In a SENS announcement, Growthpoint Properties released its FY21 nine-month trading update for the period between July 2020 and March 2021.
The REIT reported a bolstered balance sheet with a decrease in its group loan-to-value ratio (LTV) to 40.7% as of the 31st of December 2020. Growthpoint attributes this to the R4.3 billion equity raised in November 2020, together with the R577 million proceeds from the December 2020 Distribution Reinvestment Plan, the R827 million retained for FY20 and the R499 million retained for HY21 because of reducing its payout ratio to 80%.
While property development has been scaled back, Growthpoint continues to match the value of capital and development expenditure (R533 million at HY21) with assets sales (R497.7 million at HY21), reducing the need for further debt.
The effects of Covid-19 on the company and its tenants have been significant. With a dramatic increase in tenant business rescue and liquidation cases from 2019 to 2020, the thirteen cases in 2019 had a R6.7 million impact on arrears, most of which was written off, compared to the 39 cases in 2020 that have had a R124.4 million impact on arrears with Edcon, Ster-Kinekor and Consolidated Steel the most significant examples.
Post HY21, Growthpoint provided a further R54.5 million in discounts to tenants as well as an additional R5.3 million in deferrals while R16.9 million of deferrals previously provided have recovered. Arrears decreased to R437.9 million at the end of March 2021 from R494.2 million at the end of December 2020 and R512 million at FY20 with R80.9 million written off during the nine-month period. An additional R24.9 million was provided during this period, bringing the total bad debt provision to R277.1 million at the end of March 2021.
Many tenants want to return to their offices but have yet to do so considering the delayed Covid-19 vaccine roll-out and the arrival of the third wave of the pandemic. Hesitant to commit to future office requirements, Growthpoint reported low new letting levels of 131 225m2 in the first nine months of FY21.
Office vacancies increased to 19.5%. Growthpoint’s most significant concentration of offices is in Sandton, where 21.1% of the total office gross lettable area (GLA) is located with the biggest vacancy exposure at around 84 000m2 or 25.4% of total office vacancies. Gauteng is under more pressure than KwaZulu-Natal or the Western Cape, where vacancies are concentrated in one or two buildings.
Non-renewals added 119 317m2 of vacant space, of which some 20 000m2 relate to renewals with reduced space requirements. Leases were terminated in relation to 42 827m2 of space.
Although reduced, Growthpoint reports additional requests for relief from tenants whose businesses are under pressure. However, the collection of rental deferrals previously provided has been better than anticipated.
Arrears of approximately R92.8 million as of the 31st of March 2021 equates to 19.4% of collectables, down from R106 million at HY21, with many of the persistent and larger arrears provided for.
Growthpoint achieved a renewal success rate of 53.5% and the average renewal lease term increased to 4.7% due to the signing of a significant lease with Absa in Sandton.
Longer lease periods are still being attained at the expense of renewal rental growth, which at the end of March 2021, was -15.1%. With an oversupply of space in the market and pressure on occupancy levels, rental renewal growth will face downward pressure across the sector.
Five of Growthpoint’s non-core assets are in various stages of disposal for approximately R340 million.
Growthpoint reports that supermarkets, pharmaceutical, homeware, general value, and value fashion are recovering faster than others but, most of its tenants are still trading below pre-Covid-19 levels.
Its shopping centres have performed differently, with community centres outpacing all others to show trading density growth.
Growthpoint continues to assist retailers in the restaurant, fast food, entertainment, travel, and personal care categories through discounts, deferrals, or restructuring leases to more sustainable rentals. It has provided relief of R103.8 million in discounts and R3.9 million in deferrals with R4.2 million of prior deferrals recovered in the nine months and it expects further relief requests as South Africa enters the third wave.
An 88.6% renewal success rate was achieved by renewing leases over 178 302m2 of the 201 231m2 that expired during the period. Renewals were concluded at a weighted average growth of 15.2% in a highly competitive and challenging market. With retailers focusing on cost containment and negotiating reduced rentals and escalations, downward pressure on rental levels at lease expiry and, in a few extreme cases, mid lease, continued to regress the weighted average rental renewal growth on expiry.
Arrears have reduced to R173.3 million, representing 31.8% of collectibles as of the 31st of March 2021, down from R219.9 million as of the 31st of December 2020. Edcon arrears have been written off but Ster-Kinekor and CNA – both in business rescue – contribute to the largest arrears, accounting to 14% of total arrears.
Growthpoint has nine leases each with Ster-Kinekor and CNA, representing 21 020m2 and 3 491m2, respectively.
Vacancies edged up to 5.9% from December 2020’s 5.4% and the core vacancy (excluding offices and spaces under development) is 5.3%.
Six non-core shopping centres are in various stages of disposal for approximately R500 million with Edgars Bloemfontein transferred in HY21.
Leases over 353 000m2 of industrial space expired in the nine months, of which 220 050m2, or 62.2%, were renewed with a weighted average renewal growth rate of -11.7%.
Industrial vacancies moved from 8.0% from 7.1% at the half-year with Durban experiencing the lowest vacancy levels (3.8%), followed by Johannesburg (8.8%) and Cape Town (10.0%).
Arrears of R116.2 million as of the 31st of March 2021 equates to 25.3% of collectibles, increasing from R109 million at HY21. Many of the major arrears relate to increased business rescue and liquidation processes.
Growthpoint has 20 industrial assets of R640.9 million in various stages of transfer.
The V&A Waterfront’s footfall for the nine-month period dropped to 10.3 million visitors, 50% lower than the nine months to end-March 2020. Current footfall levels are at 70% – 75% of the 2019 comparative period. The lack of international tourism accounts for approximately 30% of the shortfall.
Office assets at the V&A Waterfront reported gross revenue of 35% below the same period in March 2020, driven by a 45% and 51% drop in the retail and hospitality sectors. This resulted in a 51% reduction in earnings before interest and tax to R471 million for the nine-month period of which 50% accrues to Growthpoint. Although vacancies increased slightly to 2.9%, this remains well below the industry average with arrears increasing to R196 million of which R94 million is provided for.
The V&A Waterfront obtained approval from the City of Cape Town to allocate approximately 100 000m2 of its existing bulk rights to expand the 10.5-hectare Canal District. The estimated R3.9 billion development pipeline will include projects on either side of Dock Road and around the Battery Park development.
In December 2020, the new 9 350m2 office for Deloitte was completed and received a 6-star Green Star Design rating. Makers Landing, a 3 300m2 kitchen incubator supporting early-stage businesses and entrepreneurs in the food industry, created around 130 jobs when it opened with R20 million in funding received from the Jobs Fund.
Growthpoint Healthcare Property Holdings
Growthpoint Healthcare Property Holdings continues to build a promising pipeline of development and acquisition projects.
With all tenants paying rent as per their lease agreements, deferrals Growthpoint provided last year have mostly been collected. Only three months of the twelve-month rent deferment provided to one hospital will remain due after FY21.
The fund concluded the acquisition of 51% of the Busamed Paardevlei Hospital property in Somerset West for R98.7 million. Busamed will use part of the proceeds to pay the Covid-19 rental deferment arrangements the fund provided to the Busamed Hillcrest and Gateway Hospitals.
Transfer of the Cintocare Hospital, developed by the Growthpoint trading and development division, is imminent and transfer is expected before the end of June 2021.
The transaction with the IFC for a US$80 million equity and convertible debt package is nearing closure. The funds should flow in early FY22. A bridging facility has been arranged with a local bank to fund both the Busamed Paardevlei and Cintocare acquisitions in the interim.
Growthpoint Healthcare Property Holdings continues to engage with development finance institutions (DFIs), institutional investors, asset consultants and pension funds regarding a further equity raise.
Lango Real Estate Limited
Lango Real Estate Limited (previously Growthpoint Investec African Properties) continued to deliver robust performance despite challenging markets. In terms of acquisition activity, it acquired the remaining minority shareholdings in the Wings Office Complex in Lagos, Nigeria, in January 2021 and the Stanbic Heights office building in Accra, Ghana.
Having deployed all its initial equity raised and having achieved significant further growth, Lango recently announced a second fundraising period, which commenced on the 1st of May 2021, and it will run for six months to the 31st of October 2021. The fundraising process will enable existing investors to follow pre-emptive rights and allow potential new investors to subscribe for shares.
Lango budgeted for rental concessions and deferrals in the 2021 financial year of US$2.8 million to support small business tenants, and smaller retail tenants. The provision of additional support post the2021 financial year is currently not envisaged. The various markets in Africa in which Lango is invested continue to show signs of recovery and are re-gaining ground to pre-Covid levels of trade. Consequently, Lango continues to see a steady improvement in footfall and turnover metrics at its retail centres.
Following the unrest in Nigeria in late 2020, which resulted in property damage to Circle Mall, a complete reinstatement project is underway, with completion anticipated in late 2021 or early 2022. In the interim, the property’s income is protected by comprehensive insurance cover.
Lango’s asset portfolio value is expected to be adjusted marginally downwards by around 3% following an independent annual valuation of its assets, which considers current market conditions. Any valuation adjustments are expected to be significantly offset by the accretive nature of Lango’s various transactions concluded during the year, including the minority transactions mentioned above. While the underlying operational performance of the assets remains robust, certain markets are challenging. Currency liquidity and convertibility issues, particularly in Nigeria, are complicating Lango’s ability to externalise income generated in that country. This process is more straightforward for assets in Ghana and Zambia, highlighting the value of diversification. Nonetheless, Lango expects to announce a final dividend for its 2021 financial year shortly. This dividend will follow its maiden distribution, which was declared and paid to shareholders in December 2020.
Lango’s LTV remains relatively stable, and the business recently completed a full restructure of its entire debt portfolio. The US$300 million debt restructure, reported to be the largest real estate finance transaction to be concluded in Africa (ex-South Africa), has resulted in a lowered cost of funding for the Lango group, as well as enhancing its operational activities through a simplified debt structure and a set of risk covenants which have been harmonised across the business. Lango’s management company is also in active discussions to introduce a B-BBEE partner in 2021.
Treasury and capital management
Growthpoint’s total nominal debt at the end of March 2021 was R37.9 billion. Its R750 million bond auction in April 2021 was three times oversubscribed. The REIT successfully placed R249 million of three-year paper at 155bps over the Johannesburg Interbank Average Rate (Jibar) and R498 million of five-year paper at 199bps over Jibar. The proceeds were used mainly to repay maturing bonds: R594 million in May 2021 and R100 million in June 2021.
In line with the company’s objective to decrease its exposure to offshore funding in respect of its offshore investments, Growthpoint settled a ZAR/EUR cross-currency interest rate swap (CCIRS) of €43 million.
At the end of March, unutilised committed facilities totalled R5.0 billion, and the surplus cash balance was R2.0 billion.
The weighted average term of all liabilities was 3.0 years at the close of the third quarter. Growthpoint’s weighted average interest rate was 8.1% (8.2% FY20). Including CCIRSs and foreign-denominated loans, it decreases to 5.9% (5.9% FY20). A total of 85.8% of its interest rate book was hedged for a weighted average term of 2.9 years.
The quantum of dividends the company expects to receive from GWI is less than initially anticipated due to the impact of Covid-19 and GWI now paying a more sustainable level of dividends. Due to this decrease, the Euro dividend currency exposure is over hedged. Anticipated FY21 dividends from Lango and GOZ are well hedged.
Growthpoint is considering various alternatives for our $425 million Eurobond, which matures in May 2023.
Growthpoint intends to continue to pay dividends twice a year of at least 75% of distributable income, to preserve its REIT status.
The company will release its FY21 results on Wednesday, the 15th of September 2021.