A closer look at Vukile

Vukile Property Fund has an interesting portfolio, with exposure to township and rural properties in South Africa and a retail property strategy in Spain. That’s certainly an unusual combination. With a recent debt roadshow presentation released to the market, the fund caught Ghost Grad Kreeti Panday’s eye.

Vukile is a REIT that describes itself as a “high-quality, low-risk, retail REIT operating in South Africa and Spain.” It has been listed on the JSE since 2004 and the Namibian Stock Exchange since 2007. It holds a controlling stake in Spanish subsidiary Castellana Property Socimi, which is listed on the BME Growth market, a Spanish sub-market on which SMEs are traded.

Vukile was the first property fund to be awarded REIT status by the JSE on 1st April 2013. Whilst some property companies have seemed like April Fool’s jokes, Vukile isn’t one of them.

Vukile owns around 52 retail properties in South Africa and Spain, including Pine Crest in Pinetown, Gugulethu Square in Cape Town and Dobsonville Mall in Soweto.

South African strategy

The group concentrates its efforts in townships and rural markets, seeking out properties that are occupied by tenants such as Pick ‘n Pay, Pepkor and Foschini. These are “blue chip” tenants because they theoretically provide steady income. One has to be careful though, as Edcon would’ve been considered a blue chip at some point in its life.

A third of the company’s rental income comes from essential service providers such as supermarkets, pharmacies and banking. Around 44% of the company’s rental income comes from its top 10 tenants, which include the retailers mentioned above and the likes of Mr Price, Spar and Massmart. It’s worth highlighting that Massmart is really struggling at the moment and particularly in the Game format, which is probably the division that Vukile is most exposed to within Massmart.

The group’s Weighted Average Lease Expiry (an indicator of when the landlord-tenant dynamics will play out in negotiations) is currently at 3.4 years based on GLA (Gross Lettable Area). The group has achieved a tenant retention rate of 93%, which makes sense as township malls of sufficient quality for leading retailers are thin on the ground. In many cases, it’s likely that Vukile owns the only mall servicing a particular catchment area with formal retail operations. As this is an important market, retailers aren’t likely to walk away from these malls.

Spanish strategy

Vukile’s portfolio exposure means that Spain is (slightly) more important than South Africa, with 54% exposure to the land of raging bulls and great sporting talent. Vukile owns 86.9% in Castellana and intends to increase its share for as long as the price remains favourable, given that Vukile is currently purchasing shares at approximately a 48% discount to EPRA NTA (Net Tangible Assets).

Managing risks

Naturally, inflation is both a risk and an opportunity for REITs. They are often seen as inflation hedges, so leases that allow for CPI-linked increases are critical in this space.

The South African operations are exposed to the realities of our country, with six of Vukile’s retail properties damaged in the 2021 July civil unrest. The group’s SASRIA cover prevented it from incurring material losses in this regard.

Interest rate risk is perhaps the biggest risk of all for REITs, as they all run high levels of gearing to help drive return on equity. Although macroeconomic factors drive the interest rate in the market, the fund can control how much debt it takes on and how much of it gets hedged. Vukile has a policy of hedging at least 75% of interest-bearing loans through fixed interest rates or interest rate swaps. The group predicts impending interest rate hikes, citing that the South African interest rate hiking cycle lasts an average of 2-3 years with interest rates rising between 200 and 400 basis points.

Looking deeper, 89% of Castellana’s debt has been hedged and 59% of South African debts have been hedged. The combined hedged is 75.5% of group debt.

Hedging doesn’t happen for free, with financial institutions making sure they earn a spread on any hedges. This is why REITs strive for a balance, hedging enough risk to give comfort to shareholders and leaving some risk on the table to avoid incurring hedging costs to such an extent that it becomes unattractive.

Hitting the green

When it comes to green financing, Vukile is taking advantage of a market that wants to lend money for renewable energy projects. Vukile has procured a 5-year R200 million green loan from Nedbank for the development of 19 solar projects.

83% of the group’s retail properties in Spain are now running entirely on solar energy and the group intends to increase this to 100% of retail properties in Spain.

Looking at other ESG topics, the group has provided 66 bursaries to students in property-related courses and is also rolling out the Vukile Retail Academy, which is targeted at advancing emerging retailers from disadvantaged communities.

Looking ahead

Vukile is still investing in South Africa, with a recently announced transaction to acquire the Pan Africa Shopping Centre that services Alexandra township in Johannesburg. This is a two-phase transaction in which Vukile will buy the existing property for R415 million and a phase 2 development (once completed) for R254 million.

Profit increased sharply in FY22, which is to be expected vs. a Covid-impacted base. The removal of all Covid restrictions should drive traffic to malls, though the outrageous petrol price may force people to stay home anyway.

The share price is up 13.5% this year and more than 24% over the past 12 months. With a market cap of R13.9 billion, this is a substantial REIT that boasts a unique portfolio exposure of Spanish and South African assets. The trailing dividend yield is around 7.5%.

Are you a shareholder in Vukile? Is there a particular reason why you wouldn’t invest? Let us know in the comments!

INVEST IN SHARES