Redefine Properties (JSE:RDF) continues to operate efficiently and allocate capital with discipline, strengthening and positioning its balance sheet to withstand the challenging environment and seizing opportunities as they arise.
The company reported on Monday that distributable income increased by a respectable 6.1% to R1.7 billion during the six months leading up to 29 February 2024. This is against the R1.6 billion achieved in the comparable period and translates to 25.3 cents (HY23: 23.9c) per share.
Ntobeko Nyawo, CFO of Redefine, said the group was able to sustain its operating profit margin at 76.5% (HY23: 76.7%), despite the tough conditions that local property counters and other interest rate-sensitive companies find themselves in.
“Like other local counters, we’ve navigated a difficult downturn and maintained our resilience,” said Redefine CEO Andrew König. “The higher-for-longer interest rates remain a persistent theme and relief is critical to moving the dial on most outcomes.”
He said Redefine is, however, not hitching its fortunes to interest rate cuts. “Instead, we have focused on variables within our control that can directly influence value creation, like capital allocation, capital sourcing, maximising rentals, and containing costs.”
Redefine has been highly strategic about where it allocates capital, focusing on recycling non-core assets to fund expansion activities where possible.
In an effort to enter the rapidly expanding township market, the company raised funds through the sale of non-core assets to purchase a stake in the retail establishment Pan Africa Mall in Alexandra, Johannesburg. The R1.8 billion purchase of Mall of the South was another significant deal concluded during the period.
“The future of physical shopping is not as bleak as many expected it to be post-COVID,” said Redefine COO Leon Kok. “Despite interest rate pressures and shoppers’ limited disposable income, the retail sector, supported by demand for essentials, value, and apparel, is performing relatively well.”
Redefine grew year-on-year trading densities by 4.8% to R34 460 per sqm, which contributed to an average rent-to-turnover ratio of 7.4% across the retail portfolio. According to Kok, this means there is opportunity for rental growth and will enable the company to pursue renewal rates in the retail sector more aggressively.
Both the retail and industrial portfolios reported a substantial improvement in rental renewal reversions during the period, with renewal rates now marginally negative in retail (-0.5%) and positive (4%) in industrial.
On a total portfolio basis, negative reversions have come down to -0.5%, compared to -3.7% in HY23. This result was skewed by higher negative reversions (-13.6%, HY23: -12.4%) in the office portfolio.
Kok noted the current oversupply of office space, and somewhat muted demand. “As a result, we can anecdotally refer to it as a tenant market, because they have options and the ability to shop upwards and occupy well-located, quality office space at relatively affordable rentals.”
Nevertheless, companies are continuing to make their return to physical office spaces and are seeking high quality P and A grade space, of which 95% of Redefine’s portfolio is comprised.
While the group reported slight deterioration in occupancy and Kok noted that pressure will remain, Redefine continues to hold its own. “The office portfolio at a net operating income level grew by 4.1%, outperforming our industrial portfolio, which speaks to its quality,” Kok said.
He reiterated that Redefine is geographically diversified and has scale across the three traditional property sectors of South Africa: retail, office, and industrial. “When there is instability and unfavorable economic conditions, this diversity becomes most beneficial because it allows us to mitigate some of the challenges that sectors or geographies may encounter.”
South Africa’s property owners continue to face significant challenges from increased load shedding, rising municipal rates, and utility bills. Redefine is proactively managing these risks and costs by implementing renewable energy and working with City Improvement Districts to improve municipal services in the areas where it operates.
“We are proud of our 41MW of installed Solar PV capacity across all sectors in the country, the bulk of which sits in retail space. Another 21MW is currently in progress, as we look to increase our capacity in the next 12 to 18 months. This will stand us in good stead to mitigate some of the cost pressures we face locally,” Kok said.
Meanwhile, in Poland, the energy price crisis, which was the biggest driver of high levels of inflation in that jurisdiction, has recovered and returned to near pre-crisis levels. This is leading to an increase in disposable income, which has also been helped by policies implemented by the new government, such as an easing of the ban on Sunday trading and raising the child social grant.
These factors, König said, bode well for the retail sector in Poland, which Redefine increased its exposure to by lifting its ownership level in Polish retail platform EPP from 95.5% to 99.2%. Occupancy levels in the core EPP portfolio sit consistently at 98.4% and the portfolio is essentially considered fully let.
“This forms part of the goal,” König said, “to create a high-quality, diversified portfolio that can generate long-term, risk-adjusted returns in a hard currency.”
“We don’t have many levers at our disposal to alter the circumstances of the external environment. So, for us, it comes down to concentrating on what we can control, such as investing strategically and focusing on conservative balance sheet management.”
According to Nyawo, the group’s healthy liquidity profile, which it has maintained at R4.2 billion, remains at levels that provide sufficient strategic headroom to weather any unforeseen events in the near term, thereby anchoring balance sheet strength.
He added that the group’s healthy debt maturity profile has helped its liquidity position with no more than 18% of facilities coming up for maturity in FY25 to FY27, which can be comfortably refinanced.
“When interest rates are high, it’s imperative to adequately hedge and protect ourselves. Approximately 76.7% of the group’s debt is hedged; during this time, we are hedged for an average term of 1.5 years, and the short, dated tenors seek to avoid baking in long-term pain of higher rates.”
König concluded by saying: “We intentionally chose not to be sidetracked by the noise, knowing there will be aftershocks along the way as we move toward a normalised interest rate environment. There will, however, be new opportunities and, across our organisation, we are aligned to mindfully opting for the upside.”
