2019 Integrated annual report

Risk management

Hyprop views risk management as a core competency critical to sustainability. The group employs a structured and disciplined approach to group-wide risk management, with the objective of maintaining a balance between risk and value creation.

The primary objectives of the Hyprop risk management process are to ensure that risk awareness is embedded in strategy discussions at board level, in day-to-day operations and processes, and that uncertainty regarding operational performance is minimised by anticipating surprises and associated costs and losses.

Risk management forms an integral part of normal operations, processes and activities, and a culture of risk awareness endures. The group also monitors and reports on industry risk trends.

Key principles

Hyprop's approach to risk management is based on several key principles:

• A practical and consistent risk process across the organisation
• Promoting and embracing a culture that recognises the importance of risk management by entrenching it in day-to-day processes, activities and decision-making
• Ensuring that risk identification, assessment and management are part of normal business activities
• Ensuring that the risk management process is aligned with Hyprop's values and strategic initiatives
• Clearly defining roles and responsibilities for the risk management process
• Establishing and maintaining appropriate risk tolerances and focusing on risks that exceed defined thresholds
• Relevant and effective risk reporting.

Risk tolerance

Risk tolerance is at the core of the risk management framework. By definition, risk tolerance specifies how much risk an organisation is willing to accept in the pursuit of its business objectives. At Hyprop, risk will not be tolerated in the instances where, if the risk event were to occur, it could cause any one, or more, of the following:

• The inability to meet any of Hyprop's core service obligations within prescribed timeframes
• The death, or serious injury, of a customer or an employee while on duty
• The inability to meet any one, or more, of Hyprop's financial obligations
• The inability to generate sufficient profit to sustain its current and future operations
• Reputational loss to the company such that its ability to operate effectively is seriously impacted.

These underlying risk tolerance principles are encoded in Hyprop's formal working documents and processes, for example:

• Key Performance Deliverables (KPDs) assigned to executives as part of Hyprop's performance management process (refer to our remuneration report on page 69)
• An annual budget with targets for financial performance and guidance on reporting on unfavourable variances
• A board charter which sets out the powers which have been reserved by the board, and a delegation of authority document defining the authorities delegated to management.
• Policy documents, approved by the board, which regulate how and to what extent certain risks are mitigated through specific actions/procedures.

Summary of key risks

Risk number	Key risk	Strategic objective	Impact	Strategic response/mitigation	Changes to risk in the reporting period
1	Low GDP growth impacts business growth in South Africa	Focus on sustainable distributable income growth	Slower retail sales growth affects retailers' financial positions and ability to pay rent	Hyprop shopping centres are well established, in dominant locations and attract flagship stores Maintain relevance of malls by optimising tenant mix, entertainment and other offerings Improve customer interaction through technology
2	Slowing consumer spend affects retailers' trading densities and rent-to-turnover ratios	Focus on sustainable distributable income growth	Leases not renewed; discounted rentals to retain tenants; tenants more cautious on renewals and new lettings; tenants taking less space, increase in vacancies, slower extension plans	Contractual lease income with financially sound tenants (most are reputable national companies with strong balance sheets and proven business models) Model for sustainable rental growth to reduce reversions Manage total cost of occupancy for tenants
3	Downgraded sovereign credit rating (South Africa)	Focus on sustainable distributable income growth	Increased borrowing costs	Reduce LTV ratio Interest rate hedging policy adopted by the board Minimum of 75% of interest rate exposure on borrowings is hedged
4	Significant volume of leases expiring in any one year	Focus on sustainable distributable income growth	Increase in vacancies, impact of rent reversions	Stagger quantum and value of leases expiring on an annual basis Enhance properties to increase their relevance and attractiveness to tenants
5	Maintenance and capital improvements	Continuous portfolio improvement and maintaining relevance of Hyprop's malls	Compromised use/functionality of the building and increased maintenance burden/higher operational costs Malls lose relevance and become outdated	Project income budgets are based on deals concluded (signed and accepted development offers) Use reputable consultants, contractors and professionals with experience Ongoing review of design, and monitoring of construction, by development and centre management and the project team
6	Credit rating downgrade (Hyprop)	Optimise funding and restore investment grade credit rating	Inability to raise funding on competitive terms Increased cost of borrowings	Restore investment grade credit rating by reducing LTV ratio and maintaining adequate liquidity to refinance short-term debt Maintain conservative gearing levels Maintain high interest cover ratio
7	Potential increase in interest rates	Managing exposure to interest rate fluctuations	Increased borrowing costs result in reduced distributable income	Interest rate hedging policy adopted by the board Minimum of 75% of interest rate exposure on borrowings is hedged
8	Negative impact of disrupted electricity supply on the economy and at Hyprop shopping centres Negative impact of disrupted water supply at shopping centres Increased cost of occupancy from rates, taxes and utilities	Ensure continuous supply of electricity Reliable supply of water services More efficient and effective utility cost management	Prolonged electricity and water outages mean sub-optimal trading conditions Excessive increases in cost of occupancy impacting recoveries, renewals and sustainable income growth	Introducing smart metering; energy-saving initiatives Implement alternative water supplies and savings initiatives Solar photovoltaic plants at Hyprop's malls Numerous projects under way to reduce consumption: Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption Objections to high increases in municipal rates Working closely with professional consultants to optimise local authority approval processes and minimise the negative impact of billing errors Lobbying through SAPOA to reduce high tariffs Working with central improvement districts (CIDS) to improve services and reduce costs
9	Digital disruption	Embrace technology to enhance the profitability of our shopping centres	Inefficient business processes through under-utilisation of technology Digital disruption impacts performance of retail tenants' business Loss of contact with shoppers	Embrace digital disruption Develop revenue streams from non-tangible assets
10	Multi-currency and refinancing risks associated with the group's funding structure and gearing	Optimise funding and restore investment grade credit rating	Excessive gearing resulting in credit rating downgrade Increased LTV due to devaluation of the Rand Increased cost of borrowing due to currency mismatches Ability to refinance maturing debt	Matching currency between borrowings and assets/income to service borrowings Interest rate hedging policy adopted by the board Optimum capital allocation Maintain available bank facilities and strong relationships with lenders	new

	External risks (outside the control of management)	Increased Decreased Remained the same
	External risks (can be mitigated by management)
	Internal risks (under the control of management)