio value increased by 4.3%.

Equites’ assets totalled just under R28-billion at the end of the financial year, across 70 properties.

Taverna-Turisan added that land values were increasing in the Western Cape, Gauteng and KwaZulu-Natal.

However, it is becoming increasingly challenging to get land serviced in South Africa, in terms of water, electricity and sewage connections.

Another downside is ever-increasing all-in development costs in the country, with the cost of building A-grade facilities having increased by between 20% and 30% in the last two years.

The company has nonetheless seen a 20% market rental growth rate for A-grade logistics facilities in South Africa, while e-commerce and omni-channel clients are starting to demand more warehousing space.

Equites adds that loadshedding is driving demand for alternative sources of energy in logistics facilities, which brings opportunities for changes towards cleaner, more sustainable electricity, albeit with the requirement to change planning and increase capital spend.

In the UK, marginal cost of funding has also increased from 3% in 2021 to 6% in 2023. However, Equites expects market rental growth to remain strong in the UK. It also anticipates an increase in UK property values in the 2024 financial year.

One area of Equites’ capital spend in South Africa has been on increasing its environment, social and governance credentials and becoming independent from the national electricity grid.

In the year under review, Equites’ solar capacity reached 9.4 MW, representing a 65% increase compared with the 2022 financial year. This generated 11.4-million kilowatt-hours of energy, resulting in 11 846 t of avoided carbon emissions.

Equites aims to add another 9 MW of solar capacity to its buildings in the medium to long term.

The company also aims to generate revenue from excess power sold through power purchase agreements with offtakers, including the City of Cape Town, once its energy wheeling project takes shape.

While the ENGL sale process progresses, Equites sold two UK properties for £52-million in the period under review, as well as properties in South Africa for a combined consideration of R850-million.

Further planned disposals unrelated to ENGL include R3.3-billion of properties in South Africa and the UK.

Although the LTV of 39.7% is at an all-time high, having risen from 31.5% at the end of the prior financial year, Taverna-Turisan said it was a consequence of the company’s massive development pipeline and the process of recycling capital into new ESG-compliant assets.

The group has funded its capital commitments without raising equity on the JSE or any significant property disposals over the last year.

Through the sale of ENGL and other strategic moves, the company aims to stabilise LTV at 35% by February 2024.

OUTLOOK

Equites expects net property income growth in South Africa in the 2024 financial year of between 5% and 5.5%, as well as net property income growth in the UK of between 5% and 6%.

DPS guidance has been set at between 130c and 140c, accounting for the impact of excluding CCIRS income.

The company remains optimistic about the outlook of the business, as the logistics property sector remains desirable to both users and investors.