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Reviewed provisional annual results 2018
Octodec Investments Limited
Incorporated in the Republic of South Africa
Registration number: 1956/002868/06
ISIN: ZAE000192258
Share code: OCT
(Approved as a REIT by the JSE)
REVIEWED PROVISIONAL ANNUAL RESULTS 2018
Creating value beyond financial return
Octodec Investments Limited (Octodec or the group or the company) is listed on the JSE Limited (JSE) as a real estate
investment trust (REIT) with a portfolio of 306 properties valued at R12.9 billion, which includes a 50% interest in
three joint ventures. The group is a long-term investor in a Gauteng-focused property portfolio, with most of its
properties situated in the Tshwane and Johannesburg CBDs.
Octodec's portfolio, 67% of which is in Tshwane and 33% in Johannesburg, is well-positioned to continue taking
advantage of opportunities in the Tshwane and Johannesburg CBDs.
The group's primary objective is to improve our existing properties in strategic investment nodes with the objective
of attracting new tenants and improving rental income.
Octodec has contracted City Property Administration Proprietary Limited (City Property), to perform asset and property
management functions on the company's behalf.
306 properties valued at R12.9bn
Measuring our performance
- 203.4 cents per share distributed for the year (FY2017: 203.1 cents)
- R29.39 net asset value per share (FY2017: R29.33)
- 2.6% like-for-like growth in rental income for the year (FY2017: 5.3%)
- 74.5% of exposure to interest rate risk is hedged (FY2017: 82.1%)
- 37.4% loan to fair value of portfolio (FY2017: 37.1%)
- 9.0% all-in annual weighted average cost of borrowings (FY2017: 9.2%)
- 100.0% Sharon's Place, a development costing R357 million was completed during the reporting
period and is fully let
Operating sectors
In order to comply with the JSE Listings Requirements, the group's properties were aggregated into segments with
similar economic characteristics such as the occupier's market it serves and the nature of the property. This is best
achieved by the inclusion of the following sectors:
- Retail, which includes shopping centres and retail shops
- Industrial
- Offices
- Residential
- Specialised and other, which includes:
- Hotels
- Places of worship
- Education facilities
- Auto dealerships
- Healthcare
- Parking facilities
The relevant comparatives for the various operating sectors have been restated to reflect these changes.
* The information on rental income and property portfolio up to page 13, includes 100% of the joint
ventures and not only the group's share.
Rental income % by sector
- Retail 34.4% FY2017: 34.6%
- Residential 31.1% FY2017: 30.0%
- Offices 16.0% FY2017: 16.9%
- Industrial 7.1% FY2017: 7.5%
- Specialised and other 11.4% FY2017: 11.0%
REVIEW OF RESULTS
During the year under review, South Africa's challenging economic conditions and political uncertainty weighed heavily
on consumer confidence and local economic growth. With this in mind, our strategy was to continue to focus on the core
property fundamentals and position the business to provide our stakeholders with sustainable value creation. We
increased our focus on the disposal of non-core and underperforming properties and investing the proceeds in the most
attractive investment opportunities within our existing core portfolio.
Octodec's board of directors declared a dividend of 203.4 cents per share for the year ended 31 August 2018, which is
in line with our guidance. This amounts to a first and second half dividend of 101.7 cents for each period. The group's
net profit available for distribution was R541.4 million, representing an increase of 0.9%. The dividend was impacted by
pressure on rental income growth as a result of the sluggish performance of the local economy, and the anticipated
reduction in distributable income during the let-up phase of Sharon's Place.
Total revenue earned on a contractual basis increased by 3.1% (FY2017: 5.3%) and property operating expenses
increased by 2.5% (FY2017: 6.7%) compared to the prior year. The gross operating cost ratio to contractual revenue reduced
slightly to 45.7% (FY2017: 45.9%). Operating costs, net of assessment rates, utility recoveries and other recoveries, were
at 30.0% (FY2017: 30.9%) of contractual rental income. This was due to an increased focus on cost reductions and
improved efficiencies.
Salient features
Reviewed Audited
12 months 12 months
31 August 31 August
% 2018 2017
Change R'000 R'000
Revenue - earned on a contractual basis 3.1 1 893 806 1 836 251
Net property income - earned on a contractual basis 3.4 946 020 914 802
Investment property including joint ventures 0.7 12 872 103 12 776 378
Shareholders' funds 7 824 398 7 828 229
Interest bearing borrowings 4 846 533 4 826 334
Shares in issue ('000) 266 198 266 864
Net asset value (NAV) per share (cents) 0.2 2 939 2 933
Loan to investment value (LTV) ratio (%) 0.8 37.4% 37.1%
Dividend to shareholders 0.9 541 444 536 432
Dividend per share (cents)
Interim 101.7 104.8
Final 101.7 98.3
Total dividend per share 0.1 203.4 203.1
Like-for-like rental income per sector and percentage increase in like-for-like rental income for the year ended 31 August 2018
Percentage like-for-like rental income Percentage increase
Specialised and other 11.6 6.0
Residential 30.6 3.9
Retail 34.7 2.3
Industrial 7.2 0.3
Offices 15.9 (0.3)
The core portfolio, represented by those properties held for the previous comparable period with no major development
activity, reflected like-for-like rental income growth of 2.6% (2017: 5.3%). Although comprising a smaller portion of
our total portfolio, healthcare facilities, auto dealerships and parking reflected the strongest growth of 11.8%, 6.8% and
5.7%, respectively. The residential portfolio showed growth in like-for-like rental income of 3.9%. This is excluding
our new developments, Sharon's Place and One on Mutual. This lower growth is mainly attributable to increased average
vacancies and the lower rental rate escalations achieved during the year under review. A number of new competitors entered
the Hatfield (Tshwane) and Johannesburg CBD market, resulting in an increased supply of residential accommodation. Our
marketing efforts, together with a newly introduced tenant retention strategy and an enhanced tenant offering to address
this increased competition, are reflected in the results. This is reflected in the reduction in residential vacancies
we achieved in the latter half of the financial year.
Cost to income ratios
The cost to income ratios are as follows:
Reviewed Audited
31 August 31 August
2018 2017
% %
Property costs
Gross basis 45.7 45.9
Net basis 30.0 30.9
Property and administration costs
Gross basis 50.0 50.2
Net basis 35.6 36.0
Property costs, both on a gross and net basis, have decreased slightly compared to the prior year.
Bad debt write-offs and provisions during the year increased to 1.2% of total tenant income (FY2017: 0.9%). Despite
sustained economic pressure, the group's arrears and doubtful debt provisions remain at acceptable levels. This can be
attributed to tight credit risk management and we do not anticipate any significant deterioration in this regard in the
near future.
The group's administrative costs increased by R5.1 million compared to the same period in FY2017, mainly due to a
provision for a value added tax (VAT) liability relating to prior periods of R5.3 million.
Finance costs for the year amounted to R438.9 million, an increase of 7.4% year-on-year. This is in line with an
increase in investment activity resulting in increased debt levels, as well as a reduction in borrowing costs capitalised in
respect of the completion of Sharon's Place. The all-in weighted average cost of borrowings per annum reduced slightly
to 9.0% per annum (FY2017: 9.2%) as a result of the expiry during the year of interest hedges at unfavourable rates.
INVESTING FOR THE FUTURE
Developments
Sharon's Place, a large, well-located residential development consisting of 399 residential units; 5 647m2 of ground
floor retail space, anchored by Shoprite and Clicks; and 289 parking bays, is adjacent to the new Tshwane House
municipal development in the Tshwane CBD. The total cost of the project, excluding land costs, was R357.4 million. The retail
portion of the property was completed in July 2017. The residential section consists of three blocks. Block B was
completed in February 2018, while Blocks A and C were completed in phases by June 2018. There has been strong demand for the
residential units, with all units being let shortly after their completion.
In line with Octodec's strategy to upgrade, maintain and extract value from its property portfolio the group completed
several smaller projects. These included the upgrade of Nzunza House (formerly known as North City), an office block in
Braamfontein, Johannesburg, and The Tannery, a multi-tenanted industrial complex in Silverton, Tshwane, for an amount
of R34.8 million and R13.6 million, respectively. These projects will not only improve occupancy levels and enhance the
value of the portfolio, but will also contribute to the upliftment of the areas in which Octodec is predominantly
invested.
Investments
Octodec acquired the remaining 50% of Gerlan Properties Proprietary Limited (Gerlan), effective 1 July 2018, for a
consideration of R33 million at an initial yield of 9.25%. The property in Gerlan comprises a Toyota dealership, situated
in Gezina, Tshwane.
Disposals
In line with our decision to dispose of non-core or underperforming properties, a further twenty properties were sold
during the year, ten of which had been transferred for a total consideration of R61.6 million by year end. A further two
properties were transferred after the year end for a total consideration of R69.8 million. Transfer of the remaining
eight properties for a total consideration of R92.1 million is expected to take place within the first half of the 2019
financial year. The properties were sold at an average combined exit yield of 7.9% and a combined premium of 1.9% to book
value.
Properties disposed of and transferred before 31 August 2018
Total Profit/(loss) Exit
consideration on disposal Transfer yield
Property Location R'million R'million date %
Sharp Centre Tshwane CBD 5.5 - 25 October 2017 10.0
Grariv Tshwane - Other 0.7 0.1 18 December 2017 5.2
119 and 121 Johannesburg 5.5 0.2 18 December 2017 0.1
Albertina Sisulu Street CBD
Pretwade Wadeville, Johannesburg 10.2 - 1 February 2018 12.8
Iskemp Isando, Johannesburg 17.5 1.1 16 February 2018 (0.6)
Pretboy Tshwane - Other 3.1 (0.4) 18 February 2018 11.3
Tronap Tshwane - Other 6.5 (0.1) 9 May 2018 9.8
Andpot Tshwane - Other 7.5 (0.9) 24 July 2018 7.8
Monaco (various units) Tshwane - Arcadia 5.1 (0.9) July and August 2018 12.8
Total 61.6 (0.9) 6.8
Transfers expected to take place after 31 August 2018
Property Location Total Profit/(loss) Expected Exit
consideration on disposal transfer yield
R'million R'million date %
Ken's Court Tshwane CBD 44.6 1.6 September 2018 3.3
Medical Towers Johannesburg CBD 25.2 0.8 September 2018 3.3
Notrevlis Tshwane - Other 11.2 0.5 November 2018 10.1
Supmall Tshwane - Other 11.2 0.1 November 2018 10.7
Swemvoor Waverley, Gezina, Moot 8.6 - November 2018 11.2
Troymona Tshwane - Other 1.2 (0.8) November 2018 0.1
Viskin Tshwane CBD 2.9 0.8 November 2018 10.2
Armadale Johannesburg CBD 53.6 1.6 January 2019 13.9
Goleda (3) Tshwane - Other 1.9 0.3 January 2019 13.8
Midchurch Tshwane CBD 1.5 0.2 January 2019 -
Total 161.9 5.1 8.4
Vacancies
Vacancies in the Octodec portfolio at 31 August 2018, including properties held for redevelopment, amounted to 18.6%
(FY2017: 19.0%) of the gross lettable area. The group's core vacancies, which exclude the gross lettable area relating to
properties held for development, those currently being redeveloped and those recently redeveloped or sold, amounted to
11.6% (FY2017: 10.7%).
Vacancies by sector as at 31 August 2018
Properties
held for
Gross redevelopment
lettable or recently
area Total developed Core
(GLA) vacancies or sold vacancies
m2 % % %
31 August 2018
Offices 413 581 45.1 (26.4) 18.7
Retail 444 642 11.5 (0.1) 11.4
Industrial 253 396 15.0 (1.0) 14.0
Residential 393 643 6.4 (0.6) 5.8
Specialised and other* 139 171 3.7 (0.3) 3.4
Total 1 644 433 18.6 (7.0) 11.6
31 August 2017
Offices 418 428 43.6 (26.5) 17.1
Retail 436 979 10.8 (1.5) 9.3
Industrial 264 129 12.6 - 12.6
Residential 394 721 12.3 (5.1) 7.2
Specialised and other* 150 805 3.2 - 3.2
Total 1 665 062 19.0 (8.3) 10.7
* "Specialised and other" includes parking, educational facilities, hotels, auto dealerships, healthcare facilities
and places of worship. These sectors were previously reflected under offices, retail, industrial and parking, but are
dedicated facilities and, in accordance with JSE Listings Requirements, are now reflected under specialised and other. The
2017 GLA amounts and percentages have been restated.
We responded to increased competition and changing trends in the residential sector by adjusting our tenant offering
without compromising on rental recoverability or other standards. Our response has already contributed to improved
occupation levels in the residential sector with vacancies decreasing from 7.2% in FY2017 to 5.8% at 31 August 2018.
Office vacancies increased during the year mainly due to two large government tenants vacating two premises consisting
of a total of 7 139m2. As expected, a number of properties held for development, or those which are currently under
development, have vacancies.
In recent years certain office properties such as Fedsure House, Reinsurance House and Medical Towers located in the
Johannesburg CBD and Van Riebeeck Medical Building and Midtown located in Pretoria CBD, were acquired with high vacancy
levels. These office properties, with 109 024m2 of mothballed space, offer significant opportunities for possible
conversions to residential units or office redevelopment or disposals, the value of which will be realised over time. Medical
Towers was sold and transferred in September 2018 for a total consideration of R25.2 million net of commission.
Lease expiry profile
Octodec's portfolio features a mix of short to long-term leases. This is especially typical of the residential market
and leases with small to medium-sized enterprises. The majority of the leases provide for a monthly agreement at expiry
of the lease. When this occurs an effort is made to conclude longer-term leases.
Lease expiry profile by GLA
2019 2020 2021 2022 2023+ Vacant
% % % % % %
Offices 35 14 3 1 3 44
Residential 93 1 - - - 6
Retail 34 20 13 9 11 13
Industrial 44 17 14 2 7 16
Specialised and other 37 17 29 2 12 3
Total 50 13 9 3 6 19
Lease expiry profile by rental income
2019 2020 2021 2022 2023+
% % % % %
Offices 63 26 5 2 4
Residential 99 - 1 - -
Retail 35 23 16 13 13
Industrial 54 20 16 2 8
Specialised and other 42 17 29 2 10
Total 62 15 11 5 7
Borrowings
Borrowings as at 31 August 2018
Amount Weighted average
R'million interest rate per
annum
%
Bank loans 3 547.8 8.8
Domestic medium-term note programme (DMTN)
unsecured 929.1 8.4
secured 369.7 8.9
Total borrowings 4 846.6 8.7
Cost of swaps - 0.3
Total borrowings 4 846.6 9.0
The group's LTV ratio (value of interest-bearing borrowings net of cash divided by the fair value of its investment
portfolio) as at 31 August 2018 is 37.4% (FY2017: 37.1%).
The weighted average term to expiry of the loans is 2.5 years, which is in line with our strategy. Subsequent to the
financial year end, DMTN Notes in the amount of R226 million expiring in September 2018 were partly refinanced by DMTN
Notes amounting to R30 million and R130 million, for a period of twelve and eighteen months respectively.
The process to extend or refinance the remaining short term borrowings has already started with the respective banks.
Octodec has reduced its exposure to interest rate risk by entering into interest rate swap contracts in respect of
74.5% (FY2017: 82.1%) of its borrowings.
The hedges in place are for a weighted average period of 1.4 years. Steps have been taken to extend our swap expiry
profile over the next twelve months, to align with our strategy of hedging 70% to 80% of our borrowings.
The all-in average weighted interest rate of all borrowings is 9.0% per annum (FY2017: 9.2%).
Loan expiry profile per financial year (R'000 and %)
R'000 %
2019 1 605 774 (33.1%)
2020 1 002 518 (20.7%)
2021 385 160 (7.9%)
2022 400 000 (8.3%)
2023 369 687 (7.6%)
2024 1 083 394 (22.4%)
Total value of loans - R4.846 billion
Expiry profile of fixed rate loans and interest rate swap contracts per financial year (R'000 and %)
2019 1 361 400 (37.7%)
2020 500 000 (13.8%)
2021 1 750 000 (48.5%)
Total interest rate swaps and fixed rate loans R3.611 billion
Octodec participates in a listed DMTN programme through its subsidiary, Premium Properties Limited, that is
guaranteed by Octodec. As at 31 August 2018 the total issuance was at R1 298.8 million (2017: R1 116.0 million) or 26.8% (2017:
23.1%) of the group's borrowings.
Global Credit Rating's long and short-term national scale ratings of Premium Properties Limited are A-(ZA) and
A1-(ZA), respectively. Octodec had unutilised available banking facilities amounting to R669.0 million at 31 August 2018.
CHANGES IN FAIR VALUE
It is the group's policy to perform internal valuations of all its properties at the interim period and at year-end.
These valuations are based on the income capitalisation method, which is consistent with the basis used in prior years.
The property portfolio, excluding the share in joint ventures, was internally valued at R12.7 billion (2017: R12.6
billion) after a net decrease in valuation of R39.1 million (2017: R235.1 million increase) for the year ended 31 August 2018.
The mark-to-market value of interest rate swaps contracts, which protect the group against adverse interest rate
movements, resulted in a fair value gain of R39.7 million (2017: R77.0 million loss) for the year.
RENEWAL OF ASSET AND PROPERTY MANAGEMENT AGREEMENT WITH CITY PROPERTY
Octodec's shareholders approved the Asset and Property Management Agreement between Octodec and City Property, which
became effective from 1 July 2018 for a period of five years.
The fee structure contained in the new Asset and Property Management Agreement is not expected to have a material
impact on Octodec's future results.
PROSPECTS
While the change in South Africa's political leadership brought about a renewed sense of optimism across the country,
the economy continues to be constrained by increasing unemployment and higher costs of living, which do not bode well
for economic growth. We therefore anticipate another challenging year in 2019, which will impact on our ability to
deliver growing distributions.
Despite these challenges, Octodec is positioned to continue unlocking value and providing shareholders with a
sustainable distribution. Our experienced management team, diversified portfolio, large number of tenants, sound operating
fundamentals and prudent capital management, provide Octodec with the resilience and flexibility necessary to continue
creating value during challenging times.
The disposal of non-core or underperforming properties will remain a key focus area for the foreseeable future.
Octodec's objective for the 2019 financial year is to consolidate its portfolio and continue positioning the portfolio for
long-term sustainable growth. For this reason Octodec has not committed to commence construction on any major new
developments, instead we will continue to focus on improving our existing portfolio and retaining tenants.
The forecast dividend for the year ending 31 August 2019 is expected to be similar to the dividend for the year ended
31 August 2018 and therefore no growth in dividend per share is anticipated for the 2019 financial year.
This guidance is based on:
- the forecast investment property income calculated using contractual rentals and assumed market-related renewals
- an allowance for vacancies using assumptions and historical experience
- no major corporate and tenant failures occurring
- no further deterioration in the socioeconomic environment.
This forecast has neither been reviewed nor reported on by the group's auditors.
DECLARATION OF CASH DIVIDEND
The board of Octodec declared a cash dividend of 101.7 cents per share, for the six months ended 31 August 2018, out
of the company's distributable income.
SALIENT DATES AND TIMES
The salient dates and times for the cash dividend are as set out below:
2018
Last day to trade cum dividend Tuesday, 6 November
Shares trade ex dividend Wednesday, 7 November
Record date to receive cash dividend Friday, 9 November
Electronic transfer into personal bank account of certificated shareholders2 Monday, 12 November
Accounts credited by CSDP or broker to dematerialised shareholders with the cash dividend payment Monday, 12 November
Notes:
1. Shares may not be dematerialised or rematerialised between Wednesday, 7 November 2018 and Friday, 9 November 2018,
both days inclusive.
2. Where the transfer secretaries do not have the banking details of any certificated shareholders, the cash dividend
will be held by the company pending receipt of the relevant certificated shareholder's banking details, whereafter the
cash dividend will be paid via electronic transfer into the personal bank accounts of certificated shareholders.
Tax implications for non-resident shareholders
Dividends received by non-resident shareholders from a REIT will not be taxable as income and will be exempt from
income tax in terms of the exemption in section 10(1)(k)(i) of the Income Tax Act. Any dividend received by a non-resident
from a REIT is subject to dividend tax at 20%, unless the rate is reduced in terms of any applicable agreement for the
avoidance of double taxation agreements (DTA) between South Africa and the country of residence of the non-resident
shareholders. Assuming dividend tax will be withheld at a current rate of 20% the net dividend amount due to non-resident
shareholders is 81.36 cents per share.
A reduced dividend tax in terms of the applicable DTA may only be relied on if the non-resident shareholder has
submitted the following forms to his/her CSDP or broker, as the case may be, in respect of uncertificated shares,
or the transfer secretaries, in respect of certificated shares:
- A declaration that the dividend is subject to a reduced rate as a result of the application of the DTA
- A written undertaking to inform the CSDP, broker or the transfer secretaries, as the case may be, should the
circumstances affecting the reduced rate change or the beneficial owner cease to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African Revenue Services (SARS).
If applicable, non-resident shareholders are advised to contact the CSDP, broker or the company, as the case may be,
to arrange for the above-mentioned documents to be submitted prior to payment of the dividend, if such documents have not
already been submitted.
Tax implications for South African resident shareholders
Dividends received by or accrued to South African tax residents must be included in the gross income of such
shareholders. They are not exempt from income tax in terms of the exclusion to the general dividend exemption contained in
section 10(1)(k)(i)(aa) of the Income Tax Act because they are dividends distributed by a REIT. These dividends are, however,
exempt from dividend withholding tax (dividend tax) in the hands of South African resident shareholders, provided that
the South African resident shareholders have made submissions to the CSDP or broker, as the case may be, in respect of
uncertificated shares, or the company in respect of certificated shares, a DTD (EX) (dividend tax declaration that the
dividend is exempt from dividends tax and a written undertaking to inform the CSDP, broker or the company, as the case may
be, should the circumstances affecting the exemption change or the beneficial owner ceases to be the beneficial owner,
both in the form prescribed by the Commissioner for the South African Revenue Services (SARS)).
If resident shareholders have not submitted the above-mentioned documentation to confirm their status as a South
African resident they are advised to contact their CSDP or broker, as the case may be, to arrange for the documents to be
submitted prior to payment of the cash dividend.
Shareholders are encouraged to consult with their professional advisors should they be in any doubt as to the
appropriate action to take.
The number of shares in issue at the date of this declaration is 266 197 535 and Octodec's tax reference number is
9925/033/71/5.
By order of the board
S Wapnick JP Wapnick
Chairman Managing director
22 October 2018
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Basis of preparation
The reviewed condensed consolidated provisional financial statements are prepared in accordance with the JSE Listings
Requirements and the requirements of the Companies Act, 71 of 2008 of South Africa. The provisional report has been
prepared in accordance with the conceptual framework, the measurement and recognition requirements of International
Financial Reporting Standards (IFRS), at a minimum IAS 34: Interim Financial Reporting, the South African Institute
of Chartered Accountants (SAICA) Financial Reporting Guides as issued by the Accounting Practices Committee, and Financial
Pronouncements as issued by the Financial Reporting Standards Council. The accounting policies applied in the preparation
of the condensed consolidated provisional financial statements are in accordance with IFRS and are consistent with those
applied in the preparation of the previous consolidated financial statements.
These results have been prepared under the historical cost convention, except for investment properties, which are
measured at fair value, and certain financial instruments, which are measured at either fair value or amortised cost.
These reviewed condensed consolidated provisional financial statements were prepared under the supervision of
Mr AK Stein CA (SA), in his capacity as group financial director.
Fair value measurement
The fair value of investment properties is arrived at on the basis of a valuation technique using the net income
capitalisation method carried out on 31 August 2018, by taking into account prevailing market rentals, occupation levels and
capitalisation rates. The other key input used in the valuation calculation is the expected long-term net operating
income margin, of which the expense ratio and long range vacancy factor is the significant unobservable input. The directors
value the entire property portfolio biannually. The effect of the fair value measurement on investment properties
resulted in a decrease in profit of R39.1 million (2017: R235.1 million increase) in the statement of profit and loss and
other comprehensive income.
In compliance with the JSE Listings Requirements, all the properties are valued at least once over a rolling
three-year period by external independent valuation experts. In the current year, 23% (2017: 28%) of our portfolio with a value
of R6.1 billion (2017: R3.6 billion) was valued by external independent valuation experts.
Financial instruments measured at fair value include derivatives. The fair values of the interest rate swaps are
determined on a mark-to-market valuation calculated by the various financial institutions with whom the swaps are held, by
discounting the estimated future cash flows based on the terms and maturity of each contract and using the market interest
rate indicated on the SA swap curve.
The fair value hierarchy reflects the significance of the inputs used in making fair value measurements. The level
within which the fair value measurement is categorised in its entirety is determined on the basis of the lowest level input
that is significant to the fair value measurement in its entirety.
The different levels have been defined as:
- Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities
- Level 2: Input other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly (i.e. as prices) or indirectly (i.e. derived from prices)
- Level 3: Input for the asset or liability that is not based on observable market data (unobservable input).
Investment properties and derivative financial instruments have been categorised as Level 3 and Level 2, respectively,
and there have been no transfers made between Levels 1, 2 and 3 during the year. There have been no material changes in
judgements or estimates of amounts or valuation techniques as reported in previous reporting periods.
Fair value measurements using significant unobservable inputs
Reviewed Audited
investment investment
property, plant property, plant
and equipment and equipment
2018 2017
R'000 R'000
Balance as at 31 August 2017 12 598 898 12 129 631
Total fair value changes for the year included in profit and loss (39 084) 235 106
Straight-line rental income accrual 1 482 (4 905)
Depreciation and amortisation (17 558) (20 536)
Acquisitions, disposals and other movements:
Developments and subsequent expenditure 185 232 333 402
Acquired through business combination 76 000 -
Disposals (61 608) (73 800)
Balance as at 31 August 2018 12 743 362 12 598 898
Included in profit and loss for the year:
Changes in fair value of investment property (39 084) 235 106
Fair value information
The fair value of the group's investment property as at 31 August 2018 was arrived at on the basis of a valuation
technique using the net income capitalisation method, by taking into account prevalling market rentals, occupation levels
and capitalisation rates.
The first key input used in the valuation calculation is the capitalisation rate. The range of annual capitalisation
rates applied to the property portfolio is between 8.0% (2017: 8.0%) and 13.0% (2017: 13.0%) with a weighted annual
average of 9.3% (2017: 9.2%).
The second key input used in the valuation calculation is the long-term net operating income margin, of which the
expense ratio is the significant unobservable input.
Expense ratios used ranged from 5.7% to 49.1% (2017: 4.5% to 49.2%) with a weighted average of 25.1% (2017: 24.5%).
The third key input used in the valuation calculation is the long-range vacancy factor.
The expected long-range vacancy factor takes into account historic and future vacancy trends.
The long-range vacancy factor indicates the expected vacancy to be applied over the long-term that best approximates
the actual experience. The long-range vacancy factor used ranged from 0.0% to 30.0% (2017: 0.0% to 30.0%) with a
weighted average of 5.6% (2017: 5.8%).
Relationship of unobservable inputs to fair value
The significant unobservable inputs used in the fair value measurement of the group's investment properties are the
capitalisation rates, the expense to income ratios and the long range vacancy factor. Significant increases/(decreases) in
any of these inputs in isolation would result in a significantly lower/(higher) fair value measurement.
An increase of 1% in the capitalisation rate, while all other variables remain constant, would result in a decrease
in the carrying amount of investment property of R1.2 billion (2017: R1.2 billion).
A decrease of 1% in the capitalisation rate, while all other variables remain constant, would result in an increase
in the carrying amount of investment property of R1.5 billion (2017: R1.5 billion).
An increase/(decrease) of 1% in the weighted average expense ratio used to calculate the long-term net operating
income margin, while all other variables remain constant, would result in an increase/(decrease) in the carrying amount of
investment property of R168.8 million (2017: R167.4 million).
Stated capital, basic and diluted earnings per share
During the year, the company repurchased 666 784 shares in the open market for a total consideration of R11.3 million
or R17.01 per share. The shares were delisted from the JSE on 23 February 2018.
31 August 2018 31 August 2017
Shares in issue ('000) 266 198 266 864
Weighted shares in issue ('000) 266 389 261 207
Basic and diluted earnings per share (cents) 202.9 263.3
Events after the reporting date
There have been no material subsequent events that require reporting.
Commitments
The group has approved capital commitments in the amount of R25.6 million (2017: R220.2 million), relating to various
redevelopments, upgrades of properties and committed tenant installations. These will be funded out of existing unused
banking facilities.
Related party transactions
Octodec and City Property are related parties in that Jeffrey Wapnick and Sharon Wapnick are directors of Octodec and
City Property and the Wapnick family is a shareholder of both companies.
Total payments made to City Property amount to R197.1 million (2017: R188.0 million). This included fees for
collections, leasing, property and asset management, commission on acquisitions and disposals, as well as upgrades and
developments. Octodec received R10.3 million (2017: R10.0 million) from City Property for rent and operating costs recovered.
At 31 August 2018, an amount of R4.6 million (2017: R605.0 thousand) was owing by Octodec to City Property and an
amount of R1.2 million (2017: R NIL) was owing by City Property to the group.
Business combination
With effect from 1 July 2018, IPS Investments Proprietary Limited (IPS), a subsidiary of the company, acquired the
remaining 50% of Gerlan Properties Proprietary Limited (Gerlan), for a consideration of R33 million, settled in cash,
increasing its shareholding to 100%. This resulted in IPS acquiring control of Gerlan and Gerlan changed from a joint venture
to a subsidiary.
Fair value of assets acquired and liabilities recognised at the date of acquisition.
R'000
Non-current assets
Investment property 76 000
Current assets
Bank and cash balances 142
Non-current liabilities
Deferred tax (13 136)
Current liabilities
Non-interest bearing borrowings (990)
Total identifiable net assets 62 016
Fair value of equity interest held before the business combination (31 008)
Goodwill on acquisition 1 992
Acquisition date fair value consideration paid in cash 33 000
Net cash inflow on acquisition
R'000
Bank and cash acquired 142
Octodec acquired the remaining shares in Gerlan as it provided Octodec shareholders with an attractive return.
Goodwill arose on the acquisition of Gerlan because the cost of the combination included a control premium. Since
investment property is already stated at fair value, the goodwill was impaired and included in profit and loss in the 2018
financial year. The goodwill arising on the Gerlan acquisition is not deductible for tax purposes.
Impact of acquisition on the results of the group
Included in revenue and profit for the year is R1 259 372 and R1 230 625 respectively, in respect of Gerlan. Had this
business combination been effected on 1 September 2017, revenue of the group would have increased by R5 707 965 and profit
before tax would have increased by R3 264 010, net of fair value adjustment to investment property of Gerlan.
Changes to the board
During the year under review, Ms Akua Koranteng resigned from the board with effect from 10 May 2018.
Independent auditor's review report
Deloitte & Touche have issued their unmodified review report on the reviewed condensed consolidated financial
statements for the year ended 31 August 2018. The review was concluded in accordance with ISRE 2410 Review of Interim Financial
Information performed by the independent auditor of the entity. A copy of their unmodified review report is available
for inspection at Octodec's registered office.
The auditor's review report does not necessarily report on all of the information contained in this announcement/financial
results. Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor's
engagement, they should obtain a copy of that report together with the accompanying financial information from
Octodec's registered office.
FINANCIAL STATEMENTS
Condensed consolidated statement of financial position
Reviewed Audited
31 August 31 August
2018 2017
R'000 R'000
ASSETS
Non-current assets 12 590 121 12 568 875
Investment property 12 228 808 12 153 834
Plant and equipment 3 463 5 300
Straight-line rental income accrual 111 282 110 864
Tenant installation and lease costs 35 210 44 550
Other financial assets 75 000 75 000
Derivative financial instruments 7 618 1 847
Investment in joint ventures 128 740 177 480
Current assets 199 099 276 047
Trade and other receivables 130 498 143 342
Derivative financial instruments 1 986 1 736
Other financial assets 3 028 213
Taxation receivable 675 -
Bank and cash 62 912 130 756
Non-current assets held for sale 364 600 284 350
TOTAL ASSETS 13 153 820 13 129 272
EQUITY AND LIABILITIES
Equity 7 824 398 7 828 229
Stated capital 4 210 134 4 221 477
Non-distributable reserve 3 262 710 3 269 053
Retained earnings 351 554 337 699
Non-current liabilities 3 345 332 3 381 370
Interest-bearing borrowings 3 240 759 3 253 517
Derivative financial instruments 17 977 47 421
Deferred taxation 86 596 80 432
Current liabilities 1 984 090 1 919 673
Interest-bearing borrowings 1 605 774 1 572 817
Non-interest bearing borrowings 378 217 342 548
Derivative financial instruments 99 4 308
TOTAL EQUITY AND LIABILITIES 13 153 820 13 129 272
Condensed consolidated statement of comprehensive income
Reviewed Audited
Year to Year to
31 August 31 August
% 2018 2017
Change R'000 R'000
Revenue 3.5 1 895 288 1 831 346
earned on a contractual basis 3.1 1 893 806 1 836 251
straight-line rental income accrual 1 482 (4 905)
Property operating costs 2.5 (864 911) (843 636)
Net rental income from properties 4.3 1 030 377 987 710
Administrative costs 6.5 (82 875) (77 813)
Operating profit 4.1 947 502 909 897
Fair value changes 589 158 096
investment property (39 084) 235 106
interest rate derivatives 39 673 (77 010)
(Loss)/profit on sale of investment property (916) 2 943
Loss on derecognition of investment in joint venture (2 770) -
Impairment of goodwill (1 992) -
Interest income 18 584 18 094
Finance costs 7.4 (438 881) (408 702)
interest on borrowings (451 967) (439 201)
interest capitalised 13 086 30 499
Share of income from joint ventures 9 954 14 810
share of after-tax profit 9 291 1 582
reserves (9 747) 2 572
interest and management fees 10 410 10 656
Profit before taxation (23.5) 532 070 695 138
Taxation 8 493 (7 443)
current 1 522 -
deferred 6 971 (7 443)
Profit for the year (21.4) 540 563 687 695
Other comprehensive income for the year -
Items that will not be reclassified to profit and loss - -
Total comprehensive income for the year attributable to equity holders (21.4) 540 563 687 695
Basic and diluted earnings per share (cents) (22.9) 202.9 263.3
Condensed consolidated statement of changes in equity
Non-
Stated distributable Retained
capital reserve earnings Total
R'000 R'000 R'000 R'000
Balance at 31 August 2016 (audited) 3 958 207 3 112 885 342 708 7 413 800
Total comprehensive income for the year - - 687 695 687 695
Issue of new shares 263 270 - - 263 270
Dividends paid - - (536 536) (536 536)
Transfer to non-distributable reserve
profit on sale of investment property - 2 943 (2 943) -
deferred tax - (7 443) 7 443 -
fair value changes
investment property - 235 106 (235 106) -
investment property - joint ventures - 2 572 (2 572) -
interest rate derivatives - (77 010) 77 010 -
Balance at 31 August 2017 (audited) 4 221 477 3 269 053 337 699 7 828 229
Total comprehensive income for the year - - 540 563 540 563
Shares repurchased (11 343) - - (11 343)
Dividends paid - - (533 051) (533 051)
Transfer to non-distributable reserve
(loss)/profit on sale of investment property - (916) 916 -
loss on derecognition of investment in joint venture - (2 770) 2 770 -
impairment of goodwill - (1 992) 1 992 -
current and deferred tax - 8 493 (8 493) -
fair value changes -
investment property - (39 084) 39 084 -
investment property - joint ventures - (9 747) 9 747 -
interest rate derivatives - 39 673 (39 673) -
Balance at 31 August 2018 (reviewed) 4 210 134 3 262 710 351 554 7 824 398
Condensed consolidated statement of cash flows
Reviewed Audited
Year to Year to
31 August 31 August
2018 2017
R'000 R'000
Cash flow from operating activities
Net rental income from properties 947 502 909 897
Adjusted for:
straight-line rental income accrual (1 482) 4 905
depreciation and amortisation 17 558 20 536
working capital changes 42 629 12 987
Cash generated from operations 1 006 207 948 325
Interest income 18 584 18 094
Finance costs (446 227) (439 201)
Dividends paid (533 051) (536 536)
Net cash inflow/(outflow) from operating activities 45 513 (9 318)
Cash flow from investing activities
Acquisition of investment property (173 062) (303 361)
Increase in other financial assets (2 817) (23 364)
Income from joint ventures 24 916 9 913
Purchase of subsidiary (32 858) -
Proceeds from disposal of investment property 61 608 77 200
Net cash outflow used in investing activities (122 213) (239 612)
Cash flow from financing activities
Issue of new shares - 263 270
Shares repurchased (11 343) -
Proceeds from long-term borrowings 1 543 313 1 916 093
Proceeds from short-term borrowings 1 605 774 1 572 817
Repayment of long-term borrowings (1 556 071) (2 686 487)
Repayment of short-term borrowings (1 572 817) (755 116)
Net cash generated from financing activities 8 856 310 577
Net (decrease)/increase in bank and cash balance (67 844) 61 647
Bank and cash balance at beginning of year 130 756 69 109
Bank and cash balance at end of year 62 912 130 756
Reconciliation of comprehensive income to headline earnings
Reviewed Audited
Year to Year to
31 August 31 August
2018 2017
R'000 R'000
Total comprehensive income attributable to equity holders 540 563 687 695
Headline earnings adjustments
Loss/(profit) on sale of investment properties 916 (2 943)
Impairment of goodwill 1 992 -
Loss on derecognition of investment in joint venture 2 770 -
Fair value changes
investment property 39 084 (235 106)
investment property - joint ventures 9 747 (2 572)
Headline earnings attributable to equity holders 595 072 447 074
Headline and diluted headline earnings per share (cents) 223.4 171.2
Condensed consolidated segmental information
The group earns revenue in the form of property rentals. On a primary basis the group is organised into five major
operating segments:
Rental income by sector Reviewed
Reviewed Restated Audited
Year to Year to Year to
31 August 31 August Re-classification 31 August
2018 2017 of sectors* 2017
R'000 % R'000 % R'000
Offices 244 470 16.6 249 908 17.5 (67 480) 317 388
Retail 502 923 34.2 497 766 34.8 (25 282) 523 048
Industrial 109 254 7.4 111 900 7.8 (2 899) 114 799
Parking - - 0.0 (60 704) 60 704
Residential 446 730 30.4 415 129 29.0 618 414 511
Specialised and other 167 072 11.4 155 747 10.9 155 747 -
Total rental income 1 470 449 100.0 1 430 450 100.0 - 1 430 450
Recoveries and other income 424 839 400 896 - 400 896
Revenue 1 895 288 1 831 346 - 1 831 346
In order to align with the JSE Listings Requirements property portfolio information disclosures, the group changed its reporting
sectors to reflect the occupier of the property instead of the nature of the property. The comparative amounts were restated to
reflect the changes in the sectors.
Further segment results cannot be allocated on a reasonable basis due to the "mixed use" of certain of the properties.
It is the company's philosophy to invest predominantly in properties situated in the Gauteng area, therefore the
company has not reported on a geographical basis.
Reconciliation of earnings to distributable earnings
The following additional information is provided and is aimed at disclosing to the users the basis on which the
distribution is calculated:
Reviewed Audited
Year to Year to
31 August 31 August
2018 2017
% R'000 R'000
Total comprehensive income attributable to equity holders 540 563 687 695
Loss/(profit) on sale of investment properties 916 (2 943)
Loss on derecognition of investment in joint venture 2 770 -
Impairment of goodwill 1 992 -
Fair value changes
investment property 39 084 (235 106)
investment property - joint ventures 9 747 (2 572)
Fair value changes of interest rate derivatives (39 673) 77 010
Straight-line rental income accrual (1 482) 4 905
Taxation - Current and deferred (8 493) 7 443
545 424 536 432
Share of after tax profit of joint venture - not distributable (3 980) -
Distributable earnings attributable to equity holders 541 444 536 432
Represented by:
Revenue
earned on a contractual basis 3.1 1 893 806 1 836 251
Property operating costs 2.5 (864 911) (843 636)
Net rental income from properties 3.7 1 028 895 992 615
Administrative costs 6.5 (82 875) (77 813)
Operating profit 3.4 946 020 914 802
Interest income 18 584 18 094
Share of income from joint ventures 15 721 12 238
Distributable profit before finance costs 980 325 945 134
Finance costs 7.4 (438 881) (408 702)
Distributable income before taxation 0.9 541 444 536 432
Taxation - Current and deferred - -
Equity holders distributable earnings 0.9 541 444 536 432
Octodec Investments Limited
Incorporated in the Republic of South Africa
Registration number: 1956/002868/06
ISIN: ZAE000192258 (Approved as a REIT by the JSE)
Share code: OCT
Registered address
CPA House, 101 Du Toit Street, Tshwane 0002
Tel: 012 319 8781, Fax: 012 319 8812, E-mail: info@octodec.co.za
Directors
S Wapnick (Chairman)1, JP Wapnick (Managing director)2,
AK Stein (Financial director)2, DP Cohen3, GH Kemp4,
MZ Pollack1, PJ Strydom4
1 Non-executive director
2 Executive director
3 Lead independent director
4 Independent non-executive director
Group company secretary
Elize Greeff
CPA House, 101 Du Toit Street Tshwane 0002
Tel: 012 357 1564, Email: elizeg@octodec.co.za
Sponsor
Java Capital
Contact person: Tanya de Mendonca
6A Sandown Valley Crescent, Sandown, Sandton 2196
PO Box 522606, Saxonwold 2132
Tel: 011 722 3059, Email: sponsor@javacapital.co.za
Transfer secretaries
Computershare Investor Services Proprietary Limited
Contact person: Leon Naidoo
Rosebank Towers, 15 Biermann Avenue, Rosebank 2196
PO Box 61051, Marshalltown 2107
Tel: 011 370 5000, Email: leon.naidoo@computershare.co.za
Investor relations
Instinctif Partners
Contact person: Frederic Cornet
The Firs, 302 3rd Floor, Cnr Cradock and Biermann Road, Rosebank 2196
Tel: 011 447 3030, E-mail: investorrelations@octodec.co.za
http://www.octodec.co.za
Date: 22/10/2018 07:05:00 Produced by the JSE SENS Department. The SENS service is an information dissemination service administered by the JSE Limited ('JSE').
The JSE does not, whether expressly, tacitly or implicitly, represent, warrant or in any way guarantee the truth, accuracy or completeness of
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