Redefine reaps the rewards from diligent strategy

Redefine Properties (JSE: RDF) has delivered a robust performance during the half year to end February 2016 despite the stiff headwinds facing South Africa’s economy and ongoing political uncertainty.

A 6.9% increase to 41.7 cents a share in the distribution for the six months to end February 2016 has been declared. In Rand terms, distributable income rose 29.3% to R1.9bn. Excluding accretive income benefits from the investment into Poland, the company maintains its guidance of 6-7% distribution growth for the full 2016 year on the back of its well-diversified asset base and the continuing execution of its key strategic priorities

While economic uncertainty and financial market volatility is ongoing, a sharp focus continues on operational efficiency and managing relationships with all stakeholders, including local government. CEO Andrew Konig says these are “challenges we are up to.”

Konig says in the period under review, management focused on “how we can do things better.” This was targeted at creating efficiencies and also resulted in a realigning of structures to cope with new demands and beefing up of the senior management structure as part of a broader asset and property management strategy.

The bulk of Redefine’s local strategy is centred on existing properties and on servicing its significant development pipeline. Leases covering 282 070 sqm were renewed at an average rental increase of 4.3%, with the retention rate at a pleasing 83%.

During the review period, the company completed projects totalling R1.8 billion, representing investment of R700m for the period, outgunning acquisitions of about R400m. Disposals amounted to R1.2 billion, while new development projects with an approved value of R2.3 billion are currently in progress.

“We have successfully recycled capital domestically to fund development as well as new acquisitions,” explains Konig.

Net arrears improved to R34m from R42m at end 31 August 2015 and the company’s financial director Leon Kok says one of the core tenets of Redefine’s business model is its prudent management of cash. “Cash management is critically important and we have also put a greater emphasis on the quality of tenants at inception of leases,” says Kok.

High debt funding costs are expected to constrain future development in the property sector locally, but a rerating of Redefine’s share price has offset the increase in the cost of funding.

The major disposal during the six months related to Redefine’s government tenanted office portfolio, where it has been the company’s stated intention to dispose of these assets. During the period it concluded an agreement with Delta Property Fund which acquired approximately 60% of this portfolio valued at R1.3 billion, in return for Delta shares.

Opportunities for select industrial development remains on the agenda – as an example, Redefine entered into a joint venture with Pivotal and Abland whereby Redefine acquired a 45% interest in S & J land earmarked for an industrial precinct to be serviced and developed in phases based on demand. S&J land comprises a 160 hectare (1.6 million sqm) prime industrial parcel of land located in Germiston, Johannesburg.

On the retail front, expansion and improvement initiatives totalling R1.1 billion are underway to expand, improve and differentiate a number of Redefine’s malls, including Centurion Mall.

A core ongoing offshore strategy is to exploit attractive offshore yield spreads, where debt funding can be locked in for five years at exceptionally low rates. The company’s offshore portfolio is set to grow from 20% currently to 25% once the company’s ground-breaking Polish deal kicks in.

Redefine has broadened its offshore footprint via an initial 75% investment into a 1.2 billion euro high-yielding commercial platform comprising 18 properties in the rapidly-expanding and exciting Polish market. The initial stake will reduce to 49.9% as a result of a placement of shares with co-investors.

Anti-trust clearance has been received for this deal and the company anticipates the acquisition to be fully implemented on June 1 and to add accretive income in the last quarter 2016 at an additional one cent of distribution per share.

“Local property fundamentals remain challenging, with issues like electricity price increases, illiquid capital markets and the impact of drought conditions still permeating the industry. But we continue to deliver on our strategy of diversifying, growing and improving the quality of our core property portfolio, while ensuring that we focus on our people, the fine-tuning of our management structures and delivery to all our stakeholders,” concludes Konig.