JSE-listed South African-focused REIT Gemgrow Properties has reshaped its once heavy-weight office property portfolio to a more diversified one in an effort to navigate the treacherous weak market.
Gemgrow derives 39% of its income from office, 36% from retail and 25% from industrial. Vacancies have increased in line with expectations from 7.6% at year-end to 9%. This was due to several leases that the company forecast would not be renewed. Office vacancy was most impacted and grown to 14%, while the retail and industrial sectors have vacancies of 6.6% and 7.2% respectively.
Gemgrow last week announced its interim results for the six months ended 31 March 2019. The company, which owns a diversified property portfolio reported an increase of 17.8% in revenue (excluding straight line rental) relative to 31 March 2018 and dividends of 54,54 cents per A-share (31 March 2018 – 52,18 cents per share) and 35,31 cents per B-share (31 March 2018 – 38,52 cents per share). The A share performance is in line with expectations, whilst the B share performance is a marginal improvement on the guidance communicated to the market at the end of the prior financial period.
During the six-month period, Gemgrow has taken the necessary steps to improve its portfolio by investing in its assets with good property fundamentals and disposing of non-core assets. Post the transfer of R761 million of assets that it acquired last year and transferred during the current year; it now comprises 163 properties valued at R5,6 billion, up from R4,8 billion at 30 September 2018. The listed REIT also disposed R425 million of non-core assets of which eight with the value of R98 million transferred in the current interim period. The remaining R327 million is expected to transfer during the remainder of the current financial period.
Commenting on the results, COO Alon Kirkel said: “During the first half of the financial year, we remained focused on positioning our portfolio defensively by actively managing and improving the yield profile of our properties, in order to mitigate risks arising from the protracted economic downturn. This will provide up-side potential when the operating environment begins to improve and help sustain income during the tough economic environment.”
The company continues to operate in a very challenging economic environment. Tenants are under pressure and the supply of letting space outweighs demand. This has resulted in an increasingly competitive rental environment where rental reductions and higher vacancies have prevailed. The company has responded to these challenges by focusing on tenant retention, competitive letting of vacant space and strengthening its balance sheet. It also has invested in additional staff to improve its oversight in certain key areas. The company employed two asset managers and two leasing consultants which, over the short to medium-term, is expected to assist in managing lease expiries and reducing vacancy rates.
CFO Junaid Limalia highlighted that “The balance sheet remains strong and although the LTV ratio has increased to 32%, we expect to reduce debt levels and debt costs through a combination of proceeds from planned disposals and the use of excess funds to reduce loan values in access facilities. The company’s balance sheet is well positioned to weather the storm and take advantage of any opportunities that may arise.”
In April 2019, Gemgrow announced a potential merger with Arrowhead Properties Limited, its parent company. According to COO Alon Kirkel: “We believe the proposed merger between Gemgrow and Arrowhead would result in synergistic benefits for all shareholders. Additionally, Gemgrow shareholders would benefit from the improved liquidity of shares and a significantly enhanced A-share cash cover. In the meantime, however, we will continue to ensure the optimal management and performance of our portfolio by targeting efficiencies, balance sheet strength and providing a service-driven offering.”
Gemgrow expects dividend performance for the full year on the B-share to be marginally better than communicated in previous guidance.