Highlights for the six months to 31 December 2020
- Distribution for the period is 10.590 cents per share
- Net asset value per share of 229.32 cents
- Loan-to-value ratio decreased from 36.3% to 32.2%
- Arrears reduced from 4.4% to 3.1% of revenue
- Vacancies reduced from 4.5% to 3.8% of the total lettable area
- Interest cover high at 3.3 times
- Distribution growth forecast for the full year of 0%-2% and 100% pay-out ratio maintained
Fairvest Property Holdings Limited (“Fairvest”) today announced results for the six months to December 2020 that portrayed strong improvements in property fundamentals and a pleasing 7.2% increase in distribution against the most recent six months to 30 June 2020, which were at the height of the COVID-19 lockdown. When compared against the pre-COVID corresponding period of 31 December 2019, however, the distribution decreased by 5.1%.
Fairvest maintains a unique focus on retail assets weighted toward non-metropolitan and rural shopping centres, as well as convenience and community shopping centres servicing the lower income market in high growth nodes, close to commuter networks. The Fairvest property portfolio consists of 43 properties with 250 911 m2 of lettable area, valued at R3.425 billion.
Chief Executive Officer, Darren Wilder said that Fairvest’s specialist, niche positioning of smaller neighborhood centres with grocery-anchored assets, and an emphasis on essential shopping, with a focused, hands-on management team has been more resilient during the COVID-19 pandemic with the recovery being quicker than anticipated, and without significant increases in vacancies. Countrywide, food retailers demonstrated the most resilient trading densities of all merchandise categories, and smaller format retail outlets outperformed as consumers redirected their spending power toward convenience shopping closer to home.
Fairvest’s defensive portfolio and consistent distributions track record have been well-recognized and rewarded by investors. The company has featured in the top three among the JSE’s universe of 28 SA-based REITS in terms of total return performance in each of the key investment period horizons of 1, 3, 5, and 10 years.
Total property revenue increased by 2.3% to R274.2 million, as a result of income growth in the historic portfolio and acquisitions in the latter half of the previous financial year, offset by the disposal of Tokai Junction. Net profit from property operations increased by 4.6% to R176.5 million.
Expenses were well contained, assisted by significant solar savings at properties, but countered by the effect of rental concessions provided to tenants, as well as the substantial increase in the provision for expected credit losses on rental billed during the COVID-19 lockdown period.
On a like-for-like basis, the historic portfolio increased by 3.4% compared to the previous year. Capital expenditure of R12.5 million was incurred and a further R14.9 million was invested in solar installations, with 16 sites now completed and generating savings to the value of R5.0 million. Installations at eight further sites will commence during the fourth quarter of the financial year, with a further R14.2 million of capital expenditure committed.
Given the uncertainty in the current market, a conservative approach was maintained with the valuation of investment property. The weighted average exit capitalisation rate used remained unchanged at 10.3% compared to 30 June 2020, while the weighted average discount rate also remained unchanged at 14.8%. These conservative metrics continue to show prudent but fair valuations. During the period under review, Tokai Junction was sold for R180.0 million. The disposal price represents a 10.5% premium to the 30 June 2019 valuation of the property, underscoring Fairvest’s conservative valuation of its portfolio. The sale resulted in a 1.9% decrease in the value of the property portfolio at 30 June 2020 to R3.43 billion.
A low-risk portfolio with robust property fundamentals
The portfolio remains strongly diversified with a broad, geographically dispersed representation and A- and B-grade tenants who occupy 80% of the gross lettable area. The high national tenant component of 72.2% of the portfolio provides shareholders with a low-risk investment profile with national food retailers occupying 32.4% of the portfolio in terms of GLA. Tenants unable to trade during lockdowns represented less than 3.5% of monthly billings.
The weighted average contractual escalation for the portfolio decreased from 7.2% to 7.1%. Gross rentals across the portfolio trended upwards, with a 2.7% increase in the weighted average rental to R132.15/m2at 31 December 2020. This was because of contractual escalations, increases in rental achieved on new leases, and a 1.6% weighted average rental increase achieved on renewals.
Wilder said that Fairvest is fortunate to have a team of hands-on property professionals who have deep experience in both bull and bear markets. In tough times, this experience is brought to bear to continue to achieve healthy results and sustained value creation. The stable performance and notable improvements from the height of COVID are evident in the table below.
While vacancy rates within shopping centres across the industry reflected deteriorating tenant viability, Fairvest vacancies decreased from 4.5% to 3.8% during the period. Positive letting of vacancies after period-end resulted in the vacancy percentage further decreasing to 3.0%. During the period under review, 101 new leases were concluded with a total GLA of 19 081m2. Fairvest also successfully renewed 16 038m2 of leases, with a positive reversion of 1.6% being achieved on these renewals. Tenant retention for the period remained high at 67.5%. The weighted average lease term decreased slightly from 39 to 37 months.
COVID-19 impact contained
Most rent relief negotiations with tenants have been concluded during the reporting period. Additional rental remissions of R9.7 million were conceded for the six months to 31 December 2020. During the period net arrears decreased by 26.7% to R16.7 million. Collection of deferrals have been better than anticipated and we expect arrears to decrease further by the end of the financial year.
Asset quality improving further
Fairvest’s asset management initiatives resulted in improved nets cost to income ratios and further improved asset quality, with the average value per property increasing by 0.4% to R79.6 million, and the average value per square meter increasing by 2.7% to R13 650/m2.
Disciplined, conservative financial management
Wilder said that Fairvest’s balance sheet remains strong, with a conservative loan to value (“LTV”) ratio and a comfortable interest cover ratio. The LTV ratio decreased to 32.2% (June 2020: 36.3%) mainly due to the disposal of Tokai Junction during the period, offset by further investments in solar projects. Of the debt, 72.3% was fixed through interest rate swaps as at 31 December 2020, with a weighted average expiry for the fixed debt of 34 months. The weighted average all-in cost of funding increased to 8.05% (June 2020: 7.57%). The increase is due to the reduction of floating rate debt with the proceeds of the Tokai Junction disposal. The weighted average maturity of debt decreased marginally from 23 months to 21 months.
Fairvest has no debt facilities expiring for the remainder of the 2021 financial year.
Fairvest said that the lasting impact of the COVID-19 pandemic on the local economy remains uncertain, given the pace of the vaccine rollout and potential further infection waves which may impact tenants.
Fairvest remains well-positioned with a defensive portfolio of grocery-anchored assets in smaller, more convenient centres, a conservative balance sheet with modest gearing levels, and more than 3
R220 million of undrawn debt facilities. The focus areas remain to maintain viable tenancies and letting of vacancies, with a strong focus to reduce arrears even further.
After taking into consideration the uncertain environment described above, as well the performance of the past six months, the Fairvest board expects the distribution per share for the full 2021 financial year to be between 0% and 2% higher than the previous year. The board has also again resolved to maintain the current dividend pay-out ratio of 100% of distributable earnings. Any changes to this policy will be communicated to shareholders at least 12 months before any changes are implemented.
Wilder said that Fairvest’s philosophy has always been to maintain a simple property business and to focus on the basics. “We are determined to continue to keep an uncomplicated traditional property business with a conservative balance sheet and income statement, devoid of complex financial structures. We continue to maintain and grow a portfolio of quality assets with strong property fundamentals and to provide hands-on property management, as we strive to continue to add value for our shareholders.”