Treasury management

This report pertains to the treasury activities managed in South Africa.

Capital flows

Growthpoint's investment activities during FY20 were significant in terms of additional investment in the South African property portfolio as well as additional investments in GIAP and GWI and the debut investment in C&R. Growthpoint raised additional equity of R1.1bn via the Distribution Reinvestment Plan. Disposals of properties generated proceeds of R582m. The balance of the investment activity was mainly funded via debt, which showed an increase of R8.1bn, of which R1.8bn related to the translation of direct EUR, GBP and USD debt due to the weakening of the Rand.

Interest-bearing liabilities

    FY20
Rm
% of
total
debt
  FY19
Rm
  % of
total
debt
South Africa
             
Secured debt   18 872 43.5   15 134   42.9
Bank debt   16 319 37.6   12 582   35.7
Institutional financiers   2 553 5.9   2 552   7.2
Unsecured debt   24 501 56.5   20 106   57.1
Bank debt/Institutional financiers   3 629 8.4   3 476   9.9
Corporate bonds   13 498 31.1   10 650   30.2
Eurobonds   7 374 17.0   5 980   17.0
Total South African debt   43 373 100.0   35 240   100.0
Accrued interest   290     335    
Fair value on debt   (388)     480    
Australia and UK
             
Secured debt              
Bank debt and loan note   27 491     15 569    
Consolidated debt
  70 766     51 624    

Liquidity position

Liquidity preservation is of utmost importance during and after the Covid-19 crisis. At 30 June 2020, our unutilised committed facilities amounted to R3.1bn and the surplus cash balance was R142m. Post 30 June 2020, a Revolving Credit Facility Agreement has been signed with Standard Chartered Bank for R750m. The undrawn facilities are spread across several different financiers at different terms. At year end, loans due in the next 12 months amounted to R2.4bn. Capital expenditure projects have been curtailed to include only those that are critical. The Board of Directors will carefully consider the dividend pay-out ratio and the impact on Growthpoint's liquidity position.

The banks continued to support Growthpoint through the Covid-19 crisis. They provided additional loans and continued to support the re-financing of loans with imminent maturity dates. Similar to the debt capital market, additional loans granted in the last few months of FY20 were at higher margins and for shorter terms.

The South African debt capital market was effectively closed from the end of March 2020, due to the uncertainty around the Covid-19 impact. The Moody's downgrade of the South African sovereign rating from investment grade to non-investment grade exacerbated the uncertainty in the market. Towards June, fixed income investors remained broadly defensive but were generally showing more willingness to engage, with a focus on balance sheet strength and cash flow generation. Price discovery for listed notes remained a challenge, as issuers either did not issue or issued only on a private placement basis. Credit spreads widened significantly and appetite for longer-dated notes reduced. For example, Growthpoint issued three, five and seven-year notes via a public issue in November 2019 and one and three-year notes in June 2020, and the three-year note priced 85 basis points wider in the latter issue. We do expect conditions to normalise within the next 12 months. Of the total R4bn listed bonds issued in FY20, only R1bn was issued via a public auction, while the balance was issued on a private placement basis.

Liabilities of R3.8bn matured during FY20 and were successfully repaid, while facilities to the tune of R4bn (with a maturity date post 30 June 2020) were re-financed.

The weighted average term of the liabilities reduced to 3.6 years for FY20 from 4.0 years in FY19, as a number of liabilities were re-financed with shorter dated maturities due to the challenging economic environment.

Of total outstanding liabilities at 30 June 2020, 56.5% were unsecured liabilities, slightly down from 57.1% in FY19. Given the impact of Covid-19, it is anticipated that this percentage will decline further as funding in the debt capital market is likely to be restricted in the short term.

FY20 debt expiry profile – RSA (Rm)

FY20 debt expiry profile - RSA (R million)

The ratio of secured loans to total property value for the South African operations was 21% at 30 June 2020. The unencumbered direct property pool at year end amounts to R34bn and our shares in V&A, GOZ, GWI, C&R and GIAP are all unencumbered.

In October 2019, Growthpoint's DMTN Programme was updated and brought in line with the current JSE Debt Listing Requirements.

Foreign exchange denominated liabilities

We support the principle of not using hard-currency denominated debt to fund the ZAR-denominated South African operations. We only take out hard-currency denominated debt for hard-currency denominated investments. In this respect, we view cross-currency interest rate swaps as synthetic foreign-denominated debt. These swaps are used to fund foreign investments because they are typically more efficient instruments from a pricing point of view than vanilla loans.

During the year under review, Growthpoint entered into a GBP facility to fund the investment in C&R.

Balance sheet hedge table

    Currency Assets at
NAV
in million
Cost in
millions
Market
value in
millions
FX debt
in millions
CCIRS
in millions
FX debt
+ CCIRS
in ZAR
millions
Debt
as a %
of NAV
FX LTV
GOZ   AUD $1 736 $1 087 $1 536 $0 $970 R11 621 56%
GWI   EUR €529 €543 €403 €50 €413 R9 018 87%
C&R   GBP £140 £151 £50 £78 £0 R1 676 56%
GIAP   USD $50 $50 Unlisted $30 $14 R769 88%

Given the move in the foreign exchange rates, with the ZAR weakening by 23% between July 2019 and June 2020, the impact on the balance sheet in terms of the value of the interest-bearing liabilities as well as the mark-to-market on the cross-currency interest rate swaps was material.

Cost of funding

The weighted average cost of funding as per the SA REIT best practice recommendations is set out in the table:

SAREIT BPR – COST OF DEBT

As at 30 June 2020

Basis   ZAR
Quarterly
%
AUD
Semi-
annually
%
EUR 
Semi- 
annually 
USD 
Semi- 
annually 
GBP
Semi-
annually
%
Floating reference rate plus weighted average margin   6.1 0.0 1.6  0.0  2.0
Weighted average fixed rate   10.0 0.0 0.0  5.9  0.0
Pre-adjusted weighted average cost of debt   6.2 0.0 1.6  5.9  2.0
Adjustments
           
Impact of interest-rate derivatives   1.8 0.0 4.9  0.0  0.3
Impact of cross-currency interest-rate swaps   0.2 4.1 (3.4) (0.9) 0.0
Amortised transaction costs imputed into the effective interest rate   0.0 0.0 0.0  0.2  0.4
All-in weighted average cost of debt   8.2 4.1 3.1  5.2  2.7

Growthpoint's weighted average cost of debt has decreased significantly since FY19, due to the significant interest rate cuts implemented by the South African Reserve Bank (SARB) in response to South Africa's economic challenges and the Covid-19 crisis. These cuts have affected about 20% of Growthpoint's debt which is held at floating interest rates, although their impact has been slightly offset by a small increase in the weighted average margin on the debt.

The weighted average cost of debt for AUD synthetic debt also reduced in line with the lower interest rate environment in Australia.

Credit ratings and covenants

In April 2020, Moody's downgraded Growthpoint's global investment rating to Ba1 from Baa3 and its national investment rating from Aaa.za to Aa1.za, following the downgrade of the Government of South Africa to a subinvestment grade. The downgrade reflects Growthpoint's significant exposure to the real estate market in South Africa. Moody's recognises that Growthpoint's exposure outside of South Africa, from both a cash flow generation and asset point of view, as well as its good credit metrics, reduce the degree of linkage to the Government of South Africa's rating. However, Moody's does not consider that these positive factors warrant a delinking from the sovereign rating. The ratings have a negative outlook, which also reflects Growthpoint's linkage with the Government of South Africa.

Due to the challenging economic environment and its negative effects on rental levels, vacancies and property valuations, the covenants embedded in the various loan agreements have come into sharp focus, and the headroom between the limits and the actual ratios has reduced. As the end of FY20, Growthpoint had not breached any of its covenants. Growthpoint's strictest corporate loan covenants are set out in the table:

Covenants   Limit   FY20
Including
GOZ and
C&R
FY20
Excluding
GOZ and
C&R
  FY19
Including
GOZ
  FY19
Excluding
GOZ
Loan-to-value ratio (as per SA REIT BPR)   ≤55%   43.9% 39.8%   36.7%   32.0%
Interest-cover ratio (operating profit plus investment income/net interest expense)   ≥2.0x   3.1% 3.4%   3.8x   3.8x

Given Growthpoint's targeted loan to value ratio of below 40%, the Board of Directors is considering various strategies to reduce the loan-to-value ratio.

Interest rate risk management

As the Covid-19 crisis hit, swap rates peaked. However, immediately after that the SARB intervened and as at the end of FY20, swap and short-term rates were at historic lows.

Since Growthpoint has a large debt portfolio, its earnings are exposed to changes in interest rates. The company has a policy of hedging at least 75% of its liabilities at a fixed interest rate to reduce volatility in earnings. At the close of this financial year, 80.6% of Growthpoint's liabilities were hedged at a fixed interest rate as opposed to 86.5% in the prior financial year. Should interest rates increase by a full 1%, Growthpoint would pay an additional R84m worth of interest, which translates to 2.8c in distribution per share. Growthpoint therefore believes that the interest rate risk is well mitigated.

FY20 five-year swap rate and 3m JIBAR

FY20 five-year swap rate and 3m JIBAR

 


The bar chart reflects a spike for FY23 as the fixed Eurobond matures in that year. The weighted average term of the fixed interest rate profile decreased from 3.6 years at June 2019 to 3.1 years as at June 2020.

FY20 fixed interest expiry profile – RSA (%)

FY20 five-year swap rate and 3m JIBAR

 

Exchange rate risk management

The Rand is a volatile currency and was not spared in the Covid-19 crisis, although it recovered a bit from the highs at the end of April and into early May.

From a balance sheet point of view, the foreign denominated investments (GOZ, GWI, C&R and GIAP) are hedged via foreign denominated liabilities, either in the form of direct foreign denominated liabilities or via cross-currency interest rate swaps. The table "Balance sheet hedge table" above under the foreign exchange denominated liabilities section reflects the percentage hedging in the sheet.

Growthpoint's earnings are subject to exchange rate movements, largely due to the foreign exchange denominated dividend receipts from GOZ and GWI. Growthpoint mitigates this foreign exchange rate risk by matching the interest expense in the same currency as the dividend receipt and by fixing the balance of the receipts via forward exchange contracts (FECs).

FY20 AUD/ZAR exchange rate

FY20 AUD/ZAR exchange rate

FY20 AUD/ZAR exchange rate

FY20 EUR/ZAR exchange rate

FY20 AUD/ZAR exchange rate

FY20 GBP/ZAR exchange rate

FY21 FX DIVIDEND HEDGE TABLE

Investment Currency   % dividends
to be used
for servicing
FX interest
% dividends
hedged to
ZAR via FECs
Weighted
average
FX rate
on FECs
Impact of
ZAR1 change
in FX rate
on DPS
GOZ AUD   28 39 11.56 0.9
GWI EUR   73 59 19.54 (0.2)
CapReg GBP   N/A N/A N/A N/A
GIAP USD   73 0 N/A 0.0

The table is based on the expected dividends from the foreign denominated investments for FY21. As dividends from the investments have been reduced due to Covid-19, GWI is currently "over-hedged" with FECs. These FECs will either be rolled forward or closed out at maturity. The expected dividends are able to cover the expected interest payments in respect of debt taken out for the GOZ and GWI investments, but currently no dividend is declared by C&R due to the current level of uncertainty. A maiden dividend is expected from our investment in GIAP in FY21.