November 5 2024 14:45
Andrew König, Redefine Properties CEO
SOUTH AFRICA
Redefine Properties (JSE:RDF), the second largest SA-based landlord saw improvements in its key operational metrics for the financial year to end-August 2024.
This year has marked a crucial turning point for the property sector, as easing interest rates and increasing confidence are leading to better property fundamentals and a more favourable operating environment, the group said.
CEO Andrew König, said a decrease in political risk, along with a stable electricity supply, boosted confidence. He said the commercial property industry seemed to be through the worst and had moved into an upcycle.
“Advancements in strategic reforms, such as Operation Vulindlela and the Government of National Unity’s emphasis on supporting local government as well as a commitment to achieving 3% economic growth, are all contributing to this increased confidence, which serves as a cost-effective form of economic stimulus. This, combined with falling interest rates, is helping to propel the property cycle upward,” he said.
Operation Vulindlela is a joint initiative of the Presidency and National Treasury to accelerate the implementation of structural reforms and support economic recovery.
90 Grayston, office building
Operation Vulindlela aims to modernise and transform network industries, including electricity, water, transport and digital communications.
Redefine has focused on preparing for a potential recovery in the property cycle. The reported enhancements in operating metrics, though starting from a low baseline, are primarily the result of strategic initiatives. These included efforts to simplify the asset base, optimise capital by restructuring R27.7bn in local debt, develop talent, and expand sustainability initiatives like the implementation of solar PV systems to meet energy needs. This was according to König and his team.
Redefine’s chief operating officer, Leon Kok, said that during the reporting period, most of the company’s South African operating metrics either stabilised or improved.
“In particular, occupancy rates increased to 93.2%, up from 93.0% in the 2023 financial year, with noticeable enhancements across all sectors. Tenant retention, which has become more difficult due to heightened competition from excess supply, is nearing 90%. This is a strong result that reflects the quality of Redefine’s portfolio and the strength of our relationships with tenants, who are eager to renew long-term leases with us,” he said.
Redefine’s retail portfolio saw occupancy rates for the year rise to 95.0% compared with 93.6% at the end of the end of the 2023 financial year.
“We anticipate further improvements in occupancy rates for Fy25 due to positive sentiment and decreasing interest rates, which are expected to enhance consumer spending power,” said Kok.
Redefine reported an overall improvement in renewal reversions, now at -5.9%, up from -6.7% in FY23, mostly driven by the retail and industrial sectors of its portfolio. While the office portfolio saw negative reversions of -13.9%, Kok said this was because market rentals had not kept pace with underlying rental escalations. He anticipated stabilisation as market conditions improved but they would need to improve.
Occupancy in the office portfolio benefitted from Redefine’s exposure to P- and A-grade assets. The limited demand in the office market was focused on higher-quality properties, where Redefine held a more competitive advantage, the group said.
Redefine’s industrial portfolio had long leases in place, with renewal reversions rising 5.5% during the period. Kok said this result reflected both the portfolio’s quality and the underlying activity supporting market rental growth.
“Our strategy in this sector is bullish regarding capital allocation, as we have access to developable land in prime locations near key transport hubs, which should create a strong pipeline of leasing opportunities,” he said.
During the year, Redefine added another 8MW of solar capacity, with an additional 18MW underway. Once completed, this will bring the total installed capacity to more than 60MW.
Solar PV accounts for 18% of the energy requirements for the South African retail portfolio, while Redefine’s assets in Polish retail, logistics, and office sectors use 25%, 86%, and 100% green energy, respectively.
In Poland, Redefine’s retail fund EPP’s core portfolio reached an occupancy rate of 99.1% (FY23: 98.4%), with renewal reversions turning positive at 0.2% (FY23: -7.2%), which signaled a return to market rental growth.
“The Polish economy is stabilising, and we are beginning to observe a rebound in retail spending growth due to moderating inflation and electricity costs returning to pre-energy crisis levels,” König said.
“Likewise, the logistics sector is performing well, supported by a market that favours infrastructure expansion, particularly in Western Europe and Germany,” he said.
ELI, Redefine’s Polish logistics platform, has an occupancy rate of 93.4%, and the 62,601 square metres of developments completed during the period are fully occupied.
Redefine’s self-storage operations in that market also grew, following the acquisition of a business called TopBox. Along with seven new developments being considered, this could potentially increase the net lettable area by an additional 33 277 square metres.
Redefine CFO Ntobeko Nyawo said that from a financial standpoint, Redefine’s balance sheet was strong.
“We achieved distributable income per share of 50.02 cents, in line with our market guidance. Net operating income in our South African portfolio grew by 5.2% to R4.967bn, demonstrating our ability to maintain profitability amidst challenging conditions,” he said.
The EPP core portfolio delivered net property income of R1.3bn, which is an improvement on last year’s R1.2bn, and was largely driven by rental indexation and increased occupancy levels. The cash distributions from the joint ventures also increased to R612.4m compared with R334.3m in the 2023 financial year.
“We have acknowledged concerns regarding the complexity and high leverage of our joint ventures. To address these issues, we have developed a comprehensive plan and programme that will be implemented over time. Although this is not an immediate process, we have a medium-term strategy designed to tackle the challenges associated with these joint ventures, including necessary corporate actions. We are also pleased to report that institutional investment is returning to the Polish market, which supports the launch of our action plan,” Nwayo said.
Nyawo said the solid operational results were offset by the net finance charges increasing by 15.1% to R2.1bn.
“However, if we look at the quality of our earnings, it is pleasing that 95.8% of the 2024 financial year distributable income is recurring in nature; demonstrating the business’ ability to generate sustainable earnings in a tough operating environment,” he said.
During the period, Redefine achieved “a significant milestone with its innovative R27.7bn common debt-security structure”, which is anticipated to enhance competition among funders.
“The substantial refinancing completed in FY24 has resulted in a very low-risk debt maturity profile for us. In FY25 and FY26, no more than 10% of our group debt will be maturing, and with access to liquidity of R4.8bn, our business is able to absorb headwinds and cease opportunities as they arise,” Nwayo said.
Redefine’s SA real estate investment trust (Reit) loan-to-value ratio for the financial year stood at 42.3%, slightly exceeding the target range of 38% to 41%. The completion of the acquisition of the Mall of the South contributed 1.1% to this figure, which Redefine had previously communicated to the market. There are plans in place to reduce this ratio within the target range over the medium term.
The distribution results included a payout of 22.2 cents for the second half, bringing our the 2024 financial year payout ratio to 85%. This was within Redefine’s dividend payout range of between 80-90%.
König said that Redefine was optimistic about the 2025 financial year, with expectations for distributable income per share to range between 50 and 53 cents.
“We are aware of the geopolitical risks that could disrupt inflation trends and monetary easing. Therefore, we are committed to improving our business performance by enhancing operational efficiency, restructuring our debt, and further simplifying our asset base. This approach will enable us to achieve risk-adjusted returns throughout market cycles. We are transitioning from merely identifying opportunities to actively capitalising on them, building on the progress we’ve made over the past year and focusing on the opportunities we identified in FY24,” said König.
Much of the recent improvement in Redefine’s share price could be attributed to macroeconomic factors, such as increased confidence and the downward shift in interest rates.
“Moving forward, we need to reinforce this improvement with operational results that support our share price. Our strategy emphasises organic growth, and as our share price approaches a level where the forward yield aligns with our debt pricing, we can reassess the overall debt-equity balance. Additionally, we will offer a dividend reinvestment plan, which seeks to conserve cash for the company and give investors the opportunity to cost effectively reinvest in Redefine’s compelling investment proposition,” he said.
alistair@propertyflash.co.za
