Growthpoint sees ‘little to no growth’ in SA portfolio

Growthpoint media release

Growthpoint Properties today announced 5.9% growth in distributable income to R3.1bn with revenue from the group increasing 4.3% for its half-year to 31 December 2018, representing dividend growth of 4.5% per share for investors.

The solid set of results deliver on Growthpoint’s market guidance and place it on track to achieve its forecast of approximately 4.5% growth in dividend per share for FY19, subject to no further deterioration in its South African client base. Growthpoint’s group property assets grew 4.3% during the half-year to R138.7bn.

Norbert Sasse, Group CEO of Growthpoint Properties, attributes its positive performance to the strong contributions from its newer strategies, specifically internationalisation. Some 31.3% of Growthpoint’s assets are now offshore and contribute 22.5% of its earnings before interest and tax (EBIT). Sasse confirms that Growthpoint is making good progress meeting its stated objective of 30% offshore exposure in both asset value and EBIT. A strategic review to increase this target is underway.

Sasse comments:

“Growthpoint’s investments in Australia and Central Eastern Europe (CEE) contributed most of our growth. There was no growth from our South African operations as a result of economic erosion and weakening property fundamentals, as well as asset disposals. We disposed of R2.8bn of non-core assets in South Africa and put the proceeds to better use in other areas of the business.”

Growthpoint is the largest South African primary listed REIT. It creates value for its stakeholders with innovative and sustainable property solutions that provide space to thrive. Its size and diversity on three continents and across property sectors make Growthpoint strongly defensive. Its 15-year track record of uninterrupted dividend growth is underpinned by quality earnings from high-quality physical property assets.

Growthpoint owns and manages a diversified portfolio of 559 property assets including 447 properties across South Africa valued at R77.2bn and Growthpoint’s 50% interest in the properties at V&A Waterfront, Cape Town, valued at R9.2bn. Growthpoint owns 59 properties in Australia valued at R38.4bn through its 66% share in ASX-listed Growthpoint Properties Australia (GOZ). It also owns 52 properties in Romania and Poland, 100% valued at €2.5bn through its 28.96% share in LSE AIM-listed Globalworth Investment Holdings (GWI) and its 21.6% share in Warsaw-listed Globalworth Poland Real Estate (GPRE).

Currently the 21st largest company in the FTSE/JSE Top 40 Index, Growthpoint is a Top 10 constituent of the FTSE EPRA/NAREIT Emerging Index. It is also in the FTSE4Good Emerging Index and FTSE/JSE Responsible Investment Index.

Growthpoint’s balance sheet is well capitalised. It has conservative gearing with a consolidated loan-to-value ratio of 35.9%. It is also prudently leveraged with 85.6% of debt fixed at a weighted average interest rate of 6.8% including AUD and EUR cross-current interest rate swaps and European debt. Its foreign debt and distributions are well hedged and dividends more than cover interest charges.

During the period Growthpoint issued corporate bonds for three, five and seven years and upheld its Moody’s national scale rating of Some 44% of its funding now comes from debt capital markets.

Growthpoint’s investments in CEE made up 2.4% of its 5.9% distributable income growth. GWI’s dividend was up 22.7% in Euros for its FY18, and GPRE paid Growthpoint its first dividend of R59m. Both delivered on their significant investment activity. In Poland, GPRE made €538m worth of new investments during 2018. GWI continued its development activity in Romania, completing the approximately 40,000sqm Renault Bucharest Connected as well as some 92,000sqm for Globalworth Campus Tower One and Two, with Tower Three due for completion at the end of 2019. It also began new developments of 26,400sqm of new offices at Globalworth Square and a 17,700sqm logistics project at Timisoara Airport Park.

“There are good opportunities to grow by acquisition in Poland and through development in Romania. Both CEE portfolios show excellent metrics with high occupancy levels and good demand. We are in a strong position to take advantage of opportunities in the region,” says Sasse.

GOZ had a remarkable year in 2018 with its share price reaching record highs and it continued an uninterrupted growth trajectory. GOZ’s dividend grew at 3.6% for the half-year and it has confirmed that it expects the same for its full-year. GOZ accounted for 2.9% of Growthpoint’s increase in distributable income. Its gearing remains at a conservative 35% and its key portfolio metrics are excellent with vacancies at a low 1.5%. Healthy property fundamentals in its market underpinned GOZ’s new investment drive of AUD341m. It completed a successful equity raise for AUD135m to acquire Skyring Terrace in late 2018. Growthpoint invested a further R908m into GOZ in the period.

Income from Growthpoint’s third-party trading and development for the six months was R49m and contributed 1.5% to the growth in distributable income. The trading and development division is currently busy with a R2.7bn development pipeline for Growthpoint’s portfolio in South Africa and some R900m of third-party development. Growthpoint’s goal is to generate consistent, recurring income from third-party development fees and trading profit capped at very conservative levels.

Growthpoint’s new funds management business, comprising Growthpoint Investec African Properties (GIAP) and Growthpoint Healthcare Property Holdings (GHPH) is on track to reach its target of R15bn in assets in the next three to five years. The $212m raised on GIAP’s first close is expected to be fully invested by 30 June 2019. GHPH, which has a R2.6bn portfolio of five assets, has raised R700m of third-party funds and has a strong pipeline of both acquisition and greenfield development opportunities.

The V&A Waterfront contributed 1.2% to Growthpoint’s growth in distributable income. This asset is performing strongly relative to the rest of the South African portfolio; however, it is not immune to the macro-economic environment and its retail rentals are under pressure and turnover rentals are down. The Cape Town water crisis impacted hotel occupancies and turnover, but the precinct’s hotels still outperformed their peers in the city. The water crisis is now under control but the V&A Waterfront is still building its own desalination plant to take it off the water grid. Growthpoint, and its partner the PIC on behalf of the GEPF, continues to invest in the V&A Waterfront’s development roll-out. The precinct remains in high demand for new corporate offices. Development of an 8,000sqm office for Deloitte is underway at Portswood Ridge and Investec Bank has selected the V&A Waterfront’s Canal Precinct as its preferred site for a 10,000sqm office. Woolworths’s 4,000sqm extension currently underway at the Victoria Wharf mall will make it the brand’s flagship store in Cape Town.

Growthpoint’s RSA property portfolio contributed a negative 2.1% to distributable income growth, which includes group costs and treasury, on the back of South Africa’s depressed macroeconomy and worsening property fundamentals, which put pressure on occupancies, rentals and costs. Arrears, however, remained stable across all three property sectors – retail, office and industrial. Future escalations on renewal were maintained above 7% but overall vacancies moved from 5.4% to 6.5%.

Trading densities in Growthpoint’s RSA retail portfolio increased 1.5% and core vacancies increased slightly from 2.2% to 2.4% over the period. Its renewal success rate increased to 85% from 82%, however renewal growth was negative 3.3%. Importantly, Growthpoint is investing more than R500m to upgrade all its core retail centres to keep them dominant, defensive and relevant.

“Growthpoint is participating in the restructuring of Edcon Ltd, but this should have no material impact on rental income. We are providing an upfront equity injection of R110m in return for an equity stake in the Edcon business. Growthpoint has reduced its exposure to Edcon in recent years to 110,000sqm in its retail portfolio. This should decrease by a further 18,000sqm or more in the next two years,” reports Sasse.

Low economic growth, weak demand and oversupply in the office sector, together with property disposals, notably the Investec Sandton building, nudged RSA office vacancies from 8.6% to 10.2% during the period. Despite the general trend of reduced and consolidated space, Growthpoint’s office renewal success rate increased from 54.5% to 62.6%, however renewal growth was negative 8.9%.

Industrial is the only RSA property sector that achieved positive renewal growth at a rate of 1.5%, pleasingly up from negative 3.3% at the beginning of the period. Vacancies in this portfolio, however, increased from 4.0% to 5.7% linked to general economic conditions.

“Low levels of certainty and sagging business confidence makes leasing challenging and expensive. Nonetheless, Growthpoint is focused on retaining clients and filling space as a priority. Our dedicated team managed to lease over 670,000sqm of space in the half year,” notes Sasse.

Workshop17, 50% co-owned by Growthpoint, added two new co-working spaces at Workshop17 Tabakhuis in Paarl and Workshop17 Firestation in Rosebank, taking its locations to four, including 138 West in Sandton and the V&A Waterfront. Three more are planned with one at Growthpoint’s 32 on Kloof development in Gardens, Cape Town, set to open in mid-2019.

A recognised leader in environmental sustainability, Growthpoint now has 102 Green Star SA buildings rated by the Green Building Council SA, spanning over one million square metres. In the half-year, it saved 5,674 tCO2e with energy produced by solar, or R9.7m. It also made R12m in water investments.

Property Point, a Growthpoint initiative, won Accelerator of the Year at the 2018 SA Business Incubation Conference Awards by the Small Enterprise Development Agency (Seda) in partnership with the Department of Small Business Development (DSBD). In addition, Shawn Theunissen, Head of Property Point and Growthpoint’s Corporate Social Responsibility was named 2018 Aspen Network of Development Entrepreneurs (ANDE) Global Member of the Year in New York.

“We have delivered a robust set of half-year results with key strategic gains achieved in an incredibly tough operating environment. While we expect property fundamentals in South Africa to deteriorate even further, our international investments are in strong and supportive property markets. We will continue to enhance the diversity and defensiveness of Growthpoint’s portfolio with international investment and new income streams, and create value for all our stakeholders,” concludes Sasse.

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