BUSINESS DAY TV: Emira looks to diversify its portfolio
Geoff Jennett, CEO of Emira, discusses half-year results from the property fund and the plans for growth in 2017 and 2018.
Geoff Jennett is CEO of Emira Property Fund.
BUSINESS DAY TV: Emira Property Fund has reported revenue for the half-year to December up a marginal 0.9% and has declared a 68.93c dividend per share having already primed the market for negative growth of 2% in distribution per share for the full year. The company’s feeling the pressure of its office portfolio where vacancies have increased from 4.7% to 7%. But says it’s working on building a stronger portfolio that should see a return to positive growth by 2018. CEO Geoff Jennett joins me now.
Geoff, so let’s hone in on the office vacancies you’re seeing right now because they’ve increased to 16% and are above the national averages of 10.7%. Why are you getting more, so hard hit? What exactly is going on there?
GEOFF JENNETT: We’ve been a little bit unlucky on our office portfolio in that we had some large single tenants that vacated our premises last year and we’ve been anticipating this, and this is why six months ago we primed the market, we warned them, "Guys this is what’s happening." So I think we’ve been a little bit unlucky on that. There were certain big pockets that happened.
But you must also realise in the context of a South African economy that’s growing at a slow rate, 0.5% maybe 1.5% next year, offices are very correlated to that. So we certainly have had some challenges on that side, but I do know that the steps that we’ve been taking, the progress that we’ve been making will certainly enable us to come out of this with a stronger portfolio and certainly with a better organisation.
BDTV: Let’s get into the detail on that, how are you planning to get a handle on things?
GJ: We’ve identified certain assets that we believe that we need to sell. Six months ago we identified R835m worth of assets, we’ve disposed of R130m, we’ve added onto that list and at the moment that list is 19 properties totaling R917m. Of that, eight properties that we’ve got under way that are unconditional worth R380m, so you can see how we are reducing the offices side. Part of that rebalancing those is also to diversify into other asset classes, specifically I want to share this one with you, is the conversion to residential. We’ve got three sites, firstly in Rosebank, secondly in Sunninghill and thirdly in Bloemfontein which we think are ideally suited for residential conversions.
Now what this means is that you’ll be reducing your office portfolio but at the same time moving into another asset class, residential. And the yields that we’re seeing in terms of inception yields will be double digit yields. So we see that being very attractive from our side as a fund. Diversification but then also the enhanced yield.
BDTV: An interesting time to be doing that where you’ve got a South African consumer that’s highly correlated to GDP as well, feeling pressure and, of course, within an anticipated rising interest rate environment?
GJ: I’m not sure in terms of a rising interest rate environment but certainly by us delivering lower LSM quality residential into the markets that are close to offices, for example in Rosebank here, pretty close to the Gautrain station, close to Rosebank Mall aimed at the lower, the LSM 7 and 8. We see that as being a definite need for quality but affordable accommodation in or around the places where guys work. So actually we’re seeing this fitting in very well to for example the Rosebank node and for example into Sunninghill. And also on the Bloemfontein property, that will be more for student accommodation because it’s closer to the Bloemfontein Technikon, there’s certainly a need for that sort of accommodation.
BDTV: So you touched on disposals, you touched on conversion, what about actual negotiations when it comes to rental incomes, how much trickier has that become and how much have you had to compromise?
GJ: We’ve had to compromise significantly. If you look at our rental reversions in the last six months, in terms of what’s happened on our office side, we’ve had reversions of 8.6% reduction in office rentals. That’s what our new rentals are that we’re renegotiating with tenants. So you can see not only are there vacancies but the tenants have got the upper hand on the offices side. So we’re slowly starting to turn that.
The other big point is that by re-investing into your properties, by improving the quality of your portfolio, it becomes easier to let and you’re offering a better product. So that’s also been part of our strategy. I’ll tell you as well, part of the diversifying away from offices is moving into other asset classes, in terms of residential I’ve mentioned, but then also we’ve got something very exciting on our rural retail portfolio, which is our lower LSM retail portfolio where we’ve entered into a joint venture with a crowd called One Prop. This venture is called Enyuka, which is the Zulu word for expand and grow.
That’s what we’re wanting to do with that portfolio and we’re pretty confident that at the moment our asset size is R575m, by June 2017 it should be in the order of R800m, later on in 2018 pretty close to the R1bn plus. It gives us a number of opportunities, a number of options at that stage.
BDTV: That’s dealing with your diversification on a sector basis, on a geographic basis — are you looking toward more offshore expansion because, of course, you’ve acquired further shares in Growthpoint Australia, so you’re certainly seeing some appeal?
GJ: We are; we like Growthpoint Australia. That was why we followed our rights towards the end of last year off the back of their acquisition of GMO and so we certainly like the Australian story in terms of Growthpoint Australia.
But from where Emira is at the moment, we’re focusing in on our current portfolio. The Australian exposure is only 7% of our total assets and we feel at this stage it’s important to focus on SA. But having said that, there are some opportunities that we are seeing and it’s important for us to pursue those opportunities if it is in the best interests of shareholders.
BDTV: Outlook moving forward: I know you’ve provided guidance that you are anticipating to see a return to positive growth by 2018, is everything on track with regards to that?
GJ: Based on the information that we’ve got at the moment we’re certainly on track for achieving the number for FY17 and also returning to positive growth for FY18. Clearly the environment will be challenging, but given that we anticipate bouncing off this low base that we’ve now established this year, it should certainly be a return to positive growth in 2018.