Against a weakening economic environment, the sovereign downgrade in March and the Covid-19 pandemic, JSE-listed real estate investment trust Octodec Investments recorded a 22% reduction in distributable income for the financial year ended August 31 and has deferred its decision to declare a final dividend for the 2020 financial year until February 2021.

The reduction was largely attributable to the rent relief granted by Octodec to its tenants that were detrimentally affected by the Covid-19 lockdown and the increase in credit loss allowances, rental reversions and increased vacancies.

The relief granted by way of rental discounts, totalling 5.2% of rental income, resulted in a decrease in rental income of 5.3% compared with a 0.1% decrease before the rent relief.

Octodec MD Jeffrey Wapnick says the company selectively provided relief to its tenants, mainly in the form of discounts, which represented most of the 5.3% decline in rental income.

The company’s financial performance was also impacted on by an increase in unemployment, certain tenant failures, some residential tenants returning to their family homes and overall reduced affordability.

Relief granted by way of rental discounts to tenants that were impacted by the shutdown, totalled 7% of rental income or R104-million, and together with increased rental reversions, vacancies and credit loss allowances was largely responsible for the decline in distributable earnings to R417-million.

However, based off of the 2019 financial year performance, rental income (before Covid-19 relief) decreased by 0.3% overall.

As lockdown restrictions eased, more commercial tenants resumed their business activities, resulting in month-on-month improvements in rental collections from 66% in April to 99% of billings (before rental discounts) in August.

Most property costs were reduced or contained during the lockdown period, limiting the increase to 1.2%.

He says these factors weighed heavily, especially during the second half of the financial year.

“The improvement in collections as we progressed through the second half has been encouraging; however, vacancy levels, which saw an unusual spike, are receiving urgent attention.

“Our diversified portfolio, granular tenant base, strong cash generation and prudent financial management supported us through this period and will sustain us into the future.”

Octodec’s net asset value decreased from R28.47 a share at August 31, 2019, to R24.13 a share at the end of the financial year under review, driven mainly by a decrease in the value of the property portfolio as a result of weaker property fundamentals and an increase in the derivative liabilities arising from a sharp decrease in interest rates.

Occupancy levels in the company’s properties declined by 4.4% during the period, with core vacancies (excluding properties held for development or sale) at 15.8%. The residential sector was most affected with an increase in competition adding to its pressure and creating a temporary imbalance between supply and demand.

During the financial year, Octodec did not undertake any substantial new developments but rather focused on maintaining properties to keep them relevant and attractive to tenants.

Certain residential properties saw improvements made to the common areas such as the provision of additional amenities and recreational areas to create a more contemporary look that appeals to the younger occupants.

The Park, a community shopping centre in Tshwane, received a fresh modern look at a cost of R42.7-million, attracting new tenants including Pick n Pay Clothing, Ackermans, Gadgets Galore and an improved food offering.

In line with Octodec’s strategy to dispose of noncore properties, 11 properties were sold for a total consideration of R104-million, at an average yield of 11.6% and at a combined premium to book value.

Octodec has continued to apply the proceeds from disposals to the repayment of debt and is actively marketing the sale of the remaining properties approved for sale by the board.

Meanwhile, in terms of attracting new tenants, Wapnick says the Covid-19 pandemic has “catapulted” the world into the Fourth Industrial Revolution.

“We have digitised our leasing systems and placed an emphasis on digital marketing. We have expedited the roll-out of WiFi to our residential buildings and introduced furnished apartments and shared accommodation at The Fields in Hatfield which has proven successful.

“We are also working on a trial flexible office solution tailored for the central business district market.”