Emira Property Fund (JSE: EMI) announced strong operational results and continued strategic delivery for the nine (9) months to its new financial year end on 31 March 2023. It declared a final distribution of 30.35cps for the three months ending 31 March 2023, taking its dividend per share for the nine months to 96.78cps. Its net asset value per share increased by 4.2% to 1,696.60cps over the nine-month reporting period.
While the nine-month financial period cannot be directly compared to either the prior or coming 12-month financial years, the company is firmly focused on its strategic progress and operational metrics. “They are in good shape,” says Geoff Jennett, CEO of Emira Property Fund.
Jennett attributes the positive nine-month performance to consistent strategic delivery, unlocking value from investments, a strong balance sheet and the added advantage of various capital recycling initiatives.
Jennett comments, “Both our SA and US portfolios delivered pleasing operational performances, notwithstanding local and global challenges. The solid results extend Emira’s consistent track record of reliable performance, and our leasing success and lower vacancies are clear indicators of an attractive and sustainable portfolio.”
He adds, “During this period of change, we remain focused on fundamentals and managing the elements within our control. As a diversified fund, Emira has several levers at our disposal, all of which are working well to ensure that we are stable, have lower risk and attractive to the market.”
When it comes to capital allocation, Emira’s diversified portfolio is balanced to deliver stability and sustainability through different cycles with a mix of assets across sectors and geographies, and through direct property holdings and indirect property investments with specialist third-party co-investors.
In South Africa, Emira’s portfolio includes commercial – retail, office and industrial – and residential assets. Now, 18% of Emira’s asset base is made up of equity investments in 12 grocery-anchored open-air convenience shopping centres in the better-performing and stable economy of the USA, investing with US-based partner The Rainier Companies. Emira’s US investment provides a buffer to current global uncertainty and the low-growth domestic environment.
Despite a shorter-than-usual reporting period, Emira made lengthy strides in strategic capital recycling. It gained control of the specialist residential REIT Transcend Property Fund, consolidating it in October 2022 and boosting its exposure to the defensive residential property sector. It also prepared to finally transfer its holding in retail property venture Enyuka Property Fund to co-investor One Property Holdings.
Emira’s portfolio composition changed noticeably in the nine months. The Transcend consolidation saw Emira’s directly held portfolio increase from 74 assets to 94 worth R12.1bn.
Residential rental assets increased from one to 23 properties – 20% of Emira’s directly held SA portfolio. Emira also gained direct access to residential assets in Cape Town for the first time. The portfolio totalled 4,315 units split between Gauteng’s (85% by value) and Cape Town’s (15%) high-demand areas, available at rentals from R4,500 to R8,000/pm per unit, which are popular with the low-to-middle income segment of the affordable property market. With a 2.6% vacancy and slow but steady rental growth, the defensive portfolio is poised to contribute consistently to Emira’s revenue.
Its direct commercial portfolio is split between urban retail (41% of directly held SA portfolio value), office (24%) and industrial (15%), and continued to benefit from this diversification. Vacancies improved from 5.3% to 4.7% over the nine months, with all sector vacancies well below the applicable benchmarks. Rental collections were 101.6%.
Its 17-property strong retail portfolio of primarily grocery-anchored neighbourhood centres is trading well with improved metrics despite headwinds for retailers and shoppers alike. The total weighted average rental reversion lifted from -13.0% to -5.5%. Tenant retention was 88%. Retailer trading densities grew 4.5% in the nine months.
Emira’s diversified industrial portfolio of 34 properties delivered a stable and defensive performance, notwithstanding SA’s unprecedented rolling power cuts and the major impact they have on industry. Portfolio vacancies decreased from 2.7% to 2.1%, 79.1% of maturing leases were renewed and rental reversions improved from -20.1% to -6.5%.
Improved office vacancies moved down from 15.0% to 12.5% despite the challenging and uncertain environment from its portfolio of 20 mainly P- and A-grade properties, even with depressed fundamentals in this sector.
The commercial portfolio benefitted from R146.5m in tactical upgrades, many of these focused on energy efficiency, solar plants and installing backup power in response to South Africa’s electricity crisis.
“Emira’s ESG strategy supports the sustainability of Emira’s properties by prioritising energy efficiency, water conservation, and biodiversity. Our energy efficiency improvements and renewable solar power drives have accelerated into top gear in response to increased load shedding. These initiatives help manage risks to energy and water security and the environment. Decreasing energy and water security, along with rising costs for rates, taxes, and utilities pose major risks for the entire property sector,” notes Jennett.
Around 79% of gross lettable area in Emira’s commercial portfolio has full backup power, including tenant generators. With the increased need for backup power, Emira’s diesel costs rose substantially for the nine months to R27m from R4.9m for the prior 12 months. Emira recovered 84% of these costs. “Loadshedding increases the cost of doing business, intensifying the risk of tenant defaults and business failure,” cautions Jennett.
Taking its utilities mix and management even further, Emira is exploring new ways to assist its tenants in reducing their total cost of occupation and combating the significant costs associated with loadshedding. Battery solutions and wheeling energy produced by independent suppliers are among the alternatives being considered.
In the US, Emira’s 12 equity investments — grocery-anchored dominant value-oriented power centres — total R2.7bn (USD151.9m). The gradual but consistent positive growth in the US economy and low unemployment (3.5%) supports Emira’s investment in US open-air centres with a high-quality tenant base focused on popular value retail and essential goods and services. It selects robust markets with sound property fundamentals.
US portfolio vacancies were reduced from 4.5% to 2.6%, with positive rental reversions of 7.9% and an extended portfolio lease expiry profile of 5.6 years. It delivered an even better-than-anticipated performance to add R176.m to Emira’s distributable income. “This is mostly due to our latest acquisition, Summit Woods, contributing for the full nine months and the meaningful ZAR weakening against the USD during the period,” reports Jennett.
Emira’s balance sheet remains healthy with a more than adequate 2.9x interest cover ratio, unutilised debt facilities of R376.2m and cash-on-hand of R125.0m. Emira’s loan-to-value ratio was temporarily elevated at 44% as its strategic initiatives play out and it is expected to materially reduce as further strategic actions are completed. Emira benefits from diversified funding and has facilities across all major SA banks and access to debt capital markets. Its debt metrics remain comfortably within covenant levels. During the period, GCR affirmed Emira’s corporate long-term credit rating of A(ZA) and corporate short-term rating of A1(ZA), with a stable outlook.
Jennett concludes, “By continuing to focus on its strategic direction, operational excellence and portfolio-enhancing capital recycling, Emira has done well for all its stakeholders. As we move forward in a global economic slowdown with rising inflation, higher interest rates, major local electricity supply problems, and the resultant broadly weaker SA commercial property market, we are committed to continuing to execute property fundamentals with distinction and accelerating our capital recycling to further diversify our investments in more stable economies with better growth prospects.”
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