2020 Integrated Annual Report

and Consolidated & Separate
Financial Statements

Independent auditor's report to the shareholders of Hyprop Investments Limited

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), which comprise the statements of financial position as at 30 June 2020, and the statements of profit or loss and other comprehensive income, the statements of changes in equity and the statements of cash flows for the year then ended, and notes to the consolidated and separate 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 2020, 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 Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (IRBA Code) and other independent requirements applicable to performing audits of financial statements in South Africa. We have fulfilled our other ethical responsibilities in accordance with the IRBA Code and in accordance with other ethical requirements applicable to performing audits in South Africa.

The IRBA Code is consistent with the corresponding sections of the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants (including International Independence Standards). 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.

IMPACT OF COVID-19 - GROUP AND COMPANY

Refer to notes D1.1 Revenue, O1 Going concern, E1.7.3 Investment property valuation assumptions and E6.8 Financial asset valuation assumptions to the consolidated and separate financial statements.

Key audit matter     How this matter was addressed in our audit

The Covid-19 pandemic is of an unprecedented scale and has severely impacted both the global and local economy and businesses across all industries. As a result of the pandemic there are significant judgements and assumptions that impact financial reporting that are required to be considered within the consolidated and separate financial statements.

The areas within the Group and Company (collectively referred to as Hyprop) most impacted by Covid-19 include:

Going concern:

The Group’s and Company’s use of the going concern basis of accounting and the associated extent of uncertainty is a key audit matter due to the high level of judgement required by us in evaluating management’s assessment of going concern and the events or conditions that may cast significant doubt on their ability to continue as a going concern.

As at 30 June 2020 the Group’s current liabilities exceeded its current assets by R2 128 billion and the Company’s current liabilities exceeded its current assets by R954 million. This basis is dependent on the Group and Company’s ability to meet its liabilities as they fall due.

The directors have determined that the use of the going concern basis of accounting is appropriate in preparing the consolidated and separate financial statements.

Their assessment of going concern was based on the ability to raise new banking facilities and future cash flow projections. The preparation of these projections incorporated a number of assumptions and significant judgements, and the directors have concluded that the range of possible outcomes considered in arriving at this judgement does not give rise to a material uncertainty casting significant doubt on the Group’s ability to continue as a going concern.

   

Our audit response to these areas most impacted by Covid-19 is detailed below:

Going concern:

We evaluated whether management’s going concern assessment appropriately considered the impact of Covid-19. We critically assessed the levels of uncertainty, as it related to the Group and Company’s ability to continue as a going concern, within these assumptions and judgements. Our procedures included:

  • Discussions with management on the impact on the Group’s and Company’s business and financial reporting processes.
  • Assessing the level of liquidity within the Group and Company to support ongoing requirements and the ability to refinance debt for at least 12 months after the date of approval of the financial statements.
  • Evaluating the reasonableness of management’s future cash flow forecasts, which included stress testing the forecasts, and its impact on the Group and Company’s capital and liquidity positions.
  • Verified whether, subsequent to year end, there had been loans defaults or covenant breaches.
  • Assessing the adequacy of the going concern disclosures by evaluating whether they were consistent with management’s assessment and in compliance with the relevant reporting requirements.
Valuation of assets:

The Group and Company’s assets carried at fair value includes investment property and the investment in Hystead Limited, recognised as a financial asset. These asset values are based on future cash flows and risk adjusted discount factors and inputs.

There is considerable uncertainty over the global economy and how long it will take before the economy is stabilised. This has introduced a level of uncertainty relating to projected future cash flows which affects the valuation of these assets resulting in special audit considerations.

Rental income reliefs:

Hyprop offered tenants rental discounts consisting of either a full or partial waiver of the payment of rent and/or the deferral of rental payments.

In terms of IFRS 16, Leases (IFRS 16), these discounts resulted in the need to assess a lease modification which affects the straight-lining rental income accrual.

The treatment of the rental discounts granted, which involves complex IFRS 16 adjustments, in addition to the volume of discounts granted, increased the likelihood and potential magnitude of misstatements in the reported results which resulted in special audit consideration to the rental income reliefs.

Given the significant impact that Covid-19 has had on the current year reported results and the future implications, this was considered a key audit matter in our audit of the consolidated and separate financial statements.

   
Valuation of assets:
Investment property valuations:

We evaluated whether management’s assumptions used in property valuations appropriately considered the impact of Covid-19. Our procedures included:

  • Challenging the external valuators outlook and assumptions used in the property valuations as a result of Covid-19 by comparing these inputs and assumptions to the latest industry benchmarks and available market information. This was done with the assistance of our valuation specialists.
  • Assessing subsequent management information to consider if it supported the current view of a recovery used in the property valuations.
  • Assessing the reasonability of the Covid-19 related adjustments made by management relating to expected occupancy rates and rental rates by corroborating management’s forward looking lease schedule, which includes the latest rental relief provided to tenants, against approved lease agreements.
  • Assessing the methodology, assumptions and data used to derive the fair values of the investment property to obtain evidence that they were based on conditions and events existing at 30 June 2020.
Investment in Hystead Limited (Hystead):

We evaluated, with the assistance of our valuation specialists, whether management’s assumptions used in the valuation of the Hystead investment appropriately considered the impact of Covid-19. Our procedures included:

  • Challenging the assumptions and methodology used in management’s valuation. We also considered subsequent management information and corroborative evidence to assess if it supports managements cashflow forecasts and predicted recovery from Covid-19 as used in the valuation of the financial asset.
  • Assessing, with the assistance of our corporate finance specialists, the reasonability of the discount rate used in the discounted cash flow analysis by recalculating an independent discount rate using available market information for similar properties in similar regions, and comparing it to management’s discount rate.
Rental income reliefs:

We evaluated whether management’s treatment of rental discounts appropriately considered the requirements of IFRS 16 related to lease modifications. Our procedures included:

  • Evaluating, with the assistance of our technical accounting specialists, the accounting treatment of rental discounts, deferrals and extensions of lease periods in terms of the requirements of IFRS 16 lease modifications, as well as subsequent event considerations in terms of IAS 10, Events after the reporting period (IAS 10).
  • Agreeing a sample of discounts granted to tenants to lease agreement addendums and recalculated the adjusted straight-lining rental income accrual.

VALUATION OF INVESTMENT PROPERTY - GROUP AND COMPANY

Refer to the accounting policies and the key assumptions and estimations in A1 and A2 and note 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’s 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 process involves making significant assumptions and judgements. The key valuation assumptions 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, in addition to the procedures performed to specifically consider the impact of Covid-19 on the investment property:

  • 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 judgements 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 forecasted cash flows to the contracted revenue through inspection of the relevant underlying lease contracts.
    • Selecting a sample of tenants per mall and:
      • ensuring a lease contract exists for the tenant; and
      • agreeing the lease contract details to the population of lease information.
  • We agreed growth rates in the budget to the escalation rates in the lease contracts.
  • We assessed the reasonability of management’s 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 against industry benchmarks and available market information.
  • We considered the adequacy and completeness of the disclosures, in accordance with IAS 40, Investment property associated with investment property valuation.

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

Refer to the accounting policies and the key assumptions and estimations in A2 and note E6 to the consolidated and separate financial statements.

Key audit matter     How this matter was addressed in our audit

The Group and Company hold a portfolio of investment properties in South-Eastern Europe, through Hystead, that are 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 as set out in note E6.7.

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 our understanding of the Hystead structure.
  • 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 assessment of the reasonability of the discount rates used. Our corporate finance specialists recalculated a range for the discount rates used, taking into account the specific risk profile of the properties and regions in which they operate and compared this to management’s discount rates.
  • 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, in accordance with IFRS 9, in respect of the unobservable inputs made by management in relation to the valuation of the investment in Hystead.

RECOVERABILITY OF ATTAFRICA SHAREHOLDER LOAN – 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 50% 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 $185 million to AttAfrica which is governed by a shareholder loan agreement. The loan is interest bearing. The loan is recognised at amortised cost in terms of IFRS 9, Financial Instruments (IFRS 9). Loan receivable is assessed for recoverability on an individual basis.

Significant judgements, 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; and
  • 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 this loan, 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 whether there had been any changes to the shareholder loan 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 Company at the loan expiry date by incorporating forward looking information where possible. This included:
      (i) 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’re expected to be recovered.
      (ii) 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 loan in accordance with IFRS 9.
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 Financial Statements - for the year ended 30 June 2020”, which includes the Audit and Risk committee’s report, Directors’ Report, and Declaration by the Company secretary as required by the Companies Act of South Africa which we obtained prior to the date of this report, and the Integrated Annual Report, which is expected to be made available to us after that date. The other information does not include the consolidated and separate financial statements and our auditor’s report 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 this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact.

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 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 infl uence 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:


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 communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, actions taken to eliminate threats or safeguards applied.

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 five years.

KPMG Inc.

Per Tracy Middlemiss
Chartered Accountant (SA)
Registered Auditor
Director

21 September 2020