Interim dividend reinforces Growthpoint’s commitment to retaining REIT status

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

Growthpoint Properties has delivered 12.5% growth in revenue and R2.5 billion in distributable income for its six-month period to the 31st of December 2020.

Compared to the six months ended in 2019 before Covid-19, distributable income decreased by 21.6% which on a per share basis decreased by 31.0% to 73.1 cents per share, mainly because of 408 million new shares issued in November 2020 through a R4.3 billion equity raise and the dividend reinvestment programme, which raised an additional R577 million.

Norbert Sasse, Group CEO of Growthpoint Properties attributes a steady first-half performance to the better-than-expected showing from its South African portfolio, trading and development delivering handsomely, income from funds management gaining impetus and its Australian investment outperforming in its offshore portfolio.

Growthpoint continued to prioritise balance sheet strength and liquidity and focused on the factors that we can control in this market. Therefore, our results show a very stable business that is in good shape. We have lowered our South African gearing comfortably within our target range and have R5 billion of liquidity. Growthpoint has a strong balance sheet, enabling us to pursue our strategic initiatives and declare a dividend of 80% of distributable income. By paying our shareholders an interim dividend, we are reinforcing Growthpoint’s commitment to retaining our REIT status and our intention is to continue paying dividends twice a year of at least 75% of distributable income” he says.

The positive outcomes of Growthpoint’s focus on liquidity and balance sheet strength are evident in its half-year numbers. The company’s consolidated SA REIT loan-to-value (LTV) decreased from 43.9% to 40.7% during the six months, with its South African LTV reducing from 39.8% to 35.5% and an interest cover ratio (ICR) of 3.8x. Growthpoint reduced its nominal debt in South Africa from R43.4 billion to R37.8 billion during the period through R4.4 billion of repayments of R1.2 billion due to the stronger domestic currency. It has R5 billion of unutilised committed facilities and R1.1 billion of cash on its balance sheet at the 31st of December 2020. Growthpoint achieved its healthy LTV levels, despite a further 3.6% devaluation of its South African portfolio, which decreased in value by 13% over the 2020 calendar year due to unsupportive property fundamentals driven mainly by growth in income uncertainty.

Contributing to Growthpoint’s balance sheet strength was a R4.3 billion equity raise in November 2020 at R12.0 per share, which was 2.7x oversubscribed. Additionally, 43.2% of shareholders elected the share alternative, raising R577 million through the FY20 November distribution reinvestment programme. By reducing its FY20 dividend pay-out ratio to 80%, Growthpoint retained R827 million after paying tax of R154 million, and it will retain R499 million distributable income for the half-year by again applying an 80% pay-out ratio.

During the half-year, Growthpoint’s South African portfolio achieved a 97% average rental collection rate, and recovered R125 million, or 68%, of total rental deferrals granted since the onset of the pandemic. It let more than 633,000m2 of space and its renewal success rate increased from 66.4% to 68.0%. Arrears of R494 million are well provided for. However, several portfolio fundamentals continued to weaken, with vacancies rising from 9.5% to 10.3% and average rental reversions moving from -6.7% to -13.9%. Given the state of the market in the half-year, a bigger than usual portion of its portfolio was externally valued, with its retail portfolio value decreasing by 3.2%, offices 4.7% and industrial 3.1%.

Growthpoint intensified its focus on right-sizing its portfolio through the strategic sale of non-core assets, a programme which it commenced in its 2017 financial year and has since sold R7.5 billion in properties. Despite little liquidity and a challenging sales environment, it sold five properties during the period for R497.7 million at book value and held two valued at R55.5 million for sale at half-year end.

Development expertise is a competitive advantage for Growthpoint. While Growthpoint does not distribute non-recurring income, its trading and development activity proved very profitable during the half-year, earning R128 million of third-party trading profits, development fees and rental income. In step with the current market, development was curtailed to around a third of previous levels, and speculative development avoided. Turnkey developments for the Growthpoint investment portfolio remain a key focus, as well as third-party developments.

The South African retail property portfolio vacancies edged up slightly from 3.7% to 4.8%, excluding offices and space under development. While the renewal success rate improved, renewal growth, escalations and arrears all came under pressure. Trading densities, and net property income reduced in this portfolio, which accommodates gyms, restaurants, cinemas, and other tenants severely impacted by the Covid-19 lockdowns. Growthpoint granted R66.6 million in discounts and R2.2 million in deferrals to its retail tenants. Community and convenience centres outperformed larger malls, and value retail attracted the most spending. On-demand shopping services such as OneCart and Checkers Sixty60, which shop from retailer’s shelves, positively impacted in-mall sales. Growthpoint finalised the Edcon business rescue legacy, writing off both the arrears and investment.

Growthpoint’s South African office portfolio vacancies rose from 15.4% to 18.0%. Renewal successes and arrears improved, but all other metrics in this portfolio deteriorated. Growthpoint granted R14.4 million in discounts and R8.4 million in deferrals to its office tenants. It is new Altron campus redevelopment at Woodmead Office Park in Woodmead was completed after the period in February, with rental commencing on a long-term lease from this month.

Growthpoint’s industrial portfolio continued to outperform relatively, despite vacancies increasing from 7.1% to 8.2%, mostly due to the slower letting of new developments in Cape Town and Durban, and an upward trend in business failures in our tenant base. It reported steady escalations, arrears, and net property income levels, but renewal success and growth rates decreased. Growthpoint remains focused on modernising its industrial portfolio and selling non-core industrial assets.

There is some optimism about a rebound in South Africa, but the property industry lags many other sectors and is slower to reflect a change in trends. Any improvement will take time to filter through. There is likely to be a multi-year recovery in GDP. Even if the economy grows at forecast levels of between 3.3% and 4.6% in 2021, off the low base of a 7.0% contraction in 2020 it will take two to three years to reach pre-Covid-19 levels. We expect further financial and operational headwinds. We still see many business rescues and liquidations. There is a lot of capacity in the office and retail sectors, and it is not yet possible to gauge the structural shifts of work-from-home. In this difficult environment, our relatively stronger balance sheet gives us great comfort,” remarks Sasse.

The V&A Waterfront was severely impacted by various lockdown restrictions, the absence of foreign tourism, its cruise terminal’s closure, and leisure limitations. Retail turnover decreased by 36% compared to the 2019 half-year. Hotel occupancy rates were 20% compared to 70% during the same six months in 2019 and precinct footfalls nearly halved, notwithstanding good local tourism support. The V&A’s robust office portfolio proved resilient due to a high percentage of blue-chip tenants, supporting low vacancies and no material lease terminations. As an essential service, the fishing industry traded and paid rental throughout the period. Casual shipping and yachting remained strong. The cumulative impact was a 48% decline in net property income, with pressure on collections, arrears, and property values.

Notwithstanding its challenges, the V&A Waterfront achieved several highlights, including completing a new 9,350m2 head office development for Deloitte, approving a 6,900m2 head office for Investec, leasing most of the ex-Edgars space to Zara, and introducing an incubator for early-stage food industry businesses, Makers Landing.

“The return to lockdown level 1 supports performance, but with the global impacts of the pandemic, it is difficult to know when international tourists will return, which is critical for the V&A Waterfront. However, it remains a strong asset with solid property fundamentals,” explains Sasse.

Growthpoint’s capital light funds management strategy allows it to access third party capital and leverage its management strength in the unlisted and co-invested environment. Growthpoint continued building its first two funds and plans to launch a third fund invested in purpose-built student residential accommodation. During the half-year, this strategic focus earned Growthpoint R16.3m in asset management fees and distributions of R62.2 million from the hospital fund. It also received a maiden dividend of R3.7 million from the Africa fund, which Growthpoint elected to reinvest, and a distribution from the management company is expected to be paid to Growthpoint before 30 June 2021.

“Our funds management model is a core strategy. The co-investment and co-management model are effective and particularly attractive in this market” explains Sasse.

The healthcare fund, Growthpoint Healthcare Property Holdings (GHPH), in which Growthpoint has a 61.8% shareholding, grew half-year distribution per share by 7.5% to 40.8 cents per share. The fund has a R2.7 billion portfolio of four hospitals and a medical chamber. Growing its portfolio, the acquisition of 51% of the 100-bed Busamed Paardevlei Hospital in Somerset West is final and awaiting transfer. Cintocare Hospital, developed by Growthpoint in Pretoria, opened in December 2020 and is to be acquired by the fund. A USD80 million equity and convertible debt package from the International Finance Corporation is in the final stages of negotiation and is intended to finance development and acquisition opportunities, for which the healthcare fund has a healthy pipeline of around R4.5 billion.

Growthpoint has a 16% shareholding in Lango Real Estate (formerly Growthpoint Investec Property Fund or GIAP), which owns a USD638 million quality portfolio of income-producing real estate assets, comprising of eleven prime office and retail properties in Ghana, Nigeria, Zambia, and Angola. Lango performed well throughout the pandemic to pay its maiden distribution to shareholders.

In January 2021, Lango acquired the final minority stake in the Standard Chartered office building in Accra, Ghana, and now owns 100% of the asset. It is in advanced discussions with potential investors to raise additional capital. In line with capital raised, it has assembled an exciting pipeline of assets for investment as it continues to lead the African real estate market.

Growthpoint’s international investment remains at steady levels of around 40% of its property assets by book value and just over a quarter of earnings before interest and tax. It intends to refine its approach to offshore investment.

GOZ is a core investment for Growthpoint, with its defensive portfolio of quality office and industrial assets with strong tenancies. GOZ’s dividend decreased from AUD11.8 cents per share to AUD10.0 cents per share, as it chose to reinforce its capital structure thereby decreasing its pay-out ratio. Covid-19 had little impact on GOZ’s earnings and performance. Underpinning its resilience, 97% of its tenants comprise big corporates and government, and it has no retail assets. Rental collection rates remained above 98% throughout the pandemic, and GOZ closed the period with a portfolio occupancy of 95%, which will increase to 97% in the second half. Significant longer-term leases were signed during the six months – including hardware chain Bunnings as a key tenant for Botanicca, taking the portfolio’s weighted average lease expiry to 6.2 years. During the half-year, its asset values increased, and gearing levels decreased further to a low 29.9% with good liquidity of over AUD400m cash available.

“GOZ enjoys a strong capital position with gearing well below its target range, supported by positive property fundamentals and prospects for acquisitions and fund management, as well as merger and acquisition opportunities. A faster economic recovery is expected for Australia, and GOZ’s quality metropolitan office portfolio is expected to be particularly resilient, while its industrial portfolio is poised to benefit from the rapid growth in e-commerce,” reports Sasse. GOZ has guided a distribution of AUD20.0 cents per share for its 2021 financial year.

Growthpoint’s Central and Eastern European investment platform, Globalworth, comprises office and industrial assets, with little retail property. It has 38 assets in Poland and 26 in Romania. By retaining cash to reinforce balance sheet strength, Globalworth delivered significantly diluted dividends of EUR15.0 cents per share. Its inaugural green bond raised EUR400 million in July 2020, with a 2.95% coupon for six years, and was 2x oversubscribed. Globalworth’s portfolio proved defensive, with rental collections at 98.7% across 2020. It completed three new developments in a relatively quiet period with investment activity suspended. It closed 2020 with a portfolio occupancy of 91.7% including options, reflecting slower take-up of space in the new developments due to Covid-19.

“Globalworth has been relatively unaffected by the pandemic, with its strong balance sheet and a solid base of multinational tenants which favour the region,” Sasse points out.

In the UK, Capital & Regional was hard hit by Covid-19, and Growthpoint’s investment case in this pure retail REIT was severely impacted, notwithstanding its favourable community centre strategy, with a high proportion of non-discretionary retail. While all its shopping centres remained open throughout 2020, only around 30% of retailers could trade for the full year. There was some reprieve during the six months, and in mid-December 98% of the portfolio was trading before lockdown restrictions were re-introduced. Exacerbated by the pandemic, 17 national retailers faced business failure. Together, this placed pressure on income (down GBP15.1million), values (down 27.5%), and leverage (net LTVof 65%). Capital & Regional has signed waivers for all current income covenants with all its financiers. Its high cash reserves of over GBP80 million protect its liquidity position. Even in this challenging environment, Capital & Regional collected 80% of rental during the 2020 calendar year and reported a resilient 92% commercial occupancy at end-December.

“The UK’s easing of restrictions should allow all non-essential retailers to re-open by mid-April. However, the pandemic has accelerated structural shifts already underway in UK’s retail industry. More certainty is needed to accurately assess Capital & Regional’s altered retail landscape and business needs and determine the best approach to address its debt levels and shape its future,” says Sasse.

Growthpoint remains focused on protecting its balance sheet and optimising its advantages in a persistently challenging environment.

“In an extremely uncertain time, we have demonstrated the benefits good liquidity and balance sheet strength. This will remain a clear focus and priority, which supports our sustainability and performance for all our stakeholders and enables Growthpoint to continue to advance its strategic thrusts,” concludes Sasse.