Risk management
GROUP OVERVIEW

Risk management

The material risks identified by the group in terms of their probability and potential impact on Hyprop are shown below. Each risk has been mapped to the strategic objective on which it could have an impact, affected stakeholders, management’s strategic response and related key performance indicators

Approach

Hyprop’s system of internal control is designed to provide reasonable assurance as to the integrity and reliability of the financial statements. By managing rather than eliminating applicable risks, these systems are intended to safeguard, verify and maintain accountability of the company’s assets. Equally, they are designed to identify and minimise significant fraud, potential liability, loss and material misstatement, while complying with applicable laws and regulations.

Framework/process

The board reviews and monitors the efficacy of systems of internal control, assisted by the audit and risk committees. These committees in turn are assisted by management reporting and periodic reviews, as well as reports from an outsourced internal audit service provider. The committees report to the board on the findings of the internal audit function.

Executive management implements controls to ensure the validity, accuracy and completeness of financial information. These controls are reviewed by internal and external audit. External audit reports on the fair presentation of financial information at statutory reporting level. On an operational level, this is done by the executive committee.

The risk committee

The risk committee is constituted as a subcommittee of the board. The committee has an independent role, operating as an overseer and makes recommendations to the board for its consideration and final approval. The committee does not assume the functions of management, which remain the responsibility of the executive directors, officers and other members of senior management. The role of the committee, inter alia, is to adopt and implement an appropriate risk management policy, which is in accordance with industry practice. For further detail in respect of the role and mandate of the risk committee, please refer to the risk committee charter online.

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Strategic objective

Key risk

Probable effects

Severity of risk

Stakeholder

Strategic response/mitigation

Key performance indicator

Focus on sustainable income growth

Low GDP growth impacts business growth in South Africa

Slower retail sales growth affects retailers’ financial positions and ability to pay rent

High

Providers of capital (debt and equity investors and financial institutions) Tenants Mall customers

Facilitate strong trading environments by developing shopping destinations of choice, offering an attractive tenant mix with exciting brands and flagship stores in a safe, clean and friendly environment

Arrears, trading densities, rent affordability

Slowdown in consumer spend affecting retailers’ trading densities and rent ratios

Small line stores under pressure Leases not renewed Discounted rentals to retain tenants Lower distributable income

High

Tenants Providers of capital (debt and equity investors, financial institutions) Mall customers

Hyprop malls are well established, in dominant locations and often attract flagship stores Contractual lease income with financially sound tenants (most tenants are reputable national companies with strong balance sheets and proven business models) Increase shopper time spent in malls, through initiatives such as wi-fi and active marketing and social media strategies Provide geographic diversification (eg sub-Saharan expansion)

Arrears, trading densities, rent affordability

Potential increase in interest rates

Increased borrowing costs result in reduced distributable income

Low

Providers of capital (debt and equity investors and financial institutions)

Increased borrowing costs result in reduced distributable income 94,5% of debt fixed for 5,2 years, and staggered fixed interest rate Proactive management of interest-bearing borrowings

Maturity profile, cost of funding

Downgrading of sovereign credit rating

Growth and national/global competitiveness at risk Reduced foreign direct investment Increased borrowing costs

Medium

Providers of capital (debt and equity investors and financial institutions)

Provide economic and geographic diversification through sub-Saharan investments High ratio of fixed debt Introduction of unsecured debt in the form of debt capital market funding (DCM)

Distribution growth

Focus on sustainable income growth

Increased supply of retail space in the market

Discounted rentals to retain tenants Tenants become more demanding on leasing terms Increased vacancies Leases not renewed Increased pressure on renewal terms Lower rental growth

High

Tenants Providers of capital (debt and equity investors, financial institutions) Mall customers

Meet tenant demand through extensions and tenant relocations Demand for space in Hyprop centres continues to outstrip supply, resulting in a strong pipeline of prospective tenants The executive committee meets monthly to discuss operational performance

Leasing activity, rental growth, contractual escalations, workload (percentage of total leases expiring in one financial year)

Tenants more cautious on renewals and new lettings

Inability to renew leases or retain tenants means increased vacancies and prolonged periods of vacant space in shopping centres

Medium

Tenants Providers of capital (debt and equity investors, financial institutions) Mall customers

Close engagement with tenants throughout their tenure

Workload

Tenants taking less space and slower extension plans

Negative impact on budgets

Medium

Stagger major lease expiries

Significant volume of leases expiring in any one period

Negative rent reversion

Medium

Proactively manage lease expiries

Lease renewals and tenant retention

Discounted rentals to retain tenants

Medium

Ensure a strong pipeline of prospective tenants

Restrictive clauses in leases

Discounted rentals to retain tenants

Medium

Monthly lease expiry and related workload reports to executive committee

Continuous portfolio improvement

Dilutionary acquisitions, developments and disposals

Lower growth in distributions

Medium

Providers of capital (debt and equity investors, financial institutions)

Regular review of strategy against macro-economic environment, operating landscape, returns and risk tolerance Disposal of non-core assets

Approved investments and disposals with long-term growth objective

Capital budget exceeded for development/redevelopment

Project yield compromised Inefficient capital allocation

Medium

Monthly monitoring of capital expenditure Detailed analysis and research prior to approval

Ineffective progress monitoring for development/redevelopment

Project end date being compromised, escalating project costs and the yield being compromised.

Medium

Meet pre-letting requirements Ongoing review of design and monitoring of construction by development and centre management and the project professional team

Attracting and retaining the best people

Current BEE level of 6

Major tenants prefer landlord to have reasonable BEE rating Potential impact on corporate activity in SA Potential for regulatory penalties

High

Providers of capital (debt and equity investors, financial institutions) Employees Suppliers Tenants

Identified as a strategic imperative. Plan in place to achieve incremental and sustainable improvements

Independent BEE rating

Negative impact of the new codes

Transformation required in ownership, directors and senior management

Operating an environmentally sustainable business

Potential introduction of carbon tax in 2016

Increased operational costs

High

Tenants Community Employees Suppliers

Environmental, social and governance (ESG) strategy document serves to provides context and guidelines for implementation

Improved energy efficiency

Failure to meet primary targets (for energy, water, recycling and carbon consumption)

Possible reputational damage with the investment community

Providing the highest level of service to our tenants

Increased cost of occupancy due to electricity price increases

Unable to recover tenants’ portion of consumption means lower distributable income

High

Mall customers Tenants Municipal authorities

Numerous projects under way to reduce consumption

Cost of occupancy – electricity consumption

Negative impact of disruptive electricity supply on the economy and at Hyprop malls

Lower rentals to retain certain tenants Prolonged periods of power outages resulting in sub-optimal trading condition

Successful objection to incorrect valuations 1 500kWp, solar photovoltaic plant at Clearwater Mall

Increase in capital cost to provide more generators

Increased electricity and diesel costs

Introducing smart metering Energy-saving and similar initiatives

Providing the highest level of service to our tenants

Increased cost of occupancy from rates, taxes and utilities

Cost and supply of electricity and water Excessive increase in cost of occupancy impacting recoveries and renewals

Medium

Tenants Mall customers Providers of capital (debt and equity investors, financial institutions)

Numerous projects under way to reduce consumption Tenants guided by tenant criteria document, with guidelines on reducing electricity consumption Introducing smart metering

Cost of occupancy – water, rates and electricity consumption

Deterioration of municipal administration and service delivery

Incorrect utility billings Delays in transfer of acquisitions and disposals Inadequate services provided Billing errors Excessive lead times for town planning approval

High

Tenants Providers of capital (debt and equity investors, financial institutions) Mall customers

Working closely with professional consultants to optimise local authority approval processes and to minimise negative impact of billing errors

Town council approvals received, utilities recovered

Providing the highest level of service to our tenants

Increased levels of crime at shopping centres

Hyprop forced to spend more capital on security equipment Crime, robberies, theft, etc at shopping malls Negative impact on footfall Reputational damage for Hyprop and for its malls

High

Mall customers Tenants Community

Improve quality of service provider and security equipment Better engagement between shopping centre staff, service provider, community and local police

Improvement in crime statistics at shopping malls

Increase portfolio and geographic diversification

Weakening of currencies placing local tenants under pressure

Unable to repatriate funds due to illiquid currency markets or capital restrictions Reduced distributable income Excessive volatility in exchange rates

High

Tenants Mall customers Providers of capital (debt and equity investors, financial institutions)

Matching debt with income (USD) Consider hedging exposure in terms of material dividends received

Size of dividend (current percentage of income)

Slowdown in consumer spend

Small line stores under pressure Leases not renewed

High

Tenants Mall customers Providers of capital (debt and equity investors, financial institutions)

Hyprop malls are well established, in dominant locations and often attract flagship stores Strong lease agreements with financially sound tenants (most tenants are reputable national companies with strong balance sheets and proven business models)

Arrears, trading densities, rent affordability