Executives' report
| Morné Wilken CHIEF EXECUTIVE OFFICER |
Brett Till CHIEF FINANCIAL OFFICER |
Wilhelm Nauta CHIEF INVESTMENT OFFICER |
Overview
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Introduction and overview
2019 was a year of significant change for Hyprop. Arising from the resignations of the former CEO and CFO, both of whom had been with the group for over a decade, Morné Wilken (CEO) and Brett Till (CFO) were appointed, and together with Wilhelm Nauta (CIO), comprise the new executive team.
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).
The key priorities for the next 18 months are to exit the sub-Saharan African (excluding South Africa) portfolio, to reposition the South African portfolio and to improve the dominance of the Eastern European portfolio. In addition, we will develop and implement a strategy around digital disruption and technologies in the retail, property and infrastructure spaces.
From a financial perspective we aim 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 cash-backed income will form the basis of calculating distributions to shareholders.
Market conditions in the South African and sub-Saharan African regions have deteriorated and tenants face significant challenges as a result of the poor economic growth and currency volatility, respectively. Consumer demand remains depressed and shopping preferences are changing, impacting on the ability to maintain rental rates and growth in distributions.
New appointments to the board, and at operational levels, have been made to ensure the group has the necessary skills to deal with the challenges and opportunities presented by the strategic initiatives. Further details on specific actions being taken to meet these challenges are included in the individual portfolio reviews on the following pages.
These changes, the decision to dispose of the group's sub-Saharan Africa assets and the refinancing of Dollar denominated debt with Rand denominated debt, due to the impairment of the group's sub-Saharan Africa interests based on the anticipated sales proceeds, have/will negatively impact distributable income for the 2019 and the 2020 financial years. The group believes these are necessary for the group's long-term sustainability and anticipate positive growth in distributable income in 2021 and beyond.
Distributable income decreased by 0,1% from R1 905 million for the year ended 30 June 2018 to R1 903 million. The distribution per share for the year decreased by 1,5% from 756,5 cents to 744,9 cents as a result of the increase in the weighted average number of shares in issue during the year. 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 portfolio.
Strategic review
Following the appointment of the new executive team Hyprop's strategy was interrogated, resulting in a new three-year strategic plan that will see Hyprop adapt to the rapidly evolving retail landscape, disruptive technologies and market conditions.
Underlying the group’s new vision and mission is our “Why” – why do we exist:
“To create environments and opportunities for people to connect and have authentic and meaningful experiences.”
The group’s vision remains largely unchanged:
“To be the leading South African based REIT through managing and developing tangible and non-tangible assets”.
How do we aim to achieve these objectives:
“By owning and managing mixed-use precincts underpinned by dominant retail centres in key economic nodes in South Africa and Europe.”
Arising from the revised vision, why and how, the group will exit its sub-Saharan African portfolio to focus on its South African and European portfolios. Consideration will be given to expanding the European geographies in which the group invests to include all of Eastern Europe and not only South-Eastern Europe as at present.
Mixed-use precincts are increasingly becoming hubs for economic and social activity internationally and in South Africa. We believe that these precincts will provide better opportunities for sustainable growth in the long term. In line with our vision, we will focus on owning retail centres in our South African and Eastern European portfolios which are focal points within mixed-use precincts and provide a range of retail, entertainment and related services to residents and workers within the precinct. It is not our intention to become developers of mixed-use precincts, but rather to play a leading role within the precinct and provide a strong retail underpin.
The group's activities will be expanded to embrace and develop relevant non-tangible assets arising from the digital disruption which is transforming many traditional market sectors (including the retail and property sectors). Our disruptive technology strategy is multifaceted, and will include:
- Increasing the use of technology in our business to improve efficiencies
- Using technology to improve interaction with shoppers, particularly millennials who represent a growing proportion of consumers, and whose needs and shopping habits are changing the way we and our tenants approach our businesses
- Embracing online retailers and providing facilities for them to either distribute their products via our malls or through co-trading environments within the malls
- Investing in the development of disruptive technologies which will have a direct impact on our business – be it in the property or retail sectors. This will include the funding and development of new technologies in collaboration with technology innovators
Further details of specific elements of this strategy will be communicated in due course.
Strategic priorities, which align with the group's overall strategic objectives, have been set for each of the group's focus areas and are explained in more detail in the relevant sections which follow.
Organisation structure
In order to achieve the group's strategic objectives various changes have been made to the organisational structure.
A new strategic committee (Stratco), comprising the three executive directors, portfolio executives Nicole Greenstone and Wayne Abbeglen, and national development executive Steven Riley, was established. Stratco's mandate is to oversee all aspects of the group's operations and divisions, including setting strategic priorities for each division and allocation of resources across the group. Stratco meets monthly to set and review progress on achieving strategic priorities and overall group financial performance.
The existing executive committees (Excos) for the South African and Eastern European portfolios have been restructured and revised mandates for the committees put in place. A new Exco was recently established under Hyprop's leadership for the sub-Saharan African portfolio and includes representatives of AttAfrica. Each Exco comprises at least three Stratco members as well as senior executives from the relevant regions covering operations, finance, human resources, IT, marketing and legal. The Excos are responsible for driving the operational and financial performance of the regional businesses, as well as collaboration between the different divisions and between the malls within each division.
Portfolio executives are responsible for the strategic development of their respective portfolio malls, including tenant profiling and selection, leasing strategies, and planning and assessment of major capital projects. There are currently two portfolio executives in the South African portfolio (with a possible third to be appointed in the 2020 financial year) and one in the Eastern European portfolio. A new portfolio executive was recently appointed for the sub-Saharan African (excluding South Africa) portfolio to enable the asset management role to be done in-house. The portfolio executive's main role is to provide guidance and support to the general managers of each mall, who are in turn responsible for implementing the mall strategy and day-to-day operations and performance of their mall.
Collaboration across the group is a key element to our future success. Existing operating and support structures have been reorganised to ensure higher levels of collaboration between divisions and malls, which should result in improved efficiencies and economies of scale.
The group's support functions for finance, capital projects and developments, human resources, and legal and compliance are based in Johannesburg and provide support to all group operating divisions, including Eastern Europe and sub-Saharan Africa (excluding South Africa).
Given the importance of debt and capital management, a specific role was created to manage all aspects of the group's borrowings. The benefits of this revised focus are evident through the group's refinancing of R8,5 billion of debt during the year, the increase in available borrowing facilities and the reduction in the cost of borrowing.
Portfolio reviews
South African portfolio
The shopping centre 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.
| Distributable income | Gross asset value | |
 |
Key priorities Assess and reposition malls:
Increase trading densities Increase non-GLA revenue |
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Financial performance
| 30 June 2019 R000 |
30 June 2018 R000 |
|||
|---|---|---|---|---|
| Revenue | 3 003 847 | 2 889 135 | ||
| Expenses | (1 092 420) | (956 146) | ||
| Net property income | 1 911 427 | 1 932 989 | ||
| Other operating expenses | (44 969) | (59 707) | ||
| Net interest | (239 190) | (280 812) | ||
| Net operating income before fair value adjustments | 1 627 268 | 1 592 470 | ||
| Adjustments to calculate distributable income | 67 743 | (796) | ||
| Distributable income | 1 695 011 | 1 591 674 |
Distributable income from the South African portfolio increased by 6,5% over 2018, in line with the guidance provided in September 2018. This was achieved despite a further deterioration in the South African economy and consumer confidence, particularly in the second half of the financial year.
Total revenue (before the lease straight-line adjustment) increased by 6,6% over the 2018 year, largely as a result of a 16% increase in municipal and other cost recoveries. Rental income increased by 6% having been somewhat protected from the economic climate by contractual rental escalations.
Trading density across the retail portfolio increased by 0,6% year on year and the overall rent to turnover ratio increased from 9,1% to 9,4%.
| Trading density by centre (movements reflect year-on-year changes) | Trading density (SA portfolio by month) |
 |
 |
The opening of the new food court and play area at Woodlands in May 2019 had a positive effect, with foot count at the mall up 13% and trading density up 2,4% in May and June 2019. Canal Walk, The Glen, Somerset Mall, Rosebank Mall and Atterbury Value Mart also achieved good growth in trading densities in the last quarter of the financial year increasing by an average of 4,3% year on year.
Property expenses increased by 14% compared to the year ended 30 June 2018, due to a 16% increase in non-controllable expenses (mainly rates, taxes and power-related costs). By contrast, controllable costs (excluding bad debts and depreciation), increased by 7,5%. The combined effect was an increase in the portfolio gross cost to income ratio from 33,0% in 2018 to 35,4% in 2019. On a net basis, the cost to income ratio increased from 15,8% in 2018 to 17,1% in 2019.
| Gross cost to income ratio |
 |
Other operating expenses decreased due to an increase in asset management fees received from Hystead as a result of the additional properties acquired in April 2018, and savings in staff and related costs.
Tenant arrears
At 30 June 2019 rental arrears were R31,5 million, compared to R18,9 million at 30 June 2018. Following the adoption of IFRS 9: Financial Instruments and the requirements relating to how doubtful debt provisions should be calculated, doubtful debt provisions increased to R26,8 million. The increase above this amount reflects the financial pressure on the consumer, and ultimately on retailers. At 30 June 2019 the group had no material doubtful debt exposure to, or arrear rentals owing by, any particular tenant or tenant group, including the Edcon Group (Edcon).
Lettings and vacancies
Over the past four to five years rental escalations have outpaced South Africa's economic growth and inflation rates and the growth in trading densities at our malls (as indicated in the below graph), leading to pressure on rental rates.
| Historic trading environment |
 |
Due to the current economic environment, the significant increases in other occupancy costs borne by tenants and low growth in trading densities, rent reversions were negative 9%, with a positive weighted average escalation rate of 7%. Reversions on renewals were negative 7,3%, compared to negative 12,9% on new lettings.
As noted in the prospects below, we anticipate a reduction in distributable income in the 2020 financial year due to the anticipated impact of negative rent reversions. By the end of the 2020 financial year approximately 50% of the South African portfolio leases will have been renewed and, subject to no further deterioration in the South African economy, we expect a reduction in the risk of further aggregate rent reversions thereafter.
New lettings and renewals – South Africa
| Leasing activity | % of total portfolio |
Rentable area (m²) |
Rental growth (%) |
Contractual escalation (%) |
|
|---|---|---|---|---|---|
| Retail | 17,2 | 113 795 | (9,1) | 7,0 | |
| New lettings | 6,5 | 42 839 | (12,9) | 6,5 | |
| Renewals | 10,7 | 70 954 | (7,3) | 7,3 | |
| Offices | 15,2 | 6 626 | (8,7) | 6,7 | |
| Total | 17,0 | 120 420 | (9,1) | 7,0 |
| Retail vacancy – South Africa |
 |
Vacancy levels across the retail portfolio decreased to 0,8% (5 103m2) at 30 June 2019, largely due to reductions at The Glen, Atterbury Value Mart and Clearwater Mall. Office vacancies were 4 638m2 (10,7%), mainly due to an increase in vacancy levels at Hyde Park Corner's office component.
The strategy to reposition the South African portfolio is designed to drive positive growth in trading densities, thereby reducing rent ratios for tenants. Over R360 million of capital expenditure is budgeted for the 2020 financial year towards achieving these objectives (see following below). We are also evaluating projects aimed at reducing occupancy costs for tenants, such as the introduction of solar plants at our malls, water saving initiatives and other "green" technologies.
At 30 June 2019 Edcon occupied 57 145m2 (2018: 66 781m2) in Hyprop malls, equivalent to 8,1% (2018: 9,2%) of GLA. During the year Hyprop initiated a plan to reduce our exposure to Edcon by 15 910m2. By 30 June 2019, 9 636m2 of this space had been re-let and it is anticipated that the remaining 6 274m2 will be re-let during the 2020 financial year. In re-letting the space vacated by Edcon we plan to introduce new strong anchor tenants to our centres that should positively impact trading densities.
Valuations
The market value of the South African portfolio, as determined by the group's independent valuers, decreased by R143 million (0,5%) from R28,77 billion (excluding assets held-for-sale) at 30 June 2018 to R28,64 billion at 30 June 2019. The main reasons for the decrease are negative rent reversions and the impact of the two-year Edcon restructure. The valuations are based on an average discount rate of 12,5% (2018: 12,5%) and an average exit cap rate of 6,8% (2018: 6,8%). The resultant average implied yield on the portfolio is 7,2% (2018: 7,1%).
| Value attributable to Hyprop | Value per m2 | |||
|---|---|---|---|---|
| Property valuations – South Africa | Rentable area (m2) |
30 June 2019 R000 |
30 June 2018 R000 |
30 June 2019 R000 |
| Shopping centres | 653 509 | 27 089 719 | 27 351 847 | 45 455 |
| Value centres | 48 649 | 1 411 000 | 1 303 000 | 29 004 |
| Total retail | 702 158 | 28 500 719 | 28 654 847 | 44 315 |
| Total standalone offices1 | 4 468 | 136 000 | 323 000 | 30 437 |
| Investment property – independent valuations | 706 626 | 28 636 719 | 28 977 847 | 44 227 |
| 1 | Reduction from 2018 to 2019 as a result of the disposal of Lakefield Office Park (2018 value: R198 million). |
Capital expenditure
Capital projects with a value of R132 million were completed during the year. A further R87 million of projects were delayed to the 2020 financial year. New capital expenditure for the 2020 financial year has been budgeted at R363 million, and is focused on repositioning our malls and improving trading densities.
| Capital expenditure |  |
 |
Included in yield-driven projects for 2020 is an amount of R54 million relating to new tenant installations as a result of the reduction in space occupied by Edcon, as well as R69 million to be spent on tenant installations for the replacement and/or relocation of tenants as we fine tune our tenant mixes in line with changing customer preferences and to strengthen tenant profiles. Trading density improvement projects are aimed at improving shopper experience and dwell times. These include the development of a technology based customer interaction platform which will allow improved connectivity with "new-age" shoppers, enhancing the food and entertainment offerings at many of our malls, upgrading parking systems (including use of better technology to reduce customer frustration and improve controls), installation and improvements to back-up power supply systems (to ensure continuous trading) and air-conditioning systems. Other projects under consideration are centred on creating co-working and co-trading environments for new entrants to the retail sector to showcase and promote their products and services in a flexible and affordable manner.
Disposals
The sale of Lakefield Office Park was finalised on 4 January 2019 and the sale proceeds of R200 million were received.
Eastern Europe
Hyprop's Eastern European investments, 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.
| Distributable income | Gross asset value | |
 |
Key priorities Retain dominance:
Leverage SA expertise Formalise growth strategy |
 |
In line with the provisions of the Hystead shareholders' agreement, Hyprop accounts for the investment in Hystead as a financial asset.
Financial performance
| Audited year ended 30 June 2019 €000 |
Audited year ended 30 June 2018 €000 |
Year ended 30 June 2019 €000 |
Year ended 30 June 2018 €000 |
||
|---|---|---|---|---|---|
| Dividend income | 221 190 | 180 525 | 13 080 | 11 820 | |
| Guarantee fees | 40 542 | 46 671 | 2 397 | 3 051 | |
| Foreign exchange gains | 4 284 | 7 277 | |||
| Distributable income | 266 016 | 234 473 | 15 477 | 14 871 |
Distributable income from Hystead, comprising dividends from Hystead and guarantee fees from PDI Investment Holdings (PDI), increased by 13% from R234 million to R266 million.
Trading conditions in the region remain favourable with all sites, other than Delta City Belgrade, achieving growth in net operating income. The reduction in net operating income for Delta City Belgrade was mainly due to the substantial increase in electricity prices, and the conversion of the fixed rental with Inditex to turnover based rental. The average trading density for the portfolio increased by 3.7% from 2018.
| Trading density per month | Net operating income |
 |
 |
In June 2019 The Mall in Sofia, Bulgaria, successfully completed a 12 000m2 extension. The extension added 40 new stores, an increase from 182 to 222, making it the second largest shopping centre in Bulgaria at 62 000m2 . A diverse portfolio of brands has been added to The Mall, including a modernised version of Billa supermarket (one of Central and Eastern Europe's leading supermarket chains), one of the first Pepco stores in Sofia, a Ciela book store on two levels, Scandinavian home and living retailer Jysk, and a renovated Hippoland kids store. In addition, LPP, a leading international fashion group from Poland, opened the biggest Sinsay store (900m2) in Sofia in August. Initial feedback after the opening has been positive.
Various other investment projects are planned for the new financial year to maintain the portfolio's dominance. Skopje City Mall is undergoing an 18-month project to right-size various tenants, introduce additional international retailers, improve foot-flow and public and common areas, and refresh the food court and entertainment offerings. The project is budgeted to be earnings accretive and expected to be completed by March 2021 at an estimated cost of EUR6 million.
Investment property
| 30 June 2019 '000 |
30 June 2018 '000 |
||
|---|---|---|---|
| Investment property – independent value (100%) | €795 732 | €771 800 | |
| Hyprop attributable share1 | €458 539 | €456 330 | |
| Hyprop attributable share1 | R7 386 292 | R7 302 740 | |
| Rentable area m2 | 241 326 | 230 584 | |
| Value per m2 | €3 297 | €3 347 | |
| 1 | Based on Hyprop's 60% effective interest in Hystead, other than Hystead's Croatian assets in which Hyprop has a 54% effective interest due to the 10% minority shareholder in Croatia. |
At 30 June 2019 Hystead's investment property portfolio was valued at EUR796 million (2018: EUR772 million) based on a weighted average capitalisation rate of 7,6% (2018: 7,5%). This is equivalent to an implied forward yield of 8,0%. Hyprop's attributable share of the Hystead portfolio was R7,4 billion (EUR459 million) (2018: R7,3 billion (EUR456 million)).
Vacancies
The Hystead portfolio remains almost fully let with a vacancy level of 0,5% (2018: 0,1%) due mainly to the new extension at Skopje City Mall.
| Retail vacancy – Eastern European portfolio |
 |
Sub-Saharan Africa (excluding SA)
| Distributable income | Gross asset value | |
 |
Key priorities
|
 |
Pursuant to the strategy review during the year, Hyprop will look to divest of the sub-Saharan African portfolio over the next 12 to 18 months, in order to focus on South Africa and Eastern Europe going forward. We have made good progress in this regard.
At 30 June 2019 the sub-Saharan African portfolio included interests in Accra Mall and West Hills Mall in Accra, Ghana; Kumasi City Mall in Kumasi, Ghana (all held via the group's 37,5% interest in AttAfrica); Manda Hill Centre in Lusaka, Zambia (held jointly with AttAfrica) and Ikeja City Mall in Lagos, Nigeria.
In June 2019, AttAfrica disposed of its interest in Achimota Retail Centre, in Accra, Ghana. Hyprop's share of the net disposal proceeds, being USD16 million, was received by Hyprop Mauritius on 26 June 2019.
Subsequent to year-end, Hyprop Mauritius (50%) and AttAfrica (50%) disposed of their interests in Manda Hill Shopping Centre. The group's interest in Manda Hill is accounted for as an investment in a joint venture and is included under loans receivable on the statement of financial position at 30 June 2019. The carrying value of the investment has been adjusted in line with Hyprop's share of the total net sale proceeds, being approximately USD50 million.
Progress is being made on the disposal of the group's remaining sub-Saharan African assets and the interest in Ikeja City Mall is classified as an asset held-for-sale at 30 June 2019.
Net proceeds from the disposals will be applied to reduce the group's US Dollar denominated debt.
In light of the decision to dispose of the sub-Saharan African portfolio, the carrying amounts of the remaining properties have been impaired to align with their anticipated sales proceeds. The result of these adjustments is an impairment/fair value adjustment of Hyprop's investments in sub-Saharan Africa of R1,46 billion at 30 June 2019.
Financial performance
| Sub-Saharan Africa | 30 June 2019 R'000 |
30 June 2018 R'000 |
|
| Revenue | 214 000 | 224 578 | |
| Expenses | (86 634) | (93 746) | |
| Net property income | 127 366 | 130 832 | |
| Other operating expenses | (914) | (1 095) | |
| Net interest paid | (221 965) | (1 461) | |
| Net operating income before fair value adjustments | (95 513) | 128 276 | |
| Adjustments to calculate distributable income | 37 154 | (49 909) | |
| Distributable income | (58 359) | 78 367 |
The investments in sub-Saharan Africa were affected, inter alia, by weaker local currencies against the US Dollar and certain South African retailers that have curtailed their operations. This resulted in an increase in vacancies and a need to re-tenant at lower yields. As a consequence, cash flow in Hyprop Mauritius, after servicing borrowings, was negative.
Accounting income from the sub-Saharan African portfolio comprises operating profits from Ikeja City Mall and interest received on loans advanced by Hyprop Mauritius to AttAfrica and Manda Hill. Ikeja City Mall and Accra Mall (owned by AttAfrica) continued to trade in line with expectations and contributed positively to distributable income for the year. Interest income from AttAfrica is only recognised on the net unimpaired loan balance and to the extent it is received in cash. This resulted in the increase in net interest paid for the year.
Distributable income from the sub-Saharan African investments reduced from R78 million for the year ended 30 June 2018 to a loss of R58 million after deducting interest paid in Hyprop Mauritius. The negative distributable income in 2019 was exacerbated by the devaluation of the Rand against the Dollar from 2018 to 2019.
Operations and structure
Management have reviewed the business model of AttAfrica and are implementing certain changes with the objective of preserving the value of the assets until the disposal process is completed. These include the internalisation of the asset management function, retaining and hiring key staff (including a new portfolio executive who was recruited post-year-end), which should result in clearer lines of communication between operations and shareholders, re-organising arrangements with in-country partners, restructuring portions of the in-country bank debt to reduce borrowing costs and restructuring the shareholder funding arrangement from 1 January 2020.
Many questions have been asked by investors about the similarities between the group's investments and funding structures in Africa and Eastern Europe. We have analysed the main risk factors and lessons learnt from the group's experience in Africa and how these risks are mitigated in our investments in Eastern Europe, as set out below:
| Sub-Saharan Africa | Eastern Europe | |||||
| Impact of currency depreciation |  |
Volatile with significant depreciation against USD over time. |  |
Local currency is Euro or pegged to Euro in two countries. Other currencies relatively stable against Euro. | ||
| Cost of hard currency debt | |
Cost of debt very close to yield on property assets. | |
Average cost of debt 3% compared to property yields of 8%. Healthy interest cover ratio of 2,5 times. | ||
| Internal versus external asset management | |
External asset management. | |
On-site internal asset management team based in Europe. | ||
| Alignment of shareholders' interests | |
Multiple shareholders across multiple jurisdictions, each with different objectives. | |
PDI is only partner in Hystead. Interests of shareholders are aligned in terms of capital and income growth/distributions. One local minority shareholder in Croatian assets with no minority protections. | ||
| Skin in the game | |
Financial investment and risk not proportionate to shareholding. | |
PDI has invested R1,4 billion in Hystead, which is at risk. Compensation is paid to Hyprop in return for Hyprop guaranteeing more than its pro rata proportion of debt. | ||
| Specification levels of malls | |
Developed malls are oversized and too high-spec for the environment. | |
Appropriate specifications for market and environment. | ||
| Risk of greenfields developments | |
Mall developments undertaken based on South African development model. | |
All malls were acquired with trading histories and known market shares and positioning. | ||
| Secure local tenants | |
Reliance on South African based retailers as anchor tenants. | |
Strong support and demand for space from local tenants and retailers. | ||
| GDP and GDP growth | |
Volatile GDP growth of commodity based economies. | – | Stable positive GDP growth. |
Group financial results and analysis
| Distribution | NAV per share | |
 |
Key priorities
|
 |
Distributable income and dividend
Distributable income 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 portfolio.
| 30 June 2019 | 30 June 2018 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| South Africa R000 |
Eastern Europe R000 |
Sub-Saharan Africa R000 |
Group R000 |
South Africa R000 |
Eastern Europe R000 |
Sub-Saharan Africa R000 |
Group R000 |
||||
| Net income before fair value adjustments | 1 627 268 | 266 016 | (95 513) | 1 797 771 | 1 592 470 | 234 473 | 128 276 | 1 955 220 | |||
| Adjustments to calculate distributable income | 67 743 | – | 37 154 | 104 897 | (797) | – | (49 909) | (50 706) | |||
| Straight-line rental income accrual | 81 399 | – | 6 488 | 87 887 | 4 696 | – | (848) | 3 847 | |||
| Non-controlling interest | – | – | 30 959 | 30 959 | – | – | 2 600 | 2 600 | |||
| Taxation paid | – | – | (427) | (427) | – | – | (4 381) | (4 381) | |||
| Net interest adjustments | – | – | 134 | 134 | – | – | (47 279) | (47 279) | |||
| Other fair value adjustments – Edcon | (12 705) | – | – | (12 705) | – | – | – | – | |||
| Capital items for distribution purposes | (951) | – | – | (951) | (5 493) | – | – | (5 493) | |||
| Distributable income | 1 695 011 | 266 016 | (58 359) | 1 902 668 | 1 591 673 | 234 473 | 78 368 | 1 904 514 | |||
| % change | 6,5 | 13,5 | – | (0,1) | – | – | – | – | |||
| Weighted average number of shares | 255 429 238 | 251 741 343 | |||||||||
| Shares in issue for calculating distribution per share | |||||||||||
| – first half | 255 540 828 | 247 995 018 | |||||||||
| – second half | 255 309 759 | 255 448 256 | |||||||||
| Distribution per share (cents) | |||||||||||
| – first half | 330,5 | 53,3 | 1,7 | 385,6 | 313,0 | 47,1 | 16,1 | 376,3 | |||
| – second half | 333,1 | 50,9 | (24,6) | 359,3 | 319,2 | 46,1 | 15,0 | 380,3 | |||
| Total distribution per share (cents) | 663,6 | 104,1 | (22,9) | 744,9 | 632,2 | 93,2 | 31,1 | 756,5 | |||
| % change | 5,0 | 11,8 | (1,5) | ||||||||
The weighted average number of shares used to calculate the distribution per share increased by 3,7 million from 251,7 million to 255,4 million, primarily as a result of the 7,5 million new shares issued in April 2018 when additional capital was raised.
Cash backed distributions
Cash flow management is a key priority and cash backed income forms the basis of calculating distributions to shareholders. The table below provides a reconciliation of cash generated from operations to distributable income for each operating division.
| 2019 | South Africa R000 |
Eastern Europe R000 |
Sub-Saharan Africa R000 |
Group R000 |
|
| Cash generated from operations | 1 989 011 | 44 826 | 116 095 | 2 149 932 | |
| Working capital changes | (9 272) | 18 490 | 9 218 | ||
| Depreciation | (40 523) | (1 686) | (42 209) | ||
| Straight-line rental income accrual | (81 399) | (6 489) | (87 888) | ||
| Other non-cash items | (4 063) | 41 | (4 022) | ||
| Fair value adjustment – Edcon | 12 705 | 12 705 | |||
| Net interest paid | (239 190) | (221 965) | (461 155) | ||
| Dividends received | 221 190 | 221 190 | |||
| Net income before fair value adjustments | 1 627 269 | 266 016 | (95 514) | 1 797 771 | |
| Straight-line rental income accrual | 81 399 | 6 489 | 87 887 | ||
| Non-controlling interest | 30 959 | 30 959 | |||
| Taxation expense – Mauritius | (427) | (427) | |||
| Sub-Saharan Africa | 134 | 134 | |||
| Fair value adjustment – Edcon | (12 705) | (12 705) | |||
| Capital items for distribution purposes | (952) | (952) | |||
| Distributable income | 1 695 011 | 266 016 | (58 359) | 1 902 668 |
As is evident from the table above, cash generated from operations less net interest paid from the South African portfolio exceeded distributable income for the year.
Approximately 90% of the dividend income from Hystead for the year was received in cash before 30 June 2019, with the balance received in September 2019, before payment of the final dividend for the year ended 30 June 2019 to Hyprop shareholders.
Hyprop has historically paid out 100% of its distributable income as a dividend each year. In light of the current economic climate, participants in the real estate sector have started to debate the sustainability of this practice and its long-term impact on LTV ratios, particularly when growth in property values slows or becomes negative. Market sentiment is shifting in favour of reduced pay-out ratios which will allow REITs to fund capital expenditure partly out of operating profits, and thereby strengthen their balance sheet. The group is considering a reduced dividend pay-out ratio. Any decision in this regard will be communicated to the market in advance of it being implemented.
Interests in investment property
| Investment property |
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The total value of the shopping centres in which Hyprop has interests in South Africa, Eastern Europe and sub-Saharan Africa was R51 billion at 30 June 2019. Hyprop's attributable share of this value was R39,5 billion and is reflected on the consolidated statement of financial position as follows:
- South African investment properties – R28,6 billion;
- The group's attributable share of the Hystead investment properties of R7,4 billion is reflected as a financial asset of R218 million (net of deferred gains);
- Ikeja City Mall in Nigeria (included in assets held-for-sale) – R2,0 billion; and
- The group's interest in the net assets of the remaining sub-Saharan African portfolio is reflected as loans receivable from AttAfrica and Manda Hill of R1,3 billion (after impairments), under current assets.
All investment properties are valued by independent valuers at least annually.
The impairments of the loans receivable from AttAfrica and Manda Hill were calculated with reference to the underlying independent valuations of the investment properties, anticipated proceeds which will be received on disposal of the investment properties, the impact of current year losses in AttAfrica and Hyprop Mauritius, and expected credit losses until 30 June 2020, by which date it is anticipated that the investments in sub-Saharan Africa will be sold.
Investment in Hystead – financial asset
As a result of the provisions of the suite of agreements which govern the relationship between the shareholders of Hystead, Hyprop accounts for its interest in Hystead as a financial asset. The value of the financial asset is calculated as the present value of the anticipated dividends and guarantee fees estimated to be received by Hyprop from Hystead and PDI respectively.
The value of the financial asset increased from R153 million at 30 June 2018 to R218 million at 30 June 2019 mainly as a result of growth in net operating income for the underlying property companies, the effect of the new supermarket opened in The Mall in Sofia and the reduction in borrowing costs following the refinancing of debt during the year.
In line with the group's objective of improving the clarity of its financial reporting, we have provided additional financial information for Hystead, including an indicative balance sheet and statement of operating/distributable income for the year ended 30 June 2019, on page 195 of the integrated annual report. This information has not been audited or reported on by the company's auditor.
Edcon
As part of Edcon's restructuring, Edcon approached its top 31 landlords in November 2018 and offered the landlords an opportunity to subscribe for an equity interest in Edcon, or, as an alternative, requested a 40,9% reduction in rentals for a 24-month period commencing on 1 April 2019 (the Edcon rent reduction). Hyprop agreed to assist Edcon by subscribing for equity in Edcon on a monthly basis for an amount equivalent to the monthly Edcon rent reduction (a total of R12 million from 1 April 2019 to 30 June 2019) (the Edcon subscription).
The equity which Hyprop has received in Edcon has been impaired to zero at 30 June 2019. Distributable income for the year was reduced by R12 million, as a consequence of the reduction in net cash flow received from Edcon.
Net asset value
The group's net asset value at 30 June 2019 was R95,78 per share, equating to a premium of 37,1% to the share price of R69,87 at that date.
Borrowings
| Group (including guaranteed debt) sources of funding | Group (including guaranteed debt) by lender | Total debt refinanced R8,5bn | |||
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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 would 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:
- Refinancing of the portion of debt maturing up to June 2020 – between March and June 2019 R4 billion of external debt (including EUR214 million of debt in Hystead) was refinanced. In addition, R500 million was raised from the issue of two new corporate bonds in March 2019, the proceeds of which were used to settle R358 million of bonds that matured in July 2019, with the balance being retained to finance capital expenditure in the 2020 financial year;
- Lowering of the fully consolidated LTV ratio to 35% – alternative ways to reduce the LTV ratio continue to be considered and evaluated. In the short term, the disposal of Hyprop's SSA interests and utilisation of the proceeds to settle USD-denominated debt will result in a reduction in the LTV ratio of approximately 5% (on completion of all disposals).
| Reducing the LTV (%) |
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It is stressed that there is no pressure on Hyprop by any of its banks, financial institutions or bond holders to reduce its LTV ratio. Reducing the LTV ratio is motivated by the key priorities of restoring Hyprop's investment grade credit rating (subject to South Africa's sovereign credit rating) by 31 December 2020 and reducing gearing levels in line with more difficult economic conditions. We will continue to engage with Moody's in that regard.
| 30 June 2019 (R000) | 30 June 2018 (R000) | ||||
| LTV calculation | See-through | Fully consolidated | See-through | Fully consolidated | |
| Hyprop total assets | 33 432 598 | 33 432 598 | 35 012 920 | 35 012 920 | |
| Hystead total assets | 13 570 002 | 13 216 438 | |||
| Hystead NAV (total assets – in-country debt) x 60% | 4 604 241 | 4 297 489 | |||
| Total assets | 38 036 839 | 47 062 600 | 39 310 409 | 48 229 358 | |
| Hyprop gross debt | 8 385 363 | 8 385 363 | 7 884 994 | 7 884 994 | |
| Hystead gross debt | 12 289 038 | 12 194 954 | |||
| Hystead debt guaranteed by all shareholders (gross) | 6 392 771 | 6 352 742 | |||
| Hystead debt guaranteed by PDI (EUR40 million) | (644 332) | (640 128) | |||
| Security from PDI held by Hyprop (EUR46,8 million) | (754 133) | (748 950) | |||
| Total debt | 13 379 670 | 20 674 401 | 12 848 659 | 20 079 948 | |
| Gross debt/total assets (%) | 35,2 | 44,0 | 32,7 | 41,6 | |
The majority of Hyprop's lender banks use the "see-through" LTV for covenant purposes.
At 30 June 2019, the group's see-through LTV ratio was 35,2% (calculated taking into account Hyprop's attributable share of the net assets of Hystead, the Hystead debt guaranteed by Hyprop, and the back-to-back security Hyprop holds from PDI in relation to the guarantees). If calculated on a fully consolidated basis (including 100% of Hystead's assets and borrowings) the LTV is 44,0%.
LTV ratio sensitivity analysis
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We have tested the sensitivity of changes in the valuation of the investment property portfolio on the group's see-through LTV ratio. A 20% reduction in the valuation of the investment property portfolio would result in an increase in the overall see-through LTV ratio to 44%, with the group still fully compliant with its banking covenants.
| Interest cover ratio (ICR) |
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The group's interest cover ratio remains healthy, reflecting the strong cash generative nature of Hyprop's properties. During the year the group adopted a new interest rate hedging policy, in terms of which a minimum of 75% of interest rate exposure must be hedged. Interest rate hedges are matched with loan maturity dates.
The group complied with all of its banking covenants during the year.
Rand denominated debt
| Debt maturity profile South Africa |
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The South African bank debt is secured against South African investment property, while the DCM funding is unsecured.
During the year R750 million was raised by issuing new bonds with an average duration of 4,5 years and an average interest rate of 1,62% above three-month JIBAR.
On 26 June 2019, USD100 million of debt in Hyprop Mauritius was re-financed through a Rand denominated four-year term loan of R958 million and a R500 million revolving credit facility, at an interest rate of 1,65% above three-month JIBAR.
Borrowings of R1,0 billion are due for repayment before 30 June 2020. This includes the HILB05 bond of R358 million which was redeemed from available cash resources on 11 July 2019. The remaining R650 million of the short-term debt will be refinanced through new bond issuances, term loans or available bank facilities.
US Dollar denominated debt
| Debt maturity profile sub-Saharan Africa |
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Total USD-denominated bank debt at 30 June 2019 was USD244 million (2018: USD343 million), equivalent to R3,5 billion (2018: R4,7 billion). USD188 million of this debt is secured by guarantees from Hyprop and against South African investment property.
Proceeds received from the disposal of the sub-Saharan African assets will be utilised to settle USD-denominated debt, after retaining sufficient cash to cover operating costs and service the remaining USD-denominated debt for the next 12 months.
Euro-denominated debt
| Debt maturity profile Eastern Europe (only guaranteed loans) |
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At 30 June 2019, Hyprop had guaranteed EUR357 million of interest-bearing loans advanced by banks to Hystead and certain of its subsidiaries. This debt is not consolidated in Hyprop's statement of financial position, however, the financial support results in the recognition of a financial liability in Hyprop's statement of financial position. Hyprop's obligations under these guarantees are secured against South African investment property. In exchange for providing guarantees which exceed Hyprop's 60% shareholding in Hystead, Hyprop receives a credit enhancement fee from PDI, currently equivalent to 11% of the dividends declared by Hystead.
During the period, EUR395 million of bank loans advanced to Hystead were refinanced for three to four years at an average interest rate of 2,0%. This resulted in new financial guarantees with an initial value of R110 million being recognised, and the derecognition of financial guarantees of R186 million in respect of the retired debt. As a result of more information on credit default rates having become publicly available since implementation of IFRS 9: Financial Instruments, the average credit default rates used by the independent valuers to determine the fair values of the financial guarantee liabilities reduced significantly from 2018, with a corresponding decrease in the financial liabilities.
Hyprop regularly reviews the funding of its investments in Eastern Europe. In the context of the current low European interest rate environment, the prudent interest rate hedging strategy adopted by the group and the stable performance of the Eastern European portfolio, the board is comfortable that the current funding structure is appropriate.
Exchange rates
The functional and reporting currencies for the investments in sub-Saharan African and Eastern Europe are the US Dollar and Euro, respectively. The exchange rates used to convert foreign currency amounts to Rand were as follows:
| 30 June 2019 | 30 June 2018 | ||||||
| Exchange rates | Average rate R |
Realised average rate R |
Year-end spot rate R |
Average rate R |
Realised average rate R |
Year-end spot rate R |
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| US Dollar | 14,13 | 14,15 | 12,47 | 12,53 | 13,70 | ||
| Euro | 16,04 | 16,91 | 16,11 | 15,32 | 14,80 | 16,00 | |
The realised average exchange rate is the weighted average of the actual exchange rates at which foreign currency dividends received were converted to Rand. This rate is higher than the average exchange rate for the year ended 30 June 2019 as a result of exchange rate hedges utilised during the year.
Prospects
In line with the group's revised strategic plan, the following key priorities have been set for the next 18 months:
- Reposition our South African portfolio – increase trading densities, increase non-GLA revenue, and identify alternative uses to create value
- Dispose of the remainder of the sub-Saharan African (excluding South Africa) portfolio, while preserving value in the interim
- Improve the dominance of the Eastern European portfolio – extensions to properties, asset management initiatives, leverage SA expertise and know-how
- Finalise and implement the strategy for non-tangible assets
- Reduce the LTV ratio and ultimately restore Hyprop's investment grade credit rating, and
- Improve stakeholder communication – internal and external.
Hyprop expects a reduction in distributable income per share for the year ending 30 June 2020 of approximately 10% to 13%. The main reasons for the reduction are:
- An approximate 4% to 5% reduction in distributable income from the continuing South Africa and Eastern Europe portfolios, comprising:
- a 2% reduction resulting from the full year effect of the Edcon restructure;
- reduction due to the anticipated impact of negative rent reversions as a result of the current economic conditions in South Africa and increased capital expenditure;
- offset by positive growth in dividends received from the Eastern European portfolio; and
- Approximately R145 million of additional net interest and other costs as a result of the need to refinance Dollar denominated debt with Rand denominated debt, as explained above.
The board believes that the new strategy and key priorities will create a more defensive balance sheet and a base for sustainable long-term growth, and expects that following the reduction in distributable income in the 2020 financial year, the group will achieve positive growth in distributable income for the 2021 financial year, and beyond. Hyprop continues to evaluate other potential initiatives to improve financial performance and reduce the LTV.
This guidance is based on the following key assumptions:
- Forecast investment property income is based on contractual rental escalations, and market-related renewals
- Appropriate allowances for vacancies and rent reversions have been incorporated into the forecast
- No major corporate and tenant failures will occur
- The impact of the Edcon restructure/share subscription until March 2021
- No further deterioration in the performance of the remaining sub-Saharan African assets
- The remaining sub-Saharan Africa assets will be disposed by 30 June 2020 and the proceeds will be used to settle US Dollar denominated debt
- Earnings from offshore investments will not be materially impacted by exchange rate volatility or disruptions in the financial markets, and
- Exchange rates (which have not been hedged) have been assumed at R15,00 and R17,00 to the US Dollar and Euro, respectively.
These prospects have not been reviewed or reported on by the company's auditors.
Appreciation
We would like to thank our executives, management and staff for their efforts during the year and the manner in which they have embraced the changes brought about by the new executive team. We also thank our fellow directors for their guidance and support and all our other stakeholders for their support. We look forward to the next stage of Hyprop's development.
| Morné Wilken CEO |
Brett Till CFO |
Wilhelm Nauta CIO |