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Tried and tested risk management: navigating economic turbulence with confidence

13 September 2023

As loadshedding continues to disrupt economic activity; as our country struggles with geopolitical alignment and the economic implications thereof; as we face low growth in a high unemployment environment; and as we too are impacted by supply chain disruption due to the ongoing war in Ukraine, we—as a company—would like to take a moment to bring a sense of reassurance to you by unpacking the approaches we take to reduce risk for our tenants. 

Here at Equites, our team of experts continuously monitors and assesses the changing local and global dynamics that impact our business as well as our tenants’ businesses, from economics through to supply chain logistics. One such expert is Warren Douglas, Treasurer and Head of Risk at Equites, who explains what our risk-management efforts look like in practice in the following Q&A. 

 

Warren Douglas

 

Warren, tell us what it is you do and a bit about this “team of experts”.

Yes, sure! I am responsible for managing the financial risks of the organisation, assisting in the determination of the financial strategy and planning, and overseeing organisational risk.

Looking to the wider team, we have a broad-focus integrated risk management team that includes a treasury team that covers all aspects from funding and liquidity to market risk management. We have a sustainability team that advises our development team on meeting green build requirements and works with tenants on sustainability initiatives. And, we have an internal auditor that advises each department on risk control measures and improvements. 

 

How does the team apply its insights in a practical way to manage risk?

We constantly assess and consider the different socio-economic challenges that South Africa is facing and develop and adapt our strategy accordingly. 

We especially consider various aspects when developing our properties to ensure that they are future-proof. This is critical to ensure that they can withstand changing supply chain dynamics, technology improvements, mandated sustainability requirements and increased economic pressures, such as the high inflation rate and dramatically increasing energy costs that we are currently experiencing.

 

Could you share a practical example of how Equites thinks ahead with purpose?

One of the ways that we’ve turned our observations and insights into a practical solution to mitigate risks and offer a sense of stability to our tenants is by developing what we call “logistics parks”. 

This product offers a number of benefits, due to the specific design components that we’ve implemented, but there are two main areas of concern that we have addressed with these, being safety and sustainability. With these standards, we enable our tenants to operate in a secure environment and assist them in reducing water, energy, waste, and carbon emissions. 

 

Your focus is on creating logistics parks. How are these optimised for tenants?

In scoping properties out, we’re all about logistics-first thinking. So, for example, our warehouses are located close to industrial nodes that give tenants access to the primary logistics networks. In the Gauteng region, also by means of example, our key focus is currently on the road network near OR Tambo International Airport such as the R21, R24 and R25 in the areas of Pomona/Riverfields, Modderfontein/Meadowview and Isando/Jet Park, as these areas are highly sought after by retailers and third-party logistics operators for supply chain optimisation.

This is critical since our tenants are predominantly national and international retailers as well as third-party logistics providers who require access to these key road networks given our country’s declining railway infrastructure, in order to optimise their supply chain management. In fact, indicating just how critical access to road networks is for logistics providers, the cost of rent is minor in relation to their transport costs.

Ultimately, when it comes to our planning, we focus on giving tenants the best experience for the sake of their businesses.

 

Other than planning around location, are there other ways in which Equites operates that help tenants economise?

Absolutely! It’s worth mentioning two major components. Firstly, our lease agreements and secondly, our environment, social and governance (ESG) commitment and efforts.

With regards to our leases, we enter into triple net, or fully repairing and maintaining, lease agreements with our tenants. So, while our tenants pick up on property-related expenses, we—at Equites—work with our tenants to manage these, thereby lowering costs for our tenants through scale and the expertise that our team applies (in the areas of insurance, alternative energy sources, building maintenance, and so on), as well as by way of our strong relationships with municipalities and service providers that enhance the ease of doing business.

Having triple-net leases in place also means that we can reduce the volatility of earnings for our shareholders, as fluctuations in energy usage, municipal rates and insurance costs are recoverable from tenants. By centralising the management of service costs, we can monitor tenant performance and the fulfilment of their obligations, enabling us to identify under-performance and to assist tenants in better managing their resources and reducing their overheads. Ultimately, this allows us to reduce our credit risk too, as this gives us deeper insight into the tenant’s business and we have an early sight of any property management issues.

I must add that our provision of best-in-class properties and services deepens our relationships with our tenants, leading to the renewal of long-term leases and the preservation of properties, as our 99.9% occupancy rate showcases.

All of these factors work together, both to the benefit of those in our portfolio and towards providing our capital investors with confidence in the high quality of our earnings. This is due to capital providers being cognisant of the reduced credit risk from a portfolio of 98% A-grade tenants, our non-exposure to energy costs and our perdurable properties.

Then, shifting focus to our ESG commitment and how this benefits tenants, our properties are EDGE certified and are designed to ensure optimal performance. In practical terms, this means that we equip our buildings with solar panels, diesel generators, low-energy lighting, water reduction fittings, water reuse technology, as well as dual-pipe plumbing in new buildings, thereby reducing costs for our tenants through energy security and setting them up for the future.

Given international and some local tenants’ sustainability requirements (such as zero emission targets), our buildings are more suited to them, and in some cases are essential for meeting these tenants’ sustainability needs. We're therefore seeing cases of tenants moving out of old buildings into fit-for-purpose buildings, like ours, due to appealing and necessary sustainability elements.

 

Risk management

 

How does Equites’ focus on ESG appeal to investors?

Both locally and globally, capital markets reflect an increasing emphasis on the sustainability of buildings. There is now an increased awareness that ESG factors can materially impact the performance of the corporate, and so investors and lenders are increasing scrutiny on the sustainability of the corporate. Those companies that demonstrate a track record and a commitment to sustainability are a proven reduction in risk for investors and lenders.

Furthermore, funds and banks are under increased pressure to lend to sustainable projects and to report on the impact of their investments and lending respectively, and as our buildings meet strong sustainability requirements, it results in increased certainty of funding for Equites. So given our commitment to developing best-in-class assets with their myriad of sustainability features which meet international sustainable certification, we both assist our lenders to meet their investment-driven sustainability requirements and ensure that there is a natural reduction in our own funding risk.

In the same vein, with increasing pressure on retailers and logistics providers to be located in sustainable buildings, our facilities attract such tenants, which reduces vacancy and, therefore, also reduces credit risk which is furthermore beneficial to lenders.

In summary, the cornerstones of our business—our best-in-class properties, our A-grade tenants, our long-term leases and our strong relationships—ensure that we have the continued support of our providers of capital and ensure that we remain a low risk, well-funded business—one that remains committed to the success of tenants through supply chain optimisation and the provision of energy alternatives. 

 

Any other thoughts on the state of South Africa and how Equites mitigates risk for tenants?

We believe that South Africa is an irrepressible, problem-solving country, and both Equites and our tenants have fantastic opportunities to succeed. 

Through our well-managed balance sheet, we have the ability to adapt to changing market conditions, as evidenced in our communicated strategic variations, and that will ensure that we remain the preeminent logistics REIT in South Africa. As Andrea Taverna-Turisan, our CEO, stated in his recent CEO report, “resilience is more important than the efficiency of trade”.

 

If you would like to find out more about Equites’ risk-management efforts, feel free to reach out to our team.

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