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.

Hyprop’s strategy is to own dominant, quality shopping centres in emerging markets, where such assets can be acquired or developed at attractive yields.

The shopping centre portfolio in South Africa includes super-regional centre Canal Walk, large regional centres Clearwater, The Glen, Woodlands, CapeGate, Somerset and Rosebank Malls, 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), Manda Hill Centre in Lusaka, Zambia and Ikeja City Mall in Lagos, Nigeria.

In early 2016 Hyprop expanded into South-Eastern Europe with the acquisition of a 60% interest in Delta City Belgrade, Serbia and Delta City Podgorica, Montenegro. In October 2016, Hyprop acquired a 60% interest in Skopje City Mall, in Skopje, Macedonia.

FINANCIAL RESULTS

Hyprop has declared a dividend of 347,3 cents per share for the six months ended 31 December 2016 (the period), an increase of 16,6% on the corresponding period in 2015.

Distributable earnings for the period benefited from the inclusion of R58,4 million (23,5 cents) from the investments in South-Eastern Europe. No income from the investments in South-Eastern Europe was included in the prior year interim period.

Due to constraints on the conversion of local currency to US Dollars, net distributable earnings from Ikeja City Mall in Lagos, Nigeria, amounting to R15,6 million, was excluded from distributable earnings for the period (31 December 2015: R6,0 million).

SOUTH AFRICAN PORTFOLIO

Revenue and distributable earnings

  Unaudited six months ended
31 December 2016
  Unaudited six months ended
31 December 2015
Business segment Revenue
R000
  Distributable
earnings
R000
  Revenue
R000
Distributable
earnings
R000
 
  Shopping centres 1 287 100   860 789   1 191 960 806 663  
  Value centres 119 844   80 215   114 154 76 562  
  Total retail 1 406 944   941 004   1 306 114 883 225  
  Standalone offices 28 262   16 496   26 023 15 587  
  Investment property (excluding properties sold) 1 435 206   957 500   1 332 137 898 812  
  Properties sold 17 381   10 865   25 213 15 842  
  Total investment property 1 452 587   968 365   1 357 350 914 654  

Revenue and distributable earnings from investment property (excluding properties sold) increased by 7,7% and 6,5%, respectively.

Trading density growth slowed during the period, especially among apparel retailers, who were affected by increased competition, a weaker Rand and more restrictive credit-granting regulations.

Demand for space in Hyprop’s shopping centres remains strong as evidenced by low vacancies and rental arrears, and supports further expansion at Rosebank Mall, Canal Walk and The Glen.

Cost-to-income ratios

 

  31 December
2016
  30 June
2016
 
Net basis (%) 15,5   15,0  
Gross basis (%) 33,5   33,2  

The cost-to-income ratios increased marginally, largely due to higher municipal costs.

Tenant arrears
Total arrears as a percentage of rental income were 0,5% (30 June 2016: 0,5%).

Vacancies    
  % of total rentable area  
Vacancy by sector
31 December
2016
  30 June
2016
 
Retail 0,8   0,8  
Office 3,9   4,5  
Total 1,1   1,1  

Total retail vacancies remained at 0,8%, while vacancies in the office portfolio reduced marginally, largely due to new lettings at Lakefield Office Park. Total gross lettable area in the portfolio reduced by a net 21 707m² (2,8%) due to asset sales. As a result, the reduction in office vacancies did not materially impact total vacancies.

Valuations
    Value attributable to Hyprop   Value per
rentable area
 
Business segment
Rentable
area
(m2)
  31 December
2016
R000
  30 June
2016
R000
31 December
2016
(R/m2)
 
   Shopping centres 649 499   25 937 559   25 282 472   43 974  
   Value centres 91 739   1 861 900   1 755 000   20 296  
   Total retail 741 238   27 799 459   27 037 472   41 044  
   Total standalone offices 23 811   347 175   328 075   14 580  
   Properties sold         365 000      
   Investment property 765 049   28 146 634   27 730 547   40 220  

Investment property was valued at R28,1 billion at 31 December 2016 (30 June 2016: R27,4 billion), an increase of 2,9% (excluding assets sold).

Developments

The installation of H&M at Somerset Mall (R15,8 million) and Checkers at Atterbury Value Mart (R31,0 million) were completed successfully.

The following extensions and refurbishments are underway:

Shopping centre Project Amount (Hyprop’s 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  

During the period, R73,1 million was spent on capital projects, new equipment and tenant installations.

Disposals
Somerset Value Mart and Glenfield Office Park were sold for R185 million and R180 million, respectively. Somerset Value Mart was transferred in September 2016, and Glenfield Office Park in December 2016.

Willowbridge South was sold for R460 million and was transferred in March 2017. Agreement has also been reached for the disposal of Willowbridge North for R225 million. The transaction is still subject to approval by the competition authorities as well as approval for the assignment of the leasehold rights to the purchaser.

Efforts to dispose of the remaining standalone office buildings are continuing.

INVESTMENTS IN SUB-SAHARAN AFRICA (EXCLUDING SA)

  City/Country Hyprop’s
effective
shareholding
(%)
Rentable
area (m2)
  31 December
2016
vacancy
(%)
  30 June
2016
vacancy
(%)
 
Ikeja City Mall Lagos, Nigeria 75,0 22 349     2,3  
Manda Hill Lusaka, Zambia 68,8 40 561   6,1   4,4  
Accra Mall Accra, Ghana 17,6 21 240      
West Hills Mall Accra, Ghana 16,8 27 923   6,0    
Achimota Mall Accra, Ghana 28,1 15 006   11,9   18,0  
Total portfolio     127 079   4,7   4,0  

The exclusion of distributable earnings from Ikeja City Mall in Lagos, Nigeria, resulted in a reduction in distributable earnings from the investments in sub-Saharan Africa (excluding SA) to R30,9 million (31 December 2015: R35,3 million). The Central Bank of Nigeria issued a statement on 20 February 2017, undertaking to clear all unfilled foreign exchange orders. Future distributable earnings from Ikeja City Mall will be included when the foreign exchange market becomes operational again.

Average growth in distributable earnings from Manda Hill Centre (Lusaka, Zambia), West Hills Mall and Accra Mall (both in Accra, Ghana) was 5,4%.

Despite continued challenging trading conditions in certain of the countries in which the investments are held, the centres displayed resilience and vacancies were maintained at reasonable levels. Apart from Manda Hill, the centres reported better trading numbers for December 2016 than for December 2015. Manda Hill has been affected by the opening of additional retail centres in Lusaka, however its position remains dominant and efforts are being made to improve its tenant mix.

Kumasi City Mall, in Kumasi, Ghana is currently under construction and is scheduled to open in April 2017.

Investments in sub-Saharan Africa (excluding SA) at 31 December 2016, primarily via shareholder loan funding to AttAfrica Limited, were R3,1 billion (30 June 2016: R3,3 billion). The net reduction over the period was largely due to Rand appreciation against the US Dollar. Hyprop’s share of its investment in Ikeja City Mall, in Lagos, Nigeria, reduced to R1,6 billion (30 June 2016: R1,7 billion). The reduction in value was due to a reduction in the directors’ valuation of Ikeja City Mall, as well as due to Rand appreciation against the US Dollar.

INVESTMENTS IN SOUTH-EASTERN EUROPE

  City/Country Hyprop’s
effective
shareholding
(%)
Rentable
area (m2)
  31 December
2016
vacancy
(%)
  30 June
2016
vacancy
(%)
 
Delta City Belgrade Belgrade, Serbia 60,0 29 876      
Delta City Podgorica Podgorica, Montenegro 60,0 23 729      
Skopje City Mall Skopje, Macedonia 60,0 36 128   1,7      
Total portfolio     89 733   0,7    

Delta City Podgorica (Montenegro) was purchased in February 2016, and Delta City Belgrade (Serbia) in April 2016. The final instalment of EUR49,3 million for Delta City Belgrade was paid in September 2016.

The purchase of Skopje City Mall, in Skopje, Macedonia, for a total consideration of EUR92 million, was effective in October 2016.

All of the acquisitions in South-Eastern Europe have been funded with Euro-denominated bridge funding, supported by a guarantee from Hyprop. The bridge funding will be re-financed with term funding, which will be at a higher interest rate than the bridge funding and will be implemented in tranches during 2017. It is anticipated that once the re-financing is complete, the weighted average interest rate for the Euro funding will be between 3% and 4%.

Trading conditions continue to be positive, with like-for-like foot count growth as well as turnover growth in excess of the Eurostat inflation rate. Demand for additional rentable area remains strong from the fashion anchor tenants and further extensions to the centres are planned.

The accounting treatment of the investments in South-Eastern Europe require them to be accounted for as an investment in a financial asset. Accordingly, the investments do not currently appear on the consolidated statement of financial position.

NET ASSET VALUE

The net asset value (NAV) per share at 31 December 2016 increased by 4,2% to R98,47 (30 June 2016: R94,50). The increase was due to an increase in the value of the investment property portfolio, as well as the issue of new shares at a premium to NAV per share, in July 2016.

At 31 December 2016, the closing share price of R117,31 represented a premium of 19,1% to the NAV per share.

BORROWINGS

  31 December
2016
Rm
  30 June
2016
Rm
 
Bank debt 8 968   9 344  
   South Africa 1 830   2 992  
   USD (Rand equivalent)1 4 580   4 842  
   EUR (Rand equivalent)2 2 558   1 510  
Debt capital market funding (South Africa only) 2 300   1 640  
   Corporate bonds 2 300   1 200  
   Commercial paper     440  
Cash and cash equivalents (743)   (239)  
Net borrowings 10 525   10 745  
Loan-to-value (%) 29,7   30,8  
Debt at fixed rates (%)        
   South African debt (%) 100,5   89,6  
   USD debt (%) 70,9   72,4  
Maturity of fixes (years)        
   South African debt (years) 4,4   4,9  
   USD debt (years) 3,2   3,7  
Cost of funding (%)        
   South African debt (%) 8,9   8,9  
   USD debt (%) 4,6   4,6  
   EUR debt (%) 1,7   1,7  
Debt capital market (DCM) % of total debt 20   15  
1 The USD debt includes 75% of the in-country debt relating to Ikeja City Mall (Lagos, Nigeria)
2 The Euro debt, which relates to Hyprop’s effective 60% interest in the South-Eastern European shopping malls, is not consolidated on the Hyprop statement of financial position

During the period, a maturing South African bank loan amounting to R1,2 billion was refinanced with DCM funding (three, four and five-year corporate bonds). As a consequence, the ratio of DCM funding to total debt increased to 20%. All DCM funding is unsecured.

The Rand equivalent of the US Dollar-denominated bank debt reduced during the period, largely due to Rand appreciation against the US Dollar.

Euro-denominated debt increased during the period, due to the final payment of EUR49,3 million in September 2016 in respect of Delta City Belgrade, as well as EUR92 million in October 2016 for Skopje City Mall in Macedonia. The Euro debt is short-term bridge funding and the interest rate has not been fixed.

The increase in cash is largely due to cash inflows from the issue of new shares in July 2016 (R700 million) and the sale of Somerset Value Mart and Glenfield Office Park in September and December 2016, respectively.

DISTRIBUTABLE EARNINGS STATEMENT AND RECONCILIATION TO DIVIDEND DECLARED

  Distributable earnings – six months  
  31 December
2016
R000
  31 December
2015
R000
 
South African property portfolio 968 198   914 655  
Investments in sub-Saharan Africa (excluding SA) 30 884   35 277  
Investments in South-Eastern Europe 58 351      
Fund management expenses (32 826)   (31 559)  
Net interest (180 688)   (195 091)  
Other income 17 505      
Total distributable earnings 861 424   723 282  
Total shares in issue at period end 248 441 278   243 256 092  
Treasury shares in issue (410 659)   (410 659)  
Shares in issue for distributable earnings 248 030 619   242 845 433  
Dividend per share (cents) 347,3   297,8  
Dividend per share growth (%) 16,6   13,4  

Other income, amounting to R17,5 million, comprises a credit enhancement fee received for the funding guarantee provided by Hyprop in respect of the South-Eastern European investments.

Net interest costs of R180,7 million (31 December 2015: R195,1 million) reduced due to non-core asset sales of R365 million (Somerset Value Mart and Glenfield Office Park), and a cash inflow of R700 million in July 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 and to capital expenditure in the South African portfolio.

PROSPECTS

Hyprop expects dividend growth of approximately 12% for the full year to 30 June 2017. This guidance is based on the following key assumptions:

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 R12,75 and R13,80 to the US Dollar and Euro, respectively; and
No income from Ikeja City Mall (Lagos, Nigeria) has been included in the forecast.

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

PAYMENT OF DIVIDEND

All rental income earned by the company, less property expenses and interest on debt, is distributed to shareholders semi‑annually.

A dividend of 347,3 cents per share for the six months ended 31 December 2016 will be paid to shareholders as follows:

  2017  
Last day to trade cum dividend Tuesday, 28 March  
Shares trade ex dividend Wednesday, 29 March  
Record date Friday, 31 March  
Payment date Monday, 3 April  

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 29 March 2017 and Friday, 31 March 2017, both days inclusive. The dividend will be transferred to dematerialised shareholders CSDP accounts/ broker accounts and paid to certificated shareholders’ bank accounts on Monday, 3 April 2017. An announcement relating to the tax treatment of the dividend will be released separately on SENS.

BASIS OF PREPARATION

The condensed consolidated interim financial statements for the six months ended 31 December 2016 were prepared in accordance with International Financial Reporting Standards, IAS 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by the Financial Reporting Standards Council and the requirements of the Companies Act of South Africa.

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 condensed consolidated interim financial statements.

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

These condensed consolidated interim financial statements have not been reviewed or audited by Hyprop’s independent external auditors.

Preparation of the interim 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

3 March 2017