Directors' report
for the year ended 30 June 2019
The directors have pleasure in submitting their report, which forms part of the consolidated financial statements for the year ended 30 June 2019.
Responsibility statement
The directors are responsible for the preparation and fair presentation of the consolidated and company financial statements of Hyprop, comprising the statements of financial position, the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, as well as the notes to the financial statements, which include a summary of significant accounting policies and other explanatory notes, in accordance with International Financial Reporting Standards, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and financial pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa. In addition, the directors are responsible for the preparation of the directors' report.
The directors are also responsible for such internal control as the directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error, and for maintaining adequate accounting records and an effective system of risk management.
Introduction and overview
Hyprop, is a specialist shopping centre Real Estate Investment Trust (REIT), with interests in a R51 billion portfolio of shopping centres in South Africa, Eastern Europe and sub-Saharan Africa (excluding South Africa).
The portfolio in South Africa includes super regional centre Canal Walk, large regional centres Clearwater, The Glen, Woodlands, CapeGate, Somerset and Rosebank Malls, regional centre Hyde Park Corner and value centre Atterbury Value Mart.
Hyprop's investments in South-Eastern Europe, held via a 60% interest in UK-based Hystead Limited (Hystead), include interests in Delta City in Belgrade, Serbia; Delta City in Podgorica, Montenegro; Skopje City Mall in Skopje, Macedonia; The Mall in Sofia, Bulgaria, and a 90% interest (effective 54% interest for Hyprop) in City Center One East and City Center One West, both in Zagreb, Croatia.
The sub-Saharan African portfolio (excluding SA) includes interests in Ikeja City Mall in Lagos, Nigeria, Accra Mall and West Hills in Accra, Ghana, Kumasi City Mall in Kumasi, Ghana, and Manda Hill Centre in Lusaka, Zambia.
Strategy
Under Hyprop's new executive team, Hyprop's strategy was interrogated during the year, resulting in a new three-year strategic plan which will see Hyprop adapt to the rapidly evolving retail landscape, disruptive technologies and market conditions.
The refined mission of the group is "to create environments and opportunities for people to connect and have authentic and meaningful experiences, by managing and developing tangible (mixed-use precincts underpinned by dominant retail centres in key economic nodes) and non-tangible assets".
In line with the revised strategy, the group will focus on three strategic areas - the South African property portfolio, the Eastern European property portfolio and relevant non-tangible assets arising from the digital disruption which is transforming many traditional market sectors (including the retail and property sectors). Hyprop will divest of the sub-Saharan African (excluding South Africa) portfolio over the next 12 to 18 months.
The key priorities for the next 18 months are to exit the sub-Saharan African (excluding South Africa) portfolio, reposition the South African portfolio and improve the dominance of the Eastern European portfolio. In addition, we will develop and implement our strategy around digital disruption and technologies in the retail, property and infrastructure space.
From a financial perspective we want to reduce our loan-to-value ratio and restore the group's investment grade credit rating (subject to South Africa's sovereign credit rating). Cash flow management will be a key priority and will form the basis of calculating distributions to shareholders.
Subsidiaries, joint arrangements and joint ventures
Details of investments in subsidiaries, joint arrangements and joint ventures are included in notes E3 – Investments in subsidiaries and E4 – Investments in joint arrangements to the financial statements.
Performance review
Details of the group and company's financial performance for the year ended 30 June 2019 are set out in the attached financial statements.
Net profit for the year attributable to ordinary shareholders decreased from R2 521 million in 2018 to R112 million in 2019. Distributable income for the year decreased by 0,1% from R1 905 million for the year ended 30 June 2018 to R1 903 million. The distribution per share decreased by 1,5% from 756,5 cents to 744,9 cents.
The solid performance by the South African portfolio and strong growth from the Eastern European portfolio were offset by a decrease in distributable income from the sub-Saharan African (excluding South Africa) portfolio. The key elements affecting the performance are:
- Growth in distributable income from the South African portfolio of 6,5% to R1 695 million
- Growth in distributable income from the Eastern European portfolio of 13,5% to R266 million
- A decrease in distributable income from the sub-Saharan African (excluding South Africa) portfolio to a loss of R58 million
- An impairment of the group's investments in sub-Saharan Africa (excluding South Africa) of R1,46 billion.
Dividends declared
The following dividends were declared to shareholders during the year:
- On 31 August 2018 a final dividend of 380,2 cents per share in respect of the year ended 30 June 2018
- On 1 March 2019 an interim dividend of 385,6 cents per share in respect of the six-month period ended 31 December 2018.
On 4 September 2019 the board of directors declared a final dividend of 359,3 cents per share for the year ended 30 June 2019. The total dividend for the year ended 30 June 2019 was 744,9 cents per share.
Directorate and Directors' interests
Directorate
The following changes to the board of directors occurred during the year:
- On 5 July 2018, Zuleka Jasper was appointed to the board as an independent non-executive director and Wilhelm Nauta joined the board as an executive director
- Laurence Cohen resigned as financial director with effect from 31 July 2018
- Brett Till was appointed as chief financial officer effective 1 October 2018
- With effect from 30 November 2018, Lindie Engelbrecht resigned from the board. Thabo Mokgatlha replaced Lindie as chair of the audit and risk committee and as a member of the remuneration and nominations committee with effect from 30 November 2018
- Morné Wilken joined the board of directors on 27 December 2018 and became CEO with effect from 31 January 2019
- Pieter Prinsloo resigned as a director and CEO of Hyprop with effect from 30 January 2019.
Directors who served during the financial year are as follows:
| Independent non-executive directors |
Non-executive directors |
Executive directors |
| GR Tipper (Chairman) | KM Ellerine | AW Nauta (CIO) |
| L Engelbrecht | L Norval | BC Till (CFO) |
| MJ Lewin | MC Wilken (CEO) | |
| N Mandindi | PG Prinsloo (former CEO) | |
| TV Mokgatlha | LR Cohen (former financial director) | |
| S Shaw-Taylor |
Directors' interests in shares of the company
The interests of the directors in the shares of the company at 30 June 2019 were:
| 2019 | 2018 | |||||||
| Beneficial | Non-beneficial | Beneficial | Non-beneficial | |||||
| Direct | Indirect | Indirect | Direct | Indirect | Indirect | |||
| NON-EXECUTIVE | ||||||||
| Gavin Tipper | 9 000 | – | – | 4 000 | – | – | ||
| Kevin Ellerine | – | 378 000 | – | – | 378 000 | – | ||
| Nonyameko Mandindi | – | 2 940 | – | – | 2 940 | – | ||
| Louis Norval | – | – | – | – | – | 3 447 855 | ||
| Stewart Shaw-Taylor | 21 500 | – | – | 21 500 | – | – | ||
| EXECUTIVE | – | – | – | n/a | n/a | n/a | ||
| AW Nauta(1) | 26 754 | – | – | n/a | n/a | n/a | ||
| BC Till(1) | 18 927 | 1 200 | – | n/a | n/a | n/a | ||
| MC Wilken(1) | 43 190 | 670 | – | n/a | n/a | n/a | ||
| 119 371 | 382 810 | – | 25 500 | 380 940 | 3 447 855 | |||
(1) Includes shares awarded under the Hyprop Employee Share Scheme.
There have been no changes to the above interests between 30 June 2019 and the date of this report other than:
- Gavin Tipper purchased 4 500 Hyprop ordinary shares on 17 – 18 October 2019
- MC Wilken was awarded 48 043 shares under the Hyprop Employee share scheme on 1 July 2019
- AW Nauta was awarded 24 450 shares under the Hyprop Employee share scheme on 1 July 2019
- BC Till was awarded 25 183 shares under the Hyprop Employee share scheme on 1 July 2019.
Directors' interest in contracts
No material contracts in which the directors have an interest were entered into during the year, other than the transactions detailed in note J1 – Related-party transactions and balances to the financial statements.
Capital structure and borrowings
Share capital
Details of the company's authorised and issued share capital are set out in note G1 – Share capital and treasury shares of the financial statements.
No ordinary shares were issued during the year.
There have been no changes to the authorised or issued share capital between year end and the date of this report.
Borrowings
In terms of the company's memorandum of association and the JSE Listings Requirements, the company's borrowings are limited to 60% of its gross asset value as reflected on the company's consolidated statement of financial position.
In February 2019, Moody's lowered Hyprop's long-term national scale issuer rating to Aa3.za from Aa1.za and affirmed the short-term national scale rating of Prime-1.za. The main reason cited for the decrease in the rating is that Moody's estimated that Hyprop's debt-to-asset ratio, adjusted for the full consolidation of Hystead, had increased to 41% at 30 June 2018, from 33,4% in 2017, as a result of debt funded acquisitions in Eastern Europe. Moody's further stated that Hyprop will rely on external debt financing to cover R5 billion of debt coming due in the next 18 months, including the Hystead debt that it guarantees.
Hyprop has taken cognisance of Moody's points which led to two key initiatives – (1) refinancing the portion of debt maturing up to June 2020 and (2) lowering of our LTV to 35% (as considered appropriate and calculated by Moody's). Good progress has been made with these initiatives, particularly with regards to the refinancing of short-term debt.
We will endeavour to restore Hyprop's credit rating to investment grade (subject to South Africa's sovereign credit rating) by 31 December 2020 and will continue to engage with Moody's in that regard.
Hyprop's loan-to-value (LTV) and interest cover ratios are set out in note H4 – Covenants and capital management to the financial statements.
Tax status
Hyprop is a REIT (Real Estate Investment Trust) in accordance with the South African Income Tax Act (the Act) and in terms of the JSE Listings Requirements.
In terms of section 25BB of the Act, the twice yearly dividend declared to Hyprop shareholders is deductible against Hyprop's taxable income. As a consequence of this deduction, South African income taxation is usually reduced to zero, and dividends received by South African Hyprop shareholders are free of any dividend withholding tax.
Acquisitions and Disposals
On 4 January 2019, Lakefield Office Park was sold for a consideration of R200 million.
On 28 June 2019, AttAfrica, in which the group has a 37,5% interest, disposed of its interest in Achimota Retail Centre, in Accra, Ghana.
Subsequent to year end, Hyprop Mauritius (50%) and AttAfrica (50%) disposed of their interests in Manda Hill Shopping Centre, in Lusaka, Zambia.
Special resolutions
The following special resolutions were passed at the company's annual general meeting held on 30 November 2018:
| 1. | The company or any of its subsidiaries were authorised by way of a general authority to acquire ordinary shares issued by the company, in terms of sections 46 and 48 of the Companies Act, subject to the provisions of the JSE Listings Requirements |
| 2. | The board of directors of the company may, subject to compliance with the requirements of the company’s Memorandum of Incorporation, the Companies Act and the JSE Listings Requirements, authorise the company to provide direct or indirect financial assistance, as contemplated in section 45 of the Companies Act, by way of loans, guarantees, the provision of security or otherwise, to any of its present or future subsidiaries and/or any other company or corporation that is or becomes related or inter-related (as defined in the Companies Act) to the company for any purpose or in connection with any matter, such authority to endure for a period of not more than two years. |
Administration and management
Property and asset management in Hyprop's South African operations are fully internalised. No property or asset management fees were paid to third parties during the year in South Africa.
Audit and risk committee report
The report of the audit and risk committee is set out in the Audit and risk committee's report of the annual financial statements.
The committee has fulfilled its responsibilities during the year, including having satisfied itself as to the independence of the external auditor and their suitability for reappointment for the ensuing year.
Auditor
KPMG Inc. was reappointed as auditor in accordance with part C of section 90 of the Companies Act of South Africa. The external auditor's report to the shareholders on whether the financial statements are fairly presented in accordance with the applicable financial reporting framework follows in the Independent auditor’s report.
Going concern
The financial statements are prepared on the basis of accounting policies applicable to a going concern. This basis takes into account that funds will be available to finance future operations and that the realisation of assets and settlement of liabilities will occur in the ordinary course of business.
At 30 June 2019 the company's current liabilities exceeded its current assets by R293 million. The increase in current liabilities is due to long-term loans maturing in less than one year. The company proposes to settle these short-term borrowings from existing cash balances and existing and new bank facilities.
In March 2019 the company raised R500 million by the issue of new bonds. R358 million of these proceeds (included in cash balances at 30 June 2019) are earmarked to settle R358 million of bonds which mature in July 2019.
At 30 June 2019 the company had undrawn revolving credit facilities of R500 million. Subsequent to 30 June 2019 term sheets have been signed with commercial banks for an additional R1,1 billion of bank facilities for between three and five-year terms.
Accordingly, the directors consider that the company and the group have adequate resources to continue operating for the ensuing 12 months and that it is appropriate to adopt the going concern basis in preparing the company and group financial statements.
Trading statements
Hyprop uses dividend per share as the relevant measure of its financial results for trading statement purposes.
Approval of the consolidated financial statements
The financial statements of Hyprop Investments Limited, as identified in the first paragraph, were approved by the board of directors on 23 October 2019 and are signed on its behalf by:
GR Tipper
Chairman
MC Wilken
Chief executive officer
BC Till
Chief financial officer
Johannesburg
23 October 2019