Commentary

 

Introduction

Hyprop, Africa’s leading specialist shopping centre Real Estate Investment Trust (REIT), operates a portfolio of shopping centres in major metropolitan areas across South Africa (SA), sub-Saharan Africa (excluding SA) and South-Eastern Europe.

The shopping centre portfolio in South Africa includes super-regional centre Canal Walk, large regional centres Clearwater, The Glen, Woodlands, CapeGate, Somerset Mall and Rosebank Mall, and regional centre Hyde Park Corner.

The sub-Saharan African portfolio (excluding SA) includes interests in Accra Mall, West Hills Mall and Achimota Retail Centre (all in Accra, Ghana), Kumasi City Mall in Kumasi, Ghana, Manda Hill Centre in Lusaka, Zambia and Ikeja City Mall in Lagos, Nigeria.

Hyprop’s investments in South-Eastern Europe, held via UK-based Hystead Limited, include 60% interests in Delta City Belgrade, Serbia, Delta City Podgorica, Montenegro and Skopje City Mall in Skopje, Macedonia. In July 2017, Hyprop agreed to acquire a 60% interest in The Mall in Sofia, Bulgaria.

Financial results

Hyprop has declared a dividend of 347,8 cents per share for the six months ended 30 June 2017, an increase of 8,0% on the corresponding period in 2016. The total distribution for the year of 695,1 cents per share is an increase of 12,1% on the prior year, in line with forecast.

Due to constraints on the conversion of Naira to US Dollar, distributable earnings from Ikeja City Mall in Lagos, Nigeria, amounting to R26,0 million, were excluded from dividends for the year.

Distributable earnings for the year benefited from the inclusion of income amounting to R101,8 million from the investments in South-Eastern Europe (30 June 2016: R24,6 million).

South African portfolio

Revenue and distributable earnings

  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 (excluding properties sold) increased by 7,1% and 6,1%, respectively.

Clearwater, 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 negatively affected by construction work and limited rent reductions.

Trading density growth continued to slow in the second half of the year. Excluding The Glen, trading density growth for the year was 2,0% (30 June 2016: 6,7%). Trading density growth for the year including The Glen was 1,4% (30 June 2016: 5,0%).

Notwithstanding the slowing in trading density growth, Hyprop’s shopping centres continue to receive strong demand for space from both national and international tenants.

Cost-to-income ratios

 

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

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.

Tenant arrears

Total arrears as a percentage of rental income were 0,4% (30 June 2016: 0,5%). Bad debts written off during the year were R8,9 million (30 June 2016: R13,3 million).

Vacancies    
  % of total rentable area  
Vacancy by sector
30 June
2017
  30 June
2016
 
Retail 1,9   0,8  
Office 7,9   4,5  
Total 2,4   1,1  

The retail vacancy of 1,9% includes the former Stuttafords stores at Clearwater and Rosebank Mall which were vacated at the end of May 2017 (6 299m2), Cinemas at Woodlands Boulevard (2 397m2) and the former HiFi Corporation store at CapeGate (1 358m2).

The Stuttafords store at Canal Walk has been re-let to H&M (scheduled to begin trading in November 2017). After year-end, the retail vacancy reduced to 1,7%.

The increase in office vacancies relates primarily to The Mall Offices in Rosebank, where Sasol vacated 8 942m2 during the year. Good progress has been made letting this space (albeit at lower rentals), and only 1 821m2 of space remains vacant. Other office vacancies include small areas at Hyde Park Corner and Canal Walk.

Valuations
    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  
  Total retail 710 590   27 963 589   26 603 472   43 033  
  Total standalone offices 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 the 2017 year 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 (30 June 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 remained largely the same as the previous year.

Capital expenditure
Extensions and refurbishments at Rosebank Mall, The Glen and Canal Walk are on schedule and within budget:

Shopping centre Project Amount (Hyprop share) Completion date
Rosebank Mall Additional 4 300m² rentable area
R127,0 million April 2018
The Glen Food court enclosure and additional 1 200m² rentable area R90,9  million April 2018
Canal Walk Additional retail in La Piazza area R41,6 million November 2017

The extension of Rosebank Mall will accommodate H&M and other key tenants, while the refurbishments at Canal Walk and The Glen will strengthen the retail offering in specific areas of the respective centres. The estimated average forward yield for the three projects is approximately 7%.

Hyprop is focused on improving the quality and sustainability of its shopping centres and during the year R177,9 million (30 June 2016: R178,0 million) was spent on refurbishments, tenant installations, new equipment and technology. The third phase of the solar photovoltaic plant at Clearwater Mall will be completed in September 2017, following which approximately 15% of the centre's electricity requirements will be provided by solar power.

Disposals
During the year, the following disposals were completed, at an average yield of approximately 9%:

  Sale price Rentable area (m²)   Transfer date
Somerset Value Mart R185 million 12 546   September 2016
Glenfield Office Park R180 million 10 320   December 2016
Willowbridge South R460 million 25 268   March 2017
Glenwood Office Park R42 million 3 471   May 2017
Total R867 million 51 605    

The sale of Willowbridge North for R225 million is unconditional and transfer is anticipated in September 2017.

As a consequence of the above disposals (Willowbridge North included), the rentable area in the South African portfolio will reduce by 69 152m2, a reduction of 8,8%.

Lakefield Office Park is the last remaining non-core property to be sold. Willowbridge North and Lakefield Office Park are included under assets held-for-sale in the statement of financial position at 30 June 2017.

The disposal of non-core assets has improved the overall quality of the portfolio, with a reduced exposure to the higher risk office sector.

Investments outside South Africa

The functional and reporting currencies for the 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 as follows:

  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 the actual exchange rates on the dates that the 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 receipt of the dividends.

Investments in sub-Saharan Africa (excluding South Africa)
The macro-economic environment in the countries in which Hyprop and AttAfrica are invested in has improved in the last six months. The local currencies are more stable in Ghana and Zambia and US Dollar liquidity in Nigeria has improved, although at a weaker Naira exchange rate.

Operationally, there has been an improvement in rental collections, however there has not been any significant growth in rental levels.

  Hyprop share of distributable earnings  
  30 June 2017
R000
  30 June 2016
R000
 
Distribution received  168 241     213 388    
Interest and expenses  (111 269)    (129 734)   
Net  56 9721     83 654    
1 Excludes Ikeja distribution of R26,0 million

Distributable earnings from the investments in sub-Saharan Africa (excluding SA) reduced to R57,0 million (30 June 2016: R83,7 million), largely due to the exclusion of distributable earnings from Ikeja City Mall in Lagos, Nigeria, replacement of tenants at lower rentals at Manda Hill Centre in Lusaka, Zambia and Rand appreciation against the US Dollar.

In light of the improved US Dollar liquidity in Nigeria, we expect to resume distributing income from Ikeja City Mall during the 2018 financial year. During the current year, R65,0 million (Hyprop share: R48,7 million) was applied to the reduction of senior in-country US Dollar debt in Nigeria.

Vacancies

  City/country Hyprop’s
effective
shareholding
(%)
Rentable
area
(m2)
  30 June 2017
vacancy
(%)
  30 June 2016
vacancy
(%)
 
Ikeja City Mall Lagos, Nigeria 75,0 22 223     2,3  
Manda Hill Centre Lusaka, Zambia 68,8 40 561   5,4   4,7  
Accra Mall Accra, Ghana 17,6 21 349      
West Hills Mall Accra, Ghana 16,8 27 560   5,3   5,0  
Achimota Mall Accra, Ghana 28,1 15 006   6,1   21,7  
Kumasi City Mall Kumasi, Ghana 28,1 17 948   26,5   n/a  
Total portfolio     144 647   6,5   4,0  

Demand for space at Accra Mall (Accra, Ghana) and Ikeja City Mall (Lagos, Nigeria) remains strong. Trading at Achimota Mall (Accra, Ghana), which opened in November 2015, has stabilised over the last 12 months and vacancies have reduced. Kumasi City Mall, in Kumasi, Ghana began trading in April 2017.

Hyprop share of shareholder loans/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 (30 June 2016: USD285,1 million) at a weighted average capitalisation rate of 8,4% (30 June 2016: 8,2%).

  Hyprop share  
  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 4 482 374   5 056 272  

The Rand equivalent value of the investments in sub-Saharan Africa (excluding SA) at 30 June 2017 was R4,5 billion (30 June 2016: R5,1 billion). The net reduction over the year 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 South Africa).

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

  Hyprop 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    

Trading conditions at the South-Eastern European shopping centres, including foot count and turnover growth, remain positive. Demand for space remains strong and plans to extend the centres are progressing.

Vacancies
At 30 June 2017 (and at 30 June 2016), there were no vacancies in the South-Eastern European shopping centres.

Hyprop share of investment property
At 30 June 2017 the Hyprop share of the Euro value of the Hystead portfolio was EUR179,9 million (30 June 2016: EUR123,7 million) at a weighted average capitalisation rate of 8,7% (30 June 2016: 8,4%).

  Hyprop share  
  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   n/a  
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 in Skopje, Macedonia. 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.

Funding

In March 2017, EUR206,0 million was refinanced for three years at a rate of 2,5% (previously 1,7%). The remaining Euro funding amounting to EUR93,0 million is currently at a rate of 1,7%. Euro debt of approximately EUR134,1 million will be refinanced during the course of the 2018 financial year with in-country asset backed finance.

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

Acquisition

In July 2017, it was announced that Hystead had reached agreement to acquire The Mall shopping centre in Sofia, Bulgaria, for EUR155 million. Approval for the transaction from the Bulgarian competition authority is still pending. It is anticipated that the transaction will be effective from October 2017.

This will be Hystead’s fourth South-Eastern European acquisition, taking the portfolio to a gross asset value of approximately EUR460 million. The Mall is the dominant shopping centre in Sofia and has a rentable area of 52 000m², with a weighted average rent of EUR18,30/m² per month. This acquisition is Hystead’s first entry into the European Union and will enhance the quality, profile and critical mass of the portfolio.

The acquisition will be funded in a similar manner to Hystead’s first three acquisitions, with short-term bridge funding, supported by a guarantee from Hyprop. The Hyprop support will be for approximately EUR105 million, as the property will be acquired with existing senior in-country debt, having no recourse to Hyprop.

Hystead listing

Progress is being made with a possible listing of Hystead in the first half of calendar year 2018. The listing will enable Hystead to become a standalone fund, will reduce its reliance on Hyprop and will position it for growth through further acquisitions and developments.

Net asset value

The net asset value (NAV) per share at 30 June 2017 increased by 5,6% to R99,78 (30 June 2016: R94,50). The increase was primarily due to an increase in the independent valuation of the South African investment property portfolio, as well as the issue of 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 the NAV per share.

Borrowings

  30 June 2017
R000
  30 June 2016
R000
 
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 amounting to R1,2 billion was refinanced with DCM funding (three, four and five-year corporate bonds). All DCM funding is unsecured.

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

The Euro debt, which funded Hyprop’s 60% interest in the South-Eastern European shopping malls, is not consolidated on the Hyprop statement of financial position. For the purpose of the above analysis, 60% of the debt and 60% of the corresponding asset values have been included.

Euro-denominated debt increased, due to the final payment of EUR49,3 million in September 2016 in respect of Delta City Belgrade, as well as a payment of EUR92 million in October 2016 for Skopje City Mall in Skopje, Macedonia.

Due to the pending changes in the Euro debt structure, the interest rate on the Euro debt has not yet been fixed.

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

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 (30 June 2016: R394,3 million) reduced due to non-core asset sales of R867 million and a cash inflow of R700 million in August 2016 from the issue of new shares. The proceeds from non-core asset sales and the issue of new shares were applied in part to the reduction of debt (R518,0 million) and to capital expenditure in the South African portfolio (R177,9 million). The remaining cash was placed on deposit.

Other income, amounting to R36,5 million, comprises a credit enhancement fee received for the funding guarantee provided by Hyprop in respect of the South-Eastern European investments. The implementation of asset backed finance in the Hystead subsidiaries and the possible listing of Hystead will result in the termination of these fees.

Treasury shares are held in respect of an equity settled staff incentive scheme.

Prospects

Hyprop expects dividend growth of between 7% and 9% for the year to 30 June 2018. This guidance is based on the following key assumptions:

Forecast investment property income is based on contractual rental escalations and market-related renewals
Appropriate allowances for vacancies have been incorporated into the forecast
No major corporate and tenant failures will occur
Earnings from offshore investments will not be materially impacted by exchange rate volatility. Exchange rates have been assumed at R13,00 and R15,00 to the US Dollar and Euro respectively
Loss of income due to developments in the South African portfolio amounting to R9,3 million
The Hystead listing taking place in the first half of calendar year 2018.

The forecast has not been reviewed or reported on by the company's auditors.

Payment of dividend

A dividend of 347,8 cents per share for the six months ended 30 June 2017 will be paid to shareholders as follows:

  2017  
Last day to trade cum dividend Tuesday, 26 September  
Shares trade ex dividend Wednesday, 27 September  
Record date Friday, 29 September  
Payment date Monday, 2 October  

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 27 September 2017 and Friday, 29 September 2017, both days inclusive. Payment of the dividend will be made to shareholders on Monday, 2 October 2017. In respect of dematerialised shareholders, the dividend will be transferred to the CSDP accounts/broker accounts on Monday, 2 October 2017. Certificated shareholders' dividend payments will be deposited on or about Monday, 2 October 2017.

An announcement relating to the tax treatment of the dividend will be released separately.

Basis of preparation

The summarised consolidated financial statements for the year ended 30 June 2017 were prepared in accordance with the requirements of the JSE Limited Listings Requirements for preliminary reports and the requirements of the Companies Act of South Africa. The JSE Listings Requirements require preliminary reports to be prepared in accordance with the framework concepts and the measurement and recognition requirements of International Financial Reporting
Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council and as a minimum, contain the information required in terms of IAS 34 Interim Financial Reporting.

All amendments to standards that are applicable to Hyprop for its financial year beginning 1 July 2016 have been considered. Based on management's assessment, the amendments do not have a material impact on the group's annual financial statements.

All accounting policies applied in the preparation of the group annual financial statements for the year ended 30 June 2017 are consistent with those applied by Hyprop in its consolidated group annual financial statements for the prior financial year.

These summarised consolidated financial statements for the year ended 30 June 2017 have been extracted from the audited group annual financial statements, but have not themselves been audited. The directors take full responsibility for the preparation of the summarised consolidated results and for ensuring that the financial information has been correctly extracted from the underlying audited group annual financial statements. The auditor's report does not necessarily report on all of the information included in this announcement. Shareholders are therefore advised that, in order to obtain a full understanding of the nature of the auditor's engagement, they should obtain a copy of the auditor's report, together with the underlying financial information from the registered office of the company.

KPMG Inc. has audited the group annual financial statements. Their unqualified audit report is available from the registered office of the company.

Preparation of the financial information was supervised by Laurence Cohen CA(SA) in his capacity as Financial Director.

On behalf of the board

GR Tipper PG Prinsloo
Chairman CEO

1 September 2017