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Property: Growthpoint Defies Tough Economic Climate


Recent Gauteng Business News

Growthpoint will pay the distribution of 58.3 cents per unit to its unitholders on Monday, 21 September 2009 and, in a first-ever for a South African listed property company, it has innovatively offered unitholders a distribution re-investment alternative whereby unitholders may elect to receive new Growthpoint units to the value of their distributions.

Growthpoint is the largest South African listed property company with a quality portfolio of 438 commercial properties located throughout South Africa and valued over R29 billion. Diversified across the office, retail and industrial sectors, the bulk of the value of Growthpoint’s portfolio is situated in the major metropolitan areas in robust economic nodes throughout South Africa and occupied by a strong client base.

The company’s net property income grew by R413 million as a result of rental escalations and new acquisitions. Its cost-to-income ratio decreased from 24.9% in the prior year to 23.6% at 30 June 2009, again demonstrating the benefits of Growthpoint’s internal management.

Norbert Sasse, Growthpoint Properties Limited CEO, attributes the distribution growth to the sustained performance of the company’s exceptional property portfolio, the savings and efficiencies achieved as a result of its internalised management, a long lease-expiry profile and quality clients.

“The quality of the property portfolio has ensured its defensive performance despite poor market conditions. The growth in Growthpoint’s distributions is based on sustainable earnings derived from property net rental income and investment income,” says Sasse. As a result, Growthpoint is confident that distributions for the coming year will continue to show positive growth, albeit at a somewhat subdued rate, provided that no major unforeseen events occur.

Sasse explains that while Growthpoint’s distribution growth is slower than in previous years, this is mainly due to the global recession and the eroding economic environment which has prevailed in South Africa since the latter portion of 2008. This has resulted in slow-down in demand for new space in particular.

Whereas Growthpoint’s core assets continue to perform positively notwithstanding the down-cycle, it is new office and industrial developments which have come on stream over the last nine months that have proven slow to let in the current economic climate.

Growthpoint’s vacancy levels mounted from 2.9% at year-end 2008 to 5.4% at year-end 2009. Newly acquired developments accounted for 1.2% of this increase. While occupancies in its retail portfolio have remained stable for the most part, vacancies in the office portfolio have increased from 4,9% to 8.9% and the industrial portfolio from 2.1% to 4,4%. These vacancies, however, position Growthpoint at an advantage to benefit from future rental growth.

A significant year for the company, Growthpoint became the only South African real estate company to be included in the MSCI (Morgan Stanley) Barra’s MSCI Emerging Markets Stock Index in November 2008 and it made its landmark debut on the JSE/Actuaries All Share 40 Top Companies Index (ALSI 40 Index) on 22 December 2008, ranked 31 of the Top 40 companies. Growthpoint’s market capitalisation was in excess of R18 billion at 30 June 2009.

“The inclusion in these indices has resulted in increased international exposure for Growthpoint and our foreign shareholding has increased to above 6% for the first time,” reports Sasse.

Growthpoint’s linked units are highly tradeable and liquid, with more than R800 million traded per month, on average, over the last two years. Over the last year, on average, more than 60 million linked units traded per month, showing growth from the 57 million average traded per month in 2008.

In anticipation of a potential offshore investment, the R1,6 billion refinancing of the Growthpoint ‘Series 3 securitisation’ which takes place in November 2009, and the potential for buying some quality assets from “distressed” sellers, the company strengthened its balance sheet through a partially underwritten R1.7 billion rights issue in January 2009, which was oversubscribed.

This foresight reaped rewards when, shortly after the close of its financial year, Growthpoint acquired the controlling interest in Australia Stock Exchange listed Orchard Industrial Property Fund (OIF) in its first venture offshore. The transaction represents a total investment of some $A200 million or approximately R1,3 billion at current exchange rates.

Growthpoint acquired an upfront interest of 50.1% in OIF for an amount of A$55.6million. OIF was renamed Growthpoint Properties Australia and its management was internalised. Growthpoint Properties Australia now trades on the Australian Stock Exchange under the share code GOZ. Now in the second stage of the transaction, Growthpoint is underwriting Growthpoint Properties Australia's 13-for-10 rights offer at 16 Australian cents per unit, or A$144.4 million, which closes on 15 September 2009. Depending on the percentage of Growthpoint Properties Australia's securityholders who follow their rights, Growthpoint will own 60% to 78% of the Australian trust.

Sasse explains that acquiring control of a listed property trust in Australia with excellent assets, underpinned by quality income streams, provides an acquisition base from which to pursue suitable opportunities in the region.

Growthpoint’s loan-to-value ratio at 30 June 2009 was 32.2% (net of cash on short term deposit of R497million). This is likely to increase on conclusion of the Australian transaction, but will still remain below 40%. Having secured rate fixes prior to the rights issue and the Australian acquisition, 108,4% of Growthpoint’s interest-bearing debt was fixed at a weighted average rate of 10.1% for a weighted average of 9.7 years at year-end. The ratio of fixed interest rate will reduce to 97% once the Australian transaction is complete.

Growthpoint’s finance costs increased by 32,1% from R697 million to R921 million. Of this increase, R174 million was due to higher average loan balances used to fund Growthpoint’s substantial pipeline of developments and acquisitions. Sasse notes that the increase in the cost of finance is anticipated to reflect in higher margins on the refinancing of debt for Growthpoint during the coming year, however this will be mitigated wherever possible by seeking new sources of finance in the short-term markets, where prudent.

Growth in company’s property portfolio value stemmed mainly from new acquisitions and developments. During the year Growthpoint purchased a number of office and industrial properties valued at R395,3 million whilst investing R1,5 billion on new developments and extensions to existing properties, including a number of which came on stream effectively fully let, such as the extension of 100 Grayston Drive in Sandton for Investec, Montclare Place in Claremont, Lakeside Mall in Benoni and premises for Barloworld at Growthpoint Industrial Estate. Five non-core properties and 44 residential units at Montclare were sold for R183,8m, and sale agreements have been entered into over a further six properties for a combined R573,7 million.

Despite speculation of distressed selling as a result of the economic downturn, Sasse reports that fire-sale activity in the market has been insignificant. However, he notes that Growthpoint will continue to seek appropriate opportunities to enhance its portfolio and continue to deliver sustainable, growing income returns and real capital appreciation for its investors over the long term.


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