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Octodec tenant retention plan mitigates affordability pressure

While group consolidates its portfolio.
A new public spill-out space links various Octodec properties in the Pretoria CBD – the upgraded heritage Volksbank building, the One on Mutual development and the existing Capitol Towers arcade – with trees, a fountain and public art by sculptor Angus Taylor accentuating the new route to Church Square. Image: Moneyweb

The share price of JSE-listed real estate investment trust (Reit) Octodec rose marginally on Monday after the announcement of its financial results for the year ended August 31.

By midday it traded 4c higher at R20.31. The share has lost over 12% of its value in the past year but is trading 6% higher since January.

The company reported a 3.1% increase in revenue to R1.89 billion and net property income grew by 3.4% to R946 million. Property operating expenses increased by 2.5%. Earnings per share decreased by 22.9% to 202.9c.

The total dividend per share grew marginally to 203.4c.

Octodec has 306 properties valued at R12.9 billion with most of its properties situated in the central business districts (CBDs) of Johannesburg and Pretoria. Its properties are managed by City Property Administration.

Retail property generates 34.4% of the group’s rental income, residential 31.1%, offices 16%, industrial property 7.1% and specialised property 11.4%.The specialised property sector includes hotels, education and healthcare facilities, auto dealerships, places of worship and parking facilities.

Octodec says in its results statement that consumer confidence and economic growth suffered because of political uncertainty and challenging economic conditions during the reporting period. While the demand for its rental properties is high, affordability is an issue for cash-strapped consumers and limits rental income growth.

“With this in mind, our strategy was to continue to focus on the core property fundamentals and position the business to provide our stakeholders with sustainable value creation,” the group stated. “We increased our focus on the disposal of non-core and underperforming properties and investing the proceeds in the most attractive investment opportunities within our existing core portfolio.”

During the reporting period Octodec sold 21 properties at a combined exit yield of 7.9% and a combined premium of 1.9% to book value. Those properties that have already been transferred generated R69.8 million with a further R92.1 million expected in the first half of the 2019 financial year as the transfers are finalised.

The group will over time reduce its total number of properties to about 250.

Healthcare facilities, auto dealerships and parking showed the strongest rental growth income of 11.8%, 6.8% and 5.7% respectively. On the residential side rental income grew by 3.9%, mainly due to increased vacancies and lower rental escalations. Competition in Hatfield in Tshwane and the Johannesburg CBD increased as new competitors entered the market.

Octodec increasingly succeeds in reducing residential vacancies by offering tenants a once-off incentive of R1 500 if they renew their leases.

Office vacancies increased to 45.1%, up from 43.6% in the previous financial year, due to two large government tenants moving out.

Octodec says several office buildings it acquired in the Johannesburg and Tshwane CBDs over the past few years that have high vacancy rates offer significant opportunities for conversion to residential units, redevelopment for office space or disposals.

During the reporting period Sharon’s Place – a large residential property with 5 647 m2 of ground floor retail space anchored by Clicks and Shoprite – was completed and fully let within record time. The total cost of the project, excluding land cost, amounted to R357.4 million.

Octodec expects that the new financial year will remain challenging against the backdrop of low economic growth. The group therefore expects to maintain rather than grow its distribution to shareholders.

It will continue to consolidate its portfolio by disposing of non-core and underperforming properties, and has not committed to any major new developments.

During the year under review Octodec, through its managing agent City Property, filled its newest property development, Sharon’s Place, in record time. Situated next to the newly built head office of the Tshwane metro council in the Pretoria CBD, Sharon’s Place has 399 residential units. These include 150 bachelor units, 70 one-bedroom and 79 two-bedroom units, and 289 parking bays. Rental starts from R3 800 per month for bachelor units. Catering for inner city living, it offers 24-hour security and includes braai facilities, a netted court for ball sports, garden space, patios and natural plants. Sharon’s place is named after the chair of the Octodec board, Sharon Wapnick.

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Its an interesting company but I just cant get off the fence about it.
A no buy personally although I am glad to see it get a bit of coverage. Thx

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