Octodec to shed R500m worth of office space

Property fund Octodec Investments will sell offices worth R500m as it tries to protect the income it pays to shareholders, MD Jeffrey Wapnick says.

He said the group’s offices business, which accounts for about 15.8% of the total portfolio, has been through “tough times” and vacancies have climbed to about 18.3%. Tenants are struggling to afford rental increases, Wapnick said.

“We are focused on refurbishing our properties and selling those which no longer meet our expectations where necessary. It’s not a good idea to risk things by building large developments when the economy just isn’t growing. We’d rather focus on protecting our investors’ income until there is a rebound in the economy.”

Wapnick spoke after the release of Octodec’s financial results for the year to endAugust, which saw the group’s dividend slip 1.2%.

“So we have about half a billion rand worth of offices to sell. I think our dividend growth has been quite disappointing in the past five years. It has been a very difficult economic environment to work in,” Wapnick said.

Octodec, which mostly owns properties in the Johannesburg and Pretoria city centres and has a total portfolio worth nearly R13bn, also expects flat distribution growth in its 2020 financial year.

“I think more of our rental growth needs to come from our residential portfolio, which accounts for about 32% of our total assets. Rapid urbanisation means when the economy kicks into gear, we want our residential portfolio to be positioned to benefit. Right now tenants are struggling to afford rental increases, but this will swing in the future,” he said.

Wapnick said he was happy that Octodec had managed to “more or less” maintain the size of its dividend, while some of its peers saw their dividends shrink at double-digit rates in a very weak operating environment where office and retail tenants are begging for rental cuts.

“Some large anchor tenants have asked for cuts in their rents. We have tried not to put too much pressure on rentals but we don’t want to lose our key tenants, so we have undertaken rental reversions where necessary,” he said.

Headline earnings per share fell 27.9% to 161c. Net asset value per share fell 3.1% to R28.47. The stock was trading at about a 54% discount to net asset value, given a share price of R15.95 at the end of Tuesday.

Pranita Daya, a real estate analyst at Anchor Stockbrokers, said Octodec’s dividend forecast of flat growth “owing to the subdued local economic climate” is aligned to industry peers.

“The net asset value per share decreased circa 3% year on year, mainly as a result of downward revaluations on interest rate swaps and on the property portfolio. The decline in property valuations has also contributed to the slight uptick in the loan-to-value ratio to 38.9% from 37.8%,” she said.

This is still below 40%, which is Octodec’s limit.

“The results are in line with expectations as Octodec is 100% exposed to the local SA market, which is currently experiencing muted growth. Vacancies remain elevated. However, they have not deteriorated from prior periods. We still commend management’s commitment to their strategy and continue to view Octodec as a clean, straightforward business,” Daya said.