Equites records solid full-year performance, despite challenging environment

4th May 2021 By: Tasneem Bulbulia - Senior Contributing Editor Online

JSE-listed Equites Property Fund recorded a 2.4% increase in its yearly distribution a share.

The increase in distributions was supported by strong growth of 6.7% in South African like-for-like net rental income owing to a robust in force contractual lease escalation rate, coupled with no tenant defaults and limited lease expiries during the period.

“While the past year has been one of the most challenging to date, Equites has benefited from a defensive and high-quality logistics portfolio in South Africa and the UK, a conservative capital structure, as well as a prudent approach to liquidity management throughout the pandemic,” CEO Andrea Taverna-Turisan said in a briefing on May 4.

He noted that the group had again made significant progress towards becoming a globally relevant logistics-focused real estate investment trust, with the fair value of the property portfolio having increased by 32% to R19.7-billion as at February 28.

The largest transaction in the financial year was the joint venture (JV) with Shoprite Checkers for the acquisition of a 50.1% equity stake in three distribution centres with an initial portfolio value of R3.2-billion.

Equites invested R2.2-billion in development pipelines in South Africa and the UK.

In the past financial year, the company completed four logistics facility developments in South Africa with a capital value of R887-million, with another two developments having been completed in April with a combined capital value of R361-million.

In the UK, Equites completed the development of a £12-million pre-let building in Leeds, let to DHL on a 15-year lease.

For the first time in the UK, capital was recycled through the disposal of two properties at a 5.8% premium to book value and a 4.79% exit yield.

The sale proceeds will be reinvested into the development of prime distribution warehouses by the Equites/Newlands JV, with the new logistics facilities let on 20- and 15-year leases to Hermes and Amazon, respectively.

Equites considers its long-dated leases with low-risk tenants a core fundamental strength of the property portfolio.

Taverna-Turisan highlighted the weighted average lease expiry of 15.4 years and proportion of A-grade tenants of 95% as sector-leading.

As there are significantly more development opportunities in the UK than in South Africa, Equites expects the UK portfolio to outgrow the South African portfolio in the medium to long term.

During the Covid-19 pandemic, the group’s robust balance sheet enabled it to record a loan-to-value ratio of 31.2% - among the most conservative in the sector, Taverna-Turisan said.

Equites adopted a cautious approach to liquidity management – an R800-million capital raise, two dividend reinvestment programmes of R428-million and additional debt facilities that were secured, significantly improved the liquidity position and ensured that apposite liquidity buffers were in place throughout the pandemic.

Stress tests were performed to ensure the group had sufficient liquidity to service obligations.

Equites maintains diversified sources of debt funding both in the UK and in South Africa and now has debt facilities of R7.3-billion across term facility agreements, unsecured listed and unlisted notes and working capital facilities.

The all-in effective cost of debt has decreased by 75 basis points to 5.19% since the previous year, driven principally by the 300 basis point decrease in base rates in South Africa and 61 basis point decrease in inter-bank lending rates in the UK.

At period end, the group had hedged 96.5% and 80.9% of the existing term loan balances and total committed future cash outflows respectively.

Equites offered deferred rental arrangements to 29 tenants during the pandemic.

Since granting the deferrals, it said it has seen a promising recovery, with no material defaults and 48% of total deferred rent having been repaid by year-end.

The average collection rate over the past year has been 99.3% in South Africa and 100% in the UK. The group does not expect further rental deferrals to be granted to tenants.

PROSPECTS

Taverna-Turisan said that Equites expects to achieve a 5% to 6% increase in distributions a share for the next financial year.

Management is also targeting positive net asset value (NAV) a share growth for the next financial year, supported by the development pipeline within the Newlands JV.

Equites, therefore, expects to achieve a double-digit total return for the period, which is a function of the distribution yield on the NAV a share, as well as the growth in NAV a share.