On a per-share basis, dividends increased by 9.3% to 74.43 cents, compared to 68.12 cents in the comparative period. This growth was largely driven by robust like-for-like rental growth of 7.3%. Net asset value per share increased by 6.0% year-on-year, to R17.37, with the compounded annual growth since listing exceeding 10%. In the five-and-a-half years since listing, the compounded average growth rate of the property portfolio was in excess of 55%.

CEO, Andrea Taverna-Turisan, said: “The six months to 31 August 2019 was a successful period for Equites, with the company again making significant progress in implementing its vision to be a globally relevant REIT, focused exclusively on high-quality logistics assets. Equites continued to focus on its development pipeline, both in South Africa and the United Kingdom and successfully delivered modern and efficient logistics facilities to users in both jurisdictions. Equites has become a developer of choice to some of the biggest names in logistics, retail and e-commerce. The fund grew by R3.4 billion, or 33.7% year-on-year.

The financial results for the first half of the financial year are reflective of the robust health of the portfolio and the value added through developments and acquisitions.”

With the exponential growth in e-commerce globally, rapid delivery is becoming critical to the customer experience and sophisticated logistics and supply chains have become the backbone of every retailer’s multi-channel strategy. While demand for modern logistics facilities initially came from retailers looking to build competitive capability, this is increasingly augmented by the demand created by e-commerce and large logistics companies. Rising land prices, large capital requirements and the technical capability required to participate in this sector are creating barriers to entry, which is supporting rental growth.

Equites’ focus on high-quality logistics assets, let to A-Grade tenants on long-dated leases in key logistics nodes has established the group as a market leader in this space in South Africa, with notable exposure to the United Kingdom, one of the most advanced logistics markets in the world.

Taverna-Turisan continued: “The group’s resilient performance reflects the quality of assets in the portfolio. Holding land and developing to tenants’ requirements is the cornerstone of creating value in the fund. Our developments are managed internally, which has allowed us to drive efficiencies, and by performing property management internally, we stay close to our tenants.”.

Portfolio
The fair value of the property portfolio has increased by 33.7% year-on-year, from R10.1 billion to R13.5 billion. The lion’s share of this growth is attributable to developments and acquisitions, with a 33.3% growth in income producing GLA year-on year.

– Acquisitions and developments
Equites completed four developments during the period, adding R718 million to the fund. The company also commenced four new developments that will add R558 million of capital value to the portfolio. Typically, the fair value of completed developments is 15% - 18% higher than their cost.

The Equites development teams continue to deliver world-class product to the South African and UK markets, which remains a key competitive advantage in this sector. Equites has delivered a total of 12 assets developed internally, with a capital value of R1.1 billion and views this as an increasingly important source of portfolio growth going forward. Equites’ competitive cost of capital allows the fund to develop at sector-beating yields and since it does not extract any development profits during the process, tenants pay lower comparative starting rentals, which creates value for Equites over the life of the lease.

• Strategic land holdings

In addition to its own development land and capabilities, the group has recently joined forces with UK joint-venture partner Newlands Property Developments LLP to unlock strategic land tracts for development in that region. The Newlands’ team comes with extensive expertise in the promotion of industrial land parcels and the procurement and execution of large logistics developments. Equites invested R455 million into strategic land holdings in the period, consisting of two acquisitions of land and also entered into options over three other land parcels as part of the joint venture.

Sustainable development

Equites has placed strong emphasis on sustainability in its portfolio from the outset, which in the South African context includes transformation. The fund’s level-4 B-BBEE rating under the revised property scorecard was reaffirmed in August 2019 and its certified black ownership increased to 54% (23% black women). Market-leading environmentally sustainable practices are well entrenched in its developments including water management, energy efficiency and a reduction in embedded carbon.

Balance sheet

Equites continued to make strategic progress in respect of the structure of the balance sheet in the period.

• Equites successfully raised R750 million of equity capital through an over-subscribed bookbuild in the period.
• It has established several diversified sources of debt funding both in the UK and in South Africa and currently has access to debt facilities of R5.2 billion (1H19: R3.6 billion) across term facility agreements, unsecured listed and unlisted notes and working capital facilities. Of these facilities, R1.4 billion (1H19: R1.2 billion) are undrawn at the end of the period and are available to fund acquisitions and developments;
• Equites’ long-term issuer credit rating was upgraded in Aug-19 from a A(za) to A+(za), which is expected to create further spread tightening with respect to new issuances;

• LTV has remained largely flat at 27%, being one of the lowest among SA REITs. Equites continues to benefit from the conservative financial profile employed in disciplined capital management. Actual LTV levels over the past five years have remained well below the 35% upper limit of Equites’ target range.
• The fund’s all-in effective cost of debt has fallen 95 bps to 5.76% since the last reporting period, mainly as a result of increased UK debt funding as a proportion of the total outstanding debt, but also due to the 16 bps and 19 bps decreases in the cost of debt capital in South Africa and in the UK respectively;

• Equites increased the weighted average term debt maturity profile from 3.4 to 3.6 years;
• Unencumbered assets increased as a percentage of the property portfolio to 21.5%; and
• Interest-rate hedging levels were maintained at well above 80%, while the fund had also hedged 105.6% and 78.1% of the existing-term loan balances and total committed future cash outflows respectively.

All these strategic initiatives have positioned the balance sheet for continued growth with ample head room for acquisitions and the strong development pipeline, at a reduced cost of capital.

Prospects

Equites’ track-record of industry-leading distribution growth, as well as strong net-asset value growth continues to be acknowledged by investors, awarding it the position of top-performing Real Estate Investment Trust over the past three and five years, with an annualised total return of 21.1%  and 22.1% per year, respectively.

Taverna-Turisan said: “Equites has established itself as a leading owner and developer of high-quality logistics assets in South Africa and the United Kingdom. It is the only specialist logistics REIT listed on the JSE. This gives shareholders pure exposure to an asset class that is expected to outperform over time”. 

“Equites targets strong capital and income growth whilst minimizing the risks that face the company. The fund favours long-dated leases with low-risk tenants, which is reflected in the fact that 94.3% of its revenue is derived from A-grade tenants. This, in conjunction with the long WALE of 9.5 years, suggests a high level of income predictability and low risk of default on rental streams. Combined with strong in-force escalations in South Africa and guaranteed rental increases in most of the UK leases, this will result in predictable, above-market income growth for the at least the foreseeable future.”

Equites said that the board had previously guided distribution-per-share growth of 8% - 10% for the full year. Given that there are no leases expiring for the remainder of this financial year and currency and interest rate exposures are largely hedged, the board is now satisfied that the company will likely achieve growth in the upper half of this guidance.

Highlights for the period

• Distribution per share up 9.3%
• Portfolio growth of 33.7% to R13.5 billion
• Net asset value per share up 6.0%
• Successful equity capital raise of R750 million
• Conservative loan-to-value of 27.3%
• Long-term issuer credit rating upgraded from a A(za) to A+(za)
• Successfully placed R600 million in the fixed income market
• Completed developments valued at R718 million
• Vacancies reduced to 0.2%
• Weighted average lease expiry increased to 9.5 years