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Financial Director’s review

Protecting our balance sheet and cash flow will remain a firm priority and will receive even more attention going forward.

Combined property assets R166.7bn
Market capitalisation R40.4bn

Gerald Völkel
Group Financial Director

Our finance team executes Growthpoint’s prudent approach to financial management, which underpins the strength of our balance sheet, our liquidity and our ability to transact and attract funding and investment. These characteristics of our business are crucial at any given time but became critical this year to an extent that none of us could have imagined.

Our performance for the first nine months of the financial year was in line with our goals and projected results. However, the Covid-19 pandemic changed this and our focus at Group level quickly shifted to managing our income streams, in tandem with our expense requirements, to ensure our ability to pay salaries, suppliers, interest to our funders and other obligations. Rental collections were monitored constantly, credit adjustments were passed and cash flows were assessed daily.

Growthpoint, like most of our peers in the REIT sector, found ourselves between a rock and a hard place, expected to forfeit rental income from struggling tenants but still honour all our own payment obligations. During the first three months of the Covid-19 lockdown in South Africa in FY20, the initial immense administrative burden and uncertainty did ease up as it become evident that we were able to collect enough income to service our commitments. Nonetheless, this was a tough time for our team and the business.

As the lockdown took its devastating economic toll on all business sectors, Growthpoint came to the table with rental concessions for our tenants in the form of both deferments and discounts. The guidelines drawn up by the Property Industry (PI) Group were a big help in structuring these agreements, and since we are a large business, the value of the rental relief we gave was a substantial number.

Capitalisation and discount rates increased in the course of FY20 and moved into a riskier band. The greater the our underlying asset values. The vast majority of downward valuations will be linked to lower income assumptions, stemming from lower rental income growth, higher vacancies and costs, while around 20% can be attributed to discount rates moving higher.

Growthpoint has always taken a conservative approach to its balance sheet management. Protecting our balance sheet and cash flow will remain a firm priority and in fact will receive even more attention going forward.

REITs are obliged to pay dividends equal to 75% of their distributable income in order to qualify for the REIT tax dispensation. However, due to the financial shock of the Covid-19 pandemic, the sector was forced to ask regulatory and tax authorities for leniency on this requirement for a limited period so that if we under-distribute, we will avoid non-compliance, will not be penalised with additional tax charges and, crucially, will not lose our REIT status.

The JSE allowed leeway in the release of results and reports, given the challenges of auditing under lockdown. It also granted an extension for the payment of dividends.

The JSE’s rules are, however, inextricably linked with tax regulations and there has to date been no response to the industry from National Treasury. In the light of this, we have decided to follow the in-force regulations to ensure our compliance, but to hold back on paying our dividends until December 2020 or earlier.

The people who make up our finance team were amazing and committed from day one of the Covid-19 lockdown. Our value set was a vital part of this performance. Our executives sharing their own experiences and communication from our HR department were two of the things that helped keep us motivated. We also drew inspiration from colleagues in the retail and facilities management teams who were hands-on in our buildings. Growthpoint employees showed that they are a great bunch of people capable of finding solutions in the face of great uncertainty. They got things done.

Our larger finance team – which encompasses a remarkable depth and breadth of knowledge – includes specialists in treasury, funding, tax, corporate action, legal, research and reporting. They all did a sterling job in trying circumstances and adapted quickly to safe, remote working. Only a few functions requiring the handling of masses of data needed occasionally to be run from the office.

Change in auditor

This year Growthpoint introduced EY as our new auditor after going through a comprehensive RFP process and receiving shareholders’ approval to do so. Working with a new auditor is always an adjustment and to undertake this process during the Covid-19 lockdown was an additional challenge, considering the limited access to our premises and the fact that there are certain tasks that can only be performed there. However, we took it in our stride and managed not only to introduce our new auditing team but also to stay on track, meet our deadlines and keep to our audit schedule.

Tax updates

For the financial year we provided rental relief of R436.3m to our tenants with R158.8m in deferred rent (R17.4m recovered in the period) and R277.5m of rental discounts. Rental deferments were included in taxable income, whereas rental discounts were deducted therefrom. The FY20 dividend that Growthpoint declared in March 2020 meet the requirements of a REIT “qualifying distribution” for purposes of section 25BB of the Income Tax Act, No 58 of 1962, as amended (section 25BB). As a precautionary measure to provide the Group with additional financial flexibility and bolster its liquidity in unprecedented market conditions as a result of the Covid-19 pandemic, the Board of Directors resolved to defer its decision on a final dividend payment for the year ended 30 June 2020 until December 2020 or earlier. This dividend will also meet the requirements of a REIT “qualifying distribution” for purposes of section 25BB, but Growthpoint would be exposed to an income tax if this final dividend is smaller than the taxable income.

Carbon tax does not apply to Growthpoint currently but we are cognisant of its introduction and our approach is covered in the environmental section of the ESG report.

Reporting and communication

We were thrilled to be named overall winner of the Investment Analysts Society of South Africa (IAS) Excellence in Financial Reporting and Communications Awards 2019 and as the leader in communication and financial reporting in the property sector category. These awards underscore Growthpoint’s commitment to providing accurate, meaningful and timely information to the market.

This is the third time we have received the overall IAS award and Growthpoint has been acknowledged for its excellent disclosure and the quality of information it provides to the market every year since 2011. While this is not the first time we have won both awards, it is one of the most memorable and rewarding, as every year the competition gets tougher and the bar gets set higher. Growthpoint has an incredibly talented team that drive the success of our financial reporting and communication and who can be incredibly proud of their achievements.

Given the economic and financial impacts of Covid-19 on business in general and the REIT sector specifically, we will keep a keen eye out for potential breaches of obligations. The gaps between loan covenant limits and our actual ratios have narrowed, and we will monitor this to raise red flags quickly, if and when necessary.

During FY20, the finance team was very involved in the preparation of the changeover to Growthpoint’s new IT system, which will play a vital role in enabling us to further improve our reporting function and access to information. The switchover to the new system took place just in time for our new financial year, after a smooth journey in preparation to going live. Our FY20 reporting was completed using the old system for the final time.

Growthpoint was a contributor to the second edition of the SA REIT Best Practice Recommendation (BPR), which will now replace the first edition and be effective for financial year ends commencing on or after 1 January 2020. We have elected to adopt this new recommendation early and have also restated the FY19’s figures in line with the new BPR this financial year for ease of reference and in line with our commitment to transparent reporting. We strongly support reporting in a manner that our stakeholders value and strive to always achieve the highest standards of reporting and transparency.

Changes to reporting requirements are a big issue for us and the metrics that underpin our compliance with the JSE’s definition of a going concern, for instance, will receive greater attention in the context of the Covid-19 pandemic in order to avoid raising unnecessary red flags. Stress testing of key metrics and scenario planning will become more prevalent and be reported on more prominently, with additional layers of detail added to our collections reporting in terms of discounts, deferments, rental levels and so on.



Simplified Distribution Income Statement

For the year ended 30 June 2020

TOTAL GROUP
  Notes   FY20 
Rm 
  FY19
Rm 
Revenue 1 12 008 11 388
Property expenses     (3 234) (2 635)
Net property income 8 774 8 753
Asset management costs (418) (350)
Other operating expenses (162) (85)
Finance and other investment income 6 1 310 1 322
Interest paid     (3 106)   (2 603)
Profit before taxation 6 398 7 037
Taxation 7 (180)   (118)
Profit before dividends and debenture interest 6 218 6 919
Minorities’ share of profit and realised foreign exchange profit     (740)   (489)
Distributable income     5 478   6 430
Number of shares in issue (including treasury shares) 2 989 240 606 2 950 587 688
Distributable income per share     183.1   218.1

Simplified Balance Sheet

At 30 June 2020

TOTAL GROUP
  Notes   FY20 
Rm 
  FY19
Rm 
ASSETS
Property assets 8 140 013   118 092
Equity-accounted investments 17 537   15 515
Intangible assets 9 641   1 896
Derivative assets 1 607   1 016
Long-term loans granted 2 338   76
Listed investments 837   846
Unlisted investment 922   96
Equipment 63   10
Current assets 4 482   4 144
Cash and cash equivalents 2 420   882
Other current assets 2 062   3 262
Total assets 168 440   141 691
EQUITY AND LIABILITIES
     
Shareholders’ interest 67 877   74 908
Non-controlling interest 15 168   9 004
Interest-bearing borrowings 70 766   51 624
Lease liability 2 947  
Derivative liabilities 4 762   1 132
Deferred taxation 10 3 820   2 792
Current liabilities 3 100   2 231
Trade and other payables 2 999   2 213
Taxation payable 101   18
Total equity and liabilities 168 440   141 691

Reconciliation between Statutory and Simplified financial statements

For the year ended 30 June 2020

FY20 
Rm 
FY19
Rm 
1 Revenue as stated   12 361   11 554
Less: Straight-line lease income adjustment   (353)   (166)
    12 008   11 388
2 Fair value adjustments as stated   (10 196)   1 223
Less: fair value adjustments reversed   10 196   (1 223)
     
3 Equity-accounted investment profit   (923)   33
Less: equity-accounted investment profit reversed   923   (33)
     
4 Non-cash charges as stated   (1 293)   (315)
Less: non-cash charges reversed   1 293   315
     
5 Capital items as stated   396   (38)
Less: capital items reversed   (396)   38
     
6 Finance and other investment income asstated   1 323   1 256
Less: GWI/GPRE dividend declared after year end, based on FY19 earnings   (282)   (221)
Add: GWI/GPRE dividend declared after year end, based on FY18 earnings   239   282
Add: Antecedent dividend received   30   5
    1 310   1 322
7 Taxation as stated   (1 180)   (153)
Add back: deferred taxation   1 000   35
    (180)   (118)
8 Property assets as stated   139 029   117 312
Add back: investment property reclassified as held for sale/trading and development   984   780
    140 013   118 092
9 Intangible assets as stated   700   1 983
Reversal of additional goodwill raised on deferred taxation liability*   (59)   (87)
    641   1 896
10 Deferred taxation as stated   3 879   2 879
Reversal of additional deferred tax liability on intangible asset   (59)   (87)
    3 820   2 792
* In terms of IFRS 3 Business Combinations, goodwill was created as a result of the deferred tax liability that was raised on initial recognition of the intangible asset acquired on the acquisition of the property services businesses.