Accelerate Property Fund writes down portfolio valuation by R660 million

Andrew Costa, Chief Operating Officer of Accelerate Property Fund.
Andrew Costa, Chief Operating Officer of Accelerate Property Fund.

Accelerate Property Fund has released its financial results for the year ended 31st March 2021, reporting reduced revenue from R1.09 billion to R742.7 million mainly due to Covid-19 rental relief assistance of R182.5 million and a negative straight-lining rental adjustment of R78 million.

Other factors impacting the REIT’s revenue line include successful disposals during the year and lower utility recoveries due to lower consumption, especially during the economic lockdown period. Property expenses commensurately reduced by R30 million.

The diversification of Accelerate’s portfolio resulted in a reasonable performance despite the impact of Covid on trading densities at super regional malls. This was however balanced by the resurgence in trade at regional and neighbourhood centres.

The financial year ended 31 March 2021 has no doubt been one of the most challenging in Accelerate’s history as a listed company. Notwithstanding the structural shifts within the sector and Covid related headwinds, we have used this time to stabilise the fund and are busy positioning it for growth as the economy starts to recover” commented CEO Michael Georgiou.

Considering the third wave we are currently operating under this recovery will largely depend on effective vaccine roll-outs”.

We continued to focus on our nodal investment approach with 36 diversified assets with a retail bias located in Fourways and Charles Crescent in Johannesburg, Foreshore in Cape Town and Eden Meander in George”.

We will further strengthen revenue streams and enhance our offering in line with changing market dynamics by repurposing vacant space and utilizing existing bulk at our shopping centres for storage, shared offices or residential”.  

Management’s focus on cost savings resulted in an R11 million saving in other operating expenses during the year.

Fair value adjustments include the R660 million write-down in investment properties because of Covid-19 impacts, as well as a positive mark-to-market revaluation on swaps of R63 million.

This increased loan-to-value (LTV) from 46.0% to 48.5% in the year under review is due to additional valuation write downs counteracting the effects of property sales, whilst the interest cover ratio remained stable at 2.0 times.

Key to Accelerate’s tenant retention strategy was engaging with tenants on their cash flow challenges on a case-by-case basis. This strategy resulted in tenant sustainability and strong tenant retention of 86.7% by Gross Lettable Area (GLA). As a result of this pro-active engagement the lease expiry profile was extended to beyond six years during the period as part of the rental relief programme.

Further long-term renewals of the European portfolio significantly increased the weighted average lease profile for that portfolio from 8.9 years to 12.5 years.

Rental escalations remain under pressure, with contractual escalations of 6.6% on newly concluded contracts, excluding the offshore portfolio. Considering the low inflationary environment in Europe, the average lease escalation drops to 6.2% for the overall portfolio.

Overall rental reversions were down by 1.7% and are reflective of current economic conditions, driven primarily by the office sector (where negative reversions of 15.6% were reported). The retail portfolio on the other hand showed positive reversions of 6.3% as demand started to recover during the reporting period.

Vacancies by GLA comprise 15% of the portfolio and 7.2% of revenue, excluding the vacancies under a head lease at Fourways Mall.  Office vacancies were reduced slightly, with the remaining vacancies mainly relating to B-grade properties and office space at neighbourhood centres.  The offshore portfolio has zero vacancies.

The significant rise in vacancies in the industrial portfolio is because of one industrial tenant going into liquidation.

Post the reporting period, vacancies were further reduced to 14.0% of GLA.

For us to achieve our goals, we have to execute in two areas, namely the selling of non-core assets and secondly, the unlocking of additional income and value on existing assets,” commented COO Andrew Costa.

In 2018, we embarked on our balance sheet strengthening exercise in anticipation of payments we would have to make for the equalisation of ownership at the redeveloped Fourways Mall. Since then, we have successfully disposed of R1.3 billion worth of assets”.

In 2020 we completed disposals worth R188 million with approximately R200 million in disposals currently awaiting transfer, whilst R759 million of non-core assets remain in our disposal pipeline,” he said.

To further strengthen the balance sheet by reducing gearing levels and creating additional liquidity buffers, Accelerate is actively marketing its offshore assets and are currently engaged with many interested parties in this regard.

We are also exploring numerous opportunities that will unlock additional value at existing assets, including adding storage, hospitality, flexible office, and residential space to the portfolio,” Costa remarked.

The company’s disposal strategy supports its strategic step-change in focusing on key nodes in Johannesburg, Cape Town, and George.

Accelerate expects that a purely nodal strategy will allow for greater diversification across asset classes and economies of scale, whilst allowing the Group to focus on nodes with the strongest property fundamentals.

Fourways Mall, the Group’s flagship asset, in which it holds a 50% stake received strong demand for space with the head lease reducing from approximately 22 000m2 at equalisation date to around 15 000 m2 currently. Vacancies excluding the head lease are approximately 3%.

During the review period the new La Liga flagship store opened at the mall, as did Wickleys Steakhouse. Dischem is expanding their footprint in the mall with Food Lovers Market upgrading to a premium store.

During the development of Fourways Mall, the developer built excess parking and bulk space for future development not yet owned by Accelerate on a 50/50 basis. Accelerate can acquire the additional parking and bulk space at an approximate cost of R250 million, payable only once the bulk is being developed.

Accelerate is currently in discussion with the developer on this acquisition and to ensure that all future developments at Fourways Mall are done on a 50/50 basis, subject to shareholder approval.

The REIT did not report a distributable income for the year ended 31 March 2021, due to Covid-19 relief granted to tenants, once-off bad debt write-offs related to the pandemic and other tax-deductible items and said it expected another difficult twelve months considering the third Covid-19 wave, slow vaccine rollout and continued consumer pressure.