Hyprop Investments Limited

Hyprop is a specialist shopping centre Real Estate Investment Trust (REIT), which operates a portfolio of shopping centres in South Africa (SA), sub-Saharan Africa (excluding SA) and South-Eastern Europe.

Hyprop’s strategy is to own dominant, quality shopping centres in major metropolitan areas, 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, regional centre Hyde Park Corner and value centre Atterbury Value Mart.

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 a 60% interest in UK-based Hystead Limited (Hystead), include Delta City Belgrade, Serbia; Delta City Podgorica, Montenegro; Skopje City Mall in Skopje, Macedonia; The Mall Sofia, Bulgaria (acquired October 2017) and a 90% interest in City Centre One East and City Centre One West, both in Zagreb, Croatia (acquired in April 2018).

Dividend

Hyprop has declared a dividend of 380,24450 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, reporting 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 the new shares and was not increased by an antecedent dividend (to compensate for the dilution resulting from the additional shares in issue).

Total investments

Total investments of R37,3 billion (30 June 2017: R35,5 billion) consist of direct property investments in South Africa of R29,0 billion (30 June 2017: R28,3 billion), investments in sub-Saharan Africa (excluding SA) of R4,5 billion (30 June 2017: R4,5 billion) and investments in South-Eastern Europe of R3,8 billion (30 June 2017: R2,7 billion).

The investments in South-Eastern Europe, held via Hystead, are accounted for as an investment in a financial asset with the gains on the initial recognition of the financial asset being deferred and changes in fair value recognised through profit and loss. Accordingly, the investment does not appear on the consolidated statement of financial position, except for the change in the fair value of the financial asset and equity contributions totalling R152,6 million.

Net asset value

The net asset value per share at 30 June 2018 increased by 3,2% to R102,98 (30 June 2017: R99,78). The increase was mainly due to an increase in the independent valuation of the South African investment property portfolio, as well as the increase in the Hystead financial asset, offset by an impairment of the AttAfrica and Manda Hill shareholder loans.

Total distributable earnings for the year grew by 10,5% (30 June 2017: 13,2%), largely due to income from the investments in South-Eastern Europe, particularly the new acquisitions in Skopje, Macedonia (November 2016), Sofia, Bulgaria (October 2017) and the two malls in Zagreb, Croatia (April 2018). The inclusion of distributable earnings from Ikeja City Mall in Lagos, Nigeria, which were excluded in the prior year due to US Dollar availability constraints, also contributed to the growth for the year. Hyprop's international investments contributed 16,4% (30 June 2017: 11,3%) to distributable earnings.

The net interest cost of R280,8 million (30 June 2017: R321,3 million) was lower compared with the previous year due to the application of cash from non-core asset sales of R867 million in 2017 and R230 million in 2018, as well as the proceeds of the new share issue in May 2018 of R778,2 million, to the reduction of debt and to capital expenditure in the South African portfolio. The remaining cash was placed on deposit.

Fund management expenses reduced during the year due mainly to asset management fees received from Hystead of R17,3 million (2017: R13,6 million).

Other income includes credit enhancement income of R46,7 million (2017: R36,5 million) for the funding guarantee provided by Hyprop in respect of a portion of the South-Eastern European investments.

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

Revenue and distributable earnings

Growth in distributable earnings (excluding properties sold) for the year was 4,0%. The growth in distributable earnings in the second half of the year (excluding properties sold) was 6,0% compared with 2,1% in the first half. Construction work at Rosebank Mall and The Glen, and the Stuttafords vacancies at Canal Walk, Clearwater Mall and Rosebank Mall, reduced the growth in distributable earnings, primarily in the first half of the year.

CapeGate and Somerset Mall were the best performers in the portfolio with both recording growth in distributable earnings of 8,7%. Despite being negatively affected by the Stuttafords vacancy and construction work in the La Piazza area, Canal Walk recorded distributable earnings growth of 5,4%.

Due to the impact of the weak economic conditions on consumer spend, growth in trading density reduced to 0,5% (30 June 2017: 1,4%). Good trading density growth was recorded at CapeGate (6,8%) and Clearwater Mall (4,4%).

Cost-to-income ratios

The net cost-to-income ratio increased marginally, mainly due to increases in municipal rates in the Pretoria portfolio from July 2017 and a slight reduction in recoveries across the portfolio. The improvement in the gross cost-to-income ratio is due to additional income from completed developments.

Tenant arrears

Tenant arrears were R18,9 million (excluding outstanding deposits) at year-end (30 June 2017: R13,7 million) or 0,6% of rental income (30 June 2017: 0,4%). Bad debts of R10,3 million (30 June 2017: R8,9 million) were written off during the year. The provision for bad debts increased to R8,9 million (30 June 2017: R6,5 million).

Although tenant arrears increased during the period, the arrears are a relatively small percentage of rental income and are within market norms.

Vacancies

Despite the tough trading environment for retailers, vacancies in the portfolio reduced from 2,4% to 1,9%. Canal Walk, Woodlands Boulevard and CapeGate had vacancies of less than 1%. The largest vacancies in the retail portfolio were at The Glen (4 378m²), Clearwater Mall (1 988m²) and Atterbury Value Mart (1 751m²). The Glen vacancy included vacancies resulting from the food court development of 1 100m². Since the opening in April 2018, positive interest from retailers has been received for this area.

The decrease in office vacancies from 7,9% to 5,5% is mainly due to lettings at the Rosebank Mall and Canal Walk offices.

Lettings

New leases and renewals of 133 400m² (18,5% of the total rentable area) with a contract value of R1,9 billion, were concluded during the year, at a net rental growth of 1,0% (30 June 2017: 4,0%) and an average escalation of 7,7% (30 June 2017: 7,9%).

Leases of approximately 106 000m² (15% of total rentable area) will expire in the 2019 financial year. As at 30 June 2018, the Edcon Group occupied 67 300m² (30 June 2017: 70 102m²) in Hyprop’s shopping centres. In the 2019 financial year approximately 1 380m² of the space will not be renewed, while a further 8 600m² is under review with the objective of finding replacement tenants. We will continue to work with the Edcon Group to address their space requirements, to the extent possible, as their business develops.

Valuations

Investment property was independently valued by external valuers at 30 June 2018 resulting in a net increase in value of R646,9 million (30 June 2017: R1 263,8 million). The weighted average capitalisation rate of the portfolio is 6,6%. (30 June 2017: 6,6%). All discount and capitalisation rates remained largely the same as the previous year. The sharp increase in municipal rates from July 2018 had a negative impact on the valuation of the Johannesburg shopping centres. Hyprop has objected to the increase.

In terms of IAS 40 and IFRS 13, investment properties are measured at fair value through profit or loss using valuation inputs which are categorised as level 3 on the fair value hierarchy. There were no transfers between levels 1, 2 and 3 during the year.

Capital expenditure

The following major projects were successfully completed during the year:

The projects were completed on schedule and below budgeted cost. Since the completion, a positive trend in the number of visitors to the centres has been recorded.

With a focus on improving quality and sustainability in the shopping centres a total of R66,9 million (30 June 2017: R177,9 million) was spent on refurbishments, new equipment, tenant installations and sustainable technology.

Smaller projects completed during the year include the refurbishment of the Hyde Park Corner offices (R14 million) and the façade replacement of the Rosebank Mall offices (R10 million). Opportunities are currently being explored on the rightsizing of various stores, and creating space for tenants who are not yet in all of the shopping centres. Also, an upgrade of the food courts at Woodlands Boulevard and Canal Walk are in planning stage.

The various water-saving initiatives in the Western Cape region (the use of borehole water, capturing of run-off water, the treatment of effluent grey water) are all in the final stages of commissioning. As a result of these initiatives, together with the installation of back-up water storage, the exposure of the Western Cape shopping centres to water outages has been significantly reduced. Other ongoing water-saving initiatives in the portfolio included the use of grey and borehole water at The Glen, and the installation of waterless urinals and aerators in the public bathrooms across the portfolio.

Disposals

Willowbridge North was sold during the year for R225 million. Transfer took place in September 2017.

A conditional sale agreement has been concluded for the last remaining non-core property in the portfolio, Lakefield Office Park.

The functional and reporting currencies for the investments in sub-Saharan Africa (excluding SA) and South-Eastern Europe are US Dollar and Euro, respectively.

The exchange rates used to convert to Rand 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 dividends.

Investments in sub-Saharan Africa (excluding SA)

Distributable earnings from the investments in sub-Saharan Africa (excluding SA) increased to R78,4 million (30 June 2017: R57,0 million), due to the inclusion of distributable earnings from Ikeja City Mall, Lagos, Nigeria of R24,0 million (30 June 2017: Rnil).

Vacancies

The financial performance of the portfolio overall was negatively impacted by vacancies and tenant replacements during the year. Vacancies in Accra Mall and West Hills Mall increased mainly due to the withdrawal of Truworths and Identity from Ghana, and the downsizing of fashion tenants. Income from Manda Hill shopping centre (Lusaka, Zambia) reduced due to re-tenanting of shops at lower rentals at the beginning of the financial year. Game (replacing the previous second food anchor) is due to open in November 2018 at Achimota and West Hills, which will strengthen the tenant mix.

The economic growth prospects in Ghana have improved and we have seen a general increase in trading densities in recent months. Demand for shops improved at some centres and vacancies reduced at Manda Hill, Kumasi and Achimota. At Ikeja City Mall, trading conditions and rent collection have been stable over recent months while the Nigerian economy has slowly gained momentum, benefiting from higher oil prices and improved foreign exchange liquidity.

Hyprop share of shareholder loans/investment property

At 30 June 2018 the Hyprop share of the US Dollar value of the AttAfrica portfolio, Manda Hill and Ikeja City Mall was USD282,9 million (30 June 2017: USD281,8 million) at a weighted average capitalisation rate of 8,3% (30 June 2017: 8,4%).

The small net reduction in the Rand value over the period was mainly due to the repayment of a portion of the AttAfrica shareholder loan (R65,6 million) and an impairment of the shareholder loans to AttAfrica and Manda Hill (R166,4 million), offset by an increase in value due to Rand depreciation against the US Dollar (R146,9 million) at year-end.

Certain of the properties in the portfolio, have been affected by the economic conditions of recent years and are producing lower investment returns than what was originally anticipated. As a result the income received from those properties over the next few years will be lower than previously modelled. The shareholder loans in AttAfrica and Manda Hill, which reflect Hyprop’s share of the value of the underlying property investments at group level, have therefore been impaired. Should a sale not take place before maturity of the shareholder loans to AttAfrica in 2020, it is likely that the structure will be renegotiated and extended.

As disclosed in the interim results announcement, Hyprop is investigating a reduction of its exposure to the investments in sub-Saharan Africa (excluding SA).

Hyprop’s investments in South-Eastern Europe are held through a UK company, Hystead, in which Hyprop has a 60% interest. The portfolio consists of six high-quality, dominant shopping centres, located in five capital cities in South-Eastern Europe. The total rentable area of the portfolio is approximately 230 000m² with Hystead's share of the gross asset value being EUR740,6 million.

The significant increase in net distributable earnings is mainly due to the inclusion of income from Skopje City Mall in Skopje, Macedonia (acquired November 2016), The Mall in Sofia, Bulgaria (acquired October 2017) and City Centre One Zagreb East and City Centre One Zagreb West in Zagreb, Croatia (acquired April 2018). Distributable earnings also benefited from the depreciation of the Rand against the Euro.

Vacancies

At 30 June 2018, apart from small vacancies at The Mall in Sofia and City Centre One East, the Hystead portfolio was fully let.

Benefiting from strong macro-economic conditions, trading in the South-Eastern European shopping centres remain positive with the centres reporting good trading density growth. Demand for space remains high and various extension plans are under consideration.

At 30 June 2018 the Hyprop share of the Euro value of the Hystead portfolio was EUR444,4 million (30 June 2017: EUR179,9 million) at a weighted average capitalisation rate of 7,5% (30 June 2017: 8,7%).

The total Rand equivalent value of Hyprop’s share of investment property in South-Eastern Europe increased due to the acquisition of The Mall in Sofia, Bulgaria and the two centres in Zagreb, Croatia. The Rand equivalent value of the Delta City centres and Skopje City Mall increased marginally due to the depreciation of the Rand against the Euro.

Acquisitions

Hystead made the following acquisitions during the year:

The Mall, Sofia, Bulgaria

The Mall shopping centre in Sofia, Bulgaria, effective 4 October 2017, for EUR155 million (7,3% yield). The Mall, with a rentable area of 51 200m², is one of the dominant shopping centres in Sofia.

In June 2018, Hystead acquired the former Hypermarket premises which is currently vacant and is connected to The Mall. These premises will be refurbished and integrated with The Mall, at a total cost of EUR23 million, and will introduce a supermarket of 2 450m² as well as additional line shops of 9 550m². The anticipated starting date is October 2018 and the development will take approximately six months to complete, at an estimated initial yield of 9%.

City Centre One East and City Centre One West, Zagreb, Croatia

Hystead acquired a 90% interest in two dominant shopping centres situated in Zagreb, Croatia (City Centre One Zagreb West and City Centre One Zagreb East) with rentable areas of 42 373m² and 47 191m², respectively, effective from 20 April 2018, for EUR283,5 million (7% yield). Hystead entered into a joint venture agreement with WKB3 (which retains a 10% interest in the centres), an Austrian-based company that developed and managed the centres.

During the year Hystead established a European-based executive management team, which provides management support to the onsite property management at each of the shopping centres. The asset management of the Zagreb shopping centres is undertaken jointly by the Hystead management team and by CC Real, the operating company of WKB3.

Funding

With effect from June 2018, all of the shopping centres are part funded with non-recourse asset-backed loans through offshore banks at an average loan to value ratio of 47% (EUR349,9 million). The debt has a weighted average interest rate of 3,6% and a loan term of 4,5 years, with 45% of the interest rates hedged for the full term.

Hystead listing

Consideration was given to inwardly listing Hystead separately on the JSE. Given the relatively weak capital market conditions in South Africa 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. Hystead will seek further acquisition opportunities for quality assets in the region at acceptable yields.

South African debt

The South African bank debt is secured against South African investment property, while the DCM funding is unsecured.

During the period, the following maturing corporate bonds and facilities were repaid:

In March 2018, Hyprop issued two new long-term corporate bonds, a R452 million five-year bond and a R348 million seven-year bond, at margins of 1,6% and 1,9% respectively, which were used to repay part of the Nedbank debt. The cash from the equity raised of R778,7 million as well as proceeds from previous asset sales were utilised to reduce the South African debt.

At 30 June 2018, 113,6% of the interest rate was hedged. This will reduce in the first quarter of the 2019 financial year with the expiry of a R100 million interest rate hedge in August 2018 and the potential raising of R250 million of new debt to fund capital requirements.

The interest rate on the South African debt increased due to the increase in the maturity profile of the corporate bonds.

US Dollar-denominated debt

The Rand equivalent of the US Dollar-denominated bank debt increased during the year, largely due to Rand depreciation 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).

Two bank loans in Hyprop Mauritius of USD40 million and USD20 million were consolidated and refinanced with a three-year USD60 million bank facility. During the year a portion of an expiring bank facility of USD30 million was partly repaid and refinanced with a USD23 million facility, of which only USD16,7 million was utilised.

In-country debt relating to Ikeja City Mall (Lagos, Nigeria) of USD56,5 million (Hyprop share: USD42,4 million) was refinanced for three years and converted to an interest only loan.

Euro-denominated debt

Equity funding in Hystead of EUR396 million has been provided through bank loans secured by shareholder guarantees. As per the shareholders’ agreement, Hyprop guarantees 90% of the equity funding and PDI Investment Holdings Limited (PDI), Hystead’s other shareholder, 10%. PDI provides further back-to-back guarantees to Hyprop for 11,7% of the guaranteed amount and for the remaining 18,3% that Hyprop guarantees, Hyprop receives 60% of the applicable PDI dividend as credit enhancement income. This agreement is in place until May 2021.

EUR234 million of the equity funding, provided by way of bridge loans, will be refinanced by October 2018 and replaced with three-year term loans, at an estimated average fixed interest rate of 2,1%. The balance of the equity funding was previously financed using three-year term loans, due to expire in May 2020.

The Euro debt is not consolidated in the Hyprop statement of financial position. For the purposes of the above table (including calculation of the loan-to-value ratio), 60% of the debt and 60% of the corresponding asset values have been included (in line with Hyprop’s 60% interest in Hystead).

Euro-denominated debt increased during the period due to the acquisition of The Mall in Sofia, Bulgaria in October 2017, and the two malls in Zagreb, Croatia, as well as the depreciation of the Rand against the Euro.

Board changes

Laurence Cohen (CFO) resigned from the board effective 1 August 2018. Brett Till has been appointed as the CFO effective 1 October 2018.

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.

The board thanks Laurence for his valuable contribution over the last 15 years and welcomes the new directors to the board.

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.

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

A dividend of 380,24450 cents per share for the six months ended 30 June 2018 will be paid to shareholders as follows:

Shareholders may not dematerialise or rematerialise their shares between Wednesday, 26 September 2018 and Friday, 28 September 2018, both days inclusive. Payment of the dividend will be made to shareholders on Monday, 1 October 2018. In respect of dematerialised shareholders, the dividend will be transferred to the CSDP accounts/ broker accounts on Monday, 1 October 2018. Certificated shareholders’ dividend payments will be deposited on or about Monday, 1 October 2018.

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 2018 were prepared in accordance with the JSE Limited Listings Requirements for summarised consolidated results and the requirements of the Companies Act of South Africa. The JSE Listings Requirements require summarised consolidated results 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 2017 have been considered. Based on management’s assessment, the amendments did not have a material impact on the group’s financial statements.

All accounting policies applied in the preparation of the group financial statements for the year ended 30 June 2018 are consistent with those applied by Hyprop in its consolidated group financial statements for the prior financial year.

These summarised consolidated financial statements for the year ended 30 June 2018 have been extracted from the audited group financial statements, but have not 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 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 financial statements. Their unqualified audit report is available from the registered office of the company.

The financial information was prepared by Vasti Booysen CA(SA) and supervised by Pieter Prinsloo in his capacity as CEO.

On behalf of the board