Vukile Property Fund (JSE: VKE), the specialist retail REIT invested in South Africa and Spain, has reported funds from operations (FFO) of 80.8 cents per share and declared an interim dividend of 47.32 cents per share for the six months ended 30 September 2022. This strong performance places Vukile comfortably on track to deliver its guided full-year FFO and dividend per share growth of 5% to 7%.
Laurence Rapp, CEO of Vukile Property Fund, comments, “We are pleased with the excellent operational performance achieved in both the South African and Spanish markets. Our strong results show that we have sailed safely through the recent turbulent times and metrics are exceeding pre-COVID levels. The South African reversionary rental cycle has turned positive, which together with ongoing positive reversions in Spain, signals the increasing income generated from our assets.”
Vukile holds a defensive portfolio of property assets to the value of R35bn, of which 44% are in South Africa and 56% in Spain (held through its 89.6% held Madrid-listed subsidiary Castellana Properties Socimi), offering diversified income streams across different macro-economic drivers. Both businesses are underpinned by blue-chip retail tenants reporting good performance and upward-trending trading. As a specialist retail property owner, Vukile is uniquely positioned to optimise value from its assets and grew its net asset value (NAV) by 6.6% in the period.
The SA portfolio delivered another set of strong results, with net operating income increasing by 4% and property values increasing by 3%. Vacancies further reduced to 2.3%, and retail rental reversions rallied to +1.6% from -2.4%, with 79% of all leases reverting positively or equal to previous levels. Turnovers have surpassed pre-Covid benchmarks, with shopper numbers 11% ahead of the previous comparable period. Like-for-like trading density has increased by 7.0% with notable growth on all key categories across the portfolio.
On the back of positive trading and supported by Vukile’s customer-centric strategy and approach, demand from retailers for space at Vukile’s centres continued growing, with six of Vukile’s top 10 retailers opening 40 new stores in its portfolio, led by TFG, Mr Price and Pepkor.
“We are reaping the benefits of our in-house strategic leasing team, which, with access to our state-of-the-art data and statistics, has boosted the defensive nature of the portfolio with a high percentage of essential services tenants, mirroring changing shopping patterns. We are also seeing good retailer growth in our market segment, and with Vukile’s dominant market position, its portfolio is the natural home to take up this demand. Consequently, we expect the drop in vacancies to continue,” notes Rapp.
Vukile continues to actively rotate its portfolio and prior asset sales were augmented with further sales of R280m of non-core assets. Proceeds will be deployed into two strategically aligned dominant assets being Pan Africa Mall in Alexandra, Johannesburg, purchased at a price of R421m and BT Ngebs City Mall in Mthatha, Eastern Cape, of which Vukile is acquiring a 50% undivided share in a joint venture with Flanagan & Gerard Property Group, for R400m. Both acquisitions, made at yields of 9,25%, are still subject to conditions precedent and are expected to close within the next six months.
In Spain, Castellana’s strong asset management and impressive operational results delivered a market-leading performance, with an increase in normalised net operating income of 7.5%. Together with value-adding projects, this saw the portfolio value growing by 1.1%, taking it 1.3% higher than pre-Covid values.
Castellana reported an almost insignificant vacancy level of 1.6%, with a weighted average lease expiry of 12.1 years. It increased positive rental reversions to 4.6% and collected over 99% of rentals billed. Footfalls and turnover exceeded national benchmarks at 98% and 112% of pre-pandemic levels, respectively. Almost 100% of all Castellana’s leases are indexed to inflation.
Since taking its initial stake in listed competitor Lar España, Castellana has increased its holding by a further 4% to 25.7%, enhancing the strategic optionality for Vukile to grow its market share in Spain – a market that Vukile knows and understands very well.
“While Spain is experiencing the same issues as the rest of Europe concerning supply chains, gas, and other macro-economic headwinds, Castellana’s results have held up exceptionally well, and continuing positive feedback from tenants is encouraging. That said, with the prevailing risks of the ongoing war and rising interest rate cycle, we are being suitably cautious,” says Rapp.
Vukile has a diversified funding base and has already repaid, refinanced or renegotiated 88% of debt expiring in FY23 and increased its undrawn debt facilities to R3.6bn. Its long debt-expiry profile, with 87% of group interest-bearing debt hedged and no Castellana debt expiring until FY26, insulates Vukile against the current rising interest rate cycle and the dislocation in capital markets.
Vukile’s balance sheet metrics remain robust. Its interest cover ratio (ICR) of 2.9 times and stable loan-to-value ratio of 43% highlights very comfortable headroom on covenants, evident by the upgrade of Vukile’s corporate long-term credit rating to AA(ZA) by GCR.
Supporting Vukile’s positive environmental action, its commitment to reducing climate impact as well as maintaining cost-efficient operations, Vukile added a further 800kW to its installed solar photovoltaics (PV) in SA, with another 1.7MW currently being installed and 2.5 MW of PV planned for installation in Spain. Castellana’s buildings are all BREEAM certified for environmental sustainability.
“We are proud of Vukile’s first verified carbon footprint calculation completed during the period and that both Vukile and Castellana made their first submissions to GRESB,” reports Rapp.
“Notwithstanding a worsening global backdrop, the strength and defensive nature of our assets in SA and Spain and strong tenant demand, coupled with our ongoing drive for operational efficiencies and excellence and a cautious approach given the challenging macro environment, all position Vukile strongly to deliver on its full-year guidance, pursue future growth and continue to sustainably create value for all our stakeholders,” concludes Rapp.
