Octodec’s digitalisation initiatives yield benefits as the Group broadens its residential offering and continues to pay down debt
The Group’s balance sheet optimisation and disposal strategies have also borne fruit in an improved half-year performance characterised by reduced vacancies and renewed tenant interest.
- R944.4 million rental income (28 February 2021: R898.7 million)
- Like-for-like rental growth 1.2% (28 February 2021: (8.5%))
- Distributable income after tax (FFO) R211.8 million (28 February 2021: R199.1 million)
- Distributable income per share 79.6 cents (28 February 2021: 74.8 cents)
- Net asset value (NAV) per share R23.10 (31 August 2021: R23.20)
- Cash generated from operating activities before dividend payment R193.9 million (28 February 2021: R184.3 million)
- Loan to value (LTV) 41.0% (31 August 2021: 43.2%)
- All-in annual weighted average cost of funding 8.3% (31 August 2021: 8.5%)
Tuesday, 10 May 2022 – JSE listed REIT Octodec Investments Limited, today announced its interim results for the six months ended 28 February 2022, against the backdrop of subdued market recovery. While the fourth wave of Covid-19 (November 2021-January 2022) was expected to further slowdown the local economy, only minor restrictions were placed on tenants’ businesses resulting in a limited impact on Octodec’s portfolio. Consequently, fewer rental discounts were granted to tenants over the period.
Revenue earned on a contractual basis after COVID-19 rental discounts increased by 5.1% to R944.4 million from R898.7 million. At the same time, property operating expenses increased by 5.2%, mainly due to increased administered costs such as assessment rates. The group’s bad debts remain under control at 1.9% of gross revenue compared to 2.5% for the prior period.
Speaking to various operational initiatives during the year, Jeffrey Wapnick, Managing Director of Octodec, says: “Octodec has managed to contain most property costs through hands-on management of the buildings, with a focus on maintenance management, ensuring that our buildings remain attractive to its tenants.”
Initiatives such as the introduction of shared and/or furnished accommodation at The Fields and value-added services such as Wi-Fi to tenants in various other buildings has contributed to the increase of Octodec’s residential income by 5.6% on a like-for-like basis. This, together with a focused marketing strategy to increase letting, has also resulted in reduced vacancies in our residential buildings.
Explaining actions taken to retain and attract tenants, Wapnick comments: “There is increased residential supply by competitors in Johannesburg CBD, which is why we are maintaining our competitive edge by providing quality apartments and services at affordable prices, which has been done without major CAPEX. Due to the positive outcome of the above initiatives, we intend to roll out these programmes aggressively to more residential buildings to attract new tenants.”
The residential vacancies decreased to 7% since February 2022. Subsequent to half-year, the occupancy level improved considerably at The Fields with the students’ take-up of shared/furnished accommodation, and at Kempton Place through the increased activity at OR Tambo International Airport, with both ex- and new tenants returning to take up occupation.
Over the last two years, Octodec’s retail portfolio has felt the impact of the lockdown restrictions. Many offices and government departments are still applying the work-from-home policy, at least on a rotational basis. Therefore, footfall has not returned to pre-COVID levels in the CBDs. Nevertheless, on a like-for-like basis and excluding COVID-19 rental discounts, rental income from retail increased by 4.0%.
Wapnick says: “Although there has been a continued downward resetting of rentals across the sectors, it is pleasing to see that from an Octodec perspective, several renewals are being concluded at increased rentals, and we continue to experience demand from large retailers for space in both Johannesburg and Tshwane CBDs.”
Educational facilities and Places of worship are experiencing increased student numbers and congregants respectively. However, the period was characterised by challenging trading conditions and these institutions are only beginning to emerge from the pandemic. Encouragingly, there has been an improvement with new inquiries and collections from these two sectors.
Octodec’s office portfolio has also been adversely affected by the current weak economic climate. In addition, the oversupply of office space has put pressure on occupancy levels, which is in line with the broader sector. Although vacancies have remained stable, rental income has reduced marginally by 1.5% on a like-for-like basis and before COVID-19 rental discounts.
Octodec’s industrial portfolio has performed relatively well. However, there have been negative rental reversions and a resetting of rentals. As a result, rental on a like-for-like basis and before COVID-19 rental discounts decreased by 4.5%. Occupancy in the industrial sector has remained stable, with a number of our industrial buildings 100% occupied.
Wapnick adds: “Even though Octodec’s properties were not directly impacted by the civil unrest in 2021, the impact of the unrest on the economy partially affected Octodec’s collections during this period.”
As a percentage of gross lettable area, including properties held for redevelopment, vacancies have improved marginally to 22.6% compared to 22.8% at 31 August 2021. The group’s core vacancies, which exclude the GLA relating to properties held for redevelopment or disposal, decreased from 16.2% to 15.8%.
The residential sector reflected a considerable decrease in vacancies compared to August 2021. Residential vacancies reflect an improvement from 24.3% at February 2021 to 15.4% at 28 February 2022. Despite pressure on rental income in the industrial sector, the vacancies have decreased from 11.7% to 9.9%. Retail shopping centre core vacancies also improved from 7.3% to 6.0%, with Octodec’s convenience shopping centres being well let.
“Octodec remains focused on its balance sheet optimisation, and disposal strategies to pay down debt and refinance loans where needed. Active balance sheet management and liquidity planning have shielded the business resulting in an improved LTV,” comments Anabel Viera, Financial Director of Octodec.
With the lifting of COVID-19 lockdown restrictions, Octodec has seen an improvement in the conclusion of sales of properties previously identified for sale. Against this backdrop, Octodec has sold and transferred 12 properties for a total net consideration of R121.6 million.
The board of Octodec has declared a cash dividend of 50 cents per share for the year ended 28 February 2022. However, given the broader economic and political uncertainty, the board will not be providing any guidance on distributable income and dividends for the second half of FY2022.
Speaking to prospects in the sector, Wapnick concludes: “Consumer confidence has risen in light of the cancellation of the lockdown restrictions, and there is a renewed energy in the Tshwane CBD. However, the local macro environment remains a cause for concern. With GDP expected to grow at under 2% for the foreseeable future, we do not anticipate significant growth in rental income. In addition, inflation is also expected to increase, which will also impact our costs and ultimately, net property income. With that said, Octodec remains resilient thanks to Management’s intimate knowledge of the underlying assets in the portfolio and the broader property market.”