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Hyprop Deliver Strong Operational Performance for FY2023

Hyprop, a JSE-listed REIT focused on owning and managing dominant retail centres in mixed-use precincts in South Africa (SA) and Eastern Europe (EE) reported a 24% increase in distributable income to R1.451 billion, as the four EE centres were consolidated for the full financial year.

The Group delivered a continued improvement in trading metrics across its SA and EE portfolios which is a result of its repositioning strategy and active asset management initiatives. The average monthly foot count across Hyprop’s premier retail centres in SA grew by 5.2%, while in EE it rose by an impressive 14.3%. At the same time, tenant turnover rose by 12.8% in SA and 15.9% in EE.

“The robust improvement in our portfolio’s key trading metrics reaffirms our centres' dominance and relevance to retailers and shoppers,” says Morné Wilken, Hyprop CEO.

“Even though we faced challenges such as power and water shortages, spikes in energy costs, service delivery failures, higher interest rates, geopolitical tensions and muted economic growth, our retail centres increased their strong market positions.”

At the end of June, the Group was in a strong liquidity position. It held R1.2 billion in cash and R2.3 billion in available bank facilities, despite having reduced its Euro debt by €36 million (R730 million) during the year. Over R5 billion of borrowings was refinanced in 2023, and R2 billion since year-end, at lower margins than previously achieved. The Group managed to maintain its LTV at 36.3% for the financial year.

Hyprop declared a final dividend of 299.3 cents per share, equivalent to 75% of the distributable income from the SA and EE portfolios, for FY2023 which is in line with the revised dividend policy.

Hyprop continually seeks ways to improve its waste, water and energy management. It is rolling out further solar projects on its portfolio and has several programmes to reduce and recycle water, including further installations of eco-friendly toilets. The Group saved 39 078 kl of water for this financial year, equivalent to the water used for 640 average-sized swimming pools. Through its zero-waste strategy, Hyprop plans to further optimise its waste diversion, while prioritising minimal waste.

South African assets: strengthening energy security and value proposition

Annualised trading density grew by 11.8%, outperforming the annual inflation rate of 5.4% in June 2023.

Although loadshedding remained a challenge, seven of the Group’s eight centres in SA have full backup power. Canal Walk is the exception given its historic participation in the City of Cape Town’s curtailment programme. Canal Walk will have full backup power by February 2024.

Some of the highlights in the portfolio were the opening of 11 new stores at Canal Walk and one more since year-end, including SA’s first UNIQ Clothing store. Somerset Mall strengthened its value proposition, welcoming Krispy Kreme and Xpresso Café, and began a redevelopment to accommodate a new Checkers FreshX store and Cinema Connect. At Clearwater Mall, the Piazza upgrade was completed, which has improved trading for the restaurants and food outlet tenants. Rosebank Mall performed strongly, with foot count 19.7% higher and vacancies down to 1.5% in June 2023 from 2.4% in June 2022.

Net property income from the SA portfolio rose to R1.45 billion (2022: R1.41 billion), while property expenses increased by 11%, most of which were diesel and generator costs. Tenant arrears reduced to R47 million from R74 million.

The independent valuation of the portfolio rose to R23.03 billion in June 2023 from R22.66 billion in June 2022 and the implied yield on the portfolio was unchanged at 7.3%. Hyprop spent R236 million on capital projects during the year and a budget of R500 million has been approved for FY2024.

Eastern European assets: maintaining dominant market positions

Management’s focus in 2023 was enhancing the tenant mix as well as the food and entertainment offerings in the centres to maintain their dominant market positions. Trading density was 16.9% higher year on year and the vacancy rate across the portfolio was 0.3% at year-end (2022: 0.7%).

Inflation, including higher fuel costs, is having an impact on consumer income, retail spending and tenant occupancy costs. Hyprop is monitoring tenant performance and granting temporary discounts in some cases, in return for future step-up rentals and/or extensions of lease agreements. Fortunately, inflation and fuel costs have started to come down.

Despite increasing competition in Skopje, North Macedonia, Skopje City Mall reported a 15.6% increase in foot count. It has added new brands, including the first Body Shop in the country. H&M will open its second store in North Macedonia at Skopje City Mall in March 2024. At City Center one East and City Center one West in Zagreb, Croatia, new brands were added, including L’Occitane and Pandora at City Center One East.

The Mall in Sofia, Bulgaria, which is ranked as one of the top three centres in Bulgaria, continues to benefit from its prime location, with a 26.1% increase in foot count. There were 15 new tenant openings during the year. Construction has begun on extending Line 3 of the Metro with a new station next to the Mall, to be completed in 2026. It should improve access to the Mall for the residents of Sofia.

Net property income from the EE portfolio was €43.3 million, above the €38.9 million forecast made in March 2022 when Hyprop acquired the four centres from Hystead. Despite high local inflation, property expenses rose only 5%, as increases in energy prices were mitigated by fixed price contracts and government subsidies. The portfolio was valued at €574.7 million (2022: €573.6 million), with an implied yield of 8.6%. The capital budget for 2023 was €2.6 million, which will rise to €5.7 million in 2024, mostly for the H&M project at Skopje City Mall.

Sub-Saharan Africa: consumers, retailers under pressure

At Ikeja City Mall in Lagos, Nigeria, retailers and consumer incomes are under pressure from the devaluation of the Naira and removal of fuel subsidies. The centre is providing some relief to tenants in good standing for limited periods. The relaxation of exchange controls is a positive development for the planned sale of the centre as it should enable the purchaser, an Actis fund, to obtain US dollars.

In Ghana, despite economic challenges, some key trading metrics in Cedi showed growth, with tenant turnover up 29.2% and annualised trading density 30.3% higher. However, Game’s decision to exit Ghana has had an impact on vacancies in the Sub-Saharan Africa portfolio.

Outlook

Hyprop is pursuing six strategic initiatives. These are to implement sustainable solutions to reduce the impact of loadshedding in SA, reposition the SA and EE portfolios to retain and grow market share, review the portfolios annually to evaluate recycling of assets and new growth opportunities, protect value in the Sub-Saharan Africa portfolio, pending an exit, and maintain the robustness of the balance sheet. Hyprop will also develop non-tangible assets.

“We are optimistic that the peak of inflation and interest rates is approaching,” Wilken says. “However, our financial performance will be negatively impacted in the short term by higher interest costs as borrowings are refinanced and interest rate hedges mature and are replaced at the prevailing high interest rates.”

The Group is forecasting a 10-15% decrease in distributable income a share in the year to June 2024 due to higher interest costs, which is dependent on a number of assumptions, including that no major economic or corporate disruptions occur.

Hyprop remains a well-positioned business with an excellent property portfolio that is underpinned by a sustainable yet simple business model, positive social impact, and a robust governance framework that enables sustainable stakeholder value.

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