|Left: Gavin Tipper, Chairman|
|Right: Pieter Prinsloo, Chief executive officer|
The financial year under review was difficult for South African property companies with the property index down by 16,1% over the period. While this was partly attributable to much publicised concerns relating to particular companies in the sector, it was also a function of a difficult economic environment.
The South African property sector has performed strongly over an extended period. The sector has been the beneficiary of low international interest rates and a consequent search for yield, as well as a range of factors that supported earnings growth over a sustained period. These included relatively resilient consumers, international diversification by local companies, consolidation in the sector, a legacy of solid base rentals (for better quality property), reasonably strong escalations, and, with the recent exception of Stuttafords, no major tenant defaults.
In the months prior to the date of this report international interest rates have risen, with net sales of South African equities and bonds by foreigners. The South African economy has continued to underperform, affecting consumer spend and tenants’ ability to pay rentals and accept rental increases, and larger scale tenant defaults have become a realistic possibility. These factors, together with company specific concerns, contributed to the repricing in the sector this year.
Hyprop declared a dividend of 380.2445 cents per share for the six months ended 30 June 2018, an increase of 9,3% on the corresponding period in 2017. The total dividend for the year of 756.5 cents per share is an increase of 8,8% on the prior year, a strong performance in difficult market conditions.
In May 2018, Hyprop completed a bookbuild, raising R778,7 million by way of an issue of 7,5 million new shares. The dividend per share for the six months ended 30 June 2018 included a full dividend to the new shares, despite them only being in issue for a portion of the period, and the total dividend was not increased by an antecedent dividend (to compensate for the dilution resulting from the additional shares in issue).
The SA property portfolio continues to comprise the largest part of the group. On a portfolio basis these properties performed solidly, particularly when evaluated in the context of a very difficult market. The Glen produced muted returns as a result of the redevelopment activity as did the centres affected by the Stuttafords failure. These performances were partly offset by strong performances from CapeGate and Somerset Mall.
The period included significant investments in extending the Rosebank Mall and redeveloping and enclosing The Glen’s food court. This was supplemented by ongoing investment in maintaining and enhancing the other properties. The disposal of non-core properties continued with the sale of Willowbridge North during the year.
Hyprop malls are destinations of choice for the South African shopper. We are, however, conscious of the intense levels of competition for constrained consumer spend in a low growth environment and the changing nature and demands of the customers that shop at our malls. We will continue investing and innovating in order to ensure that our properties remain relevant and attractive, and demand for space by national and international retailers is supported.
Online shopping has had a significant impact on retail centres in a number of developed countries and we monitor the trend towards online shopping locally very closely. Although the impact on South African malls has been limited, we work hard at anticipating likely changes in our shoppers’ behaviour, use of technology and spending patterns.
Crime levels in South Africa are problematic and we recognise the importance of providing our customers with a safe and secure shopping environment. We maintain high standards of security in our centres and invest in technology where that investment brings meaningful and cost-effective improvements in levels of security.
Sub-Saharan Africa (excluding SA)
The sub-Saharan Africa portfolio (excluding SA) produced a better return than in the previous financial year, largely as a result of a low base due to our inability to repatriate funds out of Nigeria in 2017, and the consequent exclusion of Ikeja’s earnings from distributable earnings.
A slow economic recovery in Nigeria, the challenges faced by the Zambian economy, and a higher than normal level of re-tenanting in Ghana, negatively affected the returns from the portfolio. Encouragingly, the level of normal arrears in Nigeria has been stable and there were improvements in footcount and trading densities in some of the Ghanaian shopping centres in the latter part of the year, with a consequent improvement in returns in the second semester.
The South-Eastern European portfolio performed well with the distributions from all of the properties exceeding budget. The properties are held via a UK company, Hystead, of which Hyprop owns 60%. Hystead acquired three properties during the period with The Mall in Sofia completed in October 2017 and two Zagreb centres completed in April 2018.
The portfolio is evenly split between EU and non-EU countries on a numerical basis, but is weighted towards EU countries in value terms. All of the countries in which the properties are held are producing satisfactory levels of growth and exhibit strong economic fundamentals.
The Hystead portfolio has achieved a reasonable degree of scale and is managed by a European-based team, headed by experienced property executives.
We have been able to enhance the returns on the properties in the Hystead portfolio through active asset management. A number of opportunities have been identified for further expansions and the investments will be made as the necessary building approvals and tenant commitments are obtained.
Considerable progress was made on non-recourse asset-based funding for the Hystead properties, with all the properties now partially funded by offshore banks, at an average loan-to-value ratio of 47%.
As set out in the interim results announcement consideration was given to listing Hystead separately. Given the relatively weak market conditions and based on feedback from potential investors, the possible listing was terminated and Hystead will be held in an unlisted format for the foreseeable future. Any further acquisitions by Hystead will be supported by the existing shareholders.
We recognise the importance of a sustainable business and of integrating sustainability into the different facets of our operations. Our commitment to being a good corporate citizen pervades our approach to business and we endeavour to act in a responsible, balanced and commercially sensible manner. As such, we regularly evaluate the longevity of our business model and its relevance to the economies in which we operate.
We are conscious of our impact on the environment and have been measuring and mitigating this for several years. We have made meaningful progress and our process has become increasingly sophisticated, with demanding goals and accountability for outcomes.
Transformation is a priority for sustainable South African businesses. Hyprop has made substantial progress in this area by implementing initiatives that benefit our people, our business and the environments in which we operate.
Hyprop is committed to the highest standards of corporate governance. Details of our governance structures and the extent to which we apply relevant principles of corporate governance, including King IV, and regulatory requirements, are set out in this integrated annual report.
Laurence Cohen, the financial director, resigned from the board effective 31 July 2018.
Subsequent to the year-end, the board accepted Pieter Prinsloo's resignation, effective 31 January 2019. Morné Wilken will join Hyprop as chief executive officer with effect from 27 December 2018.
Pieter has added considerable value to the group during his tenure and led the growth of the company. The board thanks him for his contribution and wishes him well in his future endeavours.
Zuleka Jasper was appointed to the board as an independent non-executive director on 5 July 2018. On the same date, Wilhelm Nauta joined the board as an executive director.
Brett Till has been appointed as the financial director, effective 1 October 2018.
The board thanks Laurence for his valuable contribution over the last 15 years and welcomes the new directors to the board.
Hyprop, based on JSE criteria for public shareholders, has a 100% free float. Foreign shareholders owned 23% of the company at 30 June 2018, the same as at 30 June 2017. Trading volumes increased to 58,6% from 52,1 % in 2017.
Top 10 beneficial shareholders
|Rank||Shareholder||% held at
30 June 2018
|1||Government Employees Pension Fund||12,6|
|4||MMI Holdings Limited||4,3|
|7||Prudential Investment Managers||3,3|
|10||Eskom Pension and Provident Fund||2,8|
South Africa has been locked in a cycle of low growth and economic underperformance for a number of years. This has reduced fixed investment, limited the creation of new jobs and contributed to a volatile social and economic environment. The business sector is increasingly having to shoulder many of government's responsibilities, at significant cost, exacerbating a difficult situation.
The slow normalisation of international interest rates and concerns regarding the political and economic environments in South Africa have resulted in substantial net foreign equity and bond sales and are likely to continue to do so. South African REITs have been affected and a resumption of the shareholder return levels generated in recent years will require material adjustments to the South African macro-environment, with a corresponding increase in business and investor confidence.
Government has stated it is working to reduce corruption and inefficiency, restore confidence in the economy and attract foreign investment. These are challenging tasks, and it is essential that all of the major participants in the economy support these efforts and contribute to their success.
Should the country not achieve a marked improvement in governance levels, and a step change in the business environment, it will be necessary to change current business models to cater for a customer that will be poorer in an environment where the cost of doing business will increase at levels well beyond the official inflation rate, together with the likelihood of a more volatile and weaker currency and the inflationary risks associated with that. This will pose a significant challenge to many of our tenants and, in turn, will impact on our properties.
Hyprop's South African shopping centres are of a high quality and there is regular investment to enhance their appeal. They have proved to be resilient in the current downturn with continued demand for space and acceptable performance metrics. While we believe that the portfolio has the ability to weather a continuation of the current environment, it will be increasingly difficult to achieve historical rental escalations, and increases in interest rates and operating costs will put pressure on margins. Failures by larger tenants have become more common internationally and should any of our larger tenants fail, it will take time to find replacements for the space and the lost rentals and associated costs will affect our returns.
The returns from our African portfolio should improve over the next year, if the current trends in Ghana and Nigeria persist. There has been a substantial devaluation in the Naira since we acquired the Ikeja City Mall, which has impacted on the ability of tenants to pay US Dollar indexed rentals. Despite that, we have been able to control the levels of normal arrears and if the relative stability of the currency over recent months continues, the property revenue should stabilise. The challenges faced by the Zambian economy and an increase in retail offerings in Lusaka reduced the returns from Manda Hill during the period, however the centre is well tenanted and located, and should produce solid growth over time.
The greater European economy appears to have stabilised and, subject to the effects of a possible global trade war, has a positive outlook. Three of our European properties are in EU countries, with the other three in countries that demonstrate similar or higher levels of growth.
We have planned several extensions to certain of the European properties and these, together with ongoing asset management initiatives, should supplement the growth embedded in the leases.
Hystead will make further acquisitions where appropriate. The company will remain unlisted, with the existing shareholding structure in place until the current shareholders' agreement expires in 2021, or the shareholders agree to change the structure.
Hyprop expects dividend growth of between 5% and 7% for the year to 30 June 2019. This is lower than has been the case for a number of years but is reflective of lower growth in the South African property sector and the effects of the constrained consumer environment in South Africa. We will continue to invest in and manage our properties to ensure that they remain relevant and attractive to customers through the current economic cycle.
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 or disruption in the financial markets
- Exchange rates have been assumed at R13,50 and R15,50 to the US Dollar and Euro, respectively.
- This forecast has not been reviewed by the company's auditors.
On behalf of the board we thank our executives, management and staff for their considerable efforts during the year. We also thank our stakeholders for their support and our fellow board members for their guidance and support.
22 October 2018