SA shines for Equites Property Fund amid UK exit

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SIMON BROWN: I’m chatting with Andrea Taverna-Turisan, CEO of Equites Property Fund. Andrea, appreciate the time. Distribution of 5.3%. Your like-for-like rental growth 5.3%. Good numbers in the inflation environment – particularly your like-for-like rental growth. We could probably say, I don’t know, 3%-odd inflation. You’re getting a little ahead of that.

ANDREA TAVERNA-TURISAN: Interesting. I think our rental growth in South Africa was slightly better than that. I stand to be corrected – I think it was 6.7%. Our distribution growth was 5.3%.

Your natural growth is probably a little bit lower than that, but we do have the benefit of these long-dated leases in our portfolio with very, very low vacancy. It’s 0.2% vacancy. It means that we were able to distribute through to shareholders.

So we are obviously extremely pleased with the outcome. The South African portfolio in particular behaved extremely well in the last financial year and it looks like it will do for a couple of years to come still.

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SIMON BROWN: Yes. A 0.2% vacancy is to all intents and purposes full. Your tenants are mostly A-grade. In a sense a very de-risked portfolio. To your point, a good couple of years locally ahead.

ANDREA TAVERNA-TURISAN: I know we have one institutional shareholder that is quite long on us and basically deems us to be a ‘bond proxy’, as they say. It’s a bond-like coupon that you get which grows a little bit every year and technically should be safe as houses. I think that is probably a realistic reflection of what our business is. We’re never going to give you 20% growth, but we’re also not going to fall off a cliff.

SIMON BROWN: Absolutely. What you are doing, though, is some speculative developments – although in the scope of things they’re quite small. There’s one at Jet Park, 17 500 GLA [gross lettable area]. They are small, but you’re seeing demand for them.

ANDREA TAVERNA-TURISAN: Yes. I find amazing the number of businesses that are making very important decisions in their lives and don’t plan ahead. Obviously we look to play a role in that market. As you said, they’re not massive buildings but they’re decent-sized buildings nonetheless. We have a portfolio of about 1.5 million square metres.

So to speculate, on sort of 20/30 000m² of space we believe that’s a risk worth taking kind of thing.

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SIMON BROWN: I take your point – absolutely small. But you have the new logistics facility for Tiger Brands. Even that’s around 90 000m². That, of course, goes in tenanted. And you say ‘around’. These are not the warehouses of our youth. These are state of the art facilities.

ANDREA TAVERNA-TURISAN: That’s correct. You sum it up. And I think what maybe a lot of people don’t understand is that the technology and the investments that these organisations make inside the building are normally worth more than the actual building itself.

So, while they’re signing 10-year leases, the likelihood is they’ll probably be amortising that equipment over a sort of 20/30-year period, so we see them as tenants that will be there for the long haul.

I suppose the biggest risk to any business is tenant failure, and no one is immune to that. We’ve seen some incredible businesses that everybody thought were the darlings of the world exist no more. So we must never be sort of arrogant that no one can fail. Things can fail, and we’re mindful of that.

What’s quite nice about our business is that we do conditioning reports on our buildings every year – in fact twice a year.

A mini report at half year, and a full report at year-end to ensure that our tenants maintain our buildings appropriately.

But during that process our operations guys get to see what’s going on inside those buildings. Obviously, if a business is not doing so well, you see very quickly that the warehouse is empty.

Read: Equites hikes dividend as strong logistics portfolio delivers

SIMON BROWN: [Chuckles] I take your point. You walk in and there’s nothing there and okay, something’s not going well here.

ANDREA TAVERNA-TURISAN: Yes, exactly.

SIMON BROWN: You’ve some debt expiring, but a really strong balance sheet. You have good cash. You have cash coming from some UK sales. We’ll touch on that in a moment. Your LTV [loan-to-value] is 35.1%. The balance sheet is looking really, really good.

ANDREA TAVERNA-TURISAN: Yes. The treasury team has done sterling job. Cost of debt low. LTV was 35.1% at period end but, as you said, with the UK sale that’s probably sitting plus/minus around 25% now.

We have a portfolio of developments coming through the system, already contracted, of about 160 000m². And just to give you context, the value of that is probably about R1.8 billion. And then we’re currently in process of RFT [Request for Tender], where we are in every instance one of only two bidders left in the process for a further 170 000m², which is a further R2 billion.

We probably won’t win them all. It’s impossible to win them all, but we’d like to think we’ll get a fair share of that.

Read: Equites spends R3.2bn on new developments

SIMON BROWN: Are you seeing certain sectors like FMCG [fast-moving consumer goods], for example, showing more demand – or is it spread across the economy?

ANDREA TAVERNA-TURISAN: Across the board we are seeing it from retailers. We are seeing FMCG, we’re seeing it in third-party logistics, and we’re also seeing it quite a lot. Also last-mile delivery guys.

SIMON BROWN: Let’s touch on the UK. Whenever we chat, you have been sort of exiting. As you said, there were five more properties announced earlier this week. How much business is left in the UK? What percentage is still in the UK?

ANDREA TAVERNA-TURISAN: Oh, it will be a single figure now. A single-figure percentage. This was the big one, if you like. That finally closed on Tuesday, which was a process. I’m obviously very pleased with the outcome. What it does do now is it frees up the capital to focus on what we’ve got here. It also frees up executive time and, I suppose, my mind in particular, to really drive the new business element of our business.

Read:
Equites looks to exit UK, turns focus locally
Equites mulls UK exit to focus on SA market

The joint ventures, the likes of Shoprite, have taught us a few tricks in terms of how to use the Reit joint-venture status to the benefit of the tenant, and we believe that there could be scope for some meaningful sale-and-leaseback opportunities in the next two to three years.

Over and above that, there’s a really, really healthy development pipeline coming through. Within that, obviously we’ve got a great relationship with Shoprite where we continue to learn every day from them.

Also they continue to just go from strength to strength, and we don’t think that their requirement is fully – what’s the right word? – reached, if you like. We believe that there’s a bit more coming from them in the next sort of two to three years as well. So that will all add to the pie.

Read: Equites reports solid results, says Shoprite deal is still on

SIMON BROWN: Every time I speak to Pieter Engelbrecht, he’s telling me that there’s a lot coming for a long time still, and I would never bet against it. And an LTV [loan-to-value] in the mid-20s, a lot of capacity there, a lot still to do.

We’ll leave it there. Andrea Taverna-Turisan, CEO of Equites Property Fund, appreciate the time.

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