INVESTOR UPDATE FOR THE THREE MONTHS ENDED 30 SEPTEMBER 2018 - Growthpoint
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INVESTOR UPDATE
FOR THE THREE MONTHS ENDED
30 SEPTEMBER 2018
CONTINUED FOCUS ON OUR THREE We previously communicated our strategy to grow the
offshore contribution to both the book value of property assets
STRATEGIC THRUSTS and earnings before interest and tax (EBIT) to 30%. Ultimately,
we have offshore aspirations above 50%, but this is potentially
limited by our ability to fund such expansion.
We remain committed to our three key strategic thrusts:
Growthpoint currently has a 66.4% shareholding in GOZ,
1. Internationalisation
29.0% in GWI, and 21.6% in GPRE.
2. New revenue streams
• Funds management business
2. New revenue streams
• Trading and development
3. Optimising and streamlining our existing portfolio
Funds management business
1. Internationalisation
Growthpoint Investec African Properties (GIAP) has secured
capital commitments of more than USD212m from several
The growth of our offshore business remains the key driver for
large institutional and international investors, with
Growthpoint. We continue to support both Globalworth Real
Growthpoint committing USD50m. The fund is evaluating
Estate Investments (GWI) and Globalworth Poland Real Estate
various opportunities to invest in income-producing
(GPRE) as well as Growthpoint Australia (GOZ) in their growth
commercial real estate assets in select cities across the African
trajectories while also looking for other opportunities.
continent, spanning office and retail properties.
Gearing for the Group was a low 35.2% as of 30 June 2018 and
The Healthcare Fund has attracted c.R700m of investment
has subsequently reduced to c. 33% following the sale and
from third parties so far. The fund already holds five assets in
transfer of the Investec Sandton Head Office building for
the defensive healthcare property sector valued at R2.5bn, four
R2.2bn. This gives us balance sheet capacity. We remain
of which are hospitals. All hospital assets are performing well
committed to our domestic investment grade rating and would
with expansions planned at three of the four hospitals. The fund
seek to protect our AAA status.
has several acquisition and development opportunities on the
horizon, which are being evaluated. We expect to grow it to
R5bn of assets in the next three years. In June 2018,
Growthpoint Trading and Development started the
development at the c.R500m specialist Head and Neck
Hospital in Pretoria.
Trading and development
Sticking to the limits previously communicated, the value of
projects pre-identified as opportunities for trading and
development for third-parties will not exceed 5.0% of the value
of the South African portfolio and assets developed for our own
balance sheet will not exceed 10.0%.
The GRT share price has come under some pressure, mainly due
Trading profits of c. R34m have been realised on the sale of
to the increase in the yield environment and is trading at a
some of the sectionalised units at Pine Industrial Park in
discount to net asset value (NAV), which curbs possible equity
Durban. We continue to build a sustainable pipeline of
raises and we decided not to offer the DRIP in September.
opportunities that we believe should contribute a maximum of
Offshore expansion could be funded through asset sales where
between 1.0% and 2.0% of distributable income going forward.
we would de-gear to re-gear for investment, however liquidity
in the form of asset sales, has also become more constrained in
recent months. At recent share price levels, it makes sense to
consider buying back some shares.
3. Optimising and streamlining the existing portfolio We continue to assess our major centres critically. Some form
part of our larger portfolio of asset sales. Those we consider to
We continue to negotiate the c.R5.8bn portfolio asset sale with be long-term investments are in the process of being upgraded
a BEE consortium. The transaction is complex in nature and it or will be refurbished in the next financial year, where
depends on the successful listing of the consortium. Yields of appropriate. The ongoing improvement of tenant mixes across
listed South African property stocks have increased our entire portfolio is also a key focus. Upgrades to six of our
significantly on the back of rising bond yields. Taken together malls with a capex spend of c. R440m are in progress, with
with the depressed macroeconomic environment and the upgrades/extensions planned for another three. This ensures
sector contagion experienced earlier this calendar year, this is the continued relevance of our major assets which, in turn,
making it challenging to list the consortium at a market-related protects their market position.
yield. We will continue to evaluate the opportunity and will
only proceed if the pricing is right. Discussions with Edcon are ongoing regarding various
alternatives, and renewals and non-renewals, rental
South Africa negotiations and early terminations are under consideration.
Edgars has vacated 3 000m² at Watercrest Mall in Hillcrest but
It remains incredibly tough for all three of our SA sectors. continues to pay rent. Of the 116 636m² that Edcon occupies
Three-month key performance indicators (KPIs) tend to be with Growthpoint, Edgars occupies c.66% and is the main risk
lumpy, but early indications are that they will remain under to our portfolio. We have 13 Edgars stores with a gross lettable
pressure for FY19. area (GLA) greater than 3 000m², nine of them between
3 000m² and 5 000m² and four of them greater than 5 000m².
Vacancies have increased from 5.4% at FY18 to 6.5%. Retail is A further nine stores have a GLA of 3 000m² or below.
down slightly from 3.6% to 3.5%, office up from 8.6% to 9.6%
because the sale of the Investec building reduced the office Office
base, and industrial increasing from 4.0% to 6.3% with the
largest vacancy at Growthpoint Business Park in Midrand and We are pleased to announce that we have successfully let
an industrial property in Durban, that was occupied by a tenant buildings 1 to 8 at The Woodlands, representing c.29 000m², to
that recently relocated to a new Growthpoint facility that was Altron. The 12-year lease is effective from November 2020
developed for them. once Deloitte has vacated and the buildings have been
refurbished. We will be spending c. R220m to connect the
Total arrears as a percentage of collectables has increased from
buildings with some other capital expenditure anticipated to
6.7% at FY18 to 7.5%. Some 350 000m² of space was let in the
add to the desirability of the node.
first three months of the financial year. Although slightly
improved from 66.6% at FY18, our total renewal success rate
We think office performance has bottomed out, however, given
remains under pressure at 67.9% with retail at 82.5% (FY18
the large amount of excess supply in the market, we expect the
81.8%), office at 71.0% (FY18 54.5%) and industrial at 61.8%
recovery to be slow.
(FY18 68.4%).
It is an extremely competitive market and the cost of attracting
and retaining tenants is high. Rental reversions have
deteriorated from negative 2.8% at FY18 to negative 6.2%.
Reversions in the office portfolio are negative 12.3%, retail at
negative 4.6% and industrial, surprisingly, at positive 2.3%.
This KPI is expected to smooth out during FY19 although it is
still likely to end in negative territory. Weighted average future
escalations on renewals are 7.7% and the weighted average
renewal lease period for the portfolio is 4.4 years compared to
3.2 years at FY18.
Retail
Retailers’ sales results are putting pressure on our metrics and
resulting in tough lease negotiations with new and renewing A trend of ‘nodes within nodes’ is evident. Better performing
tenants. We are still dealing with a legacy of competition across nodes include Cape Town’s southern suburbs, Bryanston and
most of our shopping centres where retailers have diluted their Rosebank. Performance is not only related to an area, as some
trading densities by committing to new space. grades of buildings do better than others in the same nodes.
P-grade offices in Sandton outperform the A- and B-grade
Trading density growth is a pedestrian 1.6% compared to 1.3% buildings. Sandton is a large node, and its demand seems to be
at FY18. Our centres that serve the upper-income segment are centred around ‘upper’ Sandton; along Rivonia Road, around
performing better relatively. However, the vast majority of our the Gautrain Station, and along Katherine Street to Discovery.
centres serve the middle-income shopper, which is where Properties on Grayston Drive and down the hill towards
growth is flat or muted. Food and value are the best performing Benmore are not faring as well.
categories and restaurants are the worst given that consumers
have less disposable income.
The negative renewal reversion of 12.3% was impacted Development remains focused on our sites in Samrand,
significantly by the renewal of Draft FCB at Pinmill for six Wadeville, Midrand and Meadowdale. We have completed and
years, and the four-year renewal of almost 16 000m2 by ENS let the latest development in Midrand Central for JDL
in the Cape Town Foreshore. Both leases had escalated Electrical. At our Mill Road Industrial Park in Cape Town, we are
substantially above market rentals and the reversions have in the final stages of completing phase one comprising a
skewed the portfolio numbers. 20 000m² speculative development, which is flexible for
subdivision into smaller units. We have successfully let three
Vacancies increased from 8.6% at FY18 to 9.6% as of 30 units so far.
September 2018. Half this increase can be attributable to the
sale of the Investec Sandton building, which has decreased the
office portfolio base, with the remainder due to various
tenants vacating.
In KwaZulu-Natal, we brought 4 500m² of new space to the
market on completion of The Boulevard on Umhlanga Ridge.
In Cape Town, we are increasing our footprint in the southern
suburbs where demand currently exceeds supply with the
development of 5 400m² at Draper Street. Enquiries are strong
with an estimated completion of end June 2019.
Tenants remain spoilt for choice in Gauteng with the supply
overhang which is putting pressure on both renewals and new
lets. Vacancies in Durban and Cape Town are at all-time lows
and supply is very limited.
Large and stubborn vacancies have increased the vacancy level
in our inland portfolio. Growthpoint Business Park has a
vacancy of 20 000m². This hybrid office/industrial park,
located in Midrand, is still facing stiff competition from
Waterfall across the highway. We also have a 13 000m² vacant
facility in Middelburg, where a sale is being negotiated.
Interest for space at 144 Oxford is positive. With our other
buildings in the node now fully let, we expect enquiries to be Our R13bn portfolio is robust and made up of around R1bn of
converted to deals. Construction is expected to be completed new developments, which is in line with our development
end May 2020.. pipeline and ‘convert the dirt’ strategy. Some R2.5bn of our
assets have received value-adding alterations, extensions or
Generally, there seems to be fewer tenants moving due to the upgrades since 2011, with the balance being standing
associated costs and an aversion to committing to long lease investments. We continue to seek strategically located
lengths. That being said, clients are still consolidating space properties in growth nodes that will add to our core portfolio.
and seem more flexible on location and grade of the building.
V&A Waterfront
Industrial
Dam levels are above 75.0% and Cape Town has officially
Like the office sector, there is a divergence in the performance averted the water crisis. As such, we expect the temporary dip
of nodes. The traditional industrial areas in western in tourist numbers to recover. Hotel occupancies have already
Johannesburg are trading vastly differently to the northern and recovered from the temporary decline seen earlier this year.
eastern nodes of the city which are outperforming. Rental The Radisson Red performed exceptionally well in September
reversions are a reality with markets being depressed and with an occupancy of 75.5%. Prospects for October and
tenants being spoilt for choice. Where rentals on long leases November are looking strong.
have escalated above market rate, there is pressure to revert to
market, especially with competitors offering similar spaces at Turnover revenue for the retail sector continues to be
market rentals with incentives such as allowance for tenant negatively impacted by the constrained consumer, reduction
installation and rent-free periods. As a result, negotiations in overall tourism numbers, and cannibalisation of store
clearly favour tenants and reversions remain the order of the trading densities by the retailers themselves. Sales for the
day. We did, however, manage to see positive renewal growth 12 months to 30 September 2018 were down 1.0% year-on-
of 2.3% for the three months driven by renewals at Lanner year with restaurants up 3.25%, fashion and accessories flat,
Place in Durban. jewellery up 31.0% on the back of the weak Rand and
department stores down 11.0%.
Development has been focused on completing the Battery Given the strong and steady flow of global money investing in
Parkade which has now opened. Construction is progressing at direct property in Australia it remains challenging to find
the old Amway building at Dock Road Junction and Spaces will accretive acquisitions. The team is, however, investigating
open their collaborative workspace on 1 December 2018. Initial various opportunities, including the recently announced
demolition and preparation work at the Cruise Terminal are acquisition of 100 Skyring Terrace in Newstead, Brisbane, for
complete. The next phase of the construction programme AUD250 million, to be partly funded by debt and partly by an
depends on successful leasing. equity raising of up to approximately AUD135 million. The
response to the equity raising has so far been strong with the
The V&A Waterfront has also participated in tenders for four full institutional component recently completed and the retail
large blue-chip corporates who are investigating options for a component underway. Growthpoint will follow its full rights
total c.95 000m² of office space in the precinct. and intends to issue a R1bn bond on the local debt capital
markets, which it will use, in the main, to finance the
International transaction.
Gearing is currently at 33.7%, rising to between 37.6% and
Growthpoint Properties Australia LTD (GOZ) 38.8% following the Newstead transaction, but still below the
midpoint of Growthpoint’s 35% to 45% target gearing range.
The acquisition of 836 Wellington Street in Perth has been Remaining headroom will be between AUD189 million and
settled to become GOZ’s inaugural investment in the Perth AUD235 million which ensures balance sheet flexibility going
office market. The property was purchased for AUD91.3m forward and, as such, GOZ is well placed to take advantage of
reflecting a market yield of 6.5%. opportunities should they present themselves.
There are signs of improvements in the Western Australian Australia’s economy is performing well with annual GDP
economy. More supportive conditions in the resources growth last measured at 3.4% and the unemployment rate
industry have stabilised the falling business investment and, reaching 5.0% in September. Strong population growth, above
while total investment is still subdued, the outlook is more long-term averages, exceeds that of other developed
promising. Recent employment data, business confidence and countries. Business confidence and conditions remain buoyant.
business conditions surveys for Western Australia are also
much improved, and these factors are leading to a better With regards to the property sector, the structural change in
performing Perth office leasing market. The removal of the retail property sector with growing online market share has
substantial subleasing from the market over the past 12 to 18 benefited the industrial property sector with greater occupier
months gives confidence that the timing of this transaction demand. Significant infrastructure spending by Federal and
will closely meet the bottom of Perth’s office leasing market State Governments totalling AUD324 billion, which is
(both for market rents and incentive levels). The long weighted supportive of the economy, is expected to benefit non-CBD
average lease expiry of 8.31 years and ‘AAA’-rated tenant precincts where a large proportion of GOZ’s office building and
covenant associated with this transaction were both strong industrial investment are located.
considerations in GOZ’s investment.
These positive economic fundamentals, coupled with record
low office vacancy in Sydney and Melbourne and increasing
occupier demand in the industrial sector, leave GOZ well
positioned to take advantage of future rent growth in markets
where it has significant investment.
GOZ is expected to perform well and deliver growth according
to its guidance of AUD23.0 cents per share. From a
Growthpoint perspective, we have taken advantage of the
weaker Rand seen in recent months and our distributions are
well hedged, the maximum dividend withholding tax is now
also in the base. We expect to see a good contribution from
GOZ for FY19.
As such, property fundamentals are solid with the region
Globalworth Real Estate Investments LTD (GWI) continuing to attract large multinational tenants on the back
AND Globalworth Poland Real Estate (GPRE) of the skilled and cost-effective labour force that is driving the
business process outsourcing and shared service centres and
Globalworth is the leading office landlord in Central and sectors such as IT.
Eastern Europe with a portfolio of over EUR2bn in Romania and
Poland. Given this, Growthpoint is committed to supporting the
growth of GWI and GPRE. GWI’s guidance is for DPS of
At its HY18 results, announced in September 2018, EUR0.54 per share for its FY18 with EUR0.27 per share paid in
Globalworth reported a 135% increase in net operating income August 2018, and the second dividend scheduled for January
from HY17 to EUR51.7m and a 300% increase in EPRA earnings 2019.
to EUR28.4m. Annualised contracted rents increased 153%
year-on-year to EUR141m.
The significant step up in operating metrics reflects the
TREASURY UPDATE
substantial expansion in the Group over the past year, notably
its entry into Poland. Overall occupancy was 96.4%, with an It has been a relatively quiet three months for our Treasury.
average unexpired lease length of 5.4 years, and 77% leased to Disposals, particularly the sale of the R2.2bn Investec building
multinationals. Today, including the latest acquisitions, the in Sandton, which transferred on 28 August 2018, resulted in
portfolio is equally split between Romania and Poland. us having surplus cash on hand and we used it to settle certain
loans. We decided not to offer shareholders the Distribution
In Romania, Globalworth sees the most opportunity in its Re-Investment Programme (DRIP) due to sufficient liquidity
accretive development pipeline. Near-term, it will deliver the coupled with our conservative loan-to-value ratio (LTV) as well
42 300m² Renault Bucharest Connected development, 100% as our share price, which was trading at a discount to NAV.
pre-leased to Groupe Renault, scheduled for 1Q:2019 at a
9.5% yield on cost. Globalworth Campus Tower 3, the final Banks continue to hold Growthpoint paper as High-Quality
phase of a three-tower office complex spanning 92 000m², Liquid Assets (HQLA) because of our national scale AAA
commenced in the first half of 2018. This 34 800m² office Moody’s rating, and they have an appetite for more. One
building is scheduled for completion in 4Q:2019 with an private placement was made in the quarter at favourable rates.
expected 11% yield on cost. The recently completed Towers 1 The proceeds were used to repay maturing loans.
and 2 were 96% let by September 2018. Beyond this, GWI has
another six future development projects spanning up to Growthpoint’s weighted average interest rate on 30
130 000m² of offices and nearly 175 000m² of light September 2018 was 9.1%, which is consistent with FY18.
industrial/logistics space, with expected yields on cost of Including cross-currency interest rate swaps (CCIRS), it
between 10% and 13.3% and a possible completion of 2020/1. decreases to 6.9%, which is also in line with FY18. The
weighted average term of the liabilities has reduced from 3.7
In Poland, the Globalworth platform is growing from strength years at FY18 to 3.5 years. Growthpoint was c.81% hedged
to strength. It has more than doubled the size of its office against increases in interest rates at 30 September 2018.
portfolio since initially entering the market. It became the
largest office landlord in Poland within one year of entry. Here, We entered into a further AUD40m of cross-currency interest
with fragmented ownership across the market, the focus is on rate swaps and took advantage of the weak rand to forward
accretive acquisitions. Globalworth has announced two large hedge our offshore dividends.
deals since June for nearly EUR300m, including Spektrum
Tower, a 25 500m² office tower in the Warsaw CBD in Poland 91% of the expected final distribution from GOZ for FY19 is
for EUR101m with contracted income of EUR6.3m and hedged (interest payments and forward exchange contract
occupancy of 93%. At the end of October, Globalworth (FECs)), with the FECs at an average rate of R10.80/AUD, and
announced its largest acquisition by value to date, at the anticipated GOZ dividends cover the interest obligations
EUR190m. This is the acquisition of Skylight and Lumen, two under the CCIRSs approximately four times for FY19.
high-quality office buildings located above the Złote Tarasay
Shopping Centre in the heart of Warsaw, demonstrating its 91% of the expected dividend income from GWI and GPRE for
focus on prime, central locations. The GLA of the two buildings FY19 is hedged (interest payments and FECs), with the FECs at
is 45 500m² over 18 and eight storeys respectively, with an average rate of R17.28/EUR. The anticipated GWI dividends
contracted rental income of c.EUR11.5m and a weighted cover the interest obligations under the loans, CCIRSs and EUR
average lease length of nearly four years. With a current interest rate swaps approximately two times for FY19.
occupancy of 89%, further rental escalation is expected.
The properties are multi-tenanted with a range of big-name
businesses including Pernod Ricard, Mars, PGE Energia Ciepła, CONCLUSION
InOffice, Regus and Cushman & Wakefield.
In conclusion, the dynamics of the negative South African
Macroeconomic conditions in both regions are strong with environment are compensated by the positive country and
GDP growth for 2019 expected to be 3.6% for Poland and property fundamentals from our offshore investments, as well
3.5% for Romania. The region also continues to receive a large as the V&A Waterfront. As such distribution guidance for FY19
proportion of EU funds as well as foreign direct investment. remains unchanged at approximately 4.5%.
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