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Growthpoint unable to deliver a growing dividend; a first in sixteen years

Norbert Sasse, Growthpoint Properties Group CEO
Norbert Sasse, Growthpoint Properties Group CEO.

Growthpoint Properties delivered 5.4% growth in revenue and R5.5 billion in distributable income for the company’s full year to the 30th of June 2020.

With additional new shares issued during the period, this translates to distributable income per share of 183.1 cents per share, which is 16.0% lower than the previous financial year. Growthpoint declared a 106 cents per share dividend for its half-year and it has yet to announce its second-half dividend.

Norbert Sasse, Group CEO of Growthpoint Properties says that at times, we all seek to strike a balance between a conservatively managed and sustainable business and the interest of Growthpoint’s investors in optimising distributions.

While no final dividend has been declared for FY20, subject to there being no material regulatory changes or market disruptions which may have a substantially negative impact on our overall financial position between the date of publication of our results, and the date of declaration of the final dividend for FY20, the Growthpoint Board is considering declaring a final dividend based on a pay-out ratio of not less than 75% of distributable income for FY20 which will ensure compliance with current REIT legislation.”

For the first time in sixteen years, Growthpoint has been unable to deliver a growing dividend to its shareholders in a period where results were negatively impacted by Covid-19 lockdown restrictions.

“Never before has Growthpoint experienced such a challenging operating environment. Following a detailed strategic review of short and long-term strategies, the Growthpoint Board of Directors is prioritising liquidity and balance sheet strength in the short term, considering the weak property fundamentals in SA in particular, and the current cycle of falling asset values and rising gearing levels. This will enable us to continue to pursue our strategic initiatives of internationalisation, optimising and streamlining our SA portfolio and introducing new revenue streams through third-party trading and development as well as funds management, which all remain relevant for our business” Sasse adds.

Growthpoint owns and manages a diversified portfolio of 440 property assets across South Africa valued at R73.4 billion and a 50% interest in the V&A Waterfront in Cape Town, valued at R9.4 billion. Growthpoint owns 58 properties in Australia valued at R51.8 billion through a 62.2% holding in ASX-listed Growthpoint Properties Australia (GOZ). This year Growthpoint acquired a 52.1% investment in LSE-listed UK REIT Capital & Regional, which has a secondary listing on the JSE and owns a portfolio of seven community shopping centres valued at R14.8 billion. Through its 29.4% investment in LSE AIM-listed, Globalworth Real Estate Investments (GWI) it owns an interest in 62 properties in Romania and Poland, of which Growthpoint’s share is valued at R17.2 billion.

Growthpoint’s consolidated South African REIT loan-to-value (LTV) increased during the year to 43.9%. The higher figure is partly due to Growthpoint’s early adoption of the second edition of the SA REIT Best Practice Reporting guidelines, which includes a new standard calculation for SA REIT LTV that increases this number for Growthpoint by 1.7%. Using the previous calculation basis, Growthpoint’s LTV is 42.2%. Debt owing in South Africa increased by R8.1 billion, including R1.8 billion relating to the translation of Rand balances of EUR, GBP, and USD loans, given the weaker domestic currency. The balance was due to Growthpoint’s further investment of R600 millio in Growthpoint Investec African Properties (GIAP), R1.3 billion in Globalworth, its new R2.9 billion investment in Capital & Regional, and development and maintenance capital expenditure of R2.0 billion in its South African portfolio, all of which were mainly funded by debt.

LTV was also impacted by the 8.8% (R7.1 billion) devaluation of Growthpoint’s South African portfolio. Its retail portfolio value decreased by 11.3%, offices 8.9% and industrial 5.8%. Growthpoint’s South African business’ SA REIT LTV increased to 39.8% from 31.8%.

Growthpoint’s net property income (NPI) from its South African business dropped by 8.7% (R559 million) of which 93.0% was directly due to the impact of Covid-19 in the final quarter of its financial year, including R277 millions of discounts granted to those tenants most severely impacted by the lockdown between April and June. Arrears increased in all sectors to an unprecedented high of R511 million. Expenses surged with a R236 million provision for bad debts, including a 25% provision on the R141 millions of rental deferments Growthpoint offered to tenants and R7.0 million of extra Covid-19-specific costs.

In South Africa, Growthpoint let more than one million square meters of space during the year. All South African portfolio fundamentals weakened, with vacancies rising from 6.8% to 9.5%, renewal success rates decreasing to 66.4% from 70.1%, and average rental reversions moving deeper into negative territory from -5.3% to -6.7%.

Growthpoint completed developments and capital expenditure projects worth R2.0 billion. While it has scaled back on all non-essential capital projects, Growthpoint remains committed to a further R634.4 million. It earned third-party development fees of R11 million and R30 millions of development rental income in the year. Growthpoint successfully disposed of R581.8 million of non-core assets and made R274.6 million of strategic acquisitions to optimise and streamline its SA portfolio.

Sasse notes, “Growthpoint’s trading and development expertise continued to give us a competitive advantage, but in line with market conditions it is likely that the scale of activity will decrease, and we have suspended speculative development for now.”

South African retail property portfolio vacancies edged up slightly but remained a low 3.7% excluding offices and space under development. Growthpoint concluded a transaction with the various acquirers of the Edcon brands which will see 90% of the related 88,680sqm of space in Growthpoint’s portfolio remain let at new market rentals. A further leasing triumph saw the previously mothballed vacancy at Lakeside Mall, Benoni, leased to two new anchor tenants, Pick n Pay and Dis-Chem as part of a spectacular upgrade to the mall.

Growthpoint’s South African office portfolio enjoyed numerous successes during the year, including fully letting its new development at 144 Oxford Road in Rosebank, Johannesburg, to blue-chip clients including anchor tenant Anglo American. However, with business failures increasing, letting slowed. Office portfolio vacancies rose 5% to 15.4% during the financial year, which has improved with a further 20,000sqm of letting since year-end. The ex-Deloitte space of 39,800sqm at Woodmead Office Park in Sandton was successfully re-let on long-lease terms to Altron and DRA Global well in advance of becoming available, but the lockdown delayed occupation which is now expected before 2021.

Growthpoint’s industrial portfolio held up relatively well. New and in-force escalations in the industrial portfolio are around the 8% mark. Growthpoint targeted and successfully increased its portfolio presence in the Cape Town and Durban metros. The final phase of the 38,000sqm Mill Road Industrial Park, Cape Town, was completed as was the 20,000sqm Trade Park industrial park development in Mount Edgecombe, KwaZulu-Natal. The weak economy and Covid-19, however, slowed leasing take-up at these developments.

“South Africa has a difficult recovery ahead with a more than 10% contraction in GDP expected this year amid a global recession. A sharp deterioration in already stressed property fundamentals will exert profound pressure on the sector. An increase in business failures will be a major factor. It is too early to understand the full extent of the structural changes taking place in the office and retail sectors. Still, we know that this environment definitely won’t be easy,” remarks Sasse.

The V&A Waterfront, which was severely impacted by the Covid-19 national lockdown due to its heavy reliance on local and international tourism and its higher exposure to hospitality, leisure and high-end fashion retail delivered R606 million, which amounts to 10.6% less in investment income to Growthpoint than last year. Visitor numbers are increasing substantially but remain at about 40% of levels this time last year. Its new office development for Deloitte remains on track and is due to welcome the tenant in November.

“We are cautiously optimistic about the V&A Waterfront in 2021. It is a strong asset with solid property fundamentals, but much will rely on the return of international and local tourism,” explains Sasse.

Growthpoint’s funds management strategy allows it to access alternative investment opportunities and leverage its management strength in the unlisted and co-invested environment. Growthpoint now has around R10bn of assets under management and is focused on building its first two funds. Income from the fund’s management business grew by 6.3% (R2 million) to R34 million.

Sasse explains, “The co-investment and co-management model is proving effective and is particularly attractive in the current environment. Growthpoint will continue to pursue innovative partnerships and ways of investing.”

The healthcare fund, Growthpoint Healthcare Property Holdings (GHPH), grew its distribution per share by 5.8% to 77.45 per share. The fund has a R2.6 billion portfolio of four hospitals and a medical chamber, and it completed the 52-bed extension of its Busamed Hillcrest hospital asset during the year. The opening of the Cintocare Head and Neck Private Hospital developed by Growthpoint in Pretoria is now scheduled for January 2021. The acquisition of 51% of the 100-bed Busamed Paardevlei Hospital in Somerset West was also delayed by Covid-19. The R288 millio disposal of 11% of GHPH to Kagiso was finalised during the year. With R973 million of capital raised from third parties, Growthpoint’s shareholding in the healthcare fund was diluted to 61.8%. An USD80 million equity and convertible debt package from the International Finance Corporation is also in the final stages of negotiation.

The Africa fund, GIAP, is emerging as a leader in the African real estate market. It has built a quality portfolio of income-producing assets to attain meaningful scale and relevance. The fund has grown its net asset value to USD301 million and now manages USD638 million of income-producing commercial property assets in Ghana, Nigeria, and Zambia. It has attracted more than 20 local and international investors and is in advanced discussions to raise more capital.

Growthpoint invested a further R4.2 billion offshore during the year, and its international investments are now 40.8% of property assets by book value and 28.2% of earnings before interest and tax. It intends to refine its approach to international investments in the year ahead.

GOZ, with its defensive portfolio of quality office and industrial assets with strong tenancies, outperformed its pre-Covid-19 guidance. With 97% of its tenant base being big corporates and government, and having no retail assets, Covid-19 had little impact on GOZ’s performance, and its earnings were not materially impacted. During the year, its asset values increased, while its cost of debt reduced, and gearing levels decreased to a low 32.2% with good liquidity. Its portfolio occupancy was 97%, excluding its new Botanicca 3 development which was completed in late 2019 and is in the process of being let.

GOZ continued to make a positive contribution to Growthpoint with NPI increasing by 8.6% to R2.5 billion while its operating expenses increased by 8.5% to R153 million. GOZ adopted a conservative approach to its dividends to preserve cash in the business amid ongoing uncertainty. Growthpoint’s dividend income from GOZ in FY20 was R1.010 billion compared to R1.071 billion in FY19, due to an overall dividend decrease of 5.2% from AUD23.0 cents per share to AUD21.8 cents per share, and increased Australian withholding tax, partially offset by an exchange rate that favoured Growthpoint shareholders.

“GOZ is a core investment for Growthpoint. It enjoys strong property fundamentals, a great liquidity position and has the means to pursue growth,” reports Sasse. GOZ has guided a distribution of AUD20.0 cents per share for its 2021 financial year.

Growthpoint’s new investment in the UK, Capital & Regional, was included in its results for the first time. Capital & Regional found itself in a challenging space with its pure retail portfolio exposed to the existing negative impacts of Brexit and the country’s shift to online retail, which were exacerbated by COVID-19. Three months of disruption to shopping centres led to a deterioration in rent payments as many shops could not trade, and a decline in property values across the industry was accelerated. Now 96% of Capital & Regional’s tenants are open and trading, it has a robust 95% occupancy rate and its cash reserves of some GBP80.0 million stand it in good stead to protect its liquidity position. Capital & Regional’s community centre strategy, with a high proportion of non-discretionary retail, positions it to emerge ahead of the curve in its market.

Capital & Regional contributed R380 million to NPI. The maiden dividend from C&R totalled GBP11.0 pence per share which converted into R107 million and, to preserve cash in the business, was paid to Growthpoint in shares via a scrip dividend.

“It is too early to quantify the full impacts of COVID-19 and the accelerating structural shifts in the retail industry on Capital & Regional’s operations, but there is no doubt that it is going to be a long road to recovery,” says Sasse.

Growthpoint’s Central and Eastern European investment platform Globalworth mainly comprises office and industrial assets, with limited exposure to retail property, which stood it in good stead to withstand the impacts of the strict Covid-19 measures imposed in Poland and Romania. The Globalworth portfolio held and increased its value with six acquisitions and one major new development completed, while its gearing remained conservative. Its portfolio occupancy was a solid 94.2% including options at year-end.

Globalworth delivered dividends of EUR49.0 cents per share which was 14% lower than the EUR57.0 cents per share in the previous year, partly as a result of its pay-out ratio being adjusted to match its funds from operations and EPRA earnings. However, Globalworth’s contribution to Growthpoint’s total distributable income for the year increased by 11.3% to R570 million from R512 million last year, as a result of Growthpoint’s additional investment in October 2019 when following its rights in Globalworth’s EUR264 million equity raise, as well as exchange rate gains.

“The relatively strong macroeconomic environment and robust property market fundamentals in Romania and Poland continues to attract multinational tenants to the region, and with its strong balance sheet Globalworth is excellently positioned to continue to benefit,” Sasse points out.

“Growthpoint’s business is run by an excellent team of people who are very engaged and committed to offering our clients superior service that will deliver sustainable returns for all stakeholders in the long term. This year, in profoundly challenging circumstances, their efforts were extraordinary,” acknowledges Sasse.

“Growthpoint is focused on protecting its strengths and advantages in an extremely difficult environment. Our ongoing commitment to best-practice corporate governance will endure while we prioritise our good liquidity and balance sheet strength to underpin our sustainability and ultimately continue to drive our strategic thrusts,” concludes Sasse.