Redefine, the country’s second largest real-estate investment trust by market capitalisation, announced its interim results to February 28 2021. The results were underwhelming indicating that Redefine’s revenue had been slashed by 30% with dividends deferred. Andrew König, the Chief Executive of Redefine, joined the BizNews Power Hour to discuss these results and the future prospects of Redefine. König maintains optimism despite the hard-hit property sector, stating that; ‘Loneliness and Zoom fatigue will drive people back to the office’. – Nadya Swart
Andrew König on the under-occupation of office space:
There’s no doubt that offices are – from a sectoral point of view – probably one of the weaker parts of our platform at the moment. There was an oversupply of offices pre the pandemic, and we do know that the pandemic has caused a huge amount of distress around the occupation of space.
We do believe that it is temporary, though, and we do believe there’s going to be a return to the office. I think the loneliness for those working from home is what’s going to drive them ultimately back, along with the burnout that follows from Zoom fatigue and the like.
On his optimism that premises will return to full occupancy:
I do believe that the vaccination rollout will give people the confidence to be mobile once again, which will give them the ability to return without the fear that the pandemic has caused in terms of contracting covid. However, the collaboration, the connectivity and the cohesion is what’s missing when working from home. And yes, for certain professions, it may work. It doesn’t work for all professions.
And we do believe that you cannot underestimate the covid fatigue, the burnout, the emotional loneliness that follows and the isolation, too. The people I interact with are all expressing sentiment that they are desperate to get back to the office, to be working in teams once again and to collaborate around the table as opposed to via a Teams or a Zoom meeting.
On the effect of the pandemic on Redefine’s valuation over the last year:
The bulk of the pandemic brunt on values happened in the prior financial period that was up to August. And that’s another reason for optimism for us, in that we saw about a 10% decline in our valuations across the spectrum last year. This time round, up to the end of February – which is our first half – we’ve seen a 1% decline.
So, we’re starting to see the bottoming of that downward cycle, which signals that the worst of the pandemic has been priced into asset values. And from this reset base, we believe that we’re going to start seeing growth going forward.
On the meaning of reversions:
What reversions means is when leases come up for renewal, there’s a renegotiation with your tenant to extend their stay with you. When the expiring rental is exceeded by the renewed rental – that’s called a negative reversion, and when the opposite applies – it’s a positive reversion. Now, in a very difficult market with no newcomers to the market – we are negotiating furiously with our tenants to retain them. You’ll see our tenants retention rates for the officers is well over 95%, and as a consequence, we had to lower our rentals to ensure that they remain with us and are happy to remain with us.
Now, to put that into context, roughly 20% of our total leases come up for renewal on an annual basis, and that would apply to that part of our portfolio.So, in revenue terms – if you have a look at it – it resulted in about an 8.6% decline in our overall revenue for the office sector, which was offset by enforced lease escalations for the balance of the portfolio of 7.1%. So on a net basis, we went backwards 1.5%.
On whether the property sector is still a yield plan:
I would like to believe and suggest that it is. Last year was a unique situation brought on by the pandemic. As you know, Redefine made a decision based on solvency and liquidity requirements as set out in the Companies Act. We believe that we will be in a position this year – come year end, once things are a lot more certain and the outlook is a lot clearer from a vaccination rather point of view – to make a dividend decision that is going to result in the payment of one.
I must just caution that it is subject to the solvency and liquidity test. But as we sit here right now – that is not the issue for us. It’s more about, in the interim period, for us to bolster our financial liquidity, as well as to give us some flexibility for the coming months.
On whether it is realistic that Redefine’s share price could return to pre-covid levels:
We believe that a return to around the net asset value [NAV] level is realistic. Our net asset value is just under R7,20. We believe that premiums to NAV in this environment you won’t see very easily. But a return close to NAV, certainly for us, is where we believe the share price should sit in that our NAV is reflective of value.
On Redefine’s target to reduce its Loan-to-Value to below 40%:
We’ve negotiated the sale of a number of non-core properties – locally they total R2.7bn. And I can give you a little bit of a breakdown of that in due course. Further to that, we’ve got a student accommodation asset in Australia for R2.1bn. So in total, we’ve got sales in progress of R4.8bn. By this time next year, we expect to be done, whereby we will be sub 40% from a LTV point of view. We anticipate ending this financial year, which is at the end of August, at a 41% (odd) LTV.
Read Also:
- Redefine’s revenue slashed by 30% and dividend deferred
- Property liquidity crunch as cash-strapped Redefine can’t pay dividends
- Companies consider hastening return of workers to office – With insights from The Wall Street Journal
