Terry Kaplan is financial director of Indluplace.

Indluplace financial director Terry Kaplan. Picture: BDTV
Indluplace financial director Terry Kaplan. Picture: BDTV

BUSINESS DAY TV: Indluplace Properties has lifted its property income for the six months ended March by 15%, while total dividends edged up 5.5%. The residential real estate investment trust says its gearing of 6.5% allows for substantial headroom to fund further acquisitions and improve dividend growth going forward. Its financial director Terry Kaplan joins us now in studio.

Terry, how much of the growth we’re seeing right now is acquisitive, how much is organic because over the period you’ve grown your portfolio by more than 49% and it now sits at what, R2.4bn?

TERRY KAPLAN: That’s correct. A lot of ours is … there weren’t really that many acquisitions that took place during the course of last year. As you said we’ve got growth of 5.5%. We are delighted with that growth because that 5.5%, we gave guidance that we’d do between 5.5% to 6% for the full year to September and we really are pleased with that.

In terms of our units, you said that we have doubled. Yes, we’ve grown a lot since acquisition, we are at about 5,500 units and, not to steal your thunder, I’m sure you’re going to ask the question about Diluculo Properties and we are growing to just under 7,000 units with the acquisition that we announced in March.

BDTV: You have announced it but it hasn’t fully gone through. It’s conditional upon Competition Commission approval. You’re sounding more positive that it is going to go through as opposed to not.

TK: Correct. We’ve been in discussion with our lawyers and we believe that it is going to go through. We’re hoping that it will go through during the course of June so that effectively from 1 July we can kick off with Diluculo Properties. It then gives us the back end of the year for us to just bed that down, and get it into our numbers. And once again, the guidance we’ve given is without including anything from Diluculo Properties.

BDTV: Give us some insight in terms of what this will actually add to the Indluplace stable.

TK: We’re 5,500 units as we stand and we’re going to go up to 7,000 units. Diluculo’s eight properties are almost an ideal match to our current property portfolio. Not that it’s a mini Indluplace, but very similar properties. Its diverse in terms of location, in terms of the unit types, ones, twos and threes, very similar to what we have, lots of two-bedroom units. And it just gives us additional exposure…

BDTV: …within the affordable rental space?

TK: That’s correct. There is no doubt about that. One thing that it does add, we’re right now in Gauteng and we’ve got a complex in Witbank. This gives us another complex in Bloemfontein, so it’s our first foray into the Free State.

BDTV: Given the current economic environment in SA, how much risk are you factoring into the equation, because you’ve obviously got to take into consideration that the environment does speak to the potential for rising interest rates moving forward, and the assumption is that it makes ownership more difficult, playing directly into your hands?

TK: That’s 100% correct. There’s no doubt that a first-time buyer, who may have previously been able to afford the mortgage on the bond, may move into our properties. We provide great quality affordable rental residential accommodation and once again, we’ve got quite a diverse range of both units and prices, ranging from the bottom end at R1,000 per unit and we go up to about R8,500 a unit.

In terms of the risk, we have a lot of key metrics that we measure across the business. Some that stand out— bad debts at the half-year, under 0.5%. Under 0.5% of revenue for the half year, very similar to the numbers that we had at September. Our arrears of R1.9m, pretty much the exact same number that we had at September.

BDTV: How do you mitigate, though, against the risk of that potentially rising when you’ve got a South African consumer that is increasingly coming under pressure?

TK: We believe that we need to get it right at the beginning. We need to make sure that the tenant we’re putting into our properties, we do all the necessary credit checks. They need to be able to afford the rental and if you get the right person in, it makes life a lot easier at a later stage when you need to collect the rent.

BDTV: Okay, we highlighted at the top, your gearing sitting at 6.5% — where are you looking to take that because it suggests that it gives you further headroom to fund further acquisitions. But then again, you’ve got to consider whether or not you, as a player, within a constrained environment are becoming a bit more cautious to…

TK: As you said, 6.5%, as we stand right now with assets of R2.4bn, there is about R600m-odd of gearing that we can take on. With that in mind, that’s based on a 35% LTV, so ample room. If we were to fund Diluculo fully with debt, our property goes from R2.4bn to R2.9bn, we bring Diluculo on our books and our gearing would be at 23% to 24%, well under the long-term level of about 35% that we have set ourselves.

BDTV: So, to what extent are you getting nervous about a further potential downgrade coming through from the likes of Moody’s because that would constrain things. Maybe not necessarily constrain things but cost you a whole lot more?

TK: What it would do is cause difficulties in making future acquisitions, so we are very careful that our acquisitions need to be accretive from the date of acquisition. I think it was worse last year. In terms of buyers and sellers there was a greater … guys weren’t as close as we have been over the current year. So, there’s definitely been an improvement. Yes, this latest potential ratings downgrade does cause problems, but once again, we are comfortable that with our balance sheet; we’re well positioned for future growth.

BDTV: We’ll check in with you at the full year.

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