2019 Integrated annual report

Independent auditor's report

To the shareholders of Hyprop Investments Limited

Report on the audit of the consolidated and separate financial statements

Opinion

We have audited the consolidated and separate financial statements of Hyprop Investments Limited (the group and company), set out in the financial statements, which comprise the statements of financial position as at 30 June 2019, and the statements of profit or loss and other comprehensive income, statements of changes in equity and statements of cash flows and notes to the consolidated and separate annual financial statements, including a summary of significant accounting policies.

In our opinion, the consolidated and separate financial statements present fairly, in all material respects, the consolidated and separate financial position of Hyprop Investments Limited as at 30 June 2019, and its consolidated and separate financial performance and consolidated and separate cash flows for the year then ended in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated and separate financial statements section of our report. We are independent of the group and company in accordance with the sections 290 and 291 of the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (Revised January 2018), parts 1 and 3 of the Independent Regulatory Board for Auditors' Code of Professional Conduct for Registered Auditors (Revised November 2018) (together the IRBA Codes) and other independence requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities, as applicable, in accordance with the IRBA Codes and in accordance with other ethical requirements applicable to performing audits in South Africa. The IRBA Codes are consistent with the corresponding sections of the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants and the International Ethics Standards Board for Accountants' International Code of Ethics for Professional Accountants (including International Independence Standards) respectively. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated and separate financial statements of the current period. These matters were addressed in the context of our audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Valuation of investment property – group and company

Refer to the accounting policies and key assumptions and estimations in A1 and A2 and E1 for the investment property note to the consolidated and separate financial statements.

Key audit matter		How this matter was addressed in our audit
The group and company’s most significant asset is its investment property portfolio. Investment property is subsequently measured at fair value, with changes in fair value recognised in profit or loss. The group and company used external independent valuers to value the investment properties. The valuation involves making significant judgements, the key valuation assumptions of which are set out in note E1.7.3. The valuation also relies on the completeness and accuracy of the underlying lease and financial information provided to the valuers by management. Due to the magnitude of the investment property portfolio held and the significance of the judgements made in measuring the investment property at fair value, this matter was considered to be a key audit matter in our audit of the consolidated and separate financial statements.		Our response to the key audit matter included performing the following audit procedures: We evaluated the competence and objectivity of the external valuers. This assessment included but was not limited to assessing their professional qualifications, experience and independence from the group and company. Through discussions with the external valuers, we obtained an understanding of the valuation process adopted; and the significant assumptions used and critical judgement areas applied in the valuation process, including contracted revenue, vacancy levels and the initial and reversionary capitalisation rates. The audit team challenged the assumptions used by the external valuers and assessed information provided to the external valuers by management to value the properties. The procedures included: Agreeing the forecast cash flows to the contracted revenue through inspection of the relevant underlying lease contracts, Selecting a sample of tenants per mall and i. Ensuring a lease contract exists for the tenant and ii. Agreeing the lease contract details to the population of lease information. Agreeing growth rates in the budget to the escalation rates in the lease contracts. Assessing the reasonability of managements forecasts by comparing the forecasts to the current year actual results and corroborating any differences identified. Our corporate finance specialist evaluated the valuations of a sample of investment properties, and challenged the underlying inputs to the valuations. We considered the adequacy and completeness of the disclosures associated with investment property valuation.

VALUATION OF INVESTMENT IN HYSTEAD LIMITED (HYSTEAD GROUP AND COMPANY)

Refer to the accounting policies and the key estimations and assumptions in A2 and note E5 to the consolidated and separate financial statements.

Key audit matter		How this matter was addressed in our audit
The group and company holds a portfolio of investment properties in Eastern Europe, held through Hystead and funded in Euros with credit enhancement provided mainly by Hyprop (referred to as the Hystead structure). The Hystead structure and the rights and obligations in the contracts underlying that structure are complex. The valuation of the right to receive dividends and deferral of that right relies on the selection of the appropriate valuation models and judgements made about the key inputs to those models. Due to the complexity of the Hystead structure and the significance of the judgements made in the related valuations, this matter was considered to be a key audit matter in our audit of the consolidated and separate financial statements.		Our response to the key audit matter included performing the following audit procedures: We obtained an understanding from management on whether there had been any changes to the shareholders’ agreement, funding agreements and other documents used to confirm the understanding of the transaction. We reviewed management’s assessment of the impact of IFRS 9 on the classification and measurement of this investment With the assistance of our corporate finance specialist, we evaluated management’s selection of the valuation model for the right to receive dividends, and the significant assumptions and judgements used in the valuation process. This included an evaluation of the appropriateness of the discount rates used For a selection of key inputs to the valuation models, we compared the inputs used by management to available internal and external sources We evaluated the dividend forecasts and growth rates applied in terms of the underlying performance of Hystead. This included assessing Hystead’s profit forecasts by challenging the assumptions used in the forecasts against lease escalation rates and industry growth rates We evaluated the adequacy of the disclosures made in respect of the unobservable inputs made by management in relation to the valuation of the investment in Hystead.

RECOVERABILITY OF ATTAFRICA SHAREHOLDER LOANS – GROUP

Refer to the accounting policies and the key assumptions and estimations in A2 and note F1 to the consolidated and separate financial statements.

Key audit matter		How this matter was addressed in our audit
Hyprop’s wholly owned subsidiary, Hyprop Mauritius Investments Limited (Hyprop MU), has an equity interest of 37,5% in AttAfrica Limited (AttAfrica) which is based in Mauritius. The interest is equity accounted in the consolidated financial statements. Hyprop MU has advanced a loan of USD185 million to AttAfrica which is governed by a shareholder loan agreement. The loan is interest-bearing and repayable on 30 June 2020. The loan is recognised at amortised cost in terms of IFRS 9: Financial Instruments (IFRS 9). Loans receivable are assessed for recoverability on an individual basis. Significant judgements, estimates and assumptions have been applied by management to: Determine if the loan or advance is credit impaired Evaluate the adequacy and recoverability of the underlying companies and properties held by AttAfrica and the costs likely to be incurred in order to realise these assets Evaluate the future performance of the underlying instruments to ensure forward looking credit losses are accounted for appropriately and in terms of IFRS 9. Due to the significant judgements applied in estimating the recoverability of these loans, this matter was considered to be a key audit matter in our audit of the consolidated financial statements.		Our response to the key audit matter included the following audit procedures: We obtained an understanding from management on whether there had been any changes to the shareholder agreement from the prior year in respect of the AttAfrica loan We evaluated management’s assessment of the recoverability of the exposure and underlying assets with reference to current economic performance by independently assessing the reasonability of assumptions and judgements made by management. This included: Assessing the reasonableness of the fair values of each of the underlying assets and liabilities in AttAfrica which can be recovered through the sale of shares of the investment holding at the loan expiry date by incorporating forward looking information into the assessment of each line item where possible. This included: > An assessment of the appropriateness of the fair values of investment properties held through assessment of the external valuations obtained. We considered the competence and objectivity of the external valuers and the appropriateness of the valuation methodology used to value the properties taking into account the manner in which they are expected to be recovered > An assessment of the costs expected to be incurred in order to realise the assets through inspection and corroboration of existing agreements in place and management’s estimates of future costs We evaluated the adequacy of the disclosures made about significant judgements made by management in relation to the recoverability of the loans.

VALUATION OF THE FINANCIAL GUARANTEES – GROUP AND COMPANY

Refer to the accounting policies and the key estimations and assumptions in A2 and note H3 to the consolidated and separate financial statements.

Key audit matter		How this matter was addressed in our audit
The group and company currently guarantees external loans in Hystead as well as Hyprop Mauritius Investments Limited (Hyprop MU). Each financial guarantee requires a valuation based on the terms of the loans and credit risk profile of the underlying entity in order to determine the estimated amount expected to be settled. Determining the fair value of the financial guarantees involves significant management judgement, including accounting estimates that have been identified as having high estimation uncertainty. These judgements included the probability of default (PD) and the loss given default (LGD) of the underlying exposures. Management further obtained external valuations for the financial guarantees. Due to the significant judgements applied in estimating the value of these guarantees, this matter was considered to be a key audit matter in our audit of the consolidated and separate financial statements.		Our response to the key audit matter included performing the following audit procedures: With the assistance of our own valuation specialists, we have assessed the appropriateness of the external valuation models, inputs and assumptions used in the fair value calculations of the financial guarantees and have independently challenged the inputs into the calculations. This included: An assessment of the credit risk profile of Hyprop and the PD and LGD applied by the external valuers against independent market information available from ratings agencies for Hyprop Investments Limited We evaluated the competence and objectivity of the external valuers. This assessment included but was not limited to assessing their professional qualifications, experience and independence from the group and company. We considered the adequacy and completeness of the disclosures associated with financial guarantees.

Emphasis of matter – Subsequent Event

We draw attention to note B2 to the consolidated and separate financial statements, "earnings per share", which indicates that the previously issued consolidated and separate financial statements for the year ended 30 June 2019, on which we issued an auditor's report dated 5 September 2019, have been revised and reissued. The basic earnings to headline earnings reconciliation in sub note B2.1 erroneously included an adjustment which added back the non-controlling interest portion of the change in fair value adjustment when it should have been deducted. The consolidated and separate financial statements have been corrected to reflect this change. Our opinion is not modified in respect of this matter.

Other information

The directors are responsible for the other information. The other information comprises the information included in the document titled "Hyprop Investments Limited and its subsidiaries' consolidated and separate annual financial statements for the year ended 30 June 2019", which includes the declaration by the company secretary, audit and risk committee's report, the directors' report, as required by the Companies Act of South Africa, and the Hyprop Investments Limited integrated annual report 2019. The other information does not include the consolidated and separate financial statements and our auditor's reports thereon.

Our opinion on the consolidated and separate financial statements does not cover the other information and we do not express an audit opinion or any form of assurance conclusion thereon.

In connection with our audit of the consolidated and separate financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated and separate financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If, based on the work we have performed on the other information obtained prior to the date of the auditor's report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard.

Responsibilities of the directors for the consolidated and separate financial statements

The directors are responsible for the preparation and fair presentation of the consolidated and separate financial statements in accordance with International Financial Reporting Standards and the requirements of the Companies Act of South Africa, and for such internal control as the directors determine is necessary to enable the preparation of consolidated and separate financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the consolidated and separate financial statements, the directors are responsible for assessing the group and company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the group and/or the company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the consolidated and separate financial statements

Our objectives are to obtain reasonable assurance about whether the consolidated and separate financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated and separate financial statements.

As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the consolidated and separate financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control
• Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the group and the company's internal control
• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors
• Conclude on the appropriateness of the directors' use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the group and the company's ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor's report to the related disclosures in the consolidated and separate financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor's report. However, future events or conditions may cause the group and/or the company to cease to continue as a going concern
• Evaluate the overall presentation, structure and content of the consolidated and separate financial statements, including the disclosures, and whether the consolidated and separate financial statements represent the underlying transactions and events in a manner that achieves fair presentation
• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide the directors with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with the directors, we determine those matters that were of most significance in the audit of the consolidated and separate financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor's report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication.

Report on Other Legal and Regulatory Requirements

In terms of the IRBA Rule published in Government Gazette Number 39475 dated 4 December 2015, we report that KPMG Inc. has been the auditor of Hyprop Investments Limited for four years.

KPMG Inc.
Registered auditor

Per Tracy Middlemiss
Chartered Accountant (SA)
Registered auditor
Director

24 October 2019

KPMG Crescent
85 Empire Road
Parktown
Johannesburg