Vukile Property Fund, the JSE-listed property group with assets across SA, Namibia and Spain, will not sell assets to pay off debt at the expense of the quality of its portfolio over the long term, says CEO Laurence Rapp.
He was speaking after the release of the company’s financial results for the six months to end-September 2020, in which Vukile provided Covid-19 lockdown relief worth R133m to tenants in Southern Africa and €15m (R274m) to tenants in Spain. Revenue and operating profit fell compared to the same period in 2019, largely due to the Covid-19 rent concessions.
During the half-year to September, debt was reduced by R1.5bn to R17bn. Rapp said the company has no immediate plans to tap shareholders for funds through rights offers to pay down debt.
Many property companies are trying to decrease their loan-to-value (LTV) ratio to 35%-40% as a high LTV can indicate poor financial health, according to analysts. LTV measures the ratio of a company’s debt and its assets.
The current LTV average in the sector is about 42%. Vukile’s LTV was 44.3% at the end of September, having fallen from 46.1% at the end of March.
“LTV is an indicator, but my opinion is that the current fixation with it is wrong. For a start, valuations of properties have a large degree of subjectivity within them so to push the narrative that all real estate investment trusts [Reits] should have an LTV that fits into an arbitrary band is wrong,” Rapp said.
Interest cover ratio (ICR) is far more important, he said, as it shows how comfortably a company can service its debt. Vukile’s ICR was 3.7 times at the end of September.
An ICR measures how many times a company can cover its current interest payments with its available earnings. The ratio is calculated by dividing a company’s earnings before interest and taxes (ebit) by the company’s interest expenses for the same period.
“The only time a bank gets nervous is when an interest payment which is due is not met,” Rapp said. In the US market Reits are not compelled to disclose LTVs while the norm in Spain is an LTV of 65%.
“We would rather buy assets to improve our core business, instead of selling assets to just get to some arbitrary ratio,” he said.
Vukile’s headline earnings fell to 27.9c per share from 82.9c per share in the previous corresponding period. The decrease in headline earnings per share was primarily due to the Covid-19 rent concessions.
Vukile’s property assets of R35.7bn include direct property portfolios in Spain worth R19.5bn and in SA worth R16.2bn. Property valuations increased 0.3% over the six months in the SA portfolio and 1% in Spain.
When compared with September 2019, the valuations were down 4% in SA and 3.4% in Spain.
“Having come through this period, we are starting to see valuations stabilise. The full-year 2020 valuation assumptions, when compared with more encouraging outcomes, are proving to be safely conservative,” Rapp said.
Jay Padayatchi, executive director at Meago Asset Management, said Vukile needs to be commended for its strong operational performance and the resilience of its properties. But it will need to find ways to lower its debt.
“What was quite surprising was the relative strength of the valuations of the direct portfolio in both SA as well as Spain. Many risks, however, remain, chief of which is the degearing of the balance sheet in a very tough environment.”
Vukile will look to sell its 11.3% investment stake in listed fund Arrowhead Properties. Rapp said Arrowhead has been a disappointing investment in recent times losing R57m of its value over the period. It did not pay dividends in the six months to September 2020, having received R42.3m in the comparable 2019 period.
“Vukile remains concerned that in the absence of a catalyst brought about by corporate change, the share price is unlikely to show any recovery in the short to medium term,” he said.
Vukile did not declare an interim dividend. As a Reit, the fund is mandated to pay a minimum of 75% of its distributable earnings as a dividend each financial year.
“We are being prudent and choosing to preserve cash until our year-end in March when we can assess the dividend situation again,” Rapp said.
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