Hyprop revises Strategy for Long-term Gains
|•||Revised strategy under new executive team|
|•||South Africa distributable income up 6,5% despite weak economy|
|•||Eastern Europe distributable income up 13%|
|•||Almost fully-let key portfolios (SA - 0.8% vacancy; Eastern Europe – 0,5% vacancy)|
|•||Reduced exposure to sub-Saharan Africa through disposals|
|•||Strong liquidity position and R8,5 billion debt refinanced|
|•||Distribution per share down 1.5%|
5 September 2019 - Against the backdrop of a deteriorating global economy, JSE retail specialist REIT – Hyprop - achieved higher distributable income in both its South Africa (SA) and Eastern Europe portfolios for the year to June 2019. The new executive team launched its overhauled business strategy for the R46 billion group portfolio, with the key focus in SA on repositioning Hyprop’s malls for ‘relevance’ and in Eastern Europe further improving mall dominance, in line with a rapidly changing retail and trading landscape. Distributions to shareholders declined by 1.5% for the year due mainly to the underperformance of the sub-Saharan Africa portfolio (SSA), which Hyprop has begun exiting.
New CEO, Morné Wilken, says “2019 marked a year of significant change for Hyprop”. Following the resignations of the former CEO and CFO in 2018, who together had steered the group for over a decade, Wilken and Brett Till (CFO) were appointed and joined Wilhelm Nauta (CIO) to form the group’s new executive. Wilken explains that his team interrogated Hyprop’s existing strategy against the evolving retail landscape, digital disruption, and market conditions and devised a new strategic plan to 2022 that will effectively reposition Hyprop to adapt to this changing environment.
The new executive also refined Hyprop’s mission, now to create environments and opportunities for people to connect and have authentic and meaningful experiences with a focus on both tangible and intangible assets. Wilken says: “By tangible assets we mean mixed-use precincts underpinned by dominant retail centres in key economic nodes, and the strategy around intangible assets is about embracing digitisation and technologies in the retail, property and infrastructure spaces”. As a result, the three core focus areas of Hyprop’s new strategy are the SA portfolio, the Eastern Europe portfolio, and intangible assets.
In South Africa distributable income for the year rose by 6.5%, despite harsh market conditions, on the back of healthy contractual rental escalations. Trading density increased by 0.6%, which Wilken sees as a key focus area going forward. “We have shifted our focus from purely distribution growth to growth in trading densities to ensure that we make the right long-term decisions, secure the right tenant mix and effectively reposition our malls.”
Wilken highlights some of Hyprop’s projects to improve mall ‘relevance’ and boost trading densities. “These include a tech-based customer interaction platform, improving food and entertainment offerings, upgrading parking systems, installing back-up power supplies, and establishing a flexible system for new retailers to showcase their product offering.” Hyprop is also looking to other areas to support its retailers, such as reducing occupancy costs and introducing further cost-saving benefits from ‘green’ projects and technologies.
The new food court and play area at Woodlands, opened in May 2019, effectively increased footcount at the mall by 13% and trading density by 2.4% in the two months to year-end. Wilken says reinvestment remains an integral component of the new strategy. “Although times are tough, continued strategic and prudent reinvestment in the portfolio remains critical to keeping our malls relevant, and a further R450 million capex has been approved for the next financial year,” he says.
He points out that Hyprop ended the year with no significant arrears exposure to any one tenant, including the Edcon group. During the year Hyprop initiated a plan to reduce its exposure to Edcon by 15 910m2. By year-end 9 636m2 of this space had been re-let and the remaining 6 274m2 is expected to be re-tenanted in the 2020 financial year. “In re-letting the space vacated by Edcon we will introduce new strong anchor tenants to our centres, which will positively impact trading densities,” he adds.
In Eastern Europe Hyprop continued to capitalise on robust trading conditions, reporting ongoing increases in distributable income and trading densities across the portfolio, the latter higher year-on-year by 3.7%. Vacancies in the portfolio have remained negligible since Hyprop began actively investing in the region. The Mall in Sofia was upgraded in the year to the second largest in Bulgaria, by adding 40 new stores including major chain flagships.
Wilken says: “The focus in this portfolio is to maintain and improve our centres’ dominance. Reinvestment in this portfolio is also critical, with EUR6,5 million earmarked for upgrading the Skopje City Mall over the next 18 months, in addition to other refurbishment and extension projects.” He adds that the Skopje Mall project is expected to be earnings-accretive.
Reducing Hyprop’s investment in SSA progressed well during the year, with the sale of both Achimota Retail Centre in Accra, Ghana and the Manda Hill Shopping Centre, Zambia. The proceeds from the disposals will be applied to reduce the group’s US Dollar-denominated debt. Wilken says it is “important to preserve value during Hyprop’s exit process and the group will therefore implement various interventions to the business model, corporate structure and capital structure of the portfolio”.
According to Wilken, the key operational priorities for the next 18 months are to reposition the SA portfolio, improve the dominance of the Eastern Europe malls and dispose of the remaining SSA properties, while formalising and implementing the strategy around intangible assets.
Looking ahead he says that given the changes to strategy to reposition Hyprop, the continued weak economic conditions and the full impact of the Edcon rent reduction, distributable income will be negatively impacted in FY2020. “We are certain that our new strategy is necessary for the group’s long-term sustainability, and anticipate growth in distributable income in 2021 and beyond.”
Wilken concludes: “Put simply, we expect short-term pain for long-term gain. The revised strategy and key initiatives in play should ensure that the drop in distributions is temporary, to be followed by a return to growth in distributions from FY2021 onwards.”
Hyprop’s share closed yesterday at R67,20.