By Pritu Makan
Dipula is an internally managed, South Africa-focused REIT that owns a portfolio of retail, office, industrial, and residential rental assets, most of which are located in Gauteng. The portfolio is defensive with a bias towards convenience, rural, and township retail centres. The REIT has a strong track record since listing on the Johannesburg Stock Exchange (JSE) over a decade ago, with management remaining agile and repositioning the portfolio to capture opportunities amid changing market dynamics. The group is also continuously reducing its risk by improving the portfolio through employing a range of value-add strategies. Strategically, Dipula remains focused on innovative, diligent asset management and prudent balance sheet management to deliver consistent and sustainable financial returns.
Looking at the group's positioning statement, Dipula invests in conveniently located retail properties that have a positive impact on communities. The company provides its quality retail tenants with suitable trading spaces to achieve their objectives and support the surrounding community. In addition, Dipula's office and industrial properties are well-located in South Africa's urban areas with the residential properties providing much-needed accommodation at good value for money.
Property portfolio
As at 31 August 2023 Dipula's property portfolio stood at R9.8 billion with 170 properties boasting gross lettable area (GLA) of 885 612 m2 (average property size: 5 209 m2; average property value: R55 million). The portfolio is weighted towards retail, which accounts for 63% of gross income (FY22: 62%). The properties are located across all nine provinces of South Africa, with the majority located in Gauteng, which accounts for 61% of rental income (FY22: 63%).
Dipula's residential portfolio consists of 716 units valued at R409 million. This represents 3% of GLA (FY22: 3%) and 4% of rental income (FY22: 4%).
Recent financial results (full year ended 31 August 2023)
Dipula dynamically refines its operating model to enhance operational efficiency, thereby improving its portfolio to remain steadfast in the current tough trading conditions. In the context of the country's power challenges, low growth and escalating costs, the group has still managed to report growth in revenue, net property income (NPI) and property valuations.
Revenue grew 3% to R1.4 billion. With management remaining focused on cost containment initiatives, property related expenses increased a moderate 3.4% to R483 million, despite the current high inflation, significantly higher than inflation increases in administered costs, and the negative impact of loadshedding on the cost of doing business. NPI was 1.8% higher y/y at R901 million, supported by:
Net finance costs rose 14.1% to R314 million, due to a significant increase in interest rates by the South African Reserve Bank (SARB). As a result, Dipula's cost-to-income ratio increased to 39.5% (FY22: 38%). This was the main contributor to the decrease in the group's distributable earnings of 6.9% to R514 million.
The full-year distributable earnings per share amounted to 56.96 cents per share - this full-year distributable earnings per share figure is not comparable to prior periods due to a capital restructure which became effective from June 2022 (all Dipula A-shares were repurchased as part of the capital restructure). The dividend, based on a 90% payout ratio, came in at 51.26 cents.
In terms of Dipula's portfolio recycling initiatives, the group disposed of properties for R190 million (FY22: R56 million) during the period at an aggregate yield of 9%. The proceeds from these sales will be utilised for debt repayment, value enhancing revamps, and the roll-out of renewable energy and back-up power.
The group's net asset value (NAV) increased 2.1% to R6.1 billion, due to positive property revaluations. However, the per share value at year end remained unchanged at R6.64 due to the increased number of shares issued in respect of the dividend reinvestment programme in May 2023.
Looking at the balance sheet, the group's gearing levels remained stable at 35.7% (FY22: 35.9%), well below covenant levels, with undrawn facilities of R178 million at year end (FY22: R80 million). The group has restructured its debt post-year end to diversify funding sources, reduce funding margins, and to increase the group's debt tenure.
Summary Investment Case
Risks
Outlook and valuation
In terms of general market conditions, the group expects the weak economic environment to persist. As a result, management does not expect an immediate recovery in the economy. In addition, management remains concerned about rapidly increasing administered costs and poor service delivery by government and municipalities. This is over-burdening property owners with additional costs and leading to value destruction.
Despite the tough underlying macroeconomic environment, Dipula's defensive retail, industrial and residential portfolios position it well to navigate the expected economic headwinds and a volatile office sector. In terms of the different sectors, the group has seen some green shoots in the office sector as companies return to offices in varying degrees, however, a significant improvement in this sector is highly correlated to economic growth. Demand for retail space remains robust as tenants continue to expand their locations. The industrial sector is still strong with low vacancies recorded. Affordable residential rental occupancies are expected to remain high in the short to medium term due to high interest rates and low disposable incomes. The lower funding margins achieved from the debt syndication programme (as highlighted above) together with lower vacancy levels into the future will provide much needed support in these tough trading conditions.
Dipula is trading on a forward distribution yield of ~12.8% and a 42% discount to NAV, which appears attractive. We like the quality of the portfolio (particularly the defensive convenience retail centres), the experienced management team, and overall operations.
Our fair value for Dipula is 484.38 ZAR cents, which implies 25.5% upside potential from the current share price.
