Growthpoint Properties Limited (JSE: GRT) delivered a 13.9% increase in SA REIT funds from operations (FFO) of R5.3bn and a 5.1% increase in distributable income per share (DIPS) of 155.6 cents for its financial year to 30 June 2022. Growthpoint’s total dividend per share (DPS) increased 8.4% to 128.4cps. Group property assets grew by 5.2% to R160.8bn.
Norbert Sasse, Group CEO of Growthpoint Properties, attributes this defensive performance to the rapid rebound of the V&A Waterfront and excellent performance from ASX-listed Growthpoint Properties Australia (GOZ), improved SA finance costs and steadily growing contributions from Growthpoint Investment Partners.
Sasse comments, “Growthpoint’s improved results show the resilience and stability of our business, and the benefits of diversification and quality earnings during yet another incredibly tough year.”
The Growthpoint share price remains significantly undervalued compared to its SA REIT net asset value of R21.58 per share, which grew by 6.7%
Growthpoint creates space to thrive with innovative and sustainable property solutions in environmentally friendly buildings while improving the social and material wellbeing of individuals and communities. It is an international property company invested in real estate across SA, Africa, Australia, Poland, Romania and the UK, and the largest SA primary listed REIT.
Growthpoint is a FTSE/JSE Top 40 Index company, a constituent of the FTSE EPRA/NAREIT Emerging Index, and has a long-standing inclusion in the FTSE4Good Emerging Index and the FTSE/JSE Responsible Index.
During the year, Growthpoint continued to reinforce its liquidity and balance sheet strength to enhance its ability to achieve its three strategic thrusts of international expansion, South African portfolio optimisation and growing its new income streams from assets under management by Growthpoint Investment Partners.
It decreased its group SA REIT loan-to-value (LTV) from 40.0% to 37.9%. In line with its improved performance, Growthpoint adopted a higher 82.5% dividend payout ratio, retaining R935.0m before tax to fund capital expenditure and development and execute on its strategies while ensuring balance sheet strength. It ended the period with R1.5bn cash on the SA balance sheet and R10.3bn of unused SA committed debt facilities. This includes contingencies for the upcoming maturity of its USD Eurobond of R6.9bn in May 2023, which Growthpoint will be in a position to repay should debt capital markets in Europe not be conducive to refinancing.
Growthpoint’s international investments represent 43.5% of property assets by book value and 28.4% of earnings before interest and tax, and its newly amplified targets are 50% and 40% respectively. The hard currency dividend income from its international investments increased from R1.4bn to R1.5bn.
It owns 58 office and industrial properties in Australia valued at R58.8bn through a 62.2% shareholding in GOZ. Through a 29.4% investment in LSE AIM-listed Globalworth Real Estate Investments (GWI), Growthpoint owns an interest in 71 office and industrial properties valued at R53.5bn in Romania and Poland. Growthpoint’s effective share is R15.8bn. It also owns six community shopping centres in the UK valued at R8.5bn through a 60.8% investment in LSE- and JSE-listed UK REIT Capital & Regional (C&R).
GOZ’s dividend of AUD20.8cps increased 4% from the prior year of AUD20.0cps, translating to a dividend of R1.1bn versus R987m in FY21, while the effective withholding tax decreased from 10.2% to 9.9%. The Australian portfolio’s net tangible assets per share increased by 9.4% to AUD4.56 driven by leasing success, yield compression and rent growth across the portfolio. All portfolio metrics are excellent: it is 98.4% occupied by gross lettable area with quality tenants and achieved an 86.0% tenant retention rate.
Its balance sheet strength can be seen in its low gearing of 34.3% after acquiring four high-quality office assets for AUD426.6m, one of which transferred post FY22, and taking into account its agreed acquisition of Fortius Fund Management for an initial purchase price of AUD45m, which has added AUD1.9bn of third-party funds under management to GOZ. It will have AUD136.9m of undrawn debt lines after funding both post-balance sheet transactions.
“GOZ delivered its best performance yet for Growthpoint and remains a core investment. It is in a great position and has provided FY23 DPS guidance of AUD21.4 cps and FFO per share range of AUD25.0 to AUD26.0cps, which is a bit lower than the highs of this year,” says Sasse.
GWI delivered a stable, resilient performance despite the global challenges affecting its markets. While property values lifted slightly, distributions of EUR27cps decreased 10.0%. GWI repaid EUR323.0m to settle its inaugural bond while sustaining good liquidity and remaining moderately geared at 41%. It continued to focus capital on logistics facilities in Romania, acquiring its first small unit logistics facility of 7,100sqm and completing four developments of a combined 61,700sqm with a further two under development totalling 56,000sqm. In Poland, it is refurbishing two mixed-use properties of 74,800sqm. GWI achieved good letting, although its vacancy rate edged up marginally to 11.9%.
“GWI is firmly focused on maintaining its resilience, operating performance and financial position, with the war in Ukraine adding to global challenges and market uncertainty. We continue to seek solutions to our minority shareholding in this investment,” notes Sasse.
During the year Growthpoint increased its investment in C&R by R480.0m (£23.7m) as part of a £30m equity raise. Several strategic transactions reduced C&R’s LTV from 72% to 40%. During the year property valuations stabilised and footfalls increased by 58%. It delivered solid letting with 55 leases signed from January to June 2022 at a 34% premium to previous rentals. C&R resumed dividend payments for the six months to June 2022 of GBP2.5 pence per share, translating to a dividend of R50m for Growthpoint, which elected to take the dividend reinvestment alternative.
“C&R expects its next six-month dividend to be similar. It has a pipeline of transformational and accretive repositioning projects driving income and value growth. We continue to believe in this platform, its management and its ‘needs-based’ community retail strategy,” Sasse says.
Growthpoint owns and manages a diversified core portfolio of 387 retail, office, and industrial properties across SA valued at R62.7bn. With valuations stabilising in all sectors other than offices, this portfolio recorded a further 1.9% devaluation. It manages these assets to optimise their value over the long term but also seeks to sell non-core assets to recycle this capital with the aim of re-balancing the portfolio towards higher growth sectors and regions. It sold 37 non-strategic properties for R2.1bn during the period, making a profit on book value of R240.9m and taking the total of properties it has sold in SA to R9.7bn since 2017.
The industrial and retail sectors delivered improved performance. There are some signs of stabilisation in the office portfolio. Vacancies in the SA portfolio, including trading and development and Growthpoint Investment Partners’ healthcare and student accommodation funds, reduced from 11.6% to 10.3% with more than 1.4m sqm let during the year. The renewal success rate improved from 65.4% to 75.1% but came at the expense of rental growth and escalations, with negative reversions across all three sectors, though rental renewal rates improved by 2.1% from -14.9% to -12.8%. The Western Cape and KwaZulu-Natal portfolios outperformed. Growthpoint collected 95%, or R187m, of all Covid-19 rental deferrals granted to tenants, and this year granted R17m of Covid-related discounts versus R198m last financial year. Arrears declined steadily across all sectors.
Vacancies in Growthpoint’s industrial portfolio improved from 9.4% to 5.7%, with particularly good letting in the Western Cape and KwaZulu-Natal where vacancies are around 2.0%. Renewal success rates increased significantly, from 62.2% to 86.3%. Reflecting the positive metrics, industrial property values increased 1.8% and like-for-like net property income grew 3.7%. Taking advantage of the demand for industrial properties, 22 non-strategic property assets were disposed of during the year, and another 19 properties are at various stages of disposal.
Office vacancies levelled off, reducing from a 22.4% peak on 31 March 2022 to 20.7% at year end. More tenants are returning to offices with a hybrid working model and smaller users that previously gave up space are also returning. Renewal success improved from 52.5% to 58.0% in a market where tenants continue to consolidate and reduce space. Reflecting the weak economic environment, although both improved, office property values and like-for-like net property income decreased by 5.4% and 8.7% respectively. To shift Growthpoint’s office exposure to higher-performing regions, nine office properties were sold.
Retail portfolio vacancies improved to 4.7% excluding offices, with a slightly higher renewal success rate of 85.0% and increased letting activity from national retailers. Retailers continued to restructure their portfolios, right-size their spaces and rebase rentals. Reflecting a less stressed retail market, Growthpoint’s shopping centres saw an 8.6% increase in average trading density, driven by the recovery in regional malls as shoppers returned to larger format shopping centres and spent more on larger basket sizes. Turnover underpins retailer rental levels, but the full positive trading takes time to filter through. Retail property values increased 0.1% and like-for-like net property income decreased 3.9%.
Growthpoint’s multisector development prowess creates opportunities to generate profits and supports its disposal strategy by unlocking the best value from non-strategic assets. The contribution to distributable income from trading and development was somewhat down at R146.2m for the year. Growthpoint invested R1.1bn in development and capex in SA and has R654.0m of capital commitments.
Growthpoint strives for excellent environmental, social and governance (ESG) performance. During the year it continued its solar energy drive, moving away from fossil-fuelled sources to using more renewable resources and supporting the continuity of power supply. Growthpoint’s SA portfolio has 13.2MW solar generation capacity and it has targeted 27.1MW by the end of FY23. It has 71 certified green buildings, which reduce carbon emissions, create energy and water efficiency, and lower tenant costs. Both of these focus areas support Growthpoint’s ambitious target to be carbon neutral by 2050.
This year, the Growthpoint Board of Directors approved its Ethics Strategy as well as its new Local Economic Development and Transformation (LED) policy for engaging with businesses in local communities where Growthpoint operates, further supporting its socioeconomic objectives. Growthpoint has a Level One B-BBEE rating. All Growthpoint’s policies align with International Finance Corporation (IFC) Performance Standards.
“We are steadily optimising our SA portfolio. Our SA business is well positioned with a strong balance sheet and good liquidity, and we are encouraged by the improvements in the industrial and retail portfolios. However, the performance of commercial real estate, and the office sector especially, correlates closely with SA’s economic health, which remains weak and is constraining our local growth prospects,” says Sasse.
Growthpoint’s 50% interest in the iconic V&A Waterfront, Cape Town, with its share of property assets valued at R9.0bn, improved its earnings significantly to deliver exceptional performance with a 52.0% increase in net property income. After being hard-hit by the Covid-19 travel bans and restrictions, international tourist arrivals at Cape Town International Airport had recovered to 75% of pre-pandemic levels by end-June 2022 and led to the V&A’s long-awaited rebound. Its visitor numbers were up 32.3% during the 12 months. They are currently 20% below pre-Covid levels, signifying more room for recovery. All V&A hotels are open are operating at 81% of pre-Covid occupancy levels with the Silo Hotel and Radisson Red exceeding these levels.
In the quarter to June 2022, retail sales at the V&A recovered to 14% above pre-Covid levels, with retail vacancies below 1% and good demand for space, although rental levels have reverted slightly. Marine and industrial properties were stable, and while the cruise season will only reopen in October 2022, income from the casual berthing of superyachts and yacht building increased 32%. Office vacancies remained at a low 1.8% underpinned by 60% blue-chip tenancies. In May 2021, construction commenced for a new multitenant 10,500sqm office building in the Canal District, anchored by Investec Bank in 7,700sqm and to be completed in the last quarter of 2023. With an area oversupply of residential stock to let, vacancies peaked at 30% and have now dropped to around 18%.
“All major sectors are enjoying low vacancies and strong demand at the V&A Waterfront. Its rebound is set to continue and we expect it to achieve higher than pre-Covid earnings in FY23,” says Sasse.
Growthpoint Investment Partners (formerly the funds management business), the capital-efficient alternative real estate co-investments platform, closed the financial year with R15.6bn of assets under management (AUM), surpassing its R15bn target which it aims to grow to R30bn by the end of FY27. In FY22, it contributed R67.2m in management fees and R181.5m in dividends to Growthpoint.
Growthpoint Investment Partners launched its third co-investment platform, Growthpoint Student Accommodation REIT, in December 2021 with seven assets of 4,979 beds valued at R2.2bn and a significant growth pipeline. Growthpoint has a 16.6% investment in SA’s first unlisted purpose-built student accommodation REIT, which has raised R1.4bn in equity, including Growthpoint’s co-investment of R240.0m. It earned Growthpoint distributions of R16.7m and asset management fees of R14.5m.
In FY22, Growthpoint Healthcare REIT concluded a USD80m equity and convertible debt package with IFC to finance growth opportunities. It has raised over R1.3bn of third-party funding. Growthpoint has a 55.9% shareholding. SA’s first unlisted healthcare REIT has a R3.4bn portfolio of seven assets and a R4.5bn pipeline of acquisitions and developments. It acquired the specialist Cintocare Hospital in Pretoria and agreed, subject to prerequisite conditions, to acquire a 50% undivided share in its first healthcare warehousing and distribution asset, the 22,455sqm facility in Midrand on a long lease to Adcock Ingram. Growthpoint Healthcare REIT delivered 7.5% DPS growth, and Growthpoint received R142.5m in distributions and R41.2m in property and asset management fees.
Lango Real Estate has a USD613.0m portfolio of prime office and retail assets in Ghana, Nigeria and Zambia, and land in Angola. Lango has raised some USD320m third-party funding to date, including Growthpoint’s 16.3% shareholding, and is in advanced discussion with potential investors to raise additional capital that it intends to use mainly to acquire a pipeline of assets, particularly in Nairobi, Kenya, as well as to reduce debt. Growthpoint received R22.3m in distributions and R11.5m in fees.
“Growthpoint Investment Partners is strategic for our immediate growth of assets under management rather than assets on the balance sheet. We intend to increase the scale of our three investment platforms and seek meaningful new co-investment opportunities that are distinct from Growthpoint’s core assets in the retail, office and industrial sectors,” says Sasse.
Growthpoint’s diversified portfolio, strong balance sheet and stable hard currency dividend income streams position the company defensively for FY23. However, given the high level of uncertainty in the local and global macroeconomic environment, coupled with rising interest rates and inflation, it expects muted distributable income per share growth for FY23.
“Growthpoint is robust and ready for the challenges that lie ahead. We have a defensive, diversified business with the great strengths of skilled people and a strong balance sheet. This gives us cause for optimism about our prospects. We remain committed to creating and conserving value for all our stakeholders,” says Sasse.
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