PROPERTY: Growthpoint Properties Distribution at 8,1%
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CEO of Growthpoint Properties Norbert Sasse attributes this positive performance to aggressive property cost management, vigilant control of arrears, fortified portfolio occupancy levels and the distribution enhancing performance of Growthpoint Properties Australia (GOZ) in which Growthpoint has a 61% holding.
“Notwithstanding the difficult local economic and financial conditions and an uncertain outlook for global economic growth, we are pleased to report positive performance,” says Sasse. Growthpoint’s distributions are based on sustainable rental income and exclude trading or capital profits.
Growthpoint’s linked unit price increased during the year from R15.52 per linked unit to R18.31 per linked unit, resulting in an 18.0% capital return. Together with the 8.4% distribution per linked unit, this equates to a 26.4% total return.
South Africa’s largest JSE listed property company, with a market capitalisation of R29,1 billion and assets valued in excess of R45.7 billion in South Africa and Australia, achieved remarkable strategic acquisitive growth during the year.
In the country’s largest single property transaction to date, Growthpoint acquired 50% of the iconic V and A Waterfront property in Cape Town for R4,9 billion. Growthpoint and the Government Employees Pension Fund (GEPF), represented by the Public Investment Corporation Limited (PIC), purchased this landmark property in equal proportions and took transfer in June 2011.
Recognised as one of the finest waterfront developments in the world, V and A Waterfront is considered the premier property asset on the African continent. Its location, mix of uses and future development opportunities all support rental growth prospects which are better than those embedded in the current Growthpoint portfolio, making it a performance enhancing acquisition.
Growthpoint Properties V and A Waterfront Expectations
Sasse notes that Growthpoint’s long-term expectations of the V and A Waterfront are for superior returns generated by completing all development opportunities. “The V and A Waterfront transaction has given Growthpoint development exposure to what is arguably the most valuable development bulk and rights in SA” says Sasse. He confirms that Growthpoint’s immediate objective is to formulate an overall precinct master plan with the GEPF to ensure the ability to take best advantage of opportunities and demand in changing markets, as well as maximising management structures.
The fully debt-funded V and A Waterfront transaction took Growthpoint’s borrowings from R9,3 billion to R14,3 billion, thereby increasing Growthpoint’s loan-to-value (LTV) ratio from 29.9% to 37.8%.
In June 2011, Growthpoint’s Moody’s rating was marked down by one notch but remains well within the “Investment Grade” sphere. It has currently got a national scale rating of A2.za long-term and P2.za short term whilst its global scale rating is now Baa3 long term and P-3 short term. All ratings have been allocated a stable outlook.
“We consider the acquisition of the V and A Waterfront strategic to Growthpoint’s future growth and are pleased that, even with the resultant increased levels of gearing, we have retained a favourable Investment Grade rating from Moody’s,” notes Sasse. “In a first for a South African listed property company, Growthpoint entered the corporate bond market and successfully issued R1,0 billion of unsecured corporate bonds during the year which, notwithstanding the change in Moody’s rating, have continued to price well and seen significant demand from investors.”
Subsequent to the close of its financial year, Growthpoint’s LTV ratio reduced to 33.8% as a result of its successful post-balance sheet capital raising in July 2011 which revealed a healthy demand for Growthpoint equity. 100-million new Growthpoint linked units were issued at a price of R18 per unit. This successful raising of R1,8 billion also marked the first international book-build for a South African listed property company.
Growthpoint Properties’ Investments
Growthpoint’s investment in GOZ continues to perform positively with the strong Australian Dollar providing an additional boost to Growthpoint’s distributions. Growthpoint’s nominal return - which includes income return, capital return and currency devaluation of the Rand to the Australian Dollar - since investing in GOZ in September 2009 is in excess for 50%, whilst the total return over the past 12 months amounted to 28.6% made up of an income return of 11.4% and a capital return of 17.2%.
GOZ acquired 15 properties during the year, bringing its total number of properties to 37 across Australia and increasing the value of the GOZ portfolio to Aus$1.2 billion. GOZ’s investment property portfolio has nearly doubled since Growthpoint’s initial investment some 18 months ago. This has diversified the fund from purely industrial properties to including a 28% spread of offices at year end.
“GOZ’s growth has been achieved without compromising growth in distributions to investors. In fact GOZ’s performance has been yield enhancing for Growthpoint’s investors,” points out Sasse. GOZ is now one of the largest direct property ownership funds in Australia, and one of only a few with a 100% distribution payout ratio. Thanks to refinancing debt, and debt maturity moved to end 2013, the fund is one of the lower risk investments in Australia.
“We will continue to support the growth of GOZ as we did during this year by underwriting two capital raisings undertaken by the Australian company,” says Sasse. As a result of the rights issues, Growthpoint’s holding in GOZ is now approximately 61%, slightly diluted from 67% at the opening of the financial year with R2,0 billion in total having been invested.
For the 12 months to 30 June 2012, forecasts indicate a distribution of 17.5 cents per share from GOZ. Based on the current price of Aus$1.90, this represents a forward yield of 9.2%.
Contributing to distribution growth, Growthpoint’s South African portfolio cost-to-income ratio remains largely unchanged at 24.9% as a result of effective cost management. “This accomplishment is significant, viewed against a backdrop of generally increased costs and, in far too many cases, deteriorating service delivery,” says Sasse. The company’s South African property portfolio comprises 424 sectorally and geographically diverse properties.
At 7.4%, tenant arrears as a percentage of total monthly collectables have been successfully cut by Growthpoint to levels not seen since before the global financial crisis of 2008/2009.
“Our portfolio occupancy was strengthened during the year, with the overall vacancy level coming down from 6.4% to 5%,” notes Sasse. “The successful cutback in vacancies has been balanced against lacklustre demand, particularly for office space, in context of a gruelling economic climate with low GDP growth and increasing unemployment figures.”
“Whilst Growthpoint’s vacancies and arrears improved during the financial year to June 2011, this does not appear to be a common trend across the industry or the listed property sector as a whole,” says Sasse. The retail and industrial property sectors are holding steady and showing some resilience.
“Despite relatively weak overall market conditions we have been successful in renewing 65.8% of all leases that expired during the financial year. These have reflected weighted average increases in rentals on renewal of 3.1%,” reports Sasse. “We have noted that clients are generally seeking shorter leases, reflecting uncertainty on the outlook of the SA and global economies.”
Sasse notes that distribution growth for Growthpoint linked unitholders for next year is expected to be between 3% and 7%. He cautions that the sluggish recovery in the SA economy, weak demand for space and debt margins which continue to increase on the refinancing existing debt, are all factors expected to effect the performance of the listed property sector in the coming year.
“The size, quality and diversity of Growthpoint’s portfolio, together with a strong balance sheet and relatively low gearing stand the company in good stead to continue growing distributions,” says Sasse. “Ongoing investment in our portfolio through refurbishments, redevelopments and capital expenditure, as well as active asset management, also underpin long-term capital appreciation.” Therefore the structure of its investments and its general business sense, seems to be paying off for Growthpoint Properties.
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