Hyprop Investments Limited

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.

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).

Revenue and distributable earnings

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

 

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).

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.

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:

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%:

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.

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:

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.

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

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%).

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.

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%).

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.

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.

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.

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.

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.

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).

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.

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:

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

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

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.

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

1 September 2017