Financial director's report

Hyprop declared a dividend of 322,1 cents per share for the six months ended 30 June 2016, an increase of 14,9% on the corresponding period in 2015. The total distribution for the year of 619,9 cents per share was an increase of 14,2% on the prior year.

Hyprop again produced a solid set of results, producing income and capital growth above the sector average.

Laurence Cohen, financial director

Distributable earnings for the year benefited from the inclusion of income from recently acquired Ikeja City Mall in Nigeria (November 2015), Delta City Podgorica in Montenegro (February 2016) and Delta City Belgrade in Serbia (April 2016), as well as the opening of Achimota Retail Centre, in Accra, Ghana (October 2015). Distributable earnings were further increased by exchange rate gains due to Rand weakness and from the inclusion of income from the redeveloped Rosebank Mall for the full period.

South African portfolio

Revenue and distributable earnings

	12 months ended 30 June 2016		12 months ended 30 June 2015
Business segment	Revenue R000	Distributable earnings R000	Revenue R000	Distributable earnings R000
Canal Walk (80%)	628 169	442 978	579 188	412 308
Clearwater Mall	376 612	260 069	358 011	245 039
Somerset Mall	257 565	177 062	231 100	159 387
Rosebank Mall	283 060	183 350	234 353	149 665
Woodlands Boulevard	246 864	162 911	231 701	152 821
The Glen (75,15%)	230 817	163 036	218 999	153 796
Hyde Park Corner	211 335	137 855	199 074	130 900
CapeGate	178 943	106 051	167 562	96 472
Shopping centres	2 413 365	1 633 312	2 219 988	1 500 388
Atterbury Value Mart	129 153	96 124	120 286	89 544
Willowbridge⁽¹⁾	99 574	56 008	90 746	49 793
Somerset Value Mart⁽¹⁾	25 524	16 750	23 784	15 308
Value centres	254 251	168 882	234 816	154 645
Total retail	2 667 616	1 802 194	2 454 804	1 655 033
Standalone offices⁽²⁾	77 078	45 957	73 126	45 866
Stoneridge⁽³⁾ (90%)			56 275	29 110
CapeGate Lifestyle⁽³⁾			32 937	22 178
Properties sold			89 212	51 288
Investment property	2 744 694	1 848 151	2 617 142	1 752 187
⁽¹⁾ Held-for-sale ⁽²⁾ Includes Glenwood, Glenfield and Lakefield — held-for-sale ⁽³⁾ Sold during the 2015 financial year

Total revenue and distributable earnings from South African investment property (excluding properties sold) increased 8,6% and 8,7%, respectively. Like-for-like revenue and distributable earnings from investment property (excluding Rosebank Mall) both increased by 7,3%.

Cost-to-income ratios

		30 June 2016	30 June 2015
Net basis %	Investment property (SA)	15,0	15,7
	Total group	19,2	18,7
Gross basis %	Investment property (SA)	33,2	33,6
	Total group	36,0	36,0

Ongoing and effective cost control in the South African portfolio contributed to a marginal improvement in the investment property cost-to-income ratio, on the net and gross basis.

Tenant arrears

Total arrears as a percentage of rental income were 0,5% (30 June 2015: 0,6%).

Valuations

	Value attributable to Hyprop			Value per rentable area
Business segment	Rentable area m²	30 June 2016 R000	30 June 2015 R000	30 June 2016 R/m²
Shopping centres	649 479	25 282 472	23 790 630	42 870
Value centres	90 600	1 755 000	1 734 000	19 371
Total retail	740 079	27 037 472	25 524 630	39 993
Standalone offices	23 811	328 075	315 775	13 778
Properties sold (post year-end)	22 866	365 000	365 000	15 963
Investment property	786 756	27 730 547	26 205 405	38 501

Investment property was valued at 30 June 2016 at R27,7 billion (2015: R26,2 billion), up 5,8% primarily due to income growth.

Investments in sub-Saharan Africa (excluding South Africa)

						Hyprop share of distributable earnings⁽²⁾
	Rentable area m²	Valuation 30 June 2016⁽¹⁾ USD000	Valuation 30 June 2015⁽¹⁾ USD000	Value per rentable area USD/m²	Vacancy %		30 June 2016 R000	30 June 2015 R000
Total portfolio	127 660	562 400	339 870	4 405	4,0		83 654	42 368
⁽¹⁾ Valuation reflects 100% of the asset value ⁽²⁾ Hyprop share of distributable earnings is reflected after interest on in-country debt and after interest on corporate debt

Distributable earnings from the investments in sub-Saharan Africa (excluding SA) increased by 97,4% to R83,7 million, in part due to income from West Hills Mall (Accra, Ghana - effective November 2014), Achimota Retail Centre (Accra, Ghana - effective November 2015) and Ikeja City Mall (Lagos, Nigeria - effective November 2015).

Distributable earnings from the investments in sub-Saharan Africa (excluding SA) benefited from exchange rate gains of R15,9 million.

Investments in sub-Saharan Africa (excluding SA) to date total R4,3 billion (excluding in-country debt in Nigeria) and are financed with USD bank funding.

Investments in South-Eastern Europe

						Hyprop share of distributable earnings ⁽²⁾
	Hyprop’s effective shareholding %	Rentable area m²	Valuation 30 June 2016⁽¹⁾ EUR000	Value per rentable area EUR/m²	Vacancy %	30 June 2016 R000
Total portfolio	60,0	53 605	206 100	3 845		31 944
⁽¹⁾ Valuation reflects 100% of the asset value ⁽²⁾ Hyprop share of distributable earnings is reflected after interest on corporate debt

The purchase of Delta City Podgorica (Montenegro) was effective in February 2016, while the purchase of Delta City Belgrade (Serbia) was effective in April 2016. Implementation of the acquisitions are progressing well and income is in line with expectations.

The purchase consideration for Delta City Podgorica has been paid in full, while payment of EUR49,3 million of the total purchase consideration relating to Delta City Belgrade was delayed, pending the fulfilment of certain conditions.

Notwithstanding the delay in payment, all net property income from Delta City Belgrade accrued to the purchasers from the effective date in April 2016. The outstanding amount was paid in September 2016.

The Delta City acquisitions were funded with EUR-denominated bridge funding, supported by a guarantee from Hyprop. The bridge funding will be refinanced within 12 months following the initial draw-down of the bridge loan. The long-term funding for the transaction will be at a higher cost than the bridge funding. It is anticipated that the long-term funding of the transaction will be in place from February 2017.

The delay in payment of the final tranche of the purchase consideration for Delta City Belgrade, as well as the lower cost of funding for the bridge loan, are both once-off benefits to Hyprop in the 2016 financial year and the first half of the 2017 financial year.

Net asset value

The net asset value (NAV) per share at 30 June 2016 increased by 6,1% to R94,50 (2015: R89,04). The increase was primarily due to an increase in the independent valuation of the investment property portfolio.

At 30 June 2016, the closing share price of R129,89 represented a premium of 37,4% to the NAV per share.

Borrowings

	30 June 2016 Rm	30 June 2015 Rm
Bank debt	9 344	4 520
South Africa	2 992	2 327
USD (Rand equivalent)⁽³⁾	4 842	2 193
EUR (Rand equivalent)⁽⁴⁾	1 510
Debt capital market funding (South Africa only)	1 640	2 172
Corporate bonds	1 200	1 800
Commercial paper	440	372
Cash and cash equivalents	(239)	(138)
Net borrowings	10 745	6 554
Loan to value %	30,8	22,9
Debt at fixed rates (%)
South African debt %	89,6	96,7
USD debt %	72,4	89,9
Maturity of fixes (years)
South African debt years	4,9	5,6
USD debt years	3,7	4,1
Cost of funding %
South African debt %	8,9	8,4
USD debt %	4,6	4,4
EUR debt %	1,7
Debt capital market (DCM) % of total debt	15	19
⁽³⁾ The USD debt includes 75% of the in-country debt relating to Ikeja City Mall (Lagos, Nigeria) ⁽⁴⁾ The EUR debt, which relates to Hyprop’s effective 60% interest in the South-Eastern European shopping malls, is not consolidated on the Hyprop statement of financial position

The Rand equivalent of USD-denominated bank debt increased due to the acquisition of Ikeja City Mall, ongoing development activity in AttAfrica and Rand depreciation against the USD.

The loan-to-value (LTV) ratio at 30 June 2016 increased to 30,8% (2015: 22,9%), largely due to the inclusion of the funding of Hyprop’s effective 60% share of the Delta City malls (Serbia and Montenegro) as well as the funding of Hyprop’s 75% share of Ikeja City Mall (Lagos, Nigeria).

The debt to acquire the Delta City malls comprises short-term bridge funding and the interest rate has therefore not been fixed.

Subsequent to year-end, a maturing South African bank facility amounting to R1,2 billion was refinanced with DCM funding (three, four and five-year corporate bonds). This has increased the ratio of DCM funding to total debt to approximately 25%. All of Hyprop’s DCM funding is unsecured.

Distributable earnings statement and reconciliation to dividend declared

	Distributable earnings 12 months
	30 June 2016 R000	30 June 2015 R000
South African property portfolio	1 848 151	1 752 187
Investments in sub-Saharan Africa (excluding SA)	83 654	42 368
Investments in South-Eastern Europe	31 944
Word4Word Marketing	1 000	4 243
Fund management expenses	(64 922)	(62 001)
Net interest	(394 310)	(417 178)
Antecedent dividend	16 704
Total distributable earnings	1 522 221	1 319 619
Total shares in issue at year-end	243 256 092	243 256 092
Treasury shares in issue	(410 659)	(265 659)
Shares issued, August 2016	5 185 186
Shares in issue for distributable earnings	248 030 619	242 990 433
Dividend per share cents	619,9	543,0
Dividend per share growth %	14,2	15,0

Net interest costs for the period of R394,3 million (2015: R417,2 million) reduced due to non-core asset sales in the second half of the 2015 financial year, amounting to R833 million (Stoneridge and CapeGate Value and Lifestyle centres), the proceeds of which were applied to the repayment of debt.

Subsequent to year-end, 5,2 million new shares were issued at R135 per share. The issue of new shares after year-end, but prior to the record date for the final distribution, resulted in an antecedent dividend amounting to R16,7 million. In accordance with industry best practice, the antecedent dividend has been added back in the calculation of distributable earnings for the year.

In the summarised consolidated results published on 2 September 2016, the antecedent dividend was reflected as R32,1 million. The correct figure is R16,7 million. For further detail, refer to note 37.3 of the group annual financial statements.

The proceeds of the equity issue will be applied to the reduction of Rand-denominated debt and to ongoing capital expenditure in the South African portfolio.

Cash management

All rental income earned by the company, less property expenses and interest on debt, is distributed to shareholders semi-annually.

Cash collected between distribution payments is paid into ﬂoating-rate debt facilities to beneﬁt from the interest saving.

New developments and capital expenditure are funded with debt while acquisitions, depending on their size, may be funded in part by equity. Proceeds from the sale of non-core assets are applied to capital expenditure, developments and the reduction of debt.

Appreciation

I thank my finance team for their dedication, commitment and hard work during the year. I also extend my appreciation to my fellow board members for their sound advice and valued guidance.

Laurence Cohen
Financial director