FIFI PETERS: The Emira real estate group reported lower distributable earnings, a key measure of earnings in the sector. This reflects the current difficulty of the South African economy. Despite this, Emira has rewarded shareholders with a dividend as its prospects in the US look much more promising. We have Geoff Jennett, the CEO of Emira Property Fund, joining SAfm’s Market Update for more information.
Geoff, thank you very much for your time. Let’s start with the United States. What is happening there that has moved you?
GEOFF JENNETT: Fifi, the important thing is that the US base is stronger than it is here from a GDP perspective, from an economic perspective; the ……[44.2] provided in that economy. And that economy is open, unlike ours, where we still have to deal with the third wave and potentially more.
So the US economy has recovered very strongly and we managed to make our 11th investment this year in June. It’s our 11th And now we have 11 investments that are invested in a small subsector of the US retail market, which are dominant outdoor ‘power centers’, anchored in supermarkets, as we call them. They are certainly very resistant and have done quite well. That, along with the dollar-denominated revenue, has certainly provided us with a buffer and speaks to the diversification we have at Emira, being a diversified Reit.
FIFI PETERS: We’ve seen the American economy come back a lot stronger than most people expected, and I suppose it helps that many of its citizens are vaccinated. A return to “business as usual” seems more likely sooner rather than later. What then, Geoff, are your immediate plans for that part of the world?
GEOFF JENNETT: It is very important that every time we invest in a new jurisdiction or take on something new, we do so on a joint venture basis. We have partnered with the Ranier Group of companies that co-invest with us. In other words, they bring capital at the same time as us, they are in the US, they are American, and they understand that market better than we could.
They are scouring the market in search of opportunities and this last one, is 11th, it’s called Newport Pavilion. It is just outside the Cincinnati CBD in Kentucky. And, because of their relationships, because of our knowledge, their knowledge and ours of that particular market, they managed to find it. They are looking for these kinds of deals, but it is a deal for a deal.
We will not provide a target or acquire assets just for the sake of doing so. They have to be the right assets, and we are very picky about that. And then secondly, it has to be the right business outcome for us. Again, we will not sacrifice quality or profitability just for outsourcing or diversification.
FIFI PETERS: Let’s go back home, where we saw money coming into the business reflected in revenue, and its operating profit is still slightly under pressure. That was at the end of June. Since you and I have this conversation now in August, how is the situation?
GEOFF JENNETT: Fifi, he’s actually getting better. We are amazed at how we have managed to collect rents. Of the 99% of the rents collected in the last financial year, we collected 95% of the deferred rents that we had provided deferrals between April, May and June. And we are seeing that the same trend continues now in July and August. The collections are strong. The tenants we have are meeting their obligations, they appreciate the well-kept nature of our buildings and the initiatives we have. So we stay close to our tenants, and that is why you would have seen that our tenant retention, our key focus is to retain our tenants, is still 82% very high.
FIFI PETERS: Talk to other property CEOs and they’ll tell you that such retention obviously comes at a cost, but it’s a slightly better cost than having to find a new tenant to move in entirely. So this is the question for you: At what cost are you paying to keep your tenants there?
GEOFF JENNETT: Fifi, there is always a cost, but it is definitely a lower cost than trying to find a new tenant in a tight and difficult market. So you better hang on to what you have.
I think it is also evident in our reversion rates, and our reversions are a function of the new rental rates we underwrite compared to the last rent that was due when an unoccupied tenant or when their lease expired. That’s pretty close to a negative 15% with large reversals occurring in the office sector. So that gives you an idea of what kind of incentive and what kind of cost is needed to retain tenants. It is much better. Like I said, upfront is holding your tenant instead of letting them go in hopes of finding someone else and charging a higher rent.
FIFI PETERS: Geoff, when you look at June, June didn’t quite reflect the extended lockdown and adjusted Level Four that started in July. And then of course in July there was also additional pressure on the real estate sector in terms of the unrest in certain parts of KwaZulu-Natal. And now we are even talking about the possibility of a fourth wave, with our vaccination campaign again overdue and delayed.
So what have those additional pressures meant for your business, and how do you see the road ahead in the face of some of these constraints?
GEOFF JENNETT: The one thing you can always count on, being a South African, is our resilience and our ability to bounce back and be innovative and persevere. So in my mind, it’s always key to recognize that secondly, the riots were very unfortunate, but I can say that Emira’s portfolio was very limited. In fact, we had one of our 77 direct assets affected in Springfield, Durban, and nothing at all in our Gauteng portfolio. We were very lucky there. But we are fully covered in Sasria terms in terms of property damage and rental loss. So we are well covered by that.
As for whether there will be a fourth wave, it is definitely possible, but we know we just have to prepare and be close to our tenants and make sure our buildings are in the best possible condition. That is why we have continued our investment program throughout this process, staying close to our tenants and offering a good product, in return for which the tenants appreciate that and fulfill their obligations. It is not something you can specifically plan for. But there is planning going on, so we know we will get through this.
There again is the advantage of having a diversified portfolio, in the sense that impact and office or retail or industrial or residential are all different, as in the US Part of our diversification is always to make sure that there is no asset or sector that harms it too much. I think we have mainly benefited from diversification at this difficult time and our rebalancing is already there, so we will withstand a fourth wave and whatever else has to come.
FIFI PETERS: Well, Geoff, good luck. We leave it there. That was Geoff Jennett, the CEO of the Emira Property Fund.