Good morning, everyone. I'd like to welcome you all to Fairvest H2's call. I'm going to hand over to the management team just to take us through the presentation, and then we'll open up the floor for Q&A after that. Just as a reminder, please keep yourself muted throughout the call. Once the Q&A session opens up, you are welcome to raise your hand, and unmute your mic to ask a question. You can also post any questions in the chat box, and I will read that out for you. Thank you, and I'll hand over to Darren for the presentation.
Thank you for the introduction. Just for those that don't know me, I'm Darren Wilder. I'm the CEO of Fairvest. To my right is Jacques Kriel, the CFO, and on the screen is our COO, Riaz, who will just identify himself. There's Riaz. Special thanks to everybody today for joining us. We always appreciate your time and, most importantly, your continued support, which obviously helps drive our business forward year after year. Special thanks to Avior for hosting us today. That's just the agenda for the day. Jacques, if you could just pull that up for us, please.
Sure.
That's our agenda. Sorry, there was a little bit of a lag. I will present together with Jacques and take you through the agenda. If we can move on to the next slide and just have a look. I'm just going to give you a really brief operational update, and where our operational strength sits before we start looking at the numbers. What differentiates us in the marketplace, and it is our opinion that it's our operational strength that is our biggest differentiator.
Fairvest remains a focused retail property fund. We're committed to simplicity and hands-on asset management and property management. We service the underserved South African retail markets on a national basis. From history, we know our strength is being a focused fund, a focused retail fund. If you couple to that our experience and hands-on management team approach, we know that also delivers results.
Property, as I always say at the beginning of every presentation, it's simple. We lease space, and we collect rentals. Looking forward, the fund will maintain its 100% payout ratio. We will always have a conservative loan-to-value. This is supported, and this will come through in the presentation. It's supported by positive rental reversions, a 29-month WALE, and with built-in escalations above inflation.
You'll also see our balance sheet is robust, remains conservative. Just Fairvest at a glance. We've got just over 1 million square meters under roof, give or take 650,000 sq m of that is retail. Our vacancy rates have remained stable. As at August, we're sitting at 5.1%. We're forecasting to be under 4.5% by year-end. We have 132 assets under management. We had a nice uptick in our market capitalization, which increased to ZAR 15.8 billion, from ZAR 13.8 billion in March.
You would have noticed that Fairvest also elected not to participate in Dipula's accelerated bookbuild. So our interest has reduced to 20.1%. We continue to prioritize and allocate capital towards direct acquisitions within our own portfolio, and we will assess any future Dipula capital raises on their merits. So that's where our thinking is on that note. Let's have a look at the highlights. So you can see we are operationally strong.
You can see what a focused strategy can deliver, and clipped onto that is a disciplined execution of the strategy, while we also lay the foundation for future growth. So let's take a look at this slide quickly. We will meet our guidance, and can confirm our distributions per B share, is expected to be at the upper end of guidance. The guidance was 11%-13%, which translates to ZAR 0.534-ZAR 0.544 per share. Retail revenue is sitting up at 71.4%. That means by revenue, we generate 71.4% of our business through our retail assets.
You'll notice from this slide that we went into the markets earlier on in the year, and we raised ZAR 900 million through an accelerated bookbuild. You will also have noticed that Fairvest has now begun its DMTN program, and we got a rating of zaAAA in national scale by S&P, which is opening access to us for the debt capital markets, and we hope on competitive terms. Looking at Refiber, which is our investment in Onepath, our total investment in Onepath as of August is ZAR 1.2 billion. We have Board approval to deploy up to a maximum of ZAR 1.5 billion.
We currently own 62.4% of Onepath. You'll also notice that the net distribution from this investment has risen from 14.4%- 15.1%. Every rand of that return has been ungeared. With now debt terms credit approval to 30% loan-to-cost, we expect yields to even improve further from here. Having a look at our latest acquisitions, you can see our two acquisitions, Jozini Mall and Tugela Ferry Mall, both Shoprite-anchored assets.
You can also see the accretive yields that we acquired these assets for. We have a strong pipeline of acquisitions lined up. The market is getting tighter from a pricing perspective, but we are still finding a decent and healthy line of assets that we will acquire, all of which will be accretive to REITs. Just to recap, we expected to deliver to our upper end of guidance. We raised ZAR 900 million in new equity.
We have attractive acquisitions, opportunities that sit in our low-income retail focus, and our vacancies, we're forecasting should end at below 4.5% as at September. Just having a look at this slide, let's look at the positive rental reversion rate of 5.6%. You can see that shows even more core operational strength. Clip top to that metric, we have a weighted average built-in escalation of 6.7% and a weighted average lease term of 29 months. If we have a look at our leasing activity, leasing has been strong across the portfolio.
You can have a look at the weighted average escalations on new deals sitting at 7.1%. When we look at the weighted average lease terms, if you look at our weighted average lease term, we're doing new deals at 39 months, so it's strong. Having a look at our renewals, strong set of renewals for the year. Slightly up on budget. Reversions, again, strong at 5.6%. Again, weighted average escalation's above inflation, sitting at 6.9%, and a weighted average lease term of 37.8 months.
You can see from an operational perspective, we've got a strong leasing team doing new deals and strong renewals team with a strong focus on driving longer lease terms. We're still trying to build in a stronger weighted average escalation. I don't believe we'll get it higher than where it is. The market has changed somewhat over the last six months. Let's have a look at our main business unit or our core business unit, which is the retail portfolio. This portfolio is the engine of Fairvest. 79 assets, 606,000 sq m.
Over the last six months of operation, we added 34,000 sq m of space to that portfolio, which are the three acquisitions that one came from the previous year and two from this year. Our vacancies held really steady in this portfolio. We're sitting at 4.3%. What's important here is to understand that vacancy sits predominantly in secondary spaces in our portfolio, and our team is working hard to let that space. As I always said, this type of retail portfolio, because it's a smaller, open-air grocery anchored center with a first-floor component to it, will always sit between 3% and 4%.
What's nice to see is our tenant retention is up. As you can also see, tenants are renewing at a 5% reversion. The average rentals are now up at ZAR 181/ sq m. Again, a strong built-in escalation of 6.5%. Effectively, this income just grows by 6.5% without us having to do or sign any other leases. Very strong metrics. Looking at the deal flow in the retail portfolio, we've signed 280 leases and new deals, over 40,000 sq m.
Close to 7% of our retail portfolio, we are let to what we say new tenants, and that's really how we hold our vacancy low at that 4.5%, 5%. These deals, if you have a look there, were done at higher rentals, ZAR 147/ sq m. Again, strong built-in escalations of just under 7%. Looking at the renewals slide in the retail portfolio, 300 leases renewed. Again, a strong business. Rentals up at 4.9%. Deals [grant] 2.5%, 3% ahead of budget. Again, weighted average escalation strengthened a little to 6.8%. Again, well above inflation.
Very interesting point and something worth noting is in the renewals portfolio, we are almost at 46 months. Our average is almost 46 months. Also strong metrics. All right. Let's have a look at the office portfolio. The office, everyone expects a little bit of bad news out of the office portfolio, but this portfolio this year has defied that thought. We've got tenants renewing with us, paying 6% more on renewals. Our average rentals rose to ZAR 140/ sq m, and strong built-in and weighted average built-in escalations in this business unit at 7.1%, with a weighted average lease expiry term of 30 months.
Again, strong business unit this year. Having a look at a bit of the granular detail, re-leasing in the office portfolio sharply increased this year. We broke, for the first time, the 9% vacancy in this business unit, which we hope to maintain. You can see we had to let 34,000 sq m to achieve that. Average rental was ZAR 135/ sq m, roughly 16%, 17% higher than last year. On renewals, we had positive reversions at 6%, up from 4.7%, so also good.
Weighted average escalation in that business unit at 7.2%, and a weighted average lease term of 36 months. Also a strong performance for this business unit. Having a look at the industrial portfolio. Industrial really always has been our strongest pricing story. Reversions were up at 8.7%. Vacancies sitting at 4.2%, probably the highest vacancy we've carried in this portfolio in the last three years, and that's predominantly due to one or two assets that are holding the vacancies in.
Understanding that this is only 270,000 sq m of GLA, so the vacancy can swing on smaller numbers. Again, weighted average built-in escalation of 7.2%. Average gross rental per square meter is still sitting under ZAR 60, so we still see some positive growth there and growth potential there. And a weighted average lease expiry term of 30 months. Looking at the granular detail of this portfolio, again, you can see, really in this business unit, the renewals are showing good strength, good statistics, a weighted average lease term of 24 months, a weighted average escalation sitting at just over 7.3%, high rental reversions of 8.7%, and we are well ahead of budget in this business unit.
But if you look at the new deals, strong leasing on the new deals. As we say, we re-letting at ZAR 52/sq m . The average on the portfolio is sitting up at ZAR 59. Again, strong weighted average lease escalations. Nice weighted average lease term. Again, good cash flow generated by this business unit with a strong set of metrics. I'm going to hand over to Jacques, who will just give you a quick financial update, and then we'll take some questions- and- answers. Jacques, over to you.
Thank you, Darren. On the balance sheet side, we expect our LTV at year-end to be below 27%. That is broadly in line with what we had at interim of 26.6%. There has been some movements on the balance sheet with our capital raise in April. We also had the transfer of the two KZN assets in July, and then we also had further investments in Onepath. The acquisitions and the Onepath investments largely offset our capital raise that we had. We are busy with our year-end valuations. As per normal, 1/3 of our portfolio will be valued by external valuers.
We expect to see an increase in the portfolio value. I think a lot of that is driven by underlying growth in the portfolio, as you've seen on the reversions that we've achieved and on the like-for-like growth that we reported at interim. We expect that to translate in an increase in the valuation of the portfolio. Our fixed debt component is expected to be at 60%, or above 60%. That is a decrease from what we reported in March.
But it is within the band that we are mandated to operate in the 60%-70% band. With a low LTV of mid-20s, our relative exposure to the interest rates is quite low and therefore we are comfortable at these levels. Given our low LTV, all of our bank covenants, LTV as well as ICR covenants, are expected to be comfortably met. As Darren mentioned previously, we have commenced our first bond issuance at the end of September. In anticipation of that, we received the zaAAA credit rating from S&P.
We've got our auction scheduled for September 29th, and we're targeting to raise ZAR 500 million with the option to upsize to ZAR 750 million. I think this does show the market that we've got access to other sources of funding other than just bank funding. And it shows how our business is maturing. As Darren mentioned, our distribution, the B share, is expected to be at the upper end of the guidance of 11%-13%.
Thank you, Darren. Guys, thank you. That's the end of the pre-close update. Are there any questions?
Thank you, Jacques and Darren. Maybe I'll just start with a few questions on your Refiber investment. So you're currently sitting on ZAR 1.2 billion invested in Onepath, and that's against a ZAR 1.5 billion sort of approved Board capacity. How should we think about the pace of deployment from here on? Is that ZAR 1.5 billion the ceiling to your investment? And if fibertime sort of achieves their ambition of connecting, I think they had said 2 million homes by 2028, what does that sort of imply for Onepath's capital requirements? Could the opportunity then become materially larger than the ZAR 1.5 billion that you currently have approved by the Board?
Yes, we believe, and we understand from the Onepath team, that the opportunity will be far greater than the ZAR 1.5 billion that we've committed to. We have board approval to invest up to ZAR 1.5 billion. From my perspective, that was the maximum we would invest, as it represents probably 9%, 10% of our asset base, and we believe that's adequate.
As you can see, we're sitting at ZAR 1.2 billion and we own 62% of Onepath. Onepath will go and find additional shareholders. They are currently bringing them on through draw. I would say we'll be through our. We're going to raise some debt in Onepath. I would say looking at the drawdowns by March, April next year, we probably would be sitting at the April, May, June, somewhere around there, we'd be sitting at the ZAR 1.5 billion mark.
Okay. With your current sort of yield from Onepath around 15%, that's obviously well above conventional property yields. What do you think is the principal, I suppose, risk investors should associate with that additional return from fiber versus traditional property?
Look, I think each shareholder can assess that themselves, that they would associate and attribute risk to how they see the investment. It's obviously not a property investment, but we do have assets in the form of strings and poles. For us, it's a logic that drives, in our business, our retail portfolio. There are roughly 50 million homes in South Africa, and in townships, and probably 20% of those are connected.
As I've said before, that doesn't show a demand problem. It's an infrastructure and affordability problem. That's the kind of problem we understand because we're already trading in these communities. In our world, affordable connectivity strengthens education, employment, and entrepreneurship in exactly the communities that support our retail assets. It's a genuine alignment of return and impact that we don't see or attribute any form of risk to this investment. It's well thought through. It's managed carefully. We're very comfortable with where we are and where we're going.
Right. Then just still on Onepath, we have a question here from Trinity. When was the additional investment in Onepath deployed? Could you also provide the cost of funding on the geared component?
Jacques can handle that. No, it's not. You go take.
We invested an additional approximately ZAR 500 million up to end of August in Onepath, and that was done equally over the period. We do monthly draws as they're rolled out. The assumption on that can be that it was done equally over the period. There is also, on the cost of funding, there is no bank funding within Onepath yet. That will only be deployed in the new financial year. At that point in time, we will report on new costs on margins that we're getting as soon as we deploy that funding, but that'll only be from October onwards.
All right. Then I'm going to just move over to the retail sector. You have a few questions in the chat on that. First question from Anda. How would you characterize impact of higher transport costs on footfall and basket mix within your retail centers?
That's a great question, Riaz. We've taken that question before. Would you like to answer it?
Thanks, Darren. Thanks, Anda. I think the majority of Fairvest retail assets are characterized as essential shopping. Our supermarkets are your daily shop where individuals are buying their bread and milk and groceries. From a fashion perspective, we have value fashion, Jet, Pepkor, school clothes, and the like. It's really essentials. It's convenient shopping in terms of the catchment areas. From the trading densities we've monitored, we haven't seen any real impact on those inflationary transport costs on our tenant base. Again, it's essential shopping. I can imagine that there's some inflationary pressure on the credit shoppers, but our retail assets are generally your cash-based retailers and your essentials that our daily shoppers are shopping at. We haven't seen any negative impact at the moment from inflationary costs.
And then-
Riaz. Sorry. Riaz, would you also just take the question from Joan while you're on the screen?
Yes. Clicks.
If you scroll a little bit further down, there's another operational question that relates to the portfolio itself.
Yeah. Let's do it. Thanks, Joan. Thank you. In terms of Clicks, we are discussing the opportunities. We've concluded one deal with a new brand and a second site. What we're finding are the retailers, particularly the retailers that enter our shopping centers, go through cycles. They've got targets in terms of store rollouts. Also, one of the avenues for growth for them is strategic rollout of new stores. There is appetite, and it changes from retailer to retailer at different times of the year. A great example, we ran an internal analysis in terms of TFG, in terms of space they've given up.
All previous two rounds of space that they've given up, we've leased all the space, and the majority of the space has been leased to national tenants. Location, market share, if those boxes are ticked, which in many cases our assets represent, there is demand for new store rollouts with the various national tenants.
In terms of cautious rollouts, tenants are looking at where they're rolling out new stores. If there are market shares, they run their feasibilities. They are cautious. But in our segment and our sector, we are seeing appetite for new stores and demand, as can be seen on the statistics for retail new deals. There's still very much demand for our assets there and our profile and location.
In terms of new openings-
Let me just-
Yeah.
Okay. Yeah.
Go for it. Apologies.
I was just going to ask from my side, just while you are talking on retail, with your contractual escalation still at 6.5%, how do you guys think about the sustainability, I suppose, of your positive reversions at around 5% if inflation remains below contractual rental growth?
It is a great question. I think the argument with the retailers or the discussion and negotiation with the retailers goes both ways. In a lower inflation market, it is low inflation for us, but also for the retailers. If they have got low inflation, their margins are under less pressure. If their margins are under less pressure, there is more room for negotiation on that step-up escalation and the built-in escalation. We do not look at it and paint every brand with one brush. We look at individual store performance, trading densities, margins, where we can get that information, and we slow the negotiation down to understand that, and that is where we negotiate the step-up escalation.
That is how we have managed to achieve the results. A higher escalation, the argument can go the other way, where the higher the escalation, because South Africa is an inflationary market, retailers are pushing some of that inflation onto their retailers, again, protecting their margin. Hence, those negotiations go backwards and forwards, and there needs to be room for that step-up escalation.
Right. Thank you. You have one question here on the industrial sector. Just provide an update-
Yeah.
...on filling the industrial vacancy.
Thank you. I see it's from [Sinovuyo] So, in terms of the industrial vacancy, Darren alluded earlier on post pre-close, we've reduced the industrial vacancy, and we'll report that as we report our year-end numbers. So we've reduced it from the 4%. The team's done some good letting, and that will go into our forecast and budget for the next financial year. So that has come down, and the team are continuously working to bring it down further.
All right. There are a few questions on capital allocation, so I'm just going to go to that, and then on the DMTN program. The first one is from Trinity. So, if I recall correctly, the KZN acquisitions that transferred on July 10 are leasehold properties. Could you confirm whether the 10.2% yield is net of ground lease payments?
It is.
Okay. Another question from Ridwaan. Please talk to additional acquisition opportunities and market yields potentially achieved. Where are we in the process?
Look, we have a very healthy pipeline of assets that we are working through. We have a range from probably 9.5%, 10.25%. So we have quite a broad band of yields and assets that we are looking at. We will communicate clearly to the market when these deals have been concluded.
Right. A question from Peter. How will proceeds of the bond issuance be used? Does Fairvest intend to be a yearly issuer, and have you defined a targeted bond, so bank debt/funding mix?
Thanks, Peter. Initially, the proceeds will be utilized against our debt facilities. So we will use that against our Access or RCF facilities. As mentioned previously, we have a strong pipeline of acquisitions that we are looking at. We have our further Onepath Investments investments that we are also looking to deploy that capital, so initially to debt and then to further accretive acquisitions.
We do intend to be a yearly issuer, so we expect to come back to the market. Obviously, we will be guided by our first auction, and then we will gauge demand and determine what the strategy is for us going forward. Annually, we will need to assess our capital mix to determine what is most efficient for us, and then we will determine what the most appropriate mix is for us going forward.
Still on that, a question from Trinity. With regard to the DMTN program, what margins are you achieving, and how much additional unencumbered asset value do you have available to support further issuances in the market?
We haven't achieved any margin yet. Our auction is only scheduled for September 29th. At that point, we will know, and we'll be able to communicate to the market that as soon as we've concluded the auction. We do have unencumbered assets in the form of direct property within the portfolio, and then we also have our investment in Dipula that's unencumbered. At this point, the ratio will be quite low, the bonds issued versus unencumbered assets. As I said, for future issuers, we'll have the opportunity to streamline that mix and also with further acquisitions, enable us to have more unencumbered assets to maintain a healthy ratio.
We have a question here on Dipula, so I'm going to read that out, and then, Albie, you can unmute your mic. Following the election not to participate in the last two Dipula book builds, could you give more detail on how you're thinking of the investment's contribution to the broader group strategy, and where can we expect the investment percentage to settle in the medium term?
I believe I did address that initially in our initial discussions. We are comfortable with our investment in Dipula, and we'll just continue to prioritize and allocate capital at this point in time towards direct acquisitions within our own portfolio, and really assess any future Dipula capital raises on their merits.
Right. Albie, you can unmute your mic and ask your question.
Thank you. Hi, Darren and Jacques.
Hi, Albie.
I am good, thank you. Look, you are operating it seems like on all cylinders currently. I just want to congratulate you guys. It looks very good. My question is also related to Dipula. I was a bit late signing in here. So your capital allocation on your Dipula investments, would you say currently, given that all your other operations and the fiber and everything is operating so well and performing so well, would you say your Dipula investment is a detractor or contributor to that core business on the one side? That is one of my questions.
Then I see there is one question questionnaire asked about that you did not participate in any Dipula capital raises. I want to add to that. I saw Dipula bought quite a large retail portfolio from other property investors recently. Would you care to comment on that strategy of them and that specific purchase as a capital allocation strategy, if you are supportive of that in the long term, given your core business doing so well? Against the background of your own acquisition pipeline that you say is so strong. That is all I would like to know. Thanks, Darren.
Albie, nice to see you. Thank you for the question. I am not going to comment on Dipula's acquisition. I think the best person to comment on that would be [Isaac] not myself. Jacques, do you want to take Albie's second question?
Yeah, I think our investment in Dipula has been contributing to our earnings. We did it, then we have seen some strong capital growth, and there has been some growth from their earnings also, which has contributed to our growth. In terms of further capital allocation, as Darren mentioned, there is a factor of looking at the returns that we can get from further investments versus increasing our investment in Dipula. At the moment, we are very happy with the investment, and it has contributed strongly to our earnings, and future allocation, we want to control where we allocate our capital.
Albie, does that answer your questions?
Partly, Darren. I could assume or understand the cautiousness. For me, it just seems it's two different kinds of businesses run by different kinds of managements. I am just a guy that's all about focus. Your business seems to be well-oiled, well-focused, and I am just not sure that Dipula fits in that core strategy of yours and that will contribute to your good quality earnings and maybe not be more of a detractor. I am unsure. That is why I am asking. I will let me lead by what you say.
Thank you, Albie. I appreciate the thoughts. As I said, we are comfortable with our investment in Dipula. The earnings have grown well over the last 18 months of trade. We do have very similar asset base, Albie. Very similar asset base.
All right.
Okay, thank you. That is all.
You have two questions here just on the retail sector. The first one is, can you please provide some color on trading densities?
We will give a full update at year-end. We will not give any update on trading densities yet. On to the next question where it says, are we seeing additional competition in the areas that you operate? And who would we regard as our closest competitor? Is that the next question we have there?
Yes. Yes.
Look, we found ourselves a niche in the market space. We are outside of the larger funds where they look for properties, and we sit on the upper end of where private landlords invest. The private landlord is probably our largest competitor. But we have a lot of headroom on our balance sheets, which enables us to effectively give a cash offer on the assets that we like, which does differentiate and allow us to act very quickly. Jacques, there is a question there. What is the interest rate on the RCF facilities?
The RCF facility interest rate is exactly the same as our term facilities. We've got a weighted average margin on ZARONIA at about 150 basis points. The term that we will deposit in that will be a pure saving to our interest cost as we reduce our debt.
You guys have a question here from Zinhle. "Your versions are only disclosed on renewals, yet new deals made up close to 50% of leasing activity this period. Would management consider disclosing at the FY results how achieved rentals on new deals compared to budget or to expiring rentals? Including new deals in the reversion metric would give a fuller read on true rental growth.
It is on the slide. Our new deals on the portfolio leasing is on the slide. We've just popped it on the screen.
This is budget.
We hadn't really reported in the past on the new deals against budget.
No, we haven't. Well, just, it's 4.2%.
That's on renewals.
On new deals.
On new deals. I think they are referring to new deals. We will consider it and come back to you on that. I just-
If I can just add on a point on that. In terms of new deals, I think it is important to also note that it is splitting to renewals that have not been concluded, where we are doing new deals, and we do have the expiry rental disclosed in our stats. From a budget perspective, vacancy, we do not budget for vacancy income. When we do new deals, it is all upside against the budget.
Right. We do not have any more questions in the chat. I think I can hand over to you, Darren, if you have any closing remarks for the group.
As we've alluded to, we can see we're operationally strong. Again, just thanks to everybody for supporting us over the years, and we will see you at our year-end results. Again, special thanks to Avior for hosting us.
Thank you. Thanks, Darren and Jacques. Thank you, everyone. You can disconnect.
Thanks. Bye-bye. Cheers, everyone.