Directors' report
for the year ended 30 June 2020
The directors have pleasure in submitting their report, which forms part of the consolidated financial statements for the year ended 30 June 2020.
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 R48.5 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; City Center One East and City Center One West, both in Zagreb, Croatia.
The sub-Saharan African (excluding SA) portfolio includes interests in Ikeja City Mall in Lagos, Nigeria; Accra Mall and West Hills in Accra, Ghana; and Kumasi City Mall in Kumasi, Ghana.
Strategy
The Group’s mission is to create environments and opportunities for people to connect and have authentic and meaningful experiences. This will be achieved by owning and managing tangible assets (dominant retail centres in mixeduse precincts in key economic nodes) and non-tangible assets.
The Group’s operations are focussed 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).
Notwithstanding the impact of Covid-19, each of the Group portfolio’s long-term strategies to create sustainable returns for shareholders remain in place – i.e. to reposition the South African portfolio, to improve the dominance of the Eastern European portfolio and to implement the non-tangible asset strategy, through projects such as the new Soko District.
Other key priorities are to conclude the disposal of the sub- Saharan Africa investments and strengthen the Group’s balance sheet.
From a financial perspective, the focus will be on generating a total return for shareholders through balanced growth in distributable income and net asset value, combined with conservative balance sheet management.
Covid-19
Since January 2020 the world has been gripped by the Covid-19 pandemic and the resultant economic and social consequences thereof.
Under the supervision of Hyprop’s Risk Committee, Covid-19 task teams were established covering our South African, Eastern European and sub-Saharan Africa (excluding South Africa) operations to monitor and manage the unique risks and challenges presented by Covid-19, as well as to implement the relevant guidelines, protocols and preventative measures recommended by the World Health Organization, local health authorities and governments.
The health and safety of our staff, tenants and customers is our top priority and we worked in partnership with all of the stakeholders in our business to find solutions which would give all of us a chance to emerge from the Covid-19 challenges with our businesses intact. We will continue to work with our key stakeholders, particularly our tenants, to ensure we have functional malls and acceptable occupancy levels.
Covid-19 has had a significant effect on the Group’s financial performance for the 2020 year and the recovery therefrom is expected to be slow.
Subsidiaries, joint arrangements and joint ventures
Details of investments in subsidiaries, joint arrangements and joint ventures are included in notes E4 – Investments in subsidiaries and E5 – 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 2020 are set out in the attached financial statements.
The Group’s net profit for the year decreased from R112 million in 2019 to a loss of R 3 523 million in 2020. Distributable income for the year decreased from R1 903 million in 2019 to R1 258 million in 2020 and the distributable income per share decreased by 34% from 744.9 cents to 493.4 cents.
The main reasons for the decrease in net profit for the year are:
- The impact of Covid-19 on the Group’s operations, including a reduction in income during the lockdowns imposed in all countries where the Group operates;
- No dividends being declared by Hystead in the second half of the financial year;
- A decrease in the value of the Group’s investment properties of R4.6 billion; and
- An impairment of the sub-Saharan Africa investments by R290 million.
Dividends declared
The following dividends were declared to shareholders during the year:
- On 31 August 2019 a final dividend of 359.3 cents per share in respect of the six-month period ended 30 June 2019.
- On 27 February 2020 an interim dividend of 308.7 cents per share in respect of the six-month period ended 31 December 2019.
Having regard to, inter alia, the challenging and unpredictable economic environment and the desire to reduce gearing levels, the board is of the view that the Company should retain as much cash as possible while continuing to meet applicable REIT minimum distribution requirements in terms of the JSE Listings Requirements.
The board is considering different options in regard to settlement of the interim distribution and declaration of a final distribution for the year ended 30 June 2020, having regard to the minimum REIT requirements. It has therefore resolved that it would be prudent to defer its decision on the settlement of the interim dividend and the declaration of the final dividend for the year ended 30 June 2020 until December 2020, or an earlier date should more clarity emerge on the likely future economic environment.
Directorate and directors’ interests
Directorate
The following changes to the board of directors occurred during the year:
- Annabel Dallamore joined the board as an Independent non-executive director with effect from 1 October 2019.
- Mike Lewin retired as a director at the Annual General Meeting held on 2 December 2019 and the board thanks him for his valuable contribution over the last 9 years. Pursuant to Mike Lewin’s retirement, Nonyameko Mandindi was appointed as the chair of the Social and Ethics committee.
- Spiro Noussis joined the board as an Independent non-executive director with effect from 27 July 2020.
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) |
| AA Dallamore | L Norval | BC Till (CFO) |
| Z Jasper | MC Wilken (CEO) | |
| MJ Lewin | ||
| N Mandindi | ||
| TV Mokgatlha | ||
| S Shaw-Taylor |
Directors’ interests in shares of the Company
The interests of the directors in the shares of the Company at 30 June 2020 were:
| 30 June 2020 | 30 June 2019 | |||||||||||
| Beneficial | Beneficial | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Direct | Indirect | Total | Direct | Indirect | Total | |||||||
| Non-executive | ||||||||||||
| Gavin Tipper | 13 500 | – | 13 500 | 9 000 | – | 9 000 | ||||||
| Kevin Ellerine | – | 378 000 | 378 000 | – | 378 000 | 378 000 | ||||||
| Nonyameko Mandindi | – | – | – | – | 2 940 | 2 940 | ||||||
| Stewart Shaw-Taylor | 21 500 | – | 21 500 | 21 500 | – | 21 500 | ||||||
| Executive | ||||||||||||
| AW Nauta (1) | 45 222 | – | 45 222 | 26 754 | – | 26 754 | ||||||
| BC Till (1) | 44 110 | 1 200 | 45 310 | 18 927 | 1 200 | 20 127 | ||||||
| MC Wilken (1) | 91 233 | 44 170 | 135 403 | 43 190 | 670 | 43 860 | ||||||
| 215 565 | 423 370 | 638 935 | 119 371 | 382 810 | 502 181 | |||||||
(1) Includes shares awarded under the Hyprop Employee Share Scheme.
There were no non-beneficial interests in either the current or prior years.
There have been no changes to the above interests between 30 June 2020 and the date of this report other than:
- MC Wilken was awarded 117 625 shares under the Hyprop Employee Share Scheme on 1 July 2020;
- AW Nauta was awarded 59 865 shares under the Hyprop Employee Share Scheme on 1 July 2020; and
- BC Till was awarded 62 824 shares under the Hyprop Employee Share Scheme on 1 July 2020.
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
The Company’s borrowings are not limited by its Memorandum of Incorporation, however, in terms of the JSE Listings Requirements, a REIT’s total consolidated borrowings may not exceed 60% of its consolidated gross asset value, as reflected in its latest published financial statements or results. Should the 60% threshold be exceeded, Hyprop may lose its REIT status under the JSE rules.
Lowering the Group’s LTV ratio below 35% (calculated on a fully consolidated basis) is a key priority. In the short-term, any cash retained from distributions will be used to reduce Rand and/or Euro denominated debt. The anticipated disposal of Ikeja City Mall and utilisation of the proceeds to reduce Dollar denominated debt will reduce the Group’s LTV ratio further. The Group is also considering reducing distributions from Hystead and utilising this cash to settle Euro denominated debt.
Hyprop’s loan-to-value (LTV) and interest cover ratios are set out in note H4 – Covenants and capital management to the financial statements. The Company complied with all of its borrowing covenants at 30 June 2020.
The majority of the Group’s debt coming due in the next 12 months comprises $172 million of debt relating to Hyprop’s assets in sub-Saharan Africa (Hyprop Mauritius and Ikeja City Mall in Nigeria) and EUR49m of non-recourse (to Hyprop) in-country asset backed finance relating to Hystead Limited, which is due in March 2021. Subsequent to 30 June 2020, $99 million of this Dollar denominated debt was settled. The remaining $73 million will be settled on disposal of the Group’s sub–Saharan Africa interests, or refinanced in either Rands or Dollars.
In April 2020 Moody’s Investor Services Inc (Moody’s) lowered the Company’s credit rating from Ba1 to Ba2. Concurrently, Moody’s lowered the long-term national scale issuer rating to A1.za from Aa3.za and affirmed the short-term national scale rating of Prime-1.za.
The main reason cited by Moody’s for the reduction in Hyprop’s rating is the level of debt maturing in the short-term, in the context of a challenging operating environment, including the temporary closure of shopping centres as a result of the lockdown aimed at reducing the spread of coronavirus, and dislocated credit markets.
Following their credit rating action in April 2020, Moody’s completed a 3-month review of Hyprop’s credit rating in June 2020 and confirmed Hyprop’s credit rating assigned in April 2020. The rating outlook was changed to “negative” from “under review for downgrade”.
Moody’s recognised that over the last twelve months Hyprop was able to refinance its debt, demonstrating good access to banking markets, and the progress made by Hyprop since April 2020 in refinancing the US Dollar and Rand denominated debt maturing over remainder of the 2020 calendar year, the additional R500 million of bank facilities that were raised, the R100 million raised through the DMTN Program and the progress being made to dispose of the Group’s sub-Saharan Africa investments.
Moody’s has withdrawn its rating of Hyprop as Hyprop has elected not to renew Moody’s appointment given the significant levels of uncertainty in the local and global economies due to the impact of Covid-19, as well as the downgrade of South Africa’s sovereign credit rating in March 2020. In terms of Hyprop’s DMTN Program, Hyprop is not required to be rated by an independent rating agency. The Company will reconsider the appointment of a rating agency when local and global markets normalise.
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 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.
Acquisition and disposals
In July 2019, Hyprop Mauritius (50%) and AttAfrica (50%) disposed of their interests in Manda Hill Shopping Centre in Lusaka, Zambia for a net consideration of $52 million.
In December 2019 the Company purchased the office building located at 17 Baker Street, Rosebank, Johannesburg for R44 million (8% initial yield).
Effective 1 January 2020, Hyprop Mauritius increased its holding in AttAfrica from 37.5% to 50%.
Subsequent to year end, the Group has reached agreement for the disposal of its interest in Ikeja City Mall in Lagos, Nigeria. The sale is subject to the fulfilment of certain conditions precedent.
Special resolutions
The following special resolutions were passed at the Company’s annual general meeting held on 2 December 2019:
- Resolved that the Company or any of its subsidiaries be and are hereby 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, and subject to the relevant provisions of the JSE Listings Requirements.
- 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 of the consolidated and seperate 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 at the annual general meeting held on 2 December 2019. 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.
The Group’s net asset value at 30 June 2020 was R19.3 billion and the Group had available cash of R835 million and undrawn revolving credit facilities of R500 million. Following the actions set out below, the Group’s liquidity position remains strong.
At 30 June 2020 the Group’s current liabilities exceeded its current assets by R2 128 million. The increase in current liabilities is due to loans maturing in less than one year and the dividend declared to shareholders for the six months ended 31 December 2019 (the interim dividend) in February 2020.
Subsequent to 30 June 2020:
- the Company raised R450 million through a new 2 year, secured revolving credit facility;
- R2 148 million of the maturing loans have been settled from the proceeds of new term facilities and revolving credit facilities; and
- the board has resolved to defer its decision on the settlement of the interim dividend and the declaration of the final dividend for the year ended 30 June 2020 until December 2020, or an earlier date should more clarity emerge on the likely future economic environment. See Note O2-Events after the reporting date for details of the financial statements.
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 21 September 2020 and are signed on its behalf by:
|
GR Tipper |
MC Wilken |
BC Till |
Johannesburg
21 September 2020