Financial director's report

 
Laurence Cohen, Financial director  

Hyprop declared a dividend of 695,1 cents per share for the year ended 30 June 2017, an increase of 12,1% on the prior year, maintaining distribution growth above the sector average in a tough trading environment

Whilst income growth from the core South African portfolio has moderated in recent years, the South African shopping centres are still defensive in a low growth economy, and dominate their catchment areas. The investments in South-Eastern Europe are becoming a more significant contributor to total distribution growth for Hyprop.

South African portfolio

Revenue and distributable earnings

In the year under review, distributable earnings from the South African portfolio constituted 90,8% (2016: 93,3%) of total distributable earnings (before the deduction of fund management expenses and net interest).

  12 months ended
30 June 2017
  12 months ended
30 June 2016
 
Business segment
Revenue
R000
  Distributable
earnings
R000
  Revenue
R000
  Distributable
earnings
R000
 
Shopping centres 2 580 200   1 723 648   2 413 365   1 633 312  
Value centres(1) 174 314   128 615   161 017   114 046  
Total retail 2 754 514   1 852 263   2 574 382   1 747 358  
Standalone offices(2) 46 908   28 332   41 701   25 828  
Investment property (excluding properties sold) 2 801 422   1 880 595   2 616 083   1 773 186  
Properties sold(3) 74 179   36 332   128 611   74 965  
Total investment property 2 875 601   1 916 927   2 744 694   1 848 151  
(1) Includes Willowbridge North (held-for-sale)
(2) Includes Lakefield Office Park (held-for-sale)
(3) Properties sold during the 2017 year include Somerset Value Mart, Willowbridge South, Glenfield and Glenwood office parks

Revenue and distributable earnings from investment property in the South African portfolio (excluding properties sold) increased by 7,1% and 6,1%, respectively.

Clearwater Mall, Hyde Park Corner, CapeGate and Somerset Mall performed well during the year, with weighted average growth in distributable earnings of 8,6%. The Glen's income was affected by construction work and limited rent reductions.

Cost-to-income ratios

In line with industry best practice, the cost-to-income ratios are presented on a gross and net basis.

  30 June
2017
  30 June
2016
 
Gross basis (%) 33,3   33,2  
Net basis (%) 15,7   15,0  

The cost-to-income ratios increased marginally, due in part to higher municipal costs at Canal Walk and loss of income due to extensions and refurbishments at The Glen, Rosebank Mall and Canal Walk.

Changes in cost-to-income ratios from year to year are frequently impacted by adjustments initiated by the city councils, which adjustments may well lead to a movement in the ratio, but do not necessarily result from a change or increase in the cost structure of the company.

Tenant arrears

Total arrears as a percentage of rental income were still at a reasonable level, at 0,4% (2016: 0,5%). Bad debts written off during the year were R8,9 million (2016: R13,3 million). Bad debts written off in 2016 were higher due to significant write-offs relating to Platinum Group arrears.

A challenging economic environment inevitably puts pressure on rental collection. Rental collection is one of the key performance deliverables (KPDs) for Hyprop employees and accordingly is a focus area, especially in a tough trading environment.

Valuations

Hyprop's South African property portfolio is valued by independent valuers at each reporting date (31 December and 30 June).

  Value attributable to Hyprop   Value per rentable area  
Business segment Rentable
area
m2
  30 June
2017
R000
  30 June
2016
R000
  30 June
2017
R/m2
 
Shopping centres 644 196   26 490 589   25 282 472   45 181  
Value centres(1) 66 394   1 473 000   1 321 000   22 186  
Retail 710 590   27 963 589   26 603 472   43 033  
Standalone offices(2) 20 328   310 798   289 075   15 289  
Total (excluding properties sold) 730 918   28 274 387   26 892 547      
Properties sold(3)         838 000      
Investment property 730 918   28 274 387   27 730 547   42 261  
(1) Includes Willowbridge North (held-for-sale)
(2) Includes Lakefield office park (held-for-sale)
(3) Properties sold during 2017 include Somerset Value Mart, Willowbridge South, Glenfield and Glenwood office parks

Excluding properties sold, investment property was valued at R28,3 billion at 30 June 2017 (2016: R26,9 billion), an increase of 5,1%. The weighted average capitalisation rate of the portfolio is 6,6%. All discount and capitalisation rates were largely in line with the previous year.

The relatively high value per square metre of Hyprop shopping centres is indicative of the premium, high quality properties that dominate the portfolio.

Investments outside South Africa

Functional and reporting currencies for investments in sub-Saharan Africa (excluding SA) and South-Eastern Europe are the US Dollar and Euro, respectively.

The relevant exchange rates used to convert to Rand at the respective dates were:

  30 June 2017   30 June 2016
  Average
rate
R
  Year-end
spot rate
R
  Average
rate
R
  Year-end
spot rate
R
 
US Dollar 13,63   13,04   14,87   14,77  
Euro 14,53   14,90   16,40   16,40  

The average rates are a weighted average of actual exchange rates on the dates that foreign currency dividends were received in South Africa. The year-end spot rate is the rate used to translate balance sheet items at year-end.

Hyprop fixes the exchange rates on US Dollar and Euro income for six months in advance of receiving dividends.

Currently, the exchange rates on receipt of US Dollar and Euro dividends are not fixed longer than six months in advance due to some level of uncertainty with respect to the timing and quantum of the dividends.

Investments in sub-Saharan Africa (excluding SA)

The macro-economic environment in the countries in which Hyprop and AttAfrica are invested has improved in the last six months. Local currencies are more stable in Ghana and Zambia while US Dollar liquidity in Nigeria has improved, although at a weaker Naira exchange rate.

The weaker Naira exchange rate will put pressure on rental growth and rental collections in Nigeria, and will negatively impact the overall cost of occupancy for tenants.

   Hyprop share of
distributable earnings
 
   30 June 
2017 
R000 
   30 June 
2016 
R000 
  
Distribution received(1)  168 241     213 388    
Interest and expenses  (111 269)    (129 734)   
Net  56 972     83 654    
(1) Excludes Ikeja City Mall distribution of R26,0 million

Distributable earnings from investments in sub-Saharan Africa (excluding SA) reduced to R57,0 million (2016: R83,7 million), largely due to excluding distributable earnings from Ikeja City Mall in Lagos, Nigeria, replacing tenants at lower rentals at Manda Hill Centre in Lusaka, Zambia, and Rand appreciation against the US Dollar.

In the current year, R65,0 million (Hyprop share: R48,7 million) was applied to reduce senior in-country US Dollar debt in Nigeria. The repayment of capital in respect of the in-country debt did mitigate in some respects the US Dollar liquidity constraints experienced in Nigeria.

Hyprop's share of shareholder loans/AttAfrica interests in investment property

At 30 June 2017, the Hyprop share of the US Dollar value of the AttAfrica portfolio, Manda Hill and Ikeja City Mall was USD281,8 million (2016: USD285,1 million) at a weighted average capitalisation rate of 8,4% (2016: 8,2%).

Hyprop's share of distributable earnings 30 June
2017
R000
  30 June
2016
R000
 
AttAfrica and Manda Hill 3 005 821   3 315 614  
Ikeja City Mall, Lagos, Nigeria (75%) 1 476 553   1 740 658  
Investments in sub-Saharan Africa (excluding SA) 4 482 374   5 056 272  

The Rand equivalent value of investments in sub-Saharan Africa (excluding SA) at 30 June 2017 was R4,5 billion (2016: R5,1 billion). The net reduction was largely due to Rand appreciation against the US Dollar, a reduction in the valuation of Ikeja City Mall and impairment of the AttAfrica shareholder loan in Hyprop Mauritius.

Hyprop is currently not looking to increase its investments in sub-Saharan Africa (excluding SA).

Investments in South-Eastern Europe

Hyprop's investments in South-Eastern Europe are held through a UK company, Hystead Limited, in which Hyprop has a 60% interest. The purchase of Skopje City Mall in Skopje, Macedonia, for EUR92 million, was effective in October 2016.

Hyprop's share of distributable earnings  30 June 
2017 
R000 
   30 June 
2016 
R000 
  
Distribution received  147 059     37 000    
Interest and expenses  (45 236)    (12 428)   
Net  101 823     24 572    

This distribution received comprises income from the two Delta City shopping centres in Belgrade, Serbia and Podgorica, Montenegro for 12 months and from Skopje City Mall for eight months. Credit enhancement fees received by Hyprop for providing, funding support for the investments in South-Eastern Europe are not included here, since the credit enhancement fees will not be recurring (refer to "Funding" below).

Trading conditions in the European shopping centres, including footcount and turnover growth, remain positive. Demand for space is strong and plans to extend the centres are progressing.

Hyprop's share of Hystead's interest in investment property

At 30 June 2017, the Hyprop share of the Euro value of the Hystead portfolio was EUR179,9 million (2016: EUR123,7 million) at a weighted average capitalisation rate of 8,7% (2016: 8,4%). The Hyprop share of the value of the Hystead portfolio represents 60% of the independent fair value of the underlying shopping centres.

Hyprop's share of distributable earnings 30 June
2017
R000
  30 June
2016
R000
 
Delta City Belgrade, Belgrade, Serbia (60%) 1 162 200   1 283 136  
Delta City Podgorica, Podgorica, Montenegro (60%) 685 698   744 888  
Skopje City Mall, Skopje, Macedonia (60%) 833 208  
Investments in South-Eastern Europe 2 681 106   2 028 024  

The total Rand equivalent value of Hyprop's share of investment property in South-Eastern Europe increased due to the acquisition of Skopje City Mall. The Rand equivalent value of the Delta City centres reduced due to the appreciation of the Rand against the Euro.

The investments in South-Eastern Europe are accounted for as an investment in a financial asset with the gain on initial recognition of the financial asset being deferred. Accordingly, the investments do not appear on the consolidated statement of financial position.

This accounting treatment results from the IFRS interpretation of the Hystead shareholder agreement. In order to address this accounting anomaly and to provide more meaningful information, the debt figures and loan-to-value ratio (under Borrowings below), have been disclosed on a see-through basis. The see-through basis takes into account 60% of the underlying assets and 60% of the Euro debt.

Funding

Euro debt is supported by a guarantee from Hyprop, as well as back-to-back security provided by the other shareholder in Hystead. Hyprop funding support results in the recognition of a financial guarantee on the Hyprop statement of financial position. Hyprop receives credit enhancement fees for this support. The underlying properties in the South-Eastern European portfolio are currently unencumbered.

The investments in South-Eastern Europe were initially funded with short-term bridge loans. The intention is to (during the 2018 financial year) refinance a portion of the bridge loans with asset-backed finance, with loan-to-value ratios of approximately 45%. The credit enhancement fees currently being received by Hyprop for its funding support will reduce, proportionately and concurrently, with implementation of the asset-backed finance.

Net asset value

Net asset value (NAV) per share at 30 June 2017 rose by 5,6% to R99,78 (2016: R94,50). This was primarily due to an increase in the independent valuation of the South African investment property portfolio, as well as issuing new shares at a premium to NAV per share in August 2016, offset by the impact of the stronger Rand on the sub-Saharan Africa portfolio.

At 30 June 2017, the closing share price of R116,76 represented a premium of 17,0% to NAV per share.

Borrowings

   30 June 
2017 
Rm 
   30 June 
2016 
Rm 
  
South African debt  4 114     4 632    
   Bank debt  1 814     2 992    
   Corporate bonds  2 300     1 200    
   Commercial paper        440    
USD debt (Rand equivalent) 4 391     4 842    
EUR debt (Rand equivalent) 2 674     1 510    
Cash and cash equivalents  (1 126)    (239)   
Net borrowings  10 052     10 745    
Loan to value (%) 28,9     30,8    
Debt at fixed rates (%)(1)            
   South African debt (%) 100,9     89,6    
   USD debt (%) 70,4     72,4    
Maturity of fixes (years)(1) 3,4     4,4    
   South African debt (years) 3,9     4,9    
   USD debt (years) 2,7     3,7    
Cost of funding (%) 5,7     6,0    
   South African debt (%) 8,9     8,9    
   USD debt (%) 4,7     4,6    
   EUR debt (%) 2,2     1,7    
Debt capital market (DCM) % of total debt  21     15    
(1) Interest rate on Euro debt is not fixed

During the year, a maturing South African bank loan of R1,2 billion was refinanced with DCM funding (three, four and five-year corporate bonds). All DCM funding is unsecured. Provided that DCM funding in South Africa can be secured at margins equivalent to or lower than bank funding, we will continue to increase the ratio of DCM funding to total funding.

The Rand equivalent of US Dollar-denominated bank debt reduced during the year, largely due to Rand appreciation against the US Dollar. US Dollar debt includes debt in Hyprop Mauritius, as well as 75% of in-country debt for Ikeja City Mall (Lagos, Nigeria).

Euro-denominated debt increased, due to the final payment of EUR49,3 million in September 2016 for Delta City Belgrade, and a payment of EUR92 million in October 2016 for Skopje City Mall. The interest rates on the Euro debt have not yet been fixed, pending changes to the Euro debt structure.

The increase in cash is largely due to inflows from the issue of new shares in August 2016 (R700 million) and proceeds from the sale of non-core assets in the South African portfolio (R867 million).

Hyprop's bank facilities (Rand, US Dollar and Euro) include loan covenants which comprise maximum loan-to-value ratios and minimum interest cover ratios. All loan covenants are currently well within the maximum and minimum levels specified in the facility agreements.

Distributable earnings statement and reconciliation to dividend declared

   Distributable earnings
12 months
 
  
  30 June 
2017 
R000 
   30 June 
2016 
R000 
  
South African property portfolio  1 916 927     1 848 151    
  Continuing operations  1 880 595     1 773 186    
  Properties sold  36 332     74 965    
Investments in sub-Saharan Africa (excluding SA) 56 972     83 654    
Investments in South-Eastern Europe  101 823     24 572    
Fund management expenses  (67 347)    (63 922)   
Net interest  (321 336)    (394 310)   
Other income  36 533     7 372    
Antecedent dividend        16 704    
Distributable earnings  1 723 572     1 522 221    
Total shares in issue at year-end  248 441 278     243 256 092    
Treasury shares  (542 246)    (410 659)   
Shares issued, August 2016        5 185 186    
Shares in issue for distributable earnings  247 899 032     248 030 619    
Dividend per share (cents) 695,1     619,9    
Dividend per share growth (%) 12,1     14,2    

Net interest costs of R321,3 million (2016: R394,3 million) reduced due to non-core asset sales of R867 million and a cash inflow of R700 million from issuing new shares. The proceeds were applied in part to reducing debt (R518,0 million) and to capital expenditure in the South African portfolio (R177,9 million). The remaining cash was placed on deposit. The cash on deposit will in part be utilised to fund ongoing capital expenditure in the South African portfolio.

As mentioned above, other income of R36,5 million comprises credit enhancement fees received for the funding guarantee provided by Hyprop for the South-Eastern European investment. The implementation of asset-backed finance in the Hystead subsidiaries will result in a reduction of these fees. A possible separate listing of Hystead will result in a termination of these fees.

Treasury shares are held for an equity-settled staff incentive scheme.

Appreciation

I thank my finance team for their dedication, commitment and hard work during the year. I also extend my appreciation to my fellow board members for their sound advice and valued guidance.

Laurence Cohen
Financial director

1 September 2017