In a strategic move to fortify its global presence, Burstone Group Limited, formerly known as Investec Property Fund, successfully completed its internalization in July 2023. The subsequent rebranding, finalized in September 2023, marked a pivotal moment for the company. The first six months of Burstone’s 2024 financial year, characterized by international integration efforts, showcased robust operational performances across its South African, European, and Australian platforms.
Despite a challenging economic backdrop, Burstone’s South African portfolio remained stable, achieving a commendable 2.0% growth in like-for-like Net Property Income (NPI). The retail and industrial sectors played a crucial role in this success, countering negative reversions, especially in the office sector. The focus on managing arrears and stable cost-to-income ratios contributed to the overall resilience of the South African segment.
Burstone’s European PEL portfolio reported a noteworthy 7.9% increase in like-for-like NPI, primarily driven by continued growth in contracted rent. The positive performance was further buoyed by effective cost containment initiatives. The platform’s ability to capture positive Estimated Rental Value (ERV) and maintain low vacancy rates underscored its operational strength. The European arm is expected to see additional cost savings of around €1 to €2 million over the next two years.
In reviewing the financials for the six months ended September 2023, Burstone reported revenue of ZAR 986,427,000, reflecting a 7.7% increase compared to the same period in the previous year. The operating profit was ZAR 656,485,000, a slight decrease of 0.7%. Distributable earnings per share declined by 5.0% to 51.07 cents. The net asset value per share stood at ZAR 1,621, reflecting a 6.6% decrease.
| Financial Information | 30 September 2023 | 30 September 2022 | Movement |
|---|---|---|---|
| Revenue (ZAR’000) | 986,427 | 915,738 | 7.7% |
| Operating profit (ZAR’000) | 656,485 | 661,028 | (0.7%) |
| Distributable earnings per share (cents) | 51.07 | 53.78 | (5.0%) |
| Net asset value per share (ZAR) | 1,621 | 1,736 | (6.6%) |
The dividend payout ratio was 95%, resulting in an interim dividend of 48.52 cents per share, slightly lower than the previous year’s 51.09 cents.
Burstone acknowledged that higher funding costs, incurred in the second half of the prior year, adversely impacted Group results. Despite this challenge, the company’s results aligned with expectations, with Distributable Income per Share (DIPS) declining by 5.0% to 51.07 cents. The Group is actively assessing early refinancing options, and the balance sheet remains healthy with a defined plan to decrease the loan-to-value (LTV) ratio over time, reaching 43% in September 2023.
The South African macroeconomic environment poses challenges for the property sector, including rising municipal costs and an energy crisis. While the South African portfolio is stabilizing and performing as expected, growth is anticipated to be modest. The focus is on reducing client occupation costs, maintaining portfolio quality, and accelerating the capital recycling program.
The European PEL platform is expected to continue its growth in contracted rent, supported by positive earnings growth and cost-saving initiatives. The Group has already realized cost savings in the European platform, with further savings expected in the next two years. The debt in Europe is well-hedged, mitigating interest rate risks for the next two years.
Burstone’s joint venture in Australia, the Irongate Australia Fund Management Platform, has performed well despite a challenging market. The platform is positioned to capitalize on market dislocations as Real Estate Investment Trusts (REITs) look to de-lever.
Despite a marginal increase in the LTV ratio to 43%, the balance sheet remains robust, supported by proactive capital and interest rate management. The Group has a clear plan to reduce LTV, focusing on further asset sales to lower it to around 41%. With R1.1 billion of debt maturing in FY24 and unutilized committed facilities of R1.1 billion, the Group maintains low near-term refinancing risk.
Burstone’s strategic focus over the past six months has been on transforming into an integrated international real estate fund and asset management company. The emphasis on a capital-light fund management model, value-add/core-plus opportunities, and a holistic sustainability strategy underlines the Group’s commitment to creating broader stakeholder value.
The immediate focus is on maintaining portfolio stability, enhancing the quality of recurring earnings, maximizing operational synergies, and managing capital allocation. Initiatives to reduce client occupation costs and further capital optimization are in progress.
The Group envisions growth in its funds management business, exploring value-add and core-plus assets leveraging its management capabilities. The rollout of the funds management strategy is expected to create new revenue streams, reducing LTV and buffering earnings.
Burstone maintains its previous guidance, expecting DIPS growth of 0% to 2% in FY24, translating to expected growth of 5% to 9% in 2H24. The Group anticipates ongoing capital allocation opportunities, considering market dislocations, and will assess the appropriateness of the dividend payout in line with its long-term strategy.
Persistently high global interest rates are expected to continue negatively impacting results, with rate increases larger than initially anticipated. Despite these challenges, the Group remains optimistic about its strong foundations for future growth.
Burstone Group Limited’s interim results reflect a resilient performance in the face of economic uncertainties. The company’s strategic initiatives, coupled with a robust balance sheet, position it well for future growth, making it a key player in the evolving landscape of international real estate and asset management.
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