September 15 2023
Growthpoint Properties, SA’s largest real estate company has warned the market that the South African economy remains in a torrid state with little growth and poor job creation. However, Cape Town is standing out as a shining light with Growthpoint’s assets there, particularly the V&A Waterfront and offices are performing superbly.
Growthpoint, which has a market capitalisation of R38bn, released financial results for the year to end-June on Wednesday where it largely disappointed the market.
The group which has assets in South Africa, the UK, Romania, Poland and Australia has been far from the belle of the ball in recent months. Growthpoint’s share price is down 23.04% year to date.
Growthpoint reported a 1.3% increase in its dividend per share (DPS) and its distributable income per share (DIPS) to 130.1 cents and 157.6 cents respectively for the June 2023 financial year. Group property assets grew 5.3% to R179.8bn and foreign currency dividend income climbed 7.6% to R1.6bn.
The group needs to achieve stronger results from its Gauteng assets.
Outgoing group CEO Norbert Sasse said Growthpoint had actually delivered a stable performance within expectations.
“We successfully achieved our planned outcomes in a year that was tougher than ever, reflecting the strength and diversification of our business and our quality earnings,” Sasse said.
Sasse said that excellent results from the V&A Waterfront made the greatest increase in contribution to this group’s results. In contrast, rising finance costs, particularly affecting Growthpoint’s South Africa and Australian businesses, presented the most significant downside.
Its Australian business had been its top asset but Growthpoint Australia’s performance has soured recently. High interest rates globally are making it pricey to manage finance costs.
Growthpoint remains focused on a strong balance sheet and the consistent application of conservative financial management in adherence with rigid treasury policies and balance sheet metrics, Sasse said.
He said balance sheet strength and liquidity enabled Growthpoint to pursue its three key goals: international expansion, optimising its South African portfolio and increasing revenue from Growthpoint Investment Partners (GIP)’s managed assets. GIP manages a number of businesses focussed on healthcare, student accommodation, Africa and other areas of real estate investment.
Growthpoint kept its dividend payout ratio at 82.5%, consistent with its last financial year. It retained R938.5m before tax to fund capital expenditure and developments together with the proceeds from property disposals.
The group’s SA loan to value (LTV) ratio was 40.1% with an interest cover ratio (ICR) of 2.9 times. Growthpoint refinanced its $425m Eurobond which matured in May 2023 with longer tenure EUR debt facilities, extending the average term of its debt book to 3.5 years.
It secured long-dated bonds through private placements with the International Finance Corporation (IFC) and other debt investors. Sasse said Growthpoint has good liquidity with R1.7bn cash on its SA balance sheet and R6.6bn in SA unutilised committed debt facilities. In a rising interest rate environment, 77.7% of its debt book is hedged. Domestic finance costs, including finance costs and income received on interest rate swaps, increased by R215.0m for FY23.
Growthpoint continued the incremental growth of its strategic international investments with 45.8% of property assets by book value located offshore and 29.1% of DIPS earned offshore for FY23. It owns 58 office and industrial properties in Australia valued at R61.8bn through a 63.7% shareholding in Growthpoint Australia (GOZ) and five community shopping centres in the UK valued at R8.5bn through a 62.4% investment in LSE- and JSE-listed Capital & Regional (C&R). Through its 29.5% investment in LSE AIM-listed Globalworth Real Estate Investments (GWI), Growthpoint owns an interest in 72 office and industrial properties valued at R59.1bn in Romania and Poland. Its effective share is R17.4bn. It reinvested the December 2022 dividends paid by C&R and GWI, and the June 2023 dividends declared will be reinvested post-period.
GOZ delivered a 2.9% increase in AUD distribution growth to AUD21.4cps supported by once-off income from the early termination of two leases, which was offset by withholding tax increasing from 9.9% to 12.8%. GOZ’s AUD funds from operations (FFO) decreased by 3.2% mainly as a result of higher finance costs. GOZ has gearing of 37.2% and AUD300.0m of undrawn debt, 70.5% of its debt fixed and its debt book has average term of 3.4 years.
“GOZ’s strong capital structure, prudent gearing, high-quality office tenant base and strong industrial property market position it solidly in a higher interest rate environment,” said Sasse. Because of high interest rates for a full year, GOZ has guided a 9.8% reduction in distribution per share to AUD19.3c and FFO per share of between AUD22.5c to AUD 23.1c in FY24.
GWI achieved a 7.4% increase in dividend per share. Increased inflation underpinned rental increases. With global challenges impacting office markets in particular, signs of pressure were evident in vacancy rates and leasing incentives, and portfolio valuations decreased 2.5% with Bucharest and Warsaw performing better than the regional cities in Poland. GWI has gearing of 42.7% with no material debt maturity until March 2025. Most of GWI’s funding is fixed and in the debt capital markets, limiting interest rate exposure.
GWI achieved good letting however vacancies increased to 14.5%. It continued its development focus on logistics facilities in Romania, delivering 60,800 square metres of logistics and light industrial facilities, and has two small-unit logistics facilities under construction of 13,300sqm. In Poland, it is refurbishing two mixed-use properties accounting for 74,900 square metres.
“GWI is showing stability and has a prudent financial position, although challenging market conditions mean a more uncertain outlook and slower growth expectations. We continue to evaluate options to maximise the value of this investment,” said Sasse.
C&R enjoyed a strong year operationally with robust metrics driven by its community-focused needs-based retail strategy. It significantly increased its dividend from GBP2.75 pence per share (pps) to GBP5.5pps totalling a R103.6m for Growthpoint.
It invested GBP12.9m in value-adding projects that will produce a yield on cost of between 8% and 9%. Post-period it completed the GBP40m acquisition of The Gyle Shopping Centre in Edinburgh in an earnings-enhancing transaction, even though the equity raised to fund the transaction was at a discount to NAV.
Letting of a substantial 1.2-million square metres in Growthpoint’s SA portfolio reduced vacancies overall to 9.4%. Its SA property values increased 1.2% to R70.5bn, signifying greater stability and a more positive market view on future rental growth rates. Renewal rental growth rates remained negative at -12.9% versus -12.8% for financial year 2022. Credit metrics improved and arrears reduced to R165.4m from R195.3m at financial year 2022.
Growthpoint owns and manages a diversified core portfolio of 362 retail, office, and industrial properties across SA. It manages these assets to optimise their value over the long term but also seeks to sell non-core assets and recycle capital to rebalance its portfolio towards higher growth sectors and regions, specifically industrial assets and the Western Cape (WC) region. It sold 29 non-strategic properties for R1.5bn during the year, making a profit on book value of R107.8m. Growthpoint has sold 142 properties for R11.2bn in SA since 1 July 2016.
Growthpoint’s total expense ratio for its SA business increased from 33.5% to 35.5%, with continued above-inflation hikes in municipal rates and taxes, plus rising utilities costs and diesel for backup electricity for its tenants as a result of the extensive loadshedding. Its diesel spend was R140.0m versus R15.4m in financial year 2022, of which 41.7% of this was recovered.
Growthpoint’s strongest and most active sector was its industrial property portfolio. All its industrial property metrics were positive, except for renewal growth as longer leases continued to revert to market. Improved letting saw vacancies reduce significantly from 5.7% to 3.7%, and in Western Cape and KwaZulu-Natal (KZN) vacancies were a low 3.3% and 0.8% respectively. Positive key metrics drove up the industrial portfolio value by 3.0%. Taking advantage of the demand to own industrial properties, Growthpoint sold 20 non-core smaller assets to owner-occupiers and private investors. It acquired one fully let property in Hammarsdale, KZN, and commenced four industrial developments in the Western Cape, Gauteng and KZN.
The 2.3% increase in retail property portfolio valuations shows the improved trading conditions for most of the year driving improved metrics. The retail property portfolio reflected a steady low core vacancy of 3.1%. Trading density growth, which was stronger in the first half of financial year 2023 at 8.6% slowed to 6.2% in the second half as a result of loadshedding disrupting trading, interest rate increases and the weaker economy putting pressure on consumer spending. While leases continued to revert negatively and rental escalations on renewal remained under pressure, this began improving towards year end. Upgrades and expansions are underway at Bayside Mall, Beacon Bay Retail Park, River Square and Vaal Mall.
The office property portfolio vacancies reduced to 19.2% after peaking at 22.4% in March 2022. In KZN vacancies were 1.7% (FY22: 7.7%) and 7.7% (FY22: 13.6%) in the WC showing the return of positive property fundamentals in these regions. In Gauteng, vacancies in Illovo halved from 45% to 22% and should reduce below 10% in financial year 2024. Letting continues in Sandton, where many large users are back at the office more frequently leading to increased occupancies, but businesses are still consolidating and reducing space. The node represents 21.9% of the Growthpoint’s office gross lettable area and is 28.7% vacant. Higher occupancy and improved metrics saw office valuations increase by 3.2% in both Western Cape and KZN, but decrease by 2.7% in Gauteng, taking the total valuation to -0.9%. Adding more amenities to its offices, it completed the refurbishment of The Place at 1 Sandton Drive. Meeting the demand for hotels in WC at its Longkloof precinct, Growthpoint is developing the 150-room Hilton Canopy Hotel set for completion in October 2024.
Sasse said Growthpoint’s in-house trading and development division develops assets for its own balance sheet and generates development fees from third-party developments as well as trading profits. The contribution to distributable income from trading and development was R80.0m for the period.
Growthpoint invested R1.9bn of development and capital expenditure in FY23, with commitments of R1.8bn for financial year 2024.
“Our SA business is soundly positioned with a strong balance sheet and liquidity. Encouraging improvements are being led by the industrial and retail portfolios and our offices in WC and KZN. Our focus remains on optimising our SA portfolio, including lowering our exposure to offices and non-performing nodes in Gauteng while reducing reliance on the national electricity grid and fossil fuels,” said Sasse.
The V&A Waterfront, Cape Town, in which Growthpoint has a 50% interest with its share of property assets valued at R10.1bn, delivered a strong performance driven by the return of tourism and events to its market. This boosted net property income 20% higher than financial year 2022 and 11.2% above financial year 2019, while footfalls increased 28% recovering to 90% of FY19 numbers. The strategy of guaranteeing that all retail, restaurants and hotels were able to trade normally through the 325 days of loadshedding has paid off, delivering a significantly improved performance, albeit at a R36m diesel cost. Vacancies across the precinct were a low 0.4%.
Retail sales increased by 39% and trading densities increased 48%, with retail vacancies at 0.2%. Alfred Mall reopened in December 2022 and is trading well. Hotels at the V&A had an exceptional year, with net property income increasing by 39%. Occupancy levels grew by 56%, the average daily rate by 42% and room revenue climbed 122%. Residential-to-let vacancies improved from 17.8% at financial year 2022 to 2.3%.
Growthpoint’s DIPS were expected to decline by 10% to 15% for financial year 2024. Growthpoint wants to maintain a pay-out ratio of 82.5%.
Sasse has chosen to continue in his capacity as group CEO until December 31 2026.