Dipula's results trump its forecasts, but faces takeover challenges

Dipula Income Fund CEO, Izak Petersen attributes the strong performance to Dipula’s strategic growth with portfolio enhancing assets, vigorous leasing, incisive property management.

Dipula Income Fund one of SA’s black-owned and managed, bowed out on Wednesday with record results that saw full year distribution growth of 7.2%‚ exceeding initial forecasts‚ as the value of its property portfolio grew and rental income rose.

The BEE real estate investment trust (REIT) reported a 10% increase in its B-linked unit distribution to 73 cents. Its A-linked unit distribution rose by 5% to 88 cents.

The property fund's portfolio including new acquisition has increased in value to R5.4 billion. Since listing in 2011, the company has doubled market capitalisation to R2.8 billion.

Izak Petersen, CEO of Dipula Income Fund, which reported its full-year results which reflect a 16% year-on-year growth in distributable earnings to 31 August 2014, attributed the strong performance to strategic growth with portfolio enhancing assets, vigorous leasing, incisive property management, unlocking value from its properties with refurbishment and astute debt management.

“We remain bullish in spite of South Africa entering a period that is anticipated to deliver low economic growth combined with possible interest rate hikes. In addition, electricity supply constraints are likely to have an impact on the sector as a whole,” notes Petersen.

He adds: “We believe that current conditions favour patient and accomplished investors, with the ability to execute transactions. Dipula expects to make acquisitions of R1 billion to R1.5 billion in the coming 12 to 18 months.”

During the year, it concluded acquisitions to the value of R987 million with an average asset value of R76 million each. Acquisitions valued at R328 million were transferred to Dipula during the year. A further R532 million are expected to transfer by the end of the 2014 calendar year.

The group disposed of 17 non-core and substantially vacant assets for a combined R103 million. It completed three major strategic revamps during the year with a R42 million investment at a combined 11% yield.

“Unlocking further value from our portfolio will remain a priority in the coming year, with R34 million worth of revamps planned at a 12% yield,” reports Petersen.

Portfolio vacancies reduced by 23% from 12% at its half-year to 9% at 31 August 2014, with a noteworthy improvement in its industrial and retail portfolio’s occupancy levels, even though the office sector remains weak.

Stanlib head of listed property Keillen Ndlovu said Dipula’s results demonstrates management’s ability to sweat its core assets while acquiring quality, yield enhancing properties in a tough environment.

He adds, management provided guidance that it expects to achieve 7% - 8% distribution growth the following year, which is comparable to its peers.

However, the challenge that Dipula faces going forward, is defending its position against Arrowhead’s proposed take-over, Ndlovu said.

Corporate Activity: Arrowhead Properties and Dipula

Petersen notes that Dipula is always on the lookout for and receptive to value enhancing corporate activity such as the friendly merger with Mergence Africa Property Fund and the acquisition of Asakhe which lead to the listing of Dipula.

Meanwhile Arrowhead Properties’ intended takeover of Dipula could turn hostile. Dipula CEO Izak Petersen spoke out strongly against Arrowhead’s overtures after the release of Dipula’s annual results.

Arrowhead, led by Gerald Leissner, acquired 22% of Dipula’s B units in March and recently increased its stake to 25%. Arrowhead has been one of the sector’s most aggressive players on the corporate action front, earlier this year completing a takeover of Vividend.

Mr Petersen, who together with other directors and associates own a 26% stake in Dipula’s B units, said he was not sure what Arrowhead’s next move would be but that Dipula’s board would put any sensible proposal to shareholders. "However, it will be silly for Arrowhead to pursue a hostile takeover. If the idea is that they want all or nothing, we will put up a big fight.’’

Mr Petersen said he did not believe a merger would be in the best interest of shareholders.

"Dipula and Arrowhead are not a good fit. Our strategies and portfolios are very different. It appears Arrowhead wants to grow assets at any cost. That’s not our game. We are very discerning in our acquisitions.’’

Arrowhead chief operating officer Mark Kaplan confirmed on Wednesday the intention remained to increase Arrowhead’s stake in Dipula. He said while Arrowhead’s intentions were not hostile it was unsure how things would play out.

"We wouldn’t have increased our stake in the company if we didn’t believe that Dipula was a good fit for Arrowhead. And our shareholders back our decision,’’ Mr Kaplan said