Redefine Properties has announced a 32% fall in its distributable income per share for the six months ended 29 February 2020 to 33.46 cents from 49.19 cents in the prior comparable period. While this was mainly due to the need for prudence in recognising offshore dividend streams in the face of the lock down and global volatility – the local portfolio held up well, with the tenant retention ratio at a pleasing and competitive 96%.
CEO Andrew Konig says given the unprecedented and evolving market conditions, property fundamentals, domestically and globally, are going to be challenged for the rest of 2020 and beyond. A “tale of two halves” for the 2020 financial year can therefore be expected.
“We are making decisions and adapting to new rules in an environment where the knowns are outweighed by evolving unknowns. So, while we cannot provide distribution guidance yet due to this evolving, fluid and dynamic situation, we also see this as a unique opportunity to change the way we do things to drive our business forward and to position ourselves to add stakeholder value,” says Konig.
Redefine remains anchored by a diverse property asset platform valued at R89.2 billion and its local portfolio is complemented by property investments in Poland, the United Kingdom (UK) and Australia.
The company continues to make inroads into realising value, with disposals during the period amounting to R707 million and with R1.9 billion deployed into property assets.
In South Africa, the active portfolio vacancy rate increased marginally during the period to 6.0% from 5.7% in the same 2019 half year period. The operating cost margin increased to 36.0% of contractual rental income from 34.7% in the comparable half year period in 2019.
Refurbishments completed during the period were for 155 West Street costing R168.5 million, as well as Kenilworth Centre, Knowledge Park and Sammy Marks at an aggregated cost of R87.0 million. Current redevelopments in progress amount to R29.1 million at Black River Park and The Towers.
Financial director Leon Kok says the current environment demanded that Redefine adopt a “manage for liquidity and sustainability and not for profit” attitude. This means Redefine had to be extraordinarily prudent in terms of its approach to revenue recognition and how it manages its balance sheet.
“Historically we relied on underlying dividend income streams which were forthcoming mainly from our international investments. However, due to the massive crosswinds, conventional thinking has had to be pushed aside,” explains Kok.
During this period in particular, impairments on offshore holdings have played a key role in the financial result. This occurred in line with requisite international financial impairment testing standards due to ongoing global volatility and uncertainty. The carrying amount of EPP for instance – in which Redefine holds 45.4% – was impaired by R442.4 million. The carrying amount of RDI REIT plc, in which Redefine holds 29.4%, was similarly impaired by R121.5 million.
In addition, the constrained local economic conditions and lack of catalysts for meaningful recovery, necessitated the impairment of goodwill and intangible assets totalling R5.6 billion. “The upshot of this is that our net asset value now only represents tangible assets and this impairment has no impact on the loan-to-value ratio,” says Kok.
Kok says Redefine is satisfied that there is sufficient headroom to absorb unexpected headwinds and impacts on revenue.
“We have sufficient liquidity to absorb pressure and continue to place the highest priority on managing our loan to value ratio – now at 44.2% from 43.9% in August last year. The prudent action we have taken will stand us in good stead as local conditions improve going forward.”
The average cost of debt is 6.1% (FY19: 5.8%) and interest rates are hedged on 88.7% (FY19: 87.3%) of total borrowings for an average period of 3.0 years (FY19: 2.9 years).
While Redefine can comfortably meet its solvency and liquidity obligations, it was resolved to defer the decision on the dividend declaration for the six months ended 29 February 2020 until the release of results for the year ended 31 August 2020, expected on November 2, 2020.
Konig says it is too early to call what the future holds from an outlook point of view but Redefine intends to use this crisis as an opportunity to match future initiatives to expected changed consumer behaviour.
“We will look at each of our properties to position them slightly differently to provide a relevant offering which differentiates us from the rest. How we work, play and live will change and we want to revisit our business model to ensure we adapt quickly and profitably,” explains Konig.
There are some positive signs emerging as a phased period to exit the lockdown begins this month.
“We are pleased with the progress in negotiations with tenants to secure rental income while alleviating pressure for those who are really battling. Generous discounts, for instance, have been given to struggling SMMEs. While the payment of rates and taxes remains a sticking point with large clothing retailers, the spirit of Ubuntu continues to shine through by all players in the property sector. We will get through this crisis if we all work together, adapt to changed circumstances and look forward,” concludes Konig.