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V&A Waterfront’s rapid rebound contributes to Growthpoint’s defensive performance during FY2022

Growthpoint Properties has published its results for the year ended June 2022, delivering a 13.9% increase in SA REIT funds from operations (FFO) and a 5.1% increase in distributable income per share of 155.6 cents. The group’s total dividend per share increased 8.4% to 128.4 cents per share with its group property assets having grown by 5.2% to R160.8 billion.

“Growthpoint’s improved results show the resilience and stability of our business, and the benefits of diversification and quality earnings during yet another incredibly tough year,” said Norbert Sasse, Group CEO of Growthpoint Properties.

The Growthpoint share price remains significantly undervalued compared to its SA REIT net asset value of R21.58 per share, which grew by 6.7%.

During the year, Growthpoint decreased its group SA REIT loan-to-value (LTV) from 40.0% to 37.9%. In line with its improved performance, Growthpoint adopted a higher 82.5% dividend payout ratio, retaining R935 million before tax to fund capital expenditure and development and execute on its strategies while ensuring balance sheet strength. It ended the period with R1.5 billion cash on the SA balance sheet and R10.3 billion of unused SA committed debt facilities. This includes contingencies for the upcoming maturity of its USD Eurobond of R6.9 billion in May 2023, which Growthpoint will be in a position to repay should debt capital markets in Europe not be conducive to refinancing.

Growthpoint’s international investments represent 43.5% of property assets by book value and 28.4% of earnings before interest and tax, and its newly amplified targets are 50% and 40% respectively. The hard currency dividend income from its international investments increased from R1.4 billion to R1.5 billion.

It owns and manages a diversified core portfolio of 387 retail, office, and industrial properties across SA valued at R62.7 billion. With valuations stabilising in all sectors other than offices, this portfolio recorded a further 1.9% devaluation. It sold 37 non-strategic properties for R2.1 billion during the period, making a profit on book value of R240.9 million and taking the total of properties it has sold in SA to R9.7 billion since 2017.

The industrial and retail sectors delivered improved performance. There are some signs of stabilisation in the office portfolio. Vacancies in the SA portfolio, including trading and development and Growthpoint Investment Partners’ healthcare and student accommodation funds, reduced from 11.6% to 10.3% with more than 1.4 million square metres let during the year. The renewal success rate improved from 65.4% to 75.1% but came at the expense of rental growth and escalations, with negative reversions across all three sectors, though rental renewal rates improved by 2.1% from -14.9% to -12.8%. The Western Cape and KwaZulu-Natal portfolios outperformed. Growthpoint collected 95%, or R187 million, of all Covid-19 rental deferrals granted to tenants, and this year granted R17 million of Covid-related discounts versus R198 million last financial year. Arrears declined steadily across all sectors.

Vacancies in Growthpoint’s industrial portfolio improved from 9.4% to 5.7%, with particularly good letting in the Western Cape and KwaZulu-Natal where vacancies are around 2.0%. Renewal success rates increased significantly, from 62.2% to 86.3%. Reflecting the positive metrics, industrial property values increased 1.8% and like-for-like net property income grew 3.7%. Taking advantage of the demand for industrial properties, 22 non-strategic property assets were disposed of during the year, and another 19 properties are at various stages of disposal.

Office vacancies levelled off, reducing from a 22.4% peak on the 31st of March 2022 to 20.7% at year end. More tenants are returning to offices with a hybrid working model and smaller users that previously gave up space are also returning. Renewal success improved from 52.5% to 58.0% in a market where tenants continue to consolidate and reduce space. Reflecting the weak economic environment, although both improved, office property values and like-for-like net property income decreased by 5.4% and 8.7% respectively. To shift Growthpoint’s office exposure to higher-performing regions, nine office properties were sold.

Retail portfolio vacancies improved to 4.7% excluding offices, with a slightly higher renewal success rate of 85% and increased letting activity from national retailers. Retailers continued to restructure their portfolios, right-size their spaces and rebase rentals. Reflecting a less stressed retail market, Growthpoint’s shopping centres saw an 8.6% increase in average trading density, driven by the recovery in regional malls as shoppers returned to larger format shopping centres and spent more on larger basket sizes. Turnover underpins retailer rental levels, but the full positive trading takes time to filter through. Retail property values increased 0.1% and like-for-like net property income decreased 3.9%.

The contribution to distributable income from trading and development was somewhat down at R146.2 million for the year. Growthpoint invested R1.1 billion in development and capex in SA and has R654 million of capital commitments.

Growthpoint’s 50% interest in the iconic V&A Waterfront, Cape Town, with its share of property assets valued at R9 billion, improved its earnings significantly to deliver exceptional performance with a 52.0% increase in net property income. After being hard-hit by the Covid-19 travel bans and restrictions, international tourist arrivals at Cape Town International Airport had recovered to 75% of pre-pandemic levels by end-June 2022 and led to the V&A’s long-awaited rebound. Its visitor numbers were up 32.3% during the 12 months. They are currently 20% below pre-Covid levels, signifying more room for recovery. All V&A hotels are open are operating at 81% of pre-Covid occupancy levels with the Silo Hotel and Radisson Red exceeding these levels.

In the quarter to June 2022, retail sales at the V&A recovered to 14% above pre-Covid levels, with retail vacancies below 1% and good demand for space, although rental levels have reverted slightly. Marine and industrial properties were stable, and while the cruise season will only reopen in October 2022, income from the casual berthing of superyachts and yacht building increased 32%. Office vacancies remained at a low 1.8% underpinned by 60% blue-chip tenancies. In May 2021, construction commenced for a new multitenant 10 500m2 office building in the Canal District, anchored by Investec Bank in 7 700m2 and to be completed in the last quarter of 2023. With an area oversupply of residential stock to let, vacancies peaked at 30% and have now dropped to around 18%.

“All major sectors are enjoying low vacancies and strong demand at the V&A Waterfront. Its rebound is set to continue, and we expect it to achieve higher than pre-Covid earnings in FY23,” says Sasse.

Growthpoint Investment Partners (formerly the funds management business), the capital-efficient alternative real estate co-investments platform, closed the financial year with R15.6 billon of assets under management (AUM), surpassing its R15 billion target which it aims to grow to R30 billion by the end of FY27. In FY22, it contributed R67.2 million in management fees and R181.5 million in dividends to Growthpoint.

Growthpoint Investment Partners launched its third co-investment platform, Growthpoint Student Accommodation REIT, in December 2021 with seven assets of 4 979 beds valued at R2.2 billion and a significant growth pipeline. Growthpoint has a 16.6% investment in SA’s first unlisted purpose-built student accommodation REIT, which has raised R1.4 billion in equity, including Growthpoint’s co-investment of R240 million. It earned Growthpoint distributions of R16.7 million and asset management fees of R14.5 million.

In FY22, Growthpoint Healthcare REIT concluded a USD80 million equity and convertible debt package with IFC to finance growth opportunities. It has raised over R1.3 billion of third-party funding. Growthpoint has a 55.9% shareholding. SA’s first unlisted healthcare REIT has a R3.4 billion portfolio of seven assets and a R4.5 billion pipeline of acquisitions and developments. It acquired the specialist Cintocare Hospital in Pretoria and agreed, subject to prerequisite conditions, to acquire a 50% undivided share in its first healthcare warehousing and distribution asset, the 22 455m2 facility in Midrand on a long lease to Adcock Ingram. Growthpoint Healthcare REIT delivered 7.5% DPS growth, and Growthpoint received R142.5 million in distributions and R41.2 million in property and asset management fees.

Lango Real Estate has a USD613 million portfolio of prime office and retail assets in Ghana, Nigeria and Zambia, and land in Angola. Lango has raised some USD320 million third-party funding to date, including Growthpoint’s 16.3% shareholding, and is in advanced discussion with potential investors to raise additional capital that it intends to use mainly to acquire a pipeline of assets, particularly in Nairobi, Kenya, as well as to reduce debt. Growthpoint received R22.3 million in distributions and R11.5 million in fees.

Growthpoint Investment Partners is strategic for our immediate growth of assets under management rather than assets on the balance sheet. We intend to increase the scale of our three investment platforms and seek meaningful new co-investment opportunities that are distinct from Growthpoint’s core assets in the retail, office, and industrial sectors,” says Sasse.

Growthpoint’s diversified portfolio, strong balance sheet and stable hard currency dividend income streams position the company defensively for FY23. However, given the high level of uncertainty in the local and global macroeconomic environment, coupled with rising interest rates and inflation, it expects muted distributable income per share growth for FY23.