Chairman’s review

Our conservative approach to business has sustained us in a difficult environment and our asset diversification, strong balance sheet, good credit rating and discipline as well as the skills base and commitment of our staff, will ensure continued success.

Offshore assets 40.8%
B-BBEE ratingLevel 2

Francois Marais

This year, our focus remained firmly on generating quality earnings from high-quality physical property assets in South Africa and internationally. The ongoing renewal of our Board was an important consideration, while the need to safeguard the health and wellbeing of our staff, partners, stakeholders and wider community, along with the financial health of our business, was highlighted by the Covid-19 pandemic.

In consultation with shareholders, we took a decision to introduce firm policies concerning the Board to support our good governance. A tenure policy will ultimately see Non-executive Directors have a fixed 12-year term, irrespective of whether their elected term has run its course. Another important change is that our directors may now not serve on more than four boards at the same time and that the chairman may chair no more than two companies at the same time.

In our drive to renew the Board, we made three new appointments during FY20 and a further two appointments after the year end. Our primary aim is to ensure that the Board is adequately endowed with directors who understand our business and have a range and depth of skills. In line with our undertaking to support diversity and inclusiveness, we are striving to improve the racial and gender balance that Growthpoint has already achieved.

Early in the process of selecting and appointing new Board members, senior directors and management were engaged to determine the required criteria. Given the prominent recent cases of governance failure, skill-sets were identified as the overriding consideration, and this was confirmed with our shareholders. Once the new appointments are finalised, there will be two steps left to complete the renewal of the Board. The first is my replacement as chairman, although I have undertaken to stay on until the end of FY21 to provide continuity to the new chairman-elect. The second step is to appoint the new chairperson of the Remuneration Committee.

Growthpoint has always endeavoured to have a strong Board, and leaving it stronger has proved to be an immense challenge. However, we remained true to the principles that we set ourselves and agreed with our shareholders, and we are confident that we have introduced significant additional skills and experience to refresh the Board. Indeed, the effect of this is already evident.

The Covid-19 pandemic helped with the onboarding of the new directors. The analyses and stress-testing processes we had to undertake as we worked through and strove to understand the many different levels of Growthpoint’s business in context of the changes in our operating environment and markets proved to be an intensive “masterclass” for the new directors, and a novel opportunity to get to grips with the business. They were able to come on board faster and with a more thorough understanding of the business than the most exhaustive induction programme would usually have facilitated.

In response to the challenges of the pandemic during the final months of FY20, the Board communicated and met much more frequently, not only to address immediate continuity issues, but also to reinforce long-term sustainability. No aspect of Growthpoint’s business model was excluded from its analysis and review.

The level of our market disclosure and frequency of updates provided over this period was well beyond what was required. We have always believed in best-practice, transparent, quality disclosure and remain committed to it.

Well before the outbreak of the Covid-19 pandemic in South Africa, the strain on the country’s economy was evident, as evidenced by the increasing number of rental defaults. Nevertheless, Growthpoint was well on its way to meet its forecasts before the onset of Covid-19.

In response to the pandemic, we undertook a thorough strategic review, considering everything from our approach to sustainability and capital management to our dividend pay-out ratio and asset allocation. Responsible REITs around the world are all asking themselves similar questions in the current environment and we believe this precedes a global re-set that will result in enhanced sustainability in the entire REIT sector.

In view of the above, the Board is still considering the final dividend which will be based on a pay-out ratio of not less than 75% of distributable income for FY20 which will ensure compliance with current REIT legislation.

If it were not for our internationalisation, Growthpoint’s results for FY20 would have been very different. Our original international investment, GOZ, has proved successful. It has protected Growthpoint’s performance in a difficult period for the South African business, with the V&A Waterfront having been hit particularly hard.

The prolonged deterioration of the South African economy was accelerated and intensified in the final four months of FY20, and business confidence is at an all-time low. However, we remain confident about Growthpoint’s prospects.

Our conservative approach to business has sustained us in a difficult environment and our asset diversification, strong balance sheet, good credit standing and discipline as well as the skills base and commitment of our staff, will ensure continued viability. We have comfortable headroom across all loan covenant metrics and access to R7.4bn (R3.1bn in RSA and separately R4.3bn in GOZ) in committed undrawn credit facilities. Growthpoint has sufficient liquidity to continue to operate efficiently and effectively, advance its strategic initiatives and take advantage of opportunities.

The lesson learned from this crisis is that a conservative, sustainable long-term business model, together with the people and skill-sets that built our portfolio, have created a platform that was not only strong enough to weather the storm of Covid-19, but will enable us to maintain a solid, defensive, sustainable position.

With the benefit of hindsight, we realised we should previously have disposed of certain properties in our South African portfolio. This ongoing strategic priority is now receiving focused attention. Growthpoint has enjoyed the benefit of size, which makes us the leader in the property sector and a low credit risk and an obligatory holding for indices and tracker funds. We have for example consistently been included in the FTSE/JSE Top 40 Index, the FTSE EPRA/NAREIT Emerging Index, the FTSE4Good Emerging Index and the FTSE/JSE Responsible Investment Index, and maintained inclusion in all these indices this year.

The importance of ESG motivates us to continuously improve and do the right things. This in turn enables us to earn better independent ratings for ESG. We are assessing our current position in order to take our environmental and social commitments to the next level – in line with international best practice, trends and investor requirements – by building on areas of relevance, improving good performance, closing gaps, managing risk and acting in areas where we fall short.

Environmental sustainability, and being innovative in energy, water and waste efficiency and green building, are priorities. For some time now, we have sought to be the leader in these areas and will continue to do so. Not only is it the right thing to do but commercially, it is essential to enable us to attract quality tenants. We have the benefit of being able to apply what we experience and learn through GOZ, GWI and C&R in their developed markets.

We have completed the migration to our new state-of-the-art IT system, and the timing is fortuitous, given the increased competition in the market. The system gives us more tools to manage our portfolios more efficiently, to the benefit of clients. It will make us more competitive by enabling us to drive greater energy, water and cost savings in our buildings that we can share with our tenants and so alleviate the impact of rising administrative costs on their businesses. This is becoming more and more important in view of continuous increases in electricity tariffs and the ever-higher rates and taxes levied by municipalities, which pose an existential threat to the South African property industry.

The lack of service delivery and levying of uncommercial prices for services provided, coupled with the mismanagement of the economy, make it more and more challenging for our clients and us to do business in South Africa.

Given the quality of our portfolio, the skill of our people and the strength of our international portfolio, Growthpoint is in a better position than most of our peers to work through the challenges.

The business has sharpened its focus on clients and we will intensify our efforts as a client-centric business to retain tenants and attract new ones.

Staff health and wellbeing is important to the Board. We continue to monitor the wellness of our staff through our HR and Remuneration Committee. The pandemic has also obliged us to be even more aware of health and safety in our shopping centres, offices and warehouses.

Sustainable transformation is also a priority for Growthpoint. We are doing well in maintaining a level 2 B-BBEE rating. However, skill shortages remain a challenge. We have dedicated initiatives in place to improve the skills of our staff at all levels. Through the Property Point programme we also endeavour to make a contribution to the industry as a whole by upskilling smaller players. Making sure the necessary skills are available for our business benefits the entire property sector.

Growthpoint’s Board and management are working hard to actively manage outcomes. Our focus continues to be a long-term, sustainable business.

We have taken the decision, amid the current uncertainty, to not provide the market with guidance. Growthpoint has communicated often and appropriately with the market to update it on our position and performance, and we will continue to do so.

I am grateful to my colleagues on the Board for the knowledge, insight and sound judgement they bring to all our deliberations. I extend a warm welcome to our new members and look forward to the journey with them that lies ahead. I would like to add my specific thanks to Lynette who resigned in FY20 and Mzoli, Ragavan and Eric who are to resign at the forthcoming AGM, for their long service and contributions.

I also extend my gratitude to our valued clients, partners, funders and investors without whose support our success would not be possible.

My sincere appreciation goes to the entire Growthpoint executive team, management and staff, for their ongoing dedication to the business, and especially for stepping forward to face the challenges of the Covid-19 pandemic with courage and commitment.

I am pleased to conclude that Growthpoint is in a robust position to protect its strengths and optimise its business with innovative and sustainable property solutions that safeguard and create value for all our stakeholders.

Francois Marais