Despite a challenging economic environment marked by high inflation, interest rates, failing infrastructure, and poor service delivery, Octodec achieved a 4.1% increase in group revenue to R2.1 billion.

• Increase in rental income to R2.1 billion
• Rental income growth largely due to the residential and shopping centre portfolio contributions
• Value-enhancing repositioning of strategic assets and tenant mix to deliver future growth
• Cash generation of R433 million and prudent balance sheet management
• Successful refinancing of debt maturities and opportunities to benefit from the declining interest rate cycle
• Riaan Erasmus announced successor for top executive positions and to drive portfolio optimisation
• Total dividend per share of 125 cents for the year

JSE-listed REIT Octodec Investments Limited today announced its annual results for the financial year ended 31 August 2024, delivering a resilient 4.1% increase in group revenue to R2.1 billion despite numerous headwinds faced during the period.

Notably, the residential and shopping centre portfolios saw the highest rental income growth at 3.8% and 3.0%, respectively, largely driven by lease escalations and offset by increased vacancies. Average collections remained strong at over 100% of billings, however rental income was affected by rental concessions related to the impact of unrepaired damage on Lilian Ngoyi Street in Johannesburg. Total core vacancies excluding properties held for redevelopment increased slightly from 14.2% to 14.9%. High inflationary cost pressures and an increase in net finance charges saw distributable income before tax end the period lower at R422 million. Octodec declared a final dividend of 65 cents per share bringing the total dividend for the year to 125 cents per share.

Resilient portfolio performance

Octodec’s residential properties offering well-located, secure, quality accommodation continue to attract tenants. Low economic growth, increased unemployment, and prolonged high interest rates have however placed financial pressure on tenants, leading to a higher rate of vacancies compared to new lettings. Vacancies generally increased as a result and were compounded by the knock-on effect of the unrepaired damage on Lilian Ngoyi Street, limiting rental income growth to 3.8%.

The Fields property in Hatfield was a key success, recording an over 50% reduction in vacancies, demonstrating the competitiveness of its enhanced student offering and benefiting from certainty around the NSFAS accommodation allowance. Octodec invested in The Fields to respond to market needs, adding event space for student wellness workshops, entertainment, and other social activities, a quiet green rooftop space for students to relax and a student centre to study individually or in work groups.

The retail shopping centres portfolio, made up of mainly convenience centres, performed well despite a temporary but sharp rise in vacancies owing to decisive management action to vacate underperforming tenants and improve the tenant mix at two key centres. The vacant spaces were re-let, introducing new tenants such as Jo Borkett and Sweet Hyper Mega, who replaced West Pack Lifestyle at Woodmead Value Mart with the portfolio (excluding Killarney Mall) fully occupied post period end. Killarney Mall has been strategically identified as an asset to recycle and management are actively working towards unlocking this value. Rental income increased by 3.0% year-on-year to R174 million, and the Group remains confident in the sector’s continued strong performance.

Octodec’s retail portfolio continues to attract high foot traffic and interest from large nationals. During the period, the challenging economic climate impacted tenant sustainability while certain tenants exposed to Lilian Ngoyi Street were unable to trade effectively. Octodec is actively supporting affected tenants until road repairs are completed and is encouraged by the strong interest from large national retailers to take up vacant space, albeit on beneficial occupation or low initial rentals. Overall, rental income from retail shops grew by 1.4% year-on-year and 2.2% on a like-for-like basis, with the low growth attributed to the rise in vacancies and retention strategies, including lease renewals without rental escalations.

Commenting on the performance, Jeffrey Wapnick, Octodec Chief Executive Officer said “I am pleased with the level of demand experienced across our portfolio, and with the overall performance from our residential and shopping centre portfolios which delivered the strongest growth despite the lacklustre economy. Our strategy to upgrade, convert, and repurpose strategically located buildings continues to unlock value, better align our portfolio with market demands, and position us for sustained success. Equally so, our decisive action to optimise our retail tenant mix within our shopping centre portfolio will support future returns.”

The office sector as evidenced across South Africa remains under pressure, with tenants continuously opting to reduce their leasing requirements. Vacancies therefore remain difficult to close and recorded a slight increase during the period with rental income unchanged from the prior year. This portfolio offers opportunity to extract value from vacant buildings through conversions or disposals which are actively being explored.

Octodec’s industrial portfolio performed relatively well over the past year. Despite the sector’s general resilience, smaller operators were negatively impacted by high interest rates and failing rail and port infrastructure, leading to some tenant failures. Consequently, vacancies increased slightly, and the portfolio’s rental growth was limited to 2.5%, or 3.8% on a like-for-like basis.

Prudent financial management

Cash generated from operations (before dividends) was at R433 million. The group’s total borrowings ended the period at R4.4 billion and the Group’s LTV was kept within Octodec’s target range at 39.2%, with all bank covenants met during the period. R400 million in funding was successfully refinanced during the period with tenors of three to five years with the weighted average cost of funding ending slightly higher at 9.5%. Post year end, a further R370 million was refinanced, and management is advanced in proactively negotiating the refinancing of a further R600 million of debt maturing in 2025. In anticipation of a declining interest rate cycle, only 68% of Octodec’s borrowings were hedged with a short weighted average term of one year. The Group ended the period with R679 million in cash and unutilised debt facilities which is sufficient for its capital commitments. 

Commenting on Octodec’s financial position, outgoing Financial Director, Anabel Vieira said “Octodec’s cash generation and prudent management of capital has ensured a robust financial position going into FY2025, with opportunities to take advantage of lower interest rates in the period ahead to reduce the cost of funding.”

Value-enhancing property Investments

Octodec is committed to maintaining the quality and relevance of its buildings. The rollout of value-added services like Wi-Fi, cashless laundry facilities and recreation areas, refurbishments of the common and entertainment areas such as those carried out at Ricci’s Place in Johannesburg and Corner Place in Tshwane, as well as the enhanced student facilities at The Fields, demonstrates this commitment.

While continuing to seek opportunities to convert and repurpose vacant office spaces, the conversion of the Prinsproes office building in the Tshwane CBD into Yethu City is in progress with leasing set to begin in January 2025. The Group remains optimistic about the prospects of this new initiative. Additionally, a solar system will be installed post-development to reduce electricity costs and provide backup power, enhancing the project’s yield.

“I am excited about the completion of Yethu City. This new offering represents a significant step forward in addressing critical market needs. By providing quality, co-living spaces at accessible prices, we are not only meeting the high demand in this sector but also playing a vital role in supporting our community by ensuring more people have the opportunity to live in secure, well-maintained accommodation. This initiative underscores our commitment to creating sustainable, inclusive communities and highlights our proactive approach to tackling housing challenges in the CBD,” added Wapnick.

In response to persistent power outages in the Johannesburg CBD and to a lesser extent in the Tshwane CBD, the Group has installed generators at several residential and office buildings to ensure operational continuity. Additionally, solar panels have been installed at Woodmead Value Mart, Blaauw Village, and Sildale Industrial Park, with a solar project at Silver Place completed post year-end. Further solar installations are planned for properties with suitable roof space, including The Fields.

Furthermore, Octodec has invested in replacing air-conditioning systems in older buildings to enhance tenant experience and reduce energy costs. Significant capital expenditure was also directed towards repurposing the ground floor of Bank Towers in the Tshwane CBD into retail space for a large national retailer, expected to boost trading densities in the area.

Cautiously optimistic outlook

Octodec is increasingly optimistic about prospects for enhanced growth following the creation of the Government of National Unity and the commencement of the interest rate cutting cycle. These developments are contributing to enhanced consumer and business confidence and spending power which will ultimately deliver economic growth. This bodes well for increased rental income and lower costs of funding for Octodec which should contribute to earnings growth in FY2025 and beyond. Additionally, lower costs of funding will enhance Octodec’s ability to carry out value-enhancing property conversions like Yethu City. Similarly, a more favourable economic environment will support the recycling of non-core assets which is a key focus in the period ahead.

The Group looks forward to Riaan Erasmus assuming his role of Financial Director and Debt Officer, as well as Deputy CEO, effective November 30, 2024. In these positions, Riaan will focus on optimising the group’s property portfolio and evaluating the internalisation of asset and property management services, alongside his primary duties as Executive Financial Director and Debt Officer.

“Riaan’s appointment marks a pivotal moment for Octodec. His extensive expertise and strategic insight will prove invaluable in propelling Octodec forward and I am excited about the future that will be built with his guidance. With the foundations set, our team is energised to drive sustainable growth and returns while leveraging a more favourable economic backdrop to ensure Octodec maximises its value creation into the future,” concluded Wapnick.