Equites Property Fund has reported growth in its distribution per share of 5.3% to 78.38 cents for the six months ending 31st of August 2021.
Net Asset Value (NAV) per share increased by 2.2% at 31 August 2020 to 31 August 2021 with both now exceeding pre-Covid-19 levels. The fair value of the group’s investment property portfolio increased by 9.4% in the six months from 28 February 2021 to R21.1 billion at 31 August 2021.
“The strong performance over the past six months is underpinned by resilient property portfolios in South Africa and the UK, and further enhanced by the attractive development pipeline of logistics properties in the top-end of the UK logistics market” commented Equites CEO, Andrea Taverna-Turisan.
The REIT’s portfolio reported a Weighted Average Lease Expiry (WALE) of 14.7 years with 97% derived from A-grade tenants. Combined, these indicate a high level of income predictability and a low risk of tenant default. Equites’ SA logistics WALE has more than doubled over the past year, from seven to fifteen years with a portfolio vacancy rate of just 1%. An in-force contractual lease escalation rate generated a like-for-like net rental growth in its South African portfolio of 7.5% with rental collection rates of 99.6% in South Africa and 100% in the UK over the period.
With 96% of its portfolio comprising of logistics assets, Equites continues to benefit from the outperformance of this property market globally. Supply chain optimisation, the growth in e-commerce and consumer requirements for faster fulfilment continues to drive strong demand for warehousing space. While its UK portfolio has been steadily increasing, the company is still a South African-focused REIT, and it continues to focus on growing its domestic portfolio through acquisitions and developments.
Equites invested R1.2 billion in its South African and UK development pipelines during the reporting period.
NET ASSET VALUE PER SHARE
The 2.2% increase in the NAV per share was driven by progress on two major UK developments, Hermes, and Amazon, which resulted in a R348 million uplift in value, along with the completion of pre-let developments in South Africa. The UK portfolio’s value increased by 5.1% on a like-for-like basis, supported by the compression of prime distribution yields in the UK during 2021 (in Pound Sterling).
Equites externally valued 74% of its domestic portfolio and 100% of its UK portfolio at 31 August 2021. Covid-19 and prevailing macroeconomic conditions resulted in the moderation of domestic property valuations at 28 February 2021 which has remained steady during the reporting period. In the UK, property valuations have reached an all-time high, driven by the structural changes in the logistics space resulting in strong demand. Higher property values are also being supported by strong rental growth in all key logistical nodes in the UK.
UK LOGISTICS MARKET AND THE NEWLANDS VENTURE
The tenant market in the UK logistics market has reached record levels with the take-up of warehousing space now 50% higher than pre-pandemic years and the national vacancy rate decreasing to 4.4%. Because of this, national market rents are estimated to grow between 5% and 7% for 2021. Average land prices in England have demonstrated an annual increase of 40% while the demand for construction materials has driven an increase in the average cost to construct a warehouse. Capital invested into the UK industrial and logistics market more than doubled during the first half of 2021 to a record £6 billion.
The prime yield for UK logistics properties compressed by 75bps over the past twelve months to 3.25%, making it feasible for the REIT to acquire new products in the open market. Its decision to partner with Newlands Property Developments affords Equites the opportunity to expand in the premium sector of the UK logistics market at a discount to open market values.
Its UK portfolio delivered a 5.1% uplift in value over the six-month period, in local currency terms with its first development in the Newlands venture reaching practical completion on the 15th of September 2021. The development is a last-mile distribution facility in Peterborough with a total development cost of £35 million (R694 million) at a 5.68% yield on cost and it will be let to Amazon on a fifteen-year, triple=net, fully repairing and insuring lease. The combined valuation uplift on these developments is expected to be more than R500 million.
Equites Newlands Group Limited entered into agreements for the development of two distribution centres for Promontoria on Hoyland Plot 2 with a total funding commitment to Equites of approximately £24 million (R492 million) and an expected profit attributable to Equites of c.£6 million (R120 million), equating to an ungeared return on invested capital of 25%. The pipeline of development opportunities with Equites Newlands Group Limited is expected to exceed £800 million (R16 billion) over the next three to five years.
SOUTH AFRICAN LOGISTICS MARKET
The logistics sector has proven its strength over the past eighteen months with demand for A-grade warehousing space and numerous national (and multinational) tenants expanding their warehousing footprints. Online shopping is gaining momentum, comprising of 2.8% of total retail sales during 2020 (c.R28 billion) with expectations that this could reach 5% of total retail sales in 2022 (c.R50 billion).
During the reporting period, Equites concluded an agreement with Attacq Limited to purchase two logistics properties, as well as an undivided half share in a development opportunity in Waterfall for Cotton On for R511 million. The WALE across all three properties is c.10 years with a weighted average acquisition yield of 8.5%.
Equites completed a R291 million distribution campus for Sandvik let on a ten-year triple-net lease. The company also secured two development leases for a total value of more than R450 million. The first, a R195 million extension to The Foschini Group’s (TFG) warehouse in Lords View, which will include the installation of a solar PV system and additional upgrades to prepare the facility for an EDGE certification. The lease term will be ten years and it will run coterminous with a lease extension on the existing property to 2032. The second agreement is for the development of a R256 million flagship distribution facility for Cargo Compass SA in Jet Park on a ten-year lease.
FUNDING
The REIT has maintained a conservative capital structure which reflected in the recent upgrade of its credit rating by Global Credit Ratings to AA-(ZA). The company raised R1.3 billion in equity over the last six months, with decreased group Loan to Value (LTV) of 28.6%. It refinanced over R1.2 billion of debt facilities during the period, while maintaining a weighted average debt maturity of three years. The company’s listed Domestic Medium Term Note (DMTN) Programme was updated and increased to R10 billion during the period. Equites issued a R300 million three-year floating rate note off the DMTN at a margin of three-month JIBAR plus 165bps. The listed debt pricing positively impacted recent refinancing of new and existing debt facilities and it allowed Equites to further reduce the cost of debt from 5.44% to 4.97% over the pas twelve months. The updated programme also enables the company to issue sustainability-linked notes funded by South African banks and other financial institutions.
Equites had cash and committed undrawn facilities of R1.6 billion at August 2021, allowing sufficient capacity to execute the development pipeline while providing the necessary flexibility to execute on any opportunities that arise. The company has a total pipeline of current opportunities of R4.2 billion, with R2 billion of capital expenditure (capex) outstanding at the reporting date. The pipeline will be funded from the cash and debt facilities, debt raised against completed developments, new listed debt instruments and several equity sources including dividend reinstatement programmes, and the potential sale of a property in the UK.
Equites has continued to use a combination of natural hedges and derivative financial instruments to hedge exposure to interest rate risk. At 31 August 2021, it had hedged 98.8% and 83.0% of the existing floating-rate term loan balances and total committed future cash outflows, respectively. Limited cross-currency interest rate swaps are used to hedge UK assets, with 23.2% of foreign denominated assets hedged as at 31 August 2021. It has also hedged net income to be received over the next twenty-four months In line with the documented group hedging level policy.
SUSTAINABLE DEVELOPMENT
ESG has become one of Equites’ key strategic areas of differentiation and it aims to be at the forefront of green building developments. Equites has qualified for a higher level of EDGE certification and has obtained EDGE certifications for all new developments in the last twelve months. The company has recently completed the refinancing of several facilities with South African banks that incorporate various forms of sustainability metrics. The South African government’s increase in permitted renewable energy generation will allow Equites to deploy capital towards increasing the solar PV at properties above the current 1MW level, with its tenants being the direct beneficiaries.
Equites is on track to deliver on its distribution per share guidance of 5% to 6% growth for FY22.
Management is targeting positive NAV per share growth for FY22, supported by the development pipeline within the Newlands venture and it expects to achieve a double-digit total return for FY22, which is a function of its distribution yield on NAV per share as well as the growth in NAV per share.
