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Strong investment-wide operational performance for HY24

Growthpoint Properties Limited reported robust operational results across its local and international investments for the six-month period ended 31 December 2023, with a stellar performance from the V&A Waterfront and its South African portfolio showing stable and steadily improving property metrics. The solid operational performances produced by the underlying portfolios of Growthpoint’s various investments were, however, overshadowed by higher interest rates globally, which presented significant downside given their impact on property values, equity and debt markets, and capitalisation and discount rates, affecting the financial performance of Growthpoint’s direct and indirect investments. Growthpoint reported total property assets down 1.1% during the period to R177.9bn. Reflecting the sound operational performance on one hand, and the impact of high interest rates locally and internationally on the other, Growthpoint will distribute R2.0bn, representing a half-year dividend per share (DPS) of 58.8cps, 8.6% down from HY23, based on a payout ratio of 82.5% of distributable income of R2.4bn. It retained R422.5m before tax to fund capital expenditure and developments together with the proceeds from property disposals. Given the impact of high interest rates across our local and international businesses, which will be greater in the second half of FY24, Growthpoint expects DIPS to decline by 10% to 12% for FY24. This is an improvement on the original guidance, which was for DIPS to decline 10% to 15% for FY24. Norbert Sasse, Group CEO of Growthpoint Properties, comments, “Growthpoint did well to deliver strong, operational outcomes and ongoing strategic progress. Despite unprecedented challenges in our markets, including low domestic growth, volatile global markets caused by interest rates that remain higher for longer and rising geopolitical tensions, our results continue to reflect the resilience and diversification of our business and our quality earnings.” Its group SA REIT loan-to-value (LTV) ratio was 42.0%, with an interest cover ratio (ICR) of 2.5 times. With good access to funding, it secured several longer-dated bonds through private placements with the International Finance Corporation (IFC) and other debt investors at attractive margins during the period. Growthpoint has good liquidity with R1.0bn cash on its SA balance sheet and R6.2bn in SA unutilised committed debt facilities. 76.7% of its debt book is fixed for an average term of two years at a rate of 9.6% or 7.1% if you include cross-currency interest rate swaps and foreign-denominated debt. Domestic finance costs increased by R207.0m from HY23 to HY24. While the LTV trajectory is upwards in the short to medium term, Growthpoint remains focused on strategic initiatives that will preserve liquidity and balance sheet strength in the long term, enabling it to pursue its three key goals: optimising its South African portfolio, international expansion and increasing revenue from Growthpoint Investment Partners’ managed assets. Growthpoint continued investing internationally with 43.5% of property assets by book value located offshore and 32.5% of DIPS earned offshore for HY24. Foreign currency income increased 4.3% to R796.0m (HY23: R763.0m). Growthpoint owns 57 office and industrial properties in Australia valued at R58.7bn through a 63.7% shareholding in Growthpoint Properties Australia (GOZ) and six community shopping centres in the UK valued at R9.3bn through a 68.1% 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 71 office and industrial properties with its effective share valued at R17.0bn. Growthpoint reinvested the June 2023 dividends received from C&R and GWI and invested in C&R’s open offer for the acquisition of Gyle Shopping Centre in Edinburgh. All GOZ’s portfolio metrics are excellent: 97.5% of the portfolio is occupied by gross lettable area (GLA), 94% is leased to the government, listed and large organisations, and it has a weighted average lease expiry of 5.8 years. GOZ’s balance sheet is robust with gearing of 38.4%, 77.0% of debt fixed for an average term of 2.7 years at a rate of 3.2% and it has AUD297.0m of undrawn debt facilities. However, higher interest rates saw GOZ’s portfolio valuation decline 4.2% on a like-for-like basis in AUD over the six months. Despite an increase in the payout ratio from 69.8% at HY23 to 79.8%, GOZ’s dividend decreased from 10.7cps at HY23 to 9.65cps for HY24. The dividend withholding tax (DWT) decreased from 14.0% at HY23 to 9.8% for HY24. The net dividend received of R551.2m (HY23: R533.6m) includes R34.5m relating to DWT over accrual for FY23. “GOZ is well positioned in this higher-for-longer interest rate environment, with a resilient portfolio, robust balance sheet and strong strategic position. GOZ’s fund management business currently has AUD1.7bn of funds under management and it is focused on sustainable and profitable growth, actively pursuing assets that are likely to increase in value as the property cycle turns and generate consistent income. GOZ expects its transaction markets to get better throughout 2024,” says Sasse. GWI reduced vacancies to 11.7% from 14.5% at FY23, showing good leasing and portfolio performance. It continued its development focus on high-quality industrial facilities in Romania. In Poland, it is refurbishing two mixed-use properties of 75,0000sqm, and finalised the sale of its Warta Tower office building in Warsaw for EUR63.4m. GWI has an LTV ratio of 42.2%, EUR396.3m of cash on hand and EUR265.0m of undrawn debt facilities. Given the significant debt refinancing in 2025 and 2026 which GWI is planning for, Growthpoint expects a decrease in dividend income from GWI for the full year. GWI’s portfolio valuation, impacted by higher interest rates, reduced 5.2% in the period and DPS reduced 26.7% to EUR11.0cps translating into R146.1m, which Growthpoint will receive in shares for HY24 against R166.6m for HY23. “Globalworth remains fundamentally strong. The Warsaw market is outperforming oversupplied regional Polish cities and the halt on new building projects in Bucharest is benefiting existing properties,” notes Sasse. C&R’s community-focused, value-driven retail strategy produced healthy metrics. Footfall increased by 1.8% on HY23, and new leases were signed at an average premium of 0.6% on previous rentals. C&R has re-let all three units vacated by the administration of Wilko, which negatively impacted portfolio occupancy of 92.1% by GLA. In September 2023, it completed the GBP43.0m acquisition of Gyle Shopping Centre in Edinburgh in an earnings-enhancing transaction, part-funded by a GBP25.0m capital raise which Growthpoint underwrote. Ultimately, Growthpoint invested GBP21.8m via the rights offer. LTV increased from 42.0% at FY23 to 43.6%. C&R has an average debt maturity term of 4.1 years, at an average cost of 3.7%, with 70% of debt fixed for the next three years. It increased its dividend to GBP2.95pps (HY23: GBP2.75pps), totaling R88.5m (HY:23 R50.4m) for Growthpoint. C&R’s portfolio valuations remained stable. “Notwithstanding the UK’s cost of living crisis impacting retail, C&R is showing operational resilience and has more value-adding projects underway,” Sasse says. Domestically, Growthpoint owns and manages a diversified core portfolio of 352 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 region. It also owns seven trading & development properties. Growthpoint sold nine properties for R635.4m during the period at close to book value, and one trading and development property for R141.0m. In total Growthpoint has sold R12.0bn of assets since 1 July 2016. Growthpoint’s SA portfolio showed it was on a far firmer footing with reduced vacancies, which have steadily improved from 10.1% at HY23 to 9.7% at FY23 and are currently 9.2%. Rental renewal growth is showing a similar positive trend, moving from -16.0% to -12.9% and -7.1% over the same period. Likewise, its renewal success continued to step up from 61.2% to 64.9% and now 79.0%. Credit metrics improved, and arrears reduced to R129.7m. The cumulative result was a 0.4% increase in SA property values to R64.2bn, signifying greater stability. Growthpoint’s total expense ratio for its SA business rose to 37.8% (HY23: 35.6%), driven by above-inflation hikes in municipal rates and taxes, rising utilities costs and the need for more diesel to power emergency electricity generators to power tenants due to frequent loadshedding. Growthpoint’s strongest and most active sector remained its industrial property portfolio. Like-for-like net property income (NPI) increased by 5.8%, driven by better sector dynamics, good letting, improved renewal rental growth, and significantly fewer bad debts. All portfolio metrics were positive, with 44 of the 101 leases renewed at positive renewal growth rates averaging 3.0% in the period. The portfolio’s vacancy rate is impressively low, at just 3.0%. This figure excludes speculative developments aimed at increasing exposure to the industrial sector, specifically modern logistics and warehousing properties. Growthpoint is currently developing speculative industrial properties in Cape Town, Gauteng and KZN. Additionally, it completed two tenant-driven projects in Ekurhuleni. Positive key metrics edged up the industrial portfolio value by 0.3%. The retail property portfolio delivered like-for-like NPI growth of 2.9%, based on a steady low core vacancy of 3.0%, a much-increased renewal success rate of 91.9% (FY23: 83.3%) and rental growth of 3.1% on average, on 39.4% of the GLA renewed in the period. Portfolio trading densities rose 5.9% in December 2023 compared to December 2022. For the six-month period, trading densities increased by 4.2% (FY23: 6.2%), despite several industry challenges, including loadshedding and higher interest rates impacting consumer spending. Growthpoint completed upgrades and extensions at River Square and Vaal Mall and is set to finish the major redevelopment of Bayside Mall by November 2024. It is also planning to extend Longbeach Mall to accommodate a 2,300sqm Builders Express that will be ready for the 2025 festive season. Retail property portfolio valuations increased by 0.1%. In a welcome positive trend, Growthpoint’s office property portfolio vacancies reduced yet again, improving to 17.8% (FY23: 19.2%) from their 22.4% peak in March 2022. Improvements were evident across nodes, but Sandton which represents 21.5% of Growthpoint’s office portfolio, showed a particularly significant change for the better, with vacancies reducing by around 20,000sqm during the period, and taking the node’s vacancy rate from 28.7% to a much improved 23.8%. While like-for-like NPI for this sector remained negative due to rentals reverting to market, tenants still consolidating and downsizing, pressure on renewal growth and escalating operating costs, the office portfolio valuation was positive for the first time in years, increasing 0.8% (FY23: -0.9%). Growthpoint has two demand-driven commercial developments underway. It is developing the 154-room Hilton Canopy Hotel in its Longkloof mixed-use precinct, set to open in November 2024 and has also started its net-zero carbon redevelopment at 36 Hans Strydom in Cape Town for Ninety One who, will occupy the building on a 15-year lease, once complete in July 2025. Growthpoint invested R1.0bn in development and capital expenditure for its SA portfolio in HY24, with commitments of R1.6bn at HY24. Growthpoint’s in-house trading and development division develops assets for its own balance sheet and earns development fees from external projects and profits from trading. This team also works on projects for Growthpoint Investment Partners, contributing to diversifying income streams. In HY24, this division made R20.3m of trading profits and earned R8.0m of development fees and R4.0m of NPI. Among the developments it undertook are two third-party residential projects: Kent La Lucia apartments and an office-to-residential conversion in Bedfordview. Growthpoint sold the Kent residential apartments in La Lucia, realising a profit of R20.3m. It also completed the Horizon Heights and Fountains View purpose-built student accommodation projects for the 2024 academic year and is busy with an extension to Hillcrest Hospital, all for Growthpoint Investment Partners. Growthpoint aims for excellent environmental, social and governance (ESG) performance, and it made significant strides towards its carbon neutral 2050 target. Adding to its 32.4MWp total solar generation already installed, Growthpoint entered a milestone Power Purchase Agreement with Etana Energy of 195GWh of renewable energy per year made up of solar (18%), hydro (15%) and wind (67%) energy. This equates to 32% of our FY23 consumption of 612GWh, which will result in more Growthpoint buildings offering tenants green energy, enabling them to save on electricity costs and meet their own carbon neutral targets. During the 10-year PPA, the cost of solar and wind power would escalate at CPI for tenants, while hydropower will escalate at 5.5%, resulting in greater cost savings in the long term, while sidestepping high NERSA hikes, which has seen the cost of Eskom electricity increase four times higher than inflation over the past 15 years. Growthpoint has targeted 40MWp of solar power generation capacity by the end of FY24. It is also targeting 40% of its annual consumption from its renewable energy mix in the foreseeable future. “The improving metrics from our SA business are encouraging, led by the industrial and retail sectors. We will continue optimising this portfolio, including increasing our exposure to better-performing real estate sectors and regions and leading the transition to renewable energy in the same way that Growthpoint championed certified green building in SA. This business is underpinned by effective strategies delivered by a skilled team of people and partners,” says Sasse. Net property income increased an impressive 17.2% at the iconic V&A Waterfront, Cape Town, in which Growthpoint has a 50% interest with its share of property assets valued at R10.3bn. This outstanding performance was driven by a 109% increase in turnover rental and fuelled by increased tourism and its knock-on benefits for retail, hotels and attractions. Holiday season visitor numbers reached a record 3 million in December 2023, up 25% on December 2022. The V&A recorded 25 million visits in 2023. December 2023 also achieved record high retail sales of R1.2bn, 16% higher than December 2022. The V&A is essentially fully occupied, with a very low 0.3% vacancy across the precinct. These numbers reflect the success of the strategy of guaranteeing that all retail, restaurants, and hotels can trade normally during loadshedding. V&A retail sales increased by 18% in the period and trading densities increased by 21% on a rolling 12-month basis — more than double the MSCI super-regional shopping centre benchmark. Rentals also exceed this benchmark, and with a 0.4% vacancy, demand for prime space is buoyant. The first TimeOut Market in Africa is trading exceptionally well after opening at the V&A in November 2023. This month also saw the refurbished helistop opening, with trading up 122% in November and 138% in December. Even with the Cape Grace closed for conversion by Fairmont from May to December 2023 and both the City Lodge and One & Only hotels undergoing refurbishment, net property income from the V&A Waterfront hotels increased an exceptional 45% in HY24 compared to HY23, with a 5% increase in occupancy rate, a 36% increase in the average daily rate and a 22% climb in room revenue. Residential-to-let vacancies were consistent at 3%, with both its residential buildings undergoing a refresh including receiving generator back-up power. Demand for V&A offices is strong, with vacancies at a minuscule 0.1%, and an increase in staff returning to their offices is noticeable in the precinct. Investec Bank moved into its 10,500sqm new office in November 2023. Ninety One has taken temporary offices at the V&A of 3,500sqm while Growthpoint completes the green redevelopment of its foreshore premises. The 7,000sqm office conversion in the Cape Town Cruise Terminal building is underway for completion in mid-2024. In the marine and industrial sector, the Cape Town Cruise Terminal is expecting to welcome 60 cruise ships during the current cruise season (October 2023 to May 2024). Charter boat businesses increased by 22% during the period, casual berthing remained robust, and the marina was fully occupied in November and December 2023. “This is a stellar performance from the V&A, which expects to deliver high single-digit income growth for FY24,” says Sasse. Growthpoint Investment Partners has R17.9bn of assets under management (AUM). This includes three funds distinct from Growthpoint’s retail, office and industrial core assets: Growthpoint Healthcare Property Holdings, Growthpoint Student Accommodation Holdings and Lango Real Estate. The capital-efficient alternative real estate co-investment platform delivered increased asset management fees of R52.0m (HY23: R48.1m) although its dividends decreased to R48.6m (HY23: R79.0m). Growthpoint Investment Partners invested R178.9m in development and capital expenditure, R633.5m in acquisitions and has commitments of R541.7m. “Growthpoint Investment Partners is attracting good investment appetite from institutional investors and continues to deliver on its solid pipeline of opportunities to grow AUM for existing funds and launch a new fund by FY25, in line with our target AUM of R30bn by FY27,” says Sasse. In conclusion, Sasse says, “Growthpoint has a diverse portfolio and income streams which position us defensively for FY24. Given that the LTV trajectory is upwards in the short to medium term, we will focus on strategic initiatives to preserve liquidity and balance sheet strength in the long term, thereby delivering value for all stakeholders. This will enable us to meet our objectives for FY24 and beyond.”