Growthpoint Properties has published its annual results for the year ended June 2024, reporting that most of its SA key performance indicators improved, including arrears, rental reversion rates, valuations, and vacancies in its office and retail portfolios.
The Group’s strong operational performance was, however, overshadowed by the negative impact of higher interest rates, lower dividends from Globalworth Real Estate Investments (GWI), and a reduced profit from its local trading and development division, resulting in a 10% decrease in distributable income to R4 813 million (FY2023: R5 363 million).
“The improvement in our domestic portfolio’s property fundamentals and the strong operational performance of our international investments, indicate that we may have passed the lowest point of the curve and are now seeing signs of improvement. We successfully progressed the company’s strategic initiatives in a year that was as tough as ever but ended with brighter prospects on the horizon,” commented Norbert Sasse, Group CEO of Growthpoint Properties.
“Interest rates are anticipated to come down, and the effect of this is likely to start showing in our business from the second half of FY25. Nevertheless, the ongoing refinancing of interest rate swaps and cross-currency interest rate swaps at significantly higher rates continues to remain a challenge for earnings growth.”
In line with this, the solid operational performances produced by Growthpoint’s direct and indirect investments in FY2024 remained overshadowed by higher interest rates globally. Growthpoint will distribute a total dividend per share (DPS) of 117.1 cents per share, 10% down from the prior year, based on a payout ratio of 82.5%. Total property assets decreased by 2.8% to R174.7 billion at yearend.
The improvement in the REIT’s domestic portfolio’s property fundamentals and the strong fundamentals of its international investments indicate the bottom of the property cycle however, the Group says it is important to recognise that the ongoing impact of high interest rates, locally and internationally, remains a challenge for distributable income per share growth in FY2025 which is expected to decline by 2% to 5%.
Growthpoint’s loan-to-value (LTV) ratio currently sits at 42.3% (FY2023: 40.10%), impacted mainly by an increase in Growthpoint Properties Australia’s (GOZ) LTV due to valuation write-downs. It recorded an interest cover ratio (ICR) of 2.4 times (FY2023: 2.9 times).
Significant refinancing of cross-currency interest rate swaps resulted in higher interest rates than those on expiry with 78.9% of its SA debt book fixed for an average term of 1.9 years at a rate that moved from 9.1% to 9.6%, or from 6.7% to 7.2% if including cross-currency interest rate swaps and foreign-dominated debt. Net South African finance costs increased by R381 million from FY2023, with its weighted average term of debt increasing from 3.5 years to 4 years.
“We believe LTVs, linked to valuations, are stabilising, other than possibly for GOZ where interest rates are lagging. We will, however, continue to focus on strategic initiatives to preserve liquidity and balance sheet strength in the long term. This supports us in achieving our key goals of enhancing the quality of the SA portfolio and optimising our international investments,” said Sasse.
Growthpoint has R465.9 million cash on its South African balance sheet with R6.3 billion in SA unutilised committed debt facilities (both including Growthpoint Investment Partners). It will retain a further R842.3 million from its 82.5% payout ratio. The Group’s R2.8 billion of debt matures in the next twelve months with an outlook for both its Fitch global scale rating at BB+ and national scale rating at AAA(zaf). Moody’s global scale rating, at Ba2 and a national scale rating of Aa1.za, remain stable.
Growthpoint owns and manages a diversified core portfolio of 345 retail, office, and logistics and industrial properties in South Africa. It also owns nine trading and development properties.
Growthpoint continued to invest in the portfolio with upgrades and new developments of R2.1 billion. It sold 17 non-strategic properties for R907.7 million during the year and two trading and development properties for R294.3 million with a combined profit on book value of R24.4 million. It intends to sell a further R2.8 billion of assets in FY2025. In total, Growthpoint has sold 161 properties for R12.4 billion since July 2016. It also continued to recycle capital from the sale of smaller, non-core properties into developing and redeveloping quality assets.
Overall, vacancies improved, reducing from 9.7% to 8.7% over the year. Rental renewal growth demonstrated an equally encouraging trend, moving from -12.9% to -6% over the same period. Likewise, its renewal success increased from 64.9% to 76.3%. Bad debts and arrears reduced dramatically and are reverting to long-term trends.
The South African valuations, with a portfolio value of R66.3 billion (FY2023:R64.1billion) at FY2024, were positively impacted by the improved property metrics across all three sectors and reduced vacancies in the office and retail sectors coupled with the repositioning of the portfolio to higher-quality assets by way of disposals and developments.
Growthpoint’s Cape Town and KwaZulu-Natal portfolios are performing particularly well, where all three sectors are nearing full occupancy.
Growthpoint’s total expense ratio for its South African business increased to 36.7% (FY2023: 35.9%), primarily driven by disposals, above-inflation hikes in municipal rates and taxes, and rising utilities costs. On a positive note, with less load shedding in 2024 so far, diesel spend reduced from R140 million in FY2023 to R112.6 million in FY2024, and diesel cost recoveries as a percentage of recoverable diesel spend was 82%.
Its local logistics and industrial portfolio’s like-for-like net property income grew by 2.6% with renewal success increasing from 59.1% to 78.3%. Renewal rental growth moved up from -10.4% to -3.3%. During the year it completed the speculative development of 15 units totalling 63 017m2 across Cape Town, KZN and Gauteng, all of which have experienced good leasing uptake. It also completed two client-driven developments in Gauteng, including a 28 375m2 logistics warehouse in Isando.
The SA retail property portfolio’s like-for-like NPI increased, swinging positive from -1.7% for FY2023 to +4.1% for FY2024, and the portfolio value increased by 0.9%. Its core vacancy remained low at 4%. Growthpoint’s retail portfolio continued to benefit from refurbishments and extensions at several malls, and strong trading density growth of 4.1% (FY2023:6.2%) with the Western Cape outperforming at 5.7%.
The iconic V&A Waterfront, Cape Town, in which Growthpoint has a 50% interest with its share of property assets valued at R11.5 billion, delivered stellar results, with exceptional performances from its retail, hospitality, and attraction sectors, driven by tourism. This strong position was bolstered by the completion of new developments, negligible vacancies at just 0.3% across the precinct, and strong demand supporting rental levels. The new Union Castle building is fully let, anchored by Marble restaurant and a flagship Nike store, and will open in time for the festive season.
The V&A’s like-for-like NPI, which includes a growing portion of operating income, increased by 13.4%.
“The V&A expects mid-single digit growth next year as it undertakes major upgrades. The extensive refurbishment of Table Bay Hotel will begin in February 2025, and it will relaunch as the InterContinental Table Bay Cape Town later in the year. The conversion and extension of an existing wing of the mall for international luxury brands is set to open in November 2025 has commenced, so normal trading in this area has paused for the project,” said Sasse.
In addition to the upgrades and extensions at River Square and Vaal Mall completed during the year, Growthpoint is set to finish the major redevelopment of Bayside Mall in November 2024. Its upgrade of Beacon Bay Retail, including a 3 100m2 expansion incorporating Builders Express, is scheduled for completion in June 2025. The Longbeach Mall extension for its 2 300m2 Builders Express will be ready in November 2025.
The office sector continued to recover with a welcomed increase in value of 1.2% after printing a 0.9% decline in the prior year’s value. Vacancies were reduced yet again across all nodes, improving from 19.2% to 15.1% at FY2024. Sandton, which represents 22.2% of Growthpoint’s office portfolio, showed a particularly notable change for the better, with vacancies reducing by around 33 000m2 during the period, taking the node’s vacancy rate from 28.7% at FY2023 to a much improved 20.1% at FY2024. Like-for-like NPI for this sector continued to firm, moving from -1.9% for FY2023 to -1% for FY2024. Similarly, renewal growth also improved significantly from -20.1% to -14.8%.
Growthpoint has two demand-driven developments underway in its office portfolio. It has initiated a net-zero carbon redevelopment at 36 Hans Strydom in Cape Town for Ninety One, who will occupy the building on a 15-year lease once completed in July 2025. Additionally, in response to tourism and hospitality demand in the Western Cape, Growthpoint is developing the 154-room Hilton Canopy Hotel in its Longkloof mixed-use precinct, set to open in December 2024.
Continuing to invest in the quality of its SA portfolio, Growthpoint has committed R1.5bn to furthering this in FY2025. Growthpoint’s in-house trading and development division develops assets for its own balance sheet, earns development fees from external projects and profits from the sale of trading and development assets, and development projects for Growthpoint Investment Partners. This year the division earned R42.2 million of trading profits, R9.8 million of development fees and R25.4 million of net property income.
The division was active with third-party trading and development projects, selling out its first major residential development, Kent residential apartments in La Lucia, Umhlanga, and a small community shopping centre in KZN. Additionally, its Riverwoods office-to-residential conversion in Bedfordview, is 80% sold, with proceeds expected in FY2025. It also delivered two student accommodation properties, Horizon Heights and Fountains View, for the 2024 academic year. The team is currently working on The Crescent Studios (previously The Podium) and Arteria Parktown (33 Princess of Wales).
Growthpoint Investment Partners continued to grow its assets under management (AUM) and fees. It ended the year with R18 billion of AUM, growing towards its goal of R30 billion of AUM by the end of FY2027. Growthpoint’s capital-efficient alternative real estate co-investment platform includes three funds that are distinct from Growthpoint’s retail, office and logistics and industrial core assets. They are Growthpoint Healthcare Property Holdings, Growthpoint Student Accommodation Holdings, which operates under the Thrive Student Living brand, and Lango Real Estate with prime office and retail assets in Ghana, Nigeria and Zambia, and land in Angola and Nigeria.
“Overall, Growthpoint Investment Partners made a steady contribution to our earnings with mixed results for the dividends and management fees earned across its three funds. Management fees increased by 10.2%, while dividends dropped by 16.0%. Growthpoint Investment Partners is actively raising capital in the funds, which are increasingly enjoying opportunities for growth through both development and acquisition,” he said.
42.1% of Growthpoint’s property assets (by book value) are located offshore and 32.4% of distributable income per share earned offshore. Foreign currency income remained steady at R1.6 billion.
The REIT owns 57 office and industrial properties in Australia valued at R54.7 billion through a 63.7% shareholding in Growthpoint Australia and six community shopping centres in the UK valued at R9.2 billion through a 68.9% investment in LSE- and JSE-listed Capital & Regional (C&R).
Through its 29.5% investment in LSE AIM-listed Globalworth Real Estate Investments (GWI), Growthpoint owns an interest in 59 office and mixed-use properties in Poland and Romania with its effective share valued at R15.1 billion. Growthpoint reinvested the June and December 2023 dividends received from C&R and GWI and invested in C&R’s open offer for the acquisition of Gyle Shopping Centre in Edinburgh.
“GOZ remains a core investment for Growthpoint, and we continue to evaluate all options to maximise the value of our investments in C&R and GWI,” noted Sasse.
Growthpoint Australia recorded successful leasing, supporting a portfolio occupancy of 97% by gross lettable area (GLA), of which 80% is leased to the government, listed and large organisations. It continues to have a long weighted average lease expiry (WALE) of 5.7 years.
GOZ’s gearing, although up from 37.2%, remains within its target range at 40.7%, driven by higher interest rates that saw GOZ’s portfolio valuation decline for the office and industrial sector by 11.2% and 1.8%, respectively, on a like-for-like basis over 12 months, with the total portfolio valued at A$4.4 billion at FY24. GOZ extended A$470 million of bank facilities in FY2024. 74.5% of its debt is fixed for an average term of 2.5 years at a rate of 3.4%, and it has A$293 million of undrawn debt facilities.
With a slightly increased payout ratio from 79.4% in FY2023 to 80.7%, GOZ’s DPS decreased from A$21.4 cents per share for FY2023 to A$19.3 cents per share for FY2024, while its funds from operations (FFO) per share declined by 10.8% to A$23.9 cents per share for FY2024 from A$26.8 cents per share in the prior year. This is principally due to the material once-off lease cancellation fees received in the prior period, the disposal of two assets and higher interest rates.
“While GOZ still plans to grow its funds management platform, conditions were not conducive to furthering this growth during the year. The headwinds GOZ faced in FY24 have not yet fully subsided, and it has provided FY2025 FFO guidance of A$ 22.3 cents per share to A$ 23.1 cents per share and distribution guidance of A$18.2 cents per share,” confirms Sasse.
Capital & Regional reported net rental income growth of 17.4% mainly due to the acquisition of Gyle Shopping Centre. Like-for-like property valuations increased 0.60%. C&R achieved strong leasing results with new leases signed at an average premium of 8.8% on previous rentals. Portfolio occupancy increased to 93.1% by GLA. C&R increased its distribution per share to £5.8 pence per share totalling R173.9 million (FY2023: €5.5 pence per share or R103.6 million). Their LTV ratio increased marginally from 42% to FY2023 to 43%. C&R has an average debt maturity term of 3.6 years at an average cost of 4.25%, with 97.8% of debt fixed until September 2025 and 78% until at least January 2027.
“C&R is defensively positioned and expected to continue delivering a stable performance.”
GWI reduced vacancies to 13.8% from 14.5% at FY2023. The disposal of its fully owned industrial portfolio was the main contributor to a 10.8% decrease in GWI’s portfolio value. GWI has low gearing of 39.9%, €210.3 million of cash on hand and £187 million of undrawn debt facilities.
Given the significant refinancing of its Eurobond during the year, at 6.25% versus 3%, GWI’s distribution per share reduced 27.6% to €21 per share totalling R304 million (FY2023: €29 per share or R395.4 million)
“GWI has bedded down its bond refinance, which places the company more firmly on the front foot, with liquidity to pursue opportunities in the market,” concluded Sasse.
