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Growthpoint declares half-year dividend off strong balance sheet and liquidity base

Growthpoint Properties Limited (JSE: GRT) delivered 12.5% growth in revenue and R2.5bn in distributable income for its six-month period to 31 December 2020, amid the Covid-19 pandemic.

Compared with the six months to end-2019 before the impacts of Covid-19, distributable income decreased 21.6% which on a per share basis decreased by 31.0% to 73.1 cents per share, mainly because of 408m new shares issued in November 2020 through a R4.3bn equity raise and the dividend reinvestment programme, which raised an additional R577m.

Norbert Sasse, Group CEO of Growthpoint Properties, attributes a steady first-half performance to the better-than-expected showing from its South African portfolio, trading and development delivering handsomely, income from funds management gaining impetus and its Australian investment outperforming in its offshore portfolio.

Sasse comments, “Growthpoint continued to prioritise balance sheet strength and liquidity, and focused on the factors that we can control in this market. As a consequence, our results show a very stable business that is in good shape. We’ve lowered our South African gearing comfortably within our target range and have R5bn of liquidity. Growthpoint has a strong balance sheet, enabling us to pursue our strategic initiatives and declare a dividend of 80% of distributable income. By paying our shareholders an interim dividend, we are reinforcing Growthpoint’s commitment to retaining our REIT status and our intention is to continue paying dividends twice a year of at least 75% of distributable income.”

The positive outcomes of Growthpoint’s focus on liquidity and balance sheet strength are evident in its half-year numbers. Growthpoint’s consolidated SA REIT loan-to-value (LTV) decreased from 43.9% to 40.7% during the six months, with its SA LTV reducing from 39.8% to 35.5% and an interest cover ratio (ICR) of 3.8x. Growthpoint reduced its nominal debt in South Africa from R43.4bn to R37.8bn during the period through R4.4bn of repayments and R1.2bn due to the stronger domestic currency. It has R5bn of unutilised committed facilities and R1.1bn of cash on its balance sheet at 31 December 2020. Growthpoint achieved its healthy loan-to-value levels, despite a further 3.6% devaluation of its South African portfolio, which decreased in value by 13% over the 2020 calendar year as a consequence of unsupportive property fundamentals driven mainly by growth in income uncertainty.

Contributing to Growthpoint’s balance sheet strength was a R4.3bn equity raise in November 2020 at R12.0 per share, which was 2.7x oversubscribed. Additionally, 43.2% of shareholders elected the share alternative, raising R577m through the FY20 November distribution reinvestment programme. By reducing its FY20 dividend pay-out ratio to 80%, Growthpoint retained R827m after paying tax of R154m, and will retain R499m distributable income for the half-year by again applying an 80% pay-out ratio.

Growthpoint creates value through innovative and sustainable property solutions that provide space to thrive. It is the most liquid and tradable way to own commercial property in SA. Growthpoint is a FTSE/JSE Top 40 Index company and a constituent of the FTSE EPRA/NAREIT Emerging Index. It has also been included in the FTSE4Good Emerging Index for four successive years and in the FTSE/JSE Responsible Investment Index for more than a decade and has achieved a level 2 B-BBEE rating

It owns and manages a diversified portfolio of 434 property assets across SA valued at R71.0bn, a 50% interest in the V&A Waterfront, Cape Town, valued at R9.0bn, and R12.0bn in assets under management via its funds management operations. Growthpoint owns 57 properties in Australia valued at R49.8bn through a 62.2% holding in ASX-listed Growthpoint Properties Australia (GOZ) and seven community shopping centres in the UK valued at R11.3bn through its 52.1% investment in LSE- and JSE-listed UK REIT Capital & Regional. Through its 29.3% investment in LSE AIM-listed Globalworth Real Estate Investments (GWI), it owns an interest in 64 properties in Romania and Poland, of which Growthpoint’s share is valued at R15.9bn.

During the half-year, Growthpoint’s South African portfolio achieved a 97% average rental collection rate, and recovered R125m, or 68%, of total rental deferrals granted since the onset of the pandemic. It let more than 633,000sqm of space and its renewal success rate increased from 66.4% to 68.0%. Arrears of R494m are well provided for. However, several portfolio fundamentals continued to weaken, with vacancies rising from 9.5% to 10.3% and average rental reversions moving from -6.7% to -13.9%. Given the state of the market in the half-year, a bigger than usual portion of its portfolio was externally valued, with its retail portfolio value decreasing by 3.2%, offices 4.7% and industrial 3.1%.

Growthpoint intensified its focus on right-sizing its portfolio through the strategic sale of non-core assets, a programme which it commenced in its 2017 financial year and has since sold R7.5bn in properties. Despite little liquidity and a challenging sales environment, it sold five properties during the period for R497.7m at book value and held two valued at R55.5m for sale at half-year end.

Development expertise is a competitive advantage for Growthpoint. While Growthpoint doesn’t distribute non-recurring income, its trading and development activity proved very profitable during the half-year, earning R128m of third-party trading profits, development fees and rental income. In step with the current market, development was curtailed to around a third of previous levels, and speculative development avoided. Turnkey developments for the Growthpoint investment portfolio remain a key focus, as well as third-party developments.

The South African retail property portfolio vacancies edged up slightly from 3.7% to 4.8%, excluding offices and space under development. While the renewal success rate improved, renewal growth, escalations and arrears all came under pressure. Trading densities, and net property income reduced in this portfolio, which accommodates gyms, restaurants, cinemas, and other tenants severely impacted by the COVID-19 lockdowns. Growthpoint granted R66.6m in discounts and R2.2m in deferrals to its retail tenants. Community and convenience centres outperformed larger malls, and value retail attracted the most spending. On-demand shopping services such as OneCart and Checkers Sixty60, which shop from retailer’s shelves, positively impacted in-mall sales. Growthpoint finalised the Edcon business rescue legacy, writing off both the arrears and investment.

Growthpoint’s South African office portfolio vacancies rose from 15.4% to 18.0%. Renewal successes and arrears improved, but all other metrics in this portfolio deteriorated. Growthpoint granted R14.4m in discounts and R8.4m in deferrals to its office tenants. It’s new Altron campus redevelopment at Woodmead Office Park in Woodmead was completed after the period in February, with rental commencing on a long-term lease from this month.

Growthpoint’s industrial portfolio continued to outperform relatively, despite vacancies increasing from 7.1% to 8.2%, mostly due to the slower letting of new developments in Cape Town and Durban, and an upward trend in business failures in our tenant base. It reported steady escalations, arrears and net property income levels, but renewal success and growth rates decreased. Growthpoint remains focused on modernising its industrial portfolio and selling non-core industrial assets.

“There is some optimism about a rebound in South Africa, but the property industry lags many other sectors and is slower to reflect a change in trends. Any improvement will take time to filter through. There is likely to be a multi-year recovery in GDP. Even if the economy grows at forecast levels of between 3.3% and 4.6% in 2021, off the low base of a 7.0% contraction in 2020 it will take two to three years to reach pre-COVID-19 levels. We expect further financial and operational headwinds. We still see many business rescues and liquidations. There is a lot of capacity in the office and retail sectors, and it isn’t yet possible to gauge the structural shifts of work-from-home. In this difficult environment, our relatively stronger balance sheet gives us great comfort,” remarks Sasse.

The V&A Waterfront was severely impacted by various lockdown restrictions, the absence of foreign tourism, its cruise terminal’s closure, and leisure limitations. Retail turnover decreased by 36% compared to the 2019 half-year. Hotel occupancy rates were 20% compared to 70% during the same six months in 2019 and precinct footfalls nearly halved, notwithstanding good local tourism support. The V&A’s robust office portfolio proved resilient due to a high percentage of blue-chip tenants, supporting low vacancies and no material lease terminations. As an essential service, the fishing industry traded and paid rental throughout the period. Casual shipping and yachting remained strong. The cumulative impact was a 48% decline in net property income, with pressure on collections, arrears and property values.

Notwithstanding its challenges, the V&A Waterfront achieved several highlights, including completing a new 9,350sqm head office development for Deloitte, approving a 6,900sqm head office for Investec, leasing most of the ex-Edgars space to Zara, and introducing an incubator for early-stage food industry businesses, Makers Landing.

“The return to lockdown level 1 supports performance, but with the global impacts of the pandemic, it is difficult to know when international tourists will return, which is critical for the V&A Waterfront. However, it remains a strong asset with solid property fundamentals,” explains Sasse.

Growthpoint’s capital light funds management strategy allows it to access third party capital and leverage its management strength in the unlisted and co-invested environment. Growthpoint continued building its first two funds and plans to launch a third fund invested in purpose-built student residential accommodation. During the half-year, this strategic focus earned Growthpoint R16.3m in asset management fees and distributions of R62.2m from the hospital fund. It also received a maiden dividend of R3.7m from the Africa fund, which Growthpoint elected to reinvest, and a distribution from the management company is expected to be paid to Growthpoint before 30 June 2021.

Sasse explains, “Our funds management model is a core strategy. The co-investment and co-management model are effective and particularly attractive in this market.”

The healthcare fund, Growthpoint Healthcare Property Holdings (GHPH), in which Growthpoint has a 61.8% shareholding, grew half-year distribution per share by 7.5% to 40.8 cents per share. The fund has a R2.7bn portfolio of four hospitals and a medical chamber. Growing its portfolio, the acquisition of 51% of the 100-bed Busamed Paardevlei Hospital in Somerset West is final and awaiting transfer. Cintocare Hospital, developed by Growthpoint in Pretoria, opened in December 2020 and is to be acquired by the fund. A USD80m equity and convertible debt package from the International Finance Corporation is in the final stages of negotiation and is intended to finance development and acquisition opportunities, for which the healthcare fund has a healthy pipeline of around R4.5bn.

Growthpoint has a 16% shareholding in Lango Real Estate (formerly Growthpoint Investec Property Fund or GIAP), which owns a USD638m quality portfolio of income-producing real estate assets, comprising 11 prime office and retail properties in Ghana, Nigeria, Zambia and Angola. Lango performed well throughout the pandemic to pay its maiden distribution to shareholders.

In January 2021, Lango acquired the final minority stake in the Standard Chartered office building in Accra, Ghana, and now owns 100% of the asset. It is in advanced discussions with potential investors to raise additional capital. In line with capital raised, it has assembled an exciting pipeline of assets for investment as it continues to lead the African real estate market.

Growthpoint’s international investment remains at steady levels of around 40% of its property assets by book value and just over a quarter of earnings before interest and tax. It intends to refine its approach to offshore investment.

GOZ is a core investment for Growthpoint, with its defensive portfolio of quality office and industrial assets with strong tenancies. GOZ’s dividend decreased from AUD11.8 cents per share to AUD10.0 cents per share, as it chose to reinforce its capital structure thereby decreasing its pay-out ratio. COVID-19 had little impact on GOZ’s earnings and performance. Underpinning its resilience, 97% of its tenants comprise big corporates and government, and it has no retail assets. Rental collection rates remained above 98% throughout the pandemic, and GOZ closed the period with a portfolio occupancy of 95%, which will increase to 97% in the second half. Significant longer-term leases were signed during the six months – including hardware chain Bunnings as a key tenant for Botanicca, taking the portfolio’s weighted average lease expiry to 6.2 years. During the half-year, its asset values increased and gearing levels decreased further to a low 29.9% with good liquidity of over AUD400m cash available

“GOZ enjoys a strong capital position with gearing well below its target range, supported by positive property fundamentals and prospects for acquisitions and fund management, as well as merger and acquisition opportunities. A faster economic recovery is expected for Australia, and GOZ’s quality metropolitan office portfolio is expected to be particularly resilient, while its industrial portfolio is poised to benefit from the rapid growth in e-commerce,” reports Sasse. GOZ has guided a distribution of AUD20.0 cents per share for its 2021 financial year.

Growthpoint’s Central and Eastern European investment platform, Globalworth, comprises office and industrial assets, with little retail property. It has 38 assets in Poland and 26 in Romania. By retaining cash to reinforce balance sheet strength, Globalworth delivered significantly diluted dividends of EUR15.0 cents per share. Its inaugural green bond raised EUR400m in July 2020, with a 2.95% coupon for six years, and was 2x oversubscribed. Globalworth’s portfolio proved defensive, with rental collections at 98.7% across 2020. It completed three new developments in a relatively quiet period with investment activity suspended. It closed 2020 with a portfolio occupancy of 91.7% including options, reflecting slower take-up of space in the new developments due to COVID-19.

“Globalworth has been relatively unaffected by the pandemic, with its strong balance sheet and a solid base of multinational tenants which favour the region,” Sasse points out.

In the UK, Capital & Regional was hard hit by Covid-19, and Growthpoint’s investment case in this pure retail REIT was severely impacted, notwithstanding its favourable community centre strategy, with a high proportion of non-discretionary retail. While all its shopping centres remained open throughout 2020, only around 30% of retailers could trade for the full year. There was some reprieve during the six months, and in mid-December 98% of the portfolio was trading before lockdown restrictions were re-introduced. Exacerbated by the pandemic, 17 national retailers faced business failure. Together, this placed pressure on income (down GBP15.1m), values (down 27.5%), and leverage (net LTV of 65%). Capital & Regional has signed waivers for all current income covenants with all its financiers. Its high cash reserves of over GBP80m protect its liquidity position. Even in this challenging environment, Capital & Regional collected 80% of rental during the 2020 calendar year and reported a resilient 92% commercial occupancy at end-December.

“The UK’s easing of restrictions should allow all non-essential retailers to re-open by mid-April. However, the pandemic has accelerated structural shifts already underway in UK’s retail industry. More certainty is needed to properly assess Capital & Regional’s altered retail landscape and business needs and determine the best approach to address its debt levels and shape its future,” says Sasse.

Growthpoint remains focused on protecting its balance sheet and optimising its advantages in a persistently challenging environment.

“In an extremely uncertain time, we have demonstrated the benefits good liquidity and balance sheet strength. This will remain a clear focus and priority, which supports our sustainability and performance for all our stakeholders, and enables Growthpoint to continue to advance its strategic thrusts,” concludes Sasse.

/ends
RELEASED BY:
Growthpoint Properties Limited
Norbert Sasse, Group Chief Executive Officer
Tel: +27 (0) 11 944 6249
www.growthpoint.co.za
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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.

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Resilient distributions 

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. 

Valuations 

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. 

Prospects 

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.”