JSE-listed real estate investment trust (Reit) Octodec Investments says a weak economic environment, exacerbated by the Covid-19 pandemic, continued to impact on its results for the six months ended February 28.
Higher unemployment, business failures and overall reduced affordability weakened the trading environment and impacted on the Reit’s performance.
Tenant relief of R26-million, mainly in the form of discounts selectively granted to the worst-affected tenants, was greatly reduced compared with the prior six months and rental collections remained high, averaging 95%.
However, the rise in vacancies, particularly in the residential and retail shop sectors and lower rentals on the renewal of leases added to the loss of rental income which decreased by 10.8% year-on-year.
Despite property costs being mostly contained, and reduced administrative and finance costs, Octodec’s distributable earnings declined to R199-million.
MD Jeffrey Wapnick says the group is confident it has taken the necessary steps to proactively respond to challenges and position the business to benefit from a recovery.
“Octodec’s resilience is underpinned by management’s intimate knowledge of the portfolio and markets, the diversified portfolio and granular tenant base, strong cash generation and prudent financial management,” he notes.
Occupancy levels were down 3% overall, driven mainly by the usual peak in residential vacancies experienced at the end of the calendar and academic year, followed by a delayed uptick in leasing in the new year.
Commercial vacancies, save for retail shops, were relatively stable owing to continued demand for Octodec’s offering and active leasing. The retail shopping centres portfolio, comprising mainly convenience and neighbourhood centres, proved to be defensive given its limited vacancies and ongoing support from consumers.
During the period, a digital leasing system was implemented and an emphasis was placed on digital marketing to attract new tenants. The rollout of Wi-Fi to residential buildings was expedited during the period, ensuring that these buildings remain relevant and attractive to tenants, the group notes.
Moreover, furnished apartments and shared accommodation were introduced at The Fields, in Hatfield, in Tshwane, with a second phase successfully launched during the period.
Wapnick says leasing activity has picked up across sectors and the group is seeing renewed confidence from national tenants to commit to leases.
“Residential vacancies have come down nicely following the delayed start to the tertiary academic year and rental payment patterns are becoming more predictable with collections averaging 99%,” he notes.
In line with the decision taken by management to preserve cash, Octodec did not undertake any major new developments and instead focused on maintaining and carrying out smaller upgrades of properties or lease-driven projects.
The business completed the refurbishment of Leo’s Place, a residential property in Tshwane at a total cost of R11.7-million.
Octodec continued with active marketing of the properties held for sale and entered into numerous conditional agreements with buyers.
During the period, the group disposed of seven properties for R26.3-million. Three of these properties transferred while the remainder are expected to do so before the end of the financial year.
Octodec finished the period on a sound financial footing with sufficient facilities available to honour commitments, the group says.
Cash generation during the period remained strong at R388-million and unused available banking facilities totalled R313-million.
Management proactively addressed short-term loan expiries and extended swap maturities while also managing covenant headroom and flexibility. The group’s loan to value was 44.2%, well within bank covenant levels of 50% despite the 4.3% devaluation of the property portfolio to R11.3-billion.
Owing to ongoing uncertainty around subsequent waves of infection and further lockdown restrictions, no interim dividend has been declared. The decision around a final dividend will be made at the time of the release of the yearly results.
“While we remain cautious on the outlook and it is early days, we are encouraged by the green shoots we are seeing in improved occupancies, collections and leasing activity since March and are hopeful that this is an indication that the worst is behind us.
“We will continue to be responsive to the dynamic environment by actively managing the portfolio and factors within our control, positioning the group to navigate the headwinds and take advantage of a change in tide,” Wapnick says.