JSE-listed diversified real estate investment trust Dipula Income Fund says it achieved robust results for the six months ended February 28, despite South Africa’s macroeconomic environment having deteriorated further.

Contractual rental income for the period grew by 3% to R556-million from R541-million in the corresponding period in 2022, while net property income tracked slightly ahead of the prior period at R447-million from R441-million.

The company outlines that management contained property-related expenses, which were limited to a below inflationary 3% increase to R239-million.

“Our portfolio of mainly convenience, rural and township retail centres continues to prove defensive, notwithstanding a deterioration in the domestic macroeconomic environment, with rising interest rates and unprecedented levels of loadshedding.

“Our strong financial performance is underpinned by diligent asset management initiatives and a consistent focus on cost containment,” says CEO Izak Petersen.

Despite Dipula’s solid operational performance, distributable earnings for the period contracted by 7% to R257-million, mainly as a result of a 3.25% increase in interest rates on a like-for-like basis, the company explains.

Distributable earnings a share were 28.72c, with dividends a share of 25.85c declared.

This represents a pay-out ratio of 90%. Distributable earnings a share and dividends a share are not comparable with the prior period as a result of Dipula having simplified its A- and B-share structure into a single ordinary share with effect from June 2022, the company notes.

Meanwhile, the group concluded 99 new leases (excluding residential leases) with a total gross lettable area (GLA) of 20 825 m² during the period, which amounts to a lease value of about R120-million at a weighted average escalation of 7.3% and a weighted average lease expiry (WALE) of three years.

Dipula notes that 137 lease contracts (excluding residential leases) representing a total GLA of 63 897 m² were successfully renewed, representing gross lease income of about R387-million over the WALE of three years.

“We are especially pleased to have achieved an average 4% positive rental reversion on renewed leases for retail and 1% for offices, although lease reversions for the industrial portfolio contracted by 2% on average.

“Management’s focus on attentive tenant service across all sectors is bearing fruit, with an impressive overall 91% tenant retention rate, compared with 78% in the prior period,” says Petersen.

Non-residential vacancies increased marginally to 9.9% from 9.3% previously, mainly as a result of structural changes in the commercial office sector globally following Covid-19.

“We are working hard at lowering the group’s vacancy to between 6% and 8% in the next 18 months,” Petersen informs.

“We will reduce retail vacancies primarily through re-tenanting of highly lettable space vacated by Game at Gillwell Mall, as well as the completion of the Atrium @ 45 mall redevelopment and various other strategic letting interventions. In addition, we have seen encouraging demand for office space in recent times,” he adds.

At period end, Dipula’s residential portfolio comprised 712 apartments valued at R387-million, with an aggregate vacancy of 9%.

Also, Dipula’s portfolio was valued at about R9.6-billion driven by revaluation increases at the end of August 2022. The portfolio comprises 179 properties with a total GLA of 915 243 m².

Peterson highlights that the group grew its net asset value by 7% period-on-period to R5.9-billion.

Lower growth in office rental income and some diesel costs under-recoveries negatively impacted on Dipula’s cost-to-income ratios. Although still competitive relative to industry norms, Dipula’s cost-to-income and administrative cost-to-income ratios were 40.4% and 5.3% respectively, it says.

The group invested about R63-million in refurbishments and redevelopments during the period and disposed of 16 properties with a book value of around R180-million.

The aggregate disposal amount was higher at R183-million, and at an average yield of 9%. Proceeds from the sales will be used to settle debt and recycled into strategic value-enhancing refurbishments as well as the rollout of renewable energy and back-up power across the portfolio.

The group loan-to-value ratio was indicated to be stable at 36.9%, well within its lenders’ loan to value covenant level of 50%. The interest cover ratio was at a comfortable 2.9 times, compared with the lender limit of two times.

The group has committed capital to the rolling out of solar photovoltaic in three phases, prioritising properties based on financial feasibility, tenant needs and the optimisation of trading hours.

Dipula shareholders will be offered an election, in respect of all or part of their shareholding, to re-invest the cash dividend of 25.85c apiece in return for shares.

Going forward, Dipula believes that the office portfolio will show improved performance after having stabilised from challenges over the past number of years, while demand for good space by retail tenants wishing to expand will drive positive performance in the retail sector.

Management believes the industrial sector will remain relatively robust, while affordable residential apartments are expected to record high occupancies in the short term.

The immediate outlook will be adversely affected by ongoing headwinds in the property sector, including loadshedding, dysfunctional local authorities, increasing interest rates and weak economic fundamentals, the group points out.