Property Flash


May 6 2024 17:30

Management at Redefine Properties, the JSE-listed real estate investment trust (Reit) with investments in SA and Poland, is hopeful about the rest of 2024 and 2025 for SA’s commercial real estate sector and economy overall.

The group which has market capitalisation worth R28.7bn reported on Monday that

The company reported on Monday that its distributable income increased 6.1% to R1.7bn during the six months leading up to February 29 2024. This was against the R1.6bn achieved in the comparable period and translated to 25.3c per share. In the first six months of the 2023 financial year it was 23.9c per share.

Ntobeko Nyawo, CFO of Redefine, said the group was able to sustain its operating profit margin at 76.5% compared with interim financial year 2023’s 76.7%, despite the tough conditions that local property counters and other interest rate-sensitive companies found themselves in.

“Like other local counters, we’ve navigated a difficult downturn and maintained our resilience,” said Redefine CEO Andrew König.

Redefine Properties CEO – Andrew König

“The higher-for-longer interest rates remain a persistent theme and relief is critical to moving the dial on most outcomes,” he said.

Redefine’s share price fell as much as 4% in early trade and ended the day 3.19% lower at R3.94.

König said Redefine would not hitch its fortunes to interest rate cuts.

“Instead, we have focused on variables within our control that can directly influence value creation, like capital allocation, capital sourcing, maximising rentals, and containing costs,” he said.

Redefine has been recycling non-core assets to fund expansion activities where possible. Over the past five years or so, it has also simplified its investment base exiting the UK and Australia. The group now has an asset base worth R100.4bn. Its Polish assets are worth R37.8bn and its SA assets are worth R62.4bn. it has R200m invested in Lango Real Estate, an investment group with assets in Lusaka, Accra and Lagos.

In terms of asset acquisitions, Redefine entered the township market. Redefine raised funds through the sale of non-core assets to purchase a stake in the Pan Africa Mall in Alexandra, Johannesburg. It also bought the Mall of the South for R1.8bn during the reporting period.

“The future of physical shopping is not as bleak as many expected it to be post-COVID,” said Redefine COO Leon Kok.

“Despite interest rate pressures and shoppers’ limited disposable income, the retail sector, supported by demand for essentials, value, and apparel, is performing relatively well,” he said.

Redefine grew year-on-year retail trading densities 4.8% to R34 460 per square metre, which contributed to an average rent-to-turnover ratio of 7.4% across the retail portfolio. Kok said this mean there was opportunity for rental growth and would enable the company to pursue renewal rates in the retail sector more aggressively.

Retailers hade recovered largely post the pandemic. The retail and industrial portfolios reported a substantial improvement in rental renewal reversions during the period, with renewal rates marginally negative in retail (-0.5%) and positive (4%) in industrial.

On a total portfolio basis, negative reversions came down to -0.5%, compared with -3.7% in 2023 interim results period. This result was skewed by higher negative reversions of -13.6% compared with the 2023 half-year results’ -12.4% in the office portfolio.

Kok said the offices were a challenging market for landlords.

“As a result, we can anecdotally refer to it as a tenant market, because they have options and the ability to shop upwards and occupy well-located, quality office space at relatively affordable rentals,” he said.

As much as 95% of Redefine’s office portfolio includes P and A grade space.

“The office portfolio at a net operating income level grew by 4.1%, outperforming our industrial portfolio, which speaks to its quality,” Kok said.

South Africa’s property owners continue to face significant challenges from increased load shedding, rising municipal rates, and utility bills. Redefine is proactively managing these risks and costs by implementing renewable energy and working with City Improvement Districts to improve municipal services in the areas where it operates.

“We are proud of our 41MW of installed Solar PV capacity across all sectors in the country, the bulk of which sits in retail space. Another 21MW is currently in progress, as we look to increase our capacity in the next 12 to 18 months. This will stand us in good stead to mitigate some of the cost pressures we face locally,” Kok said.

In Poland, an energy price crisis, which is the biggest driver of high levels of inflation in the country, has recovered and returned to near pre-crisis levels. This has led to an increase in disposable income, which has also been helped by policies implemented by the new government, such as an easing of the ban on Sunday trading and raising the child social grant.

König said these factors boded well for the retail sector in Poland, which Redefine increased its exposure to by lifting its ownership level in Polish retail platform EPP from 95.5% to 99.2%. It has exposure to retail properties through its subsidiary, EPP. Occupancy levels in the core EPP portfolio sit consistently at 98.4% and the portfolio is essentially considered fully let.

“This forms part of the goal, to create a high-quality, diversified portfolio that can generate long-term, risk-adjusted returns in a hard currency,” he said.

“We don’t have many levers at our disposal to alter the circumstances of the external environment. So, for us, it comes down to concentrating on what we can control, such as investing strategically and focusing on conservative balance sheet management,” he said.

Nyawo said Redefine had R4.2bn worth of cash and cash equivalents, providing healthy liquidity. The profile remained at levels that provided “sufficient strategic headroom to weather any unforeseen events in the near term, thereby anchoring balance sheet strength”.

Nwayo said the group’s healthy debt maturity profile has helped its liquidity position with no more than 18% of facilities coming up for maturity in financial year 2025 to financial year 2027, which can be comfortably refinanced.

“When interest rates are high, it’s imperative to adequately hedge and protect ourselves. Approximately 76.7% of the group’s debt is hedged; during this time, we are hedged for an average term of 1.5 years, and the short, dated tenors seek to avoid baking in long-term pain of higher rates,” he said.

“We intentionally chose not to be sidetracked by the noise, knowing there will be aftershocks along the way as we move toward a normalised interest rate environment. There will, however, be new opportunities and, across our organisation, we are aligned to mindfully opting for the upside,” König said.

Nesi Chetty, fund manager and head of property at Stanlib said Redefine had reported distributable income per share growth of +6% which was in line with its earlier guidance to the market. 

“Net property income in both the SA and EPP portfolios increased primarily due to reversion improvements, better tenanting and stable escalation rates. Vacancy rates in the South African portfolio increased to 7.9% from the previous 7.0% mostly because of office and industrial increases,” he said.

Chetty said that investors were looking to see to what extent higher finance costs would detract from Redefine’s core operational performance. He believed that this had been managed to a reasonable extent by Redefine.

“The loan-to-value (LTV) was at 42.6%, having increased following the Mall of the South acquisition. Although the interest cover ratio (ICR) has dropped to 2.2 from the prior period’s 2.4, Redefine remains well-capitalised with close to R4bn in cash and liquid facilities,” he said.

A disappointment was that Redefine’s dividend payout ratio was 80% for the period. As a real estate investment trust (Reit), Redefine is mandated to pay a minimum of 75% of its distributable income out as a dividend each financial year. Since becoming a Reit about a decade ago, it has historically paid 100% of this income out. But things changed during the pandemic when Redefine and its peers came under severe financial pressure.

“It’s somewhat disappointing that the payout ratio has not moved higher as yet but they must be getting close to reviewing this given the strong balance sheet and market outlook,” said Chetty.

Executive director at Meago, Jay Padayatchi said Redefine’s South African performance boded well for the group overall despite other challenges.

“I think there aspects of the results which the market was not expecting. The EPP joint ventures have been a concern as they have been going backward operationally. The rising LTV needs to be addressed,” he said.

“We are likely at the bottom of the property cycle and heading up soon, provided that interest rates play their part and ease,” he said.

Chetty said Redefine’s year to date performance was slightly worse than the All Property Index (ALPI) but better than its rival Growthpoint’s.

“Redefine trades at a significant discount to its underlying net asset value, a 45% discount, with a forward yield of 11%. the focus over the next 12 months will be on improving growth on their core assets while bringing down the LTV,” he said.

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