Octodec Announces 2021 Annual Results

A strong focus on property fundamentals and robust portfolio ensures measured Octodec performance amid challenging low growth environment

  • Distributable earnings before tax of R401.1 million, a decrease of 4.6%
  • Reduction in the all-in annual weighted average cost of borrowings to 8.5% (FY20: 8.7%)
  • Rental relief granted in support of tenants through rental discounts substantially reduced to 1.6% of rental income
  • Generally strong level of collections, averaging 100% over the year
  • 0,4% increase in vacancies indicative of stability returning
  • Active balance sheet management and liquidity planning showing results
  • Robust and encouraging post-reporting period property fundamentals

Tuesday, 2 November 2021 â€“ JSE listed REIT Octodec Investments Limited, today announced its annual results for the year ended 31 August 2021, against a weakened economic environment. COVID-19 and the consequent lockdowns and restrictions that continued through FY2021 significantly impacted Octodec’s performance.

Octodec’s distributable income decreased by 4.6% before tax and 14.1% after tax, mainly attributable to a reduction in rental income caused by rent relief granted to their tenants who were detrimentally affected by the COVID-19 lockdown restrictions, negative rental reversions and an increase in residential vacancies for a significant portion of the year.

Jeffrey Wapnick, Managing Director of Octodec, commented: â€śThe lockdown severely impacted certain sectors due to their level of social interaction, such as hospitality, places of worship and universities and colleges, many of which had moved their tuition online during the year.”

The rental relief granted through rental discounts, decreased significantly to 1.6% of rental income (FY2020: 5.3%), On a like-for-like basis, before the COVID-19 rental discounts granted, overall rental income decreased by 7.3%. In addition, rental income from the residential sector and specialised sectors decreased by 10.6% and 15.4%, respectively, mainly attributable to the impact that COVID-19 and the lockdown had on these sectors.

A decrease in collections, specifically during January and February 2021 was primarily due to typically slower collections in these months. Although Octodec’s properties did not suffer damage during the civil unrest in July 2021, this did have a temporary impact on collections.

A longer business recovery period was expected for tenants in the education, places of worship and hotel sectors resulting in lower collection levels. However, these sectors represent only 3.7% of Octodec’s total rental income, and total collections have remained at acceptable levels.

Explaining actions taken to retain and attract tenants, Wapnick said: â€śOur smaller retail tenants and restaurants rely on foot traffic from residential and office tenants, and the hybrid working model has affected their turnover. Octodec has responded to the challenging environment through various initiatives such as the ongoing roll-out of Wi-Fi to residential buildings and the embedding of online applications forms on our recently upgraded digital platform. These enhanced digital capabilities, as well as the broadening of our offering, including newly furnished apartments and shared accommodation at The Fields, to our expanded tenant demographic, forms part of our forward-looking strategy as we position the Group for growth.”

Vacancies relatively well contained
Vacancies in the Octodec portfolio including properties held for redevelopment, increased by 1.1% to 22.8% of the gross lettable area (GLA) (FY2020: 21.7%). The Group’s core vacancies, which exclude the GLA relating to properties held for development, increased by 0.4% to 16.2% (FY2020: 15.8%).
The commercial sector experienced increased vacancies, primarily as a result of COVID-19, which impacted trading conditions and resulted in tenant failures.

Retail shopping centres, comprising mainly convenience and neighbourhood centres, which remain well let with low vacancies, proved to be relatively defensive in this environment. Speaking to the impact of COVID-19 in the year, Wapnick said: “Initially, the majority of our commercial tenants were afforded rental relief in the form of discounts rather than deferrals or payment plans, especially small, medium and microenterprises (SMMEs) which continue to be the most affected. However, more recently, with each lease renewal, tenants are looking for reduced rentals rather than a once-off discount. Tenant retention remains a high priority for Octodec and we continue to engage with tenants to ensure that tenants survive the adverse effects of the pandemic.”

Against this backdrop, Octodec has strengthened its balance sheet to ensure prudent financial management. Octodec has continued to generate good cash flows in spite of the challenging circumstances, with 100% of billings collected during the year. Additionally, no covenants have been breached, and Octodec’s interest-cover-ratio (ICR) was within the limit for each lender.

“The effects of COVID-19 still linger but the diversified and granular nature of the portfolio, together with Management’s intimate knowledge of the portfolio and the broader property market have stood the business in good stead. In addition, active balance sheet management and liquidity planning have shielded the business. We will continue to take proactive steps to mitigate the reduction in earnings, optimise working capital and preserve cash flow and liquidity, thereby protecting the business,” commented Anabel Viera, FD of Octodec.

Dividend Declaration
The board of Octodec has declared a dividend of 50 cents per share for the year ended 31 August 2021. The decision to reduce the dividend is aligned to Octodec’s strategic objective to reduce debt, strengthen its balance sheet and conserve cash for essential capital expenditure, whilst retaining its REIT status.

“The decision to reduce the dividend is in line with Octodec’s decision to pay out the minimum distribution requirement to retain its REIT status while utilising the available assessed losses in the Group. While we remain cautious on the outlook, we are well-positioned to navigate the market challenges into the recovery phase. There are green shoots and early signs that the worst of COVID-19 may be behind us,” concludes Wapnick