2019 was a year of significant change for Hyprop. Arising from the resignations of the former CEO and CFO, both of whom had been with the group for over a decade, Morné Wilken (CEO) and Brett Till (CFO) were appointed, and together with Wilhelm Nauta (CIO), comprise the new executive team. Under this team Hyprop’s strategy was interrogated, resulting in a new three-year strategic plan that will see Hyprop adapt to the rapidly evolving retail landscape, disruptive technologies and market conditions.
The refined mission of the group is “to create environments and opportunities for people to connect and have authentic and meaningful experiences, by managing and developing tangible (mixed-use precincts underpinned by dominant retail centres in key economic nodes) and non-tangible assets”.
In line with the revised strategy, the group will focus on three strategic areas – the South African (SA) property portfolio, the Eastern European (EE) property portfolio and relevant non-tangible assets arising from the digital disruption which is transforming many traditional market sectors (including the retail and property sectors).
The key priorities for the next 18 months are to exit the sub-Saharan African (excluding SA) (S-SA) portfolio, to reposition the SA portfolio and to improve the dominance of the EE portfolio. In addition, we will develop and implement a strategy around digital disruption and technologies in the retail, property and infrastructure spaces.
From a financial perspective we aim to reduce our loan-to-value ratio and restore the group’s investment grade credit rating (subject to South Africa’s sovereign credit rating). Cash flow management will be a key priority and cash-backed income will form the basis of calculating distributions to shareholders.
Market conditions in the SA and S-SA regions have deteriorated and tenants, face significant challenges as a result of the poor economic growth and currency volatility, respectively. Consumer demand remains depressed and shopping preferences are changing, impacting on the ability to maintain rental rates and growth in distributions. New appointments to the board, and at operational levels, are being considered to ensure the group has the necessary skills to deal with the challenges and opportunities presented by the strategic initiatives. Further details on specific actions being taken to meet these challenges are included in the individual portfolio reviews below.
These changes, the decision to dispose of the group’s S-SA assets and the refinancing of Dollar-denominated debt with Rand-denominated debt, due to the impairment of the group’s S-SA interests based on the anticipated sales proceeds, will have a negative impact on distributable income for this financial year and the 2020 financial year. The group believes these are necessary for the group’s long-term sustainability and anticipate positive growth in distributable income in 2021 and beyond.
Against this background, the group’s financial results for the year ended 30 June 2019 are presented below.
Distributable income and dividend
Distributable income decreased by 0,1% from R1 905 million for the year ended 30 June 2018 to R1 903 million. The distribution per share decreased by 1,5% from 756,5 cents to 744,9 cents.
The solid performance by the SA portfolio and strong growth from the EE portfolio were offset by a decrease in
distributable income from the
|30 June 2019||30 June 2018|
|Net income before fair value adjustments||1 627 268||266 016||(95 513)||1 797 771||1 592 470||234 473||128 276||1 955 219|
|Adjustments to calculate distributable income||67 743||37 154||104 897||(796)||(49 909)||(50 705)|
|Straight-line rental income accrual||81 399||6 488||87 887||4 696||(849)||3 847|
|Non-controlling interest||30 959||30 959||2 600||2 600|
|Taxation paid||(427)||(427)||(4 381)||(4 381)|
|Net interest adjustments||134||134||(47 279)||(47 279)|
|Other fair value adjustments – Edcon||(12 705)||(12 705)|
|Capital items for distribution purposes||(951)||(951)||(5 492)||(5 492)|
|Distributable income||1 695 011||266 016||(58 359)||1 902 668||1 591 674||234 473||78 367||1 904 514|
|Weighted average number of shares for calculating distribution per share||255 429 272||251 741 343|
|Distribution per share (cents)||663,6||104,1||(22,9)||744,9||632,2||93,2||31,1||756,5|
The board of directors has declared a final dividend of 359,3 cents per share for the six months ended 30 June 2019. The total dividend for the year ended 30 June 2019 is 744,9 cents per share, compared to 756,5 cents per share for the year ended 30 June 2018. This dividend is based on cash earnings from the group’s operating portfolios.
The weighted average number of shares in issue during the year increased by 3,7 million from 251,7 million to 255,4 million, primarily as a result of the 7,5 million new shares issued in April 2018 when additional capital was raised.
Hyprop currently has interests in a R51 billion portfolio of shopping centres in South Africa, Eastern Europe and sub-Saharan Africa (excluding SA).
South African portfolio
The shopping centre portfolio in South Africa includes super-regional centre Canal Walk, large regional centres Clearwater, The Glen, Woodlands, CapeGate, Somerset and Rosebank Mall, regional centre Hyde Park Corner and value centre, Atterbury Value Mart.
30 June 2019
30 June 2018
|Revenue||3 003 847||2 889 135|
|Expenses||(1 092 420)||(956 146)|
|Net property income||1 911 427||1 932 989|
|Other operating expenses||(44 969)||(59 707)|
|Net interest||(239 190)||(280 812)|
|Net operating income before fair value adjustments||1 627 268||1 592 470|
|Adjustments to calculate distributable income||67 743||(796)|
|Distributable income||1 695 011||1 591 674|
Distributable income from the South African portfolio increased by 6,5% over 2018, in line with the guidance provided in September 2018. This was achieved despite a further deterioration in the South African economy and consumer confidence, particularly in the second half of the financial year.
Total revenue (before the lease straight-line adjustment) increased by 6,6% over the 2018 year, largely as a result of a 16% increase in municipal and other cost recoveries. Rental income increased by 6% having been somewhat protected from the economic climate by contractual rental escalations.
Trading density across the retail portfolio increased by 0,6% year-on-year and the overall rent-to-turnover ratio increased from 9,1% to 9,4%.
The opening of the new food court and play area at Woodlands in May 2019 had a positive effect, with foot count at the mall up 13% and trading density up 2,4% in May and June 2019. Canal Walk, The Glen, Somerset Mall, Rosebank Mall and Atterbury Value Mart also achieved good growth in trading densities in the last quarter of the financial year.
Property expenses increased by 14% compared to the year ended 30 June 2018, due to a 16% increase in non-controllable expenses (mainly rates, taxes and power-related costs). By contrast, controllable costs (excluding bad debts and depreciation), increased by 7,5%. The combined effect was an increase in the portfolio cost-to-income ratio.
|Cost-to-income ratio – South Africa||30 June 2019
|30 June 2018
|Analysis of gross cost-to-income ratio||35,4||33,0|
|Bad debts and depreciation||2,0||1,6||30,7|
|Contractor service level agreements||3,9||3,9||6,5|
|Maintenance and management costs||6,2||6,1||8,2|
Other operating expenses decreased due to an increase in asset management fees received from Hystead as a result of the additional properties acquired in April 2018, and savings in staff and related costs.
At 30 June 2019 rental arrears were R31,5 million, compared to R18,9 million at 30 June. Following the adoption of IFRS 9 Financial instruments and the requirements relating to how doubtful debt provisions should be calculated, doubtful debt provisions increased to R26,8 million. The increase in this amount reflects the financial pressure on the consumer, and ultimately on retailers. At 30 June 2019 the group had no material doubtful debt exposure to, or arrear rentals owing by, any particular tenant or tenant group, including the Edcon Group (Edcon).
Lettings and vacancies
Over the past four to five years’ rental escalations have outpaced South Africa’s economic growth and inflation rates and the growth in trading densities at our malls, leading to pressure on rental rates.
Due to the current economic environment, the significant increases in other occupancy costs borne by tenants and low growth in trading densities, rent reversions were negative 9%, with a positive weighted average escalation rate of 7,1%. The strategy to reposition the South Africa portfolio is designed to drive positive growth in trading densities, thereby reducing rent ratios for tenants. We are also investigating alternative rental models based on market-related escalations. This will reduce the risk of excessive reversions over time and produce more sustainable rental growth in the long term. Over R300 million of capital expenditure is budgeted for the 2020 financial year towards achieving these objectives (see below). We are also evaluating projects aimed at reducing occupancy costs for tenants, such as the introduction of solar plants at our malls, water saving initiatives and other “green” technologies.
Vacancy levels across the retail portfolio decreased to 0,8% (5 103m2) at 30 June 2019, largely due to reductions at The Glen, Atterbury Value Mart and Clearwater Mall. Office vacancies were 4 638m2 (10%), mainly due to an increase in vacancy levels at Hyde Park Corner’s office component.
|Rentable area (m2)||Vacancy as % of total rentable area|
|Retail||663 197||5 103||0,8%||1,6%|
|Office||43 429||4 638||10,7%||5,5%|
|Total||706 626||9 741||1,4%||1,9%|
At 30 June 2019 Edcon occupied 57 145m2 (2018: 66 781m2) in Hyprop malls, equivalent to 8,1% (2018: 9,2%) of GLA. During the year Hyprop initiated a plan to reduce its exposure to Edcon by 15 910m2. By 30 June 2019, 9 636m2 of this space had been re-let. It is anticipated that the remaining 6 274m2 will be re-let during the 2020 financial year. In re-letting the space vacated by Edcon we will introduce new strong anchor tenants to our centres that will positively impact trading densities.
As part of Edcon’s restructuring, Edcon approached its top 31 landlords in November 2018 and offered the landlords an opportunity to subscribe for an equity interest in Edcon, or, as an alternative, requested a 40,9% reduction in rentals for a 24-month period commencing on 1 April 2019 (the Edcon rent reduction). Hyprop agreed to assist Edcon by subscribing for equity in Edcon on a monthly basis for an amount equivalent to the monthly Edcon rent reduction (a total of R12 million from 1 April 2019 to 30 June 2019) (the Edcon subscription). The equity which Hyprop has received in Edcon has been impaired to zero at 30 June 2019. Distributable income for the year has been reduced by R12 million, as a consequence of the reduction in net cash flow received from Edcon pursuant to the Edcon subscription.
The market value of the South African portfolio, as determined by the group’s independent valuers, decreased by R143 million (0,5%) from R28,8 billion (excluding assets held-for-sale) at 30 June 2018 to R28,6 billion at 30 June 2019. The main reasons for the decrease are negative rent reversions and the impact of the two-year Edcon rent reduction. The valuations are based on an average discount rate of 12,5% (2018: 12,5%) and an average exit cap rate of 6,8% (2018: 6,8%). The resultant average implied yield on the portfolio is 7,2% (2018: 7,1%).
|Value attributable to Hyprop|
|Property valuations – South Africa||Rentable area
|30 June 2019
|30 June 2018
|Value per m2
30 June 2019
|Shopping centres||653 509||27 089 719||27 351 847||45 455|
|Value centres||48 649||1 411 000||1 303 000||29 004|
|Total retail||702 158||28 500 719||28 654 847||44 315|
|Standalone offices1||4 468||136 000||323 000||30 439|
|Investment property – independent valuations||706 626||28 636 719||28 977 847||44 227|
|Non-current assets held-for-sale1||(198 000)|
|Building appurtenances||(162 288)||(163 068)|
|Ikeja building appurtenances consolidated||3 157|
|Centre management assets||1 807||1 920|
|Investment property – statement of financial position||28 476 238||28 621 856|
Capital projects with a value of R132 million were completed during the year. A further R87 million of projects were delayed to the 2020 financial year. New capital expenditure for the 2020 financial year has been budgeted at R363 million, and is focused on repositioning our malls and improving trading densities.
|30 June 2020|
|Yield-based projects||30 058||211 887|
|Trading density improvements||30 755||90 720|
|Replacements||25 061||41 501|
|Infrastructure projects||1 661||18 834|
|Total capital expenditure||87 535||362 942|
Included in yield-driven projects for 2020 is an amount of R54 million relating to new tenant installations as a result of the reduction in space occupied by Edcon, as well as R69 million to be spent on tenant installations for the replacement and/or relocation of tenants as we fine tune our tenant mixes in line with changing customer preferences and to strengthen the tenant profiles. Trading density improvement projects are aimed at increasing overall shopper experience and dwell times. These include the development of a technology-based customer interaction platform which will allow improved connectivity with “new-age” shoppers, enhancing the food and entertainment offerings at many of our malls, upgrading parking systems (including use of better technology to reduce customer frustration and improve controls), installation and improvements to back-up power supply systems (to ensure continuous trading) and air conditioning systems. Other projects under consideration are centred on creating co-working and co-trading environments for new entrants to the retail sector to showcase and promote their products and services in a flexible and affordable manner.
The sale of Lakefield Office Park was finalised on 4 January 2019 and the sale proceeds of R200 million were received.
Investments in Eastern Europe
Hyprop’s EE investments, held via a 60% interest in UK-based Hystead Limited (Hystead), include interests in Delta City in Belgrade, Serbia; Delta City in Podgorica, Montenegro; Skopje City Mall in Skopje, Macedonia; The Mall in Sofia, Bulgaria, and a 90% interest (effective 54% interest for Hyprop) in City Center One East and City Center One West, both in Zagreb, Croatia.
In line with the Hystead shareholders’ agreement, Hyprop accounts for the investment in Hystead as a financial asset.
30 June 2019
30 June 2018
30 June 2019
30 June 2018
|Dividend income||221 190||180 525||13 080||11 820|
|Guarantee fees||40 542||46 671||2 397||3 051|
|Foreign exchange gains||4 284||7 277|
|Distributable income||266 016||234 473||15 477||14 871|
Distributable income from Hystead, comprising dividends from Hystead and guarantee fees from PDI Investment Holdings (PDI), increased by 13% from R234 million to R266 million.
As a result of the additional in-country asset-backed finance raised by Hystead during the previous financial year, the guarantee fee percentage reduced from 17% (average) for the year ended 30 June 2018 to 11% for the 2019 year.
Trading conditions in the region remain favourable with all sites achieving growth in net operating income. The average trading density for the portfolio increased by 3,7% from 2018.
In June 2019 The Mall of Sofia, Bulgaria, successfully completed a 12 000m² extension. The extension added 40 new stores, an increase from 182 to 222, making it the second largest shopping centre in Bulgaria at 62 000m². A diverse portfolio of brands has been added to The Mall, including a modernised version of Billa supermarket (one of Central and Eastern Europe’s leading supermarket chains), one of the first Pepco stores in Sofia, a Ciela book store on two levels, Scandinavian home and living retailer Jysk, and a renovated Hippoland kids store. In addition, LPP, a leading international fashion group from Poland, will open the biggest Sinsay store (900m²) in Sofia by August. Initial feedback after the opening has been positive.
Various other investment projects are planned for the new financial year to maintain the portfolio’s dominance. Skopje City Mall is undergoing an 18-month project to rightsize various tenants, introduce additional international retailers, improve foot-flow and public and common areas, and refresh the food court and entertainment offerings. The project is budgeted to be earnings accretive and expected to be completed by March 2021 at an estimated cost of EUR6 million.
|Eastern Europe||30 June 2019
|30 June 2018
|Investment property – independent value (100%)||€795 732||€771 800|
|Hyprop attributable share1||€458 539||€456 330|
|Hyprop attributable share1||R7 386 292||R7 302 740|
|Rentable area m²||241 326||230 584|
|Value per m²||€3 297||€3 347|
|1||Based on Hyprop’s 60% effective interest in Hystead, other than Hystead’s Croatian assets in which Hyprop has a 54% effective interest due to the 10% minority shareholder in Croatia|
At 30 June 2019 Hystead’s investment property portfolio was valued at EUR795 million (2018: EUR772 million) based on a weighted average capitalisation rate of 7,6% (2018: 7,5%). This is equivalent to an implied forward yield of 8,0%. Hyprop’s attributable share of the Hystead portfolio was R7,4 billion (EUR459 million) (2018: R7,3 billion (EUR456 million)).
The Hystead portfolio remains almost fully let with a vacancy level of 0,5%.
Investments in sub-Saharan Africa (excluding SA)
Pursuant to the strategy review during the year, Hyprop will divest of the S-SA portfolio over the next 12 to 18 months, in order to focus on South Africa and Eastern Europe going forward. We have made good progress in this regard.
At 30 June 2019 the S-SA portfolio included interests in Accra Mall and West Hills Mall in Accra, Ghana; Kumasi City Mall in Kumasi, Ghana (all held via the group’s 37,5% interest in AttAfrica); Manda Hill Centre in Lusaka, Zambia (held jointly with AttAfrica) and Ikeja City Mall in Lagos, Nigeria.
On 28 June 2019, AttAfrica disposed of its interest in Achimota Retail Centre, in Accra, Ghana. Hyprop’s share of the net disposal proceeds, being USD16 million, was received by Hyprop Mauritius on 28 June 2019.
Subsequent to year-end, Hyprop Mauritius (50%) and AttAfrica (50%) have disposed of their interests in Manda Hill Shopping Centre. The group’s interest in Manda Hill is accounted for as an investment in a joint venture and is included under loans receivable on the statement of financial position at 30 June 2019. The carrying value of the investment has been adjusted in line with Hyprop’s share of the total net sale proceeds, being approximately USD50 million.
Progress is being made on the disposal of the group’s remaining S-SA assets and the interest in Ikeja City Mall is classified as an asset held-for-sale at 30 June 2019.
Net proceeds from the disposals will be applied to reduce the group’s US Dollar-denominated debt.
In light of the decision to dispose of the S-SA portfolio, the carrying amounts of the remaining properties have been impaired to align with their anticipated sales proceeds. The result of these adjustments is an impairment/fair value adjustment of Hyprop’s investments in S-SA of R1,46 billion at 30 June 2019, of which R1,1 billion was reflected in the interim results to 31 December 2018.
12 months ended
30 June 2019
12 months ended
30 June 2019
|Revenue||214 000||224 578|
|Expenses||(86 634)||(93 746)|
|Net property income||127 366||130 832|
|Other operating expenses||(914)||(1 095)|
|Net interest paid||(221 965)||(1 461)|
|Net operating income before fair value adjustments||(95 513)||128 276|
|Adjustments to calculate distributable income||37 154||(49 909)|
|Distributable income||(58 359)||78 367|
The investments in S-SA were affected, inter alia, by weaker local currencies against the US Dollar and certain South African retailers that have curtailed their operations. This resulted in an increase in vacancies and a need to re-tenant at lower yields. As a consequence, cash flow in Hyprop Mauritius, after servicing borrowings, was negative.
Accounting income from the S-SA portfolio comprises operating profits from Ikeja City Mall and interest received on loans advanced by Hyprop Mauritius to AttAfrica and Manda Hill. Ikeja City Mall and Accra Mall (owned by AttAfrica) continued to trade in line with expectations and contributed positively to distributable income for the year. In line with the provisions of IFRS 9 Financial instruments, and the new focus on cash-backed earnings, interest income from AttAfrica is only recognised on the net unimpaired loan balance and to the extent it was received in cash.
Distributable income from the S-SA investments reduced from R78 million for the year ended 30 June 2018 to a loss of R58 million after deducting interest paid in Hyprop Mauritius. The negative distributable income in 2019 was exacerbated by the devaluation of the Rand against the Dollar from 2018 to 2019.
Management have reviewed the business model of AttAfrica and are implementing certain changes. These include the internalisation of the asset management function, re-organising arrangements with in-country local partners, retaining and hiring key staff, restructuring bank debt and restructuring the shareholder funding arrangement from 1 January 2020.