VKE continues to raise capital through debt and equity, with R5.1bn in cash and offering a further DRIP for 1H25. While LAR España was a great investment, we believe its significant income has masked the underlying poor performance in Spain. Castellana’s top line (provision of services) per sqm has declined 3% y-y in euros, while operating profit fell 9.2% y-y, and operating profit net of finance costs was down 44% y-y. While bank debt decreased 11.8% y-y, finance costs rose by 82.4% y-y. Vukile recently capitalised €97m of loans to Castellana into equity, and lent a further €108.4m, lessening the true finance cost.
The purchase yield on the Portuguese assets equates to an equivalent price of €9.75 per LAR España share, and thus this transaction will decrease Castellana’s FFO in FY26. If the additional purchases (two Portuguese assets and Bonaire) conclude, FFO might increase in absolute terms, but ROIC would decline.
South African operations have started improving from what we believe was the bottom, with FFO having declined 51.2% over the past five years. Control of general operating expenses has been excellent. Concerningly for VKE investors, 14.1c of every R1 in contractual rental goes to corporate and administrative expenses. VKE’s admin cost-to-income is almost three times that of HYP and RES, both of which run SA and European retail property portfolios, and is significantly higher than even RDF or GRT, which run complex diversified portfolios.
In our view, FY25 FFO will be in line with guidance, given a distribution is accrued for in Castellana from LAR España, even though it will not receive it after the sale. We believe FFO will come under pressure in FY26 from higher rates, more debt and with the purchase of new assets lowering ROIC.