Treasury Management

Growthpoint’s history of accelerated growth and its need for capital has placed debt management at the forefront of the business. We detail below the activities undertaken in this regard in respect of the South African operations for FY15.

CAPITAL FLOWS

During FY15 new capital employed amounted to R20,6 billion, of which R11,7 billion was raised from equity (share swap with Acucap shares, DRIPs and other) and R8,9 billion additional debt was taken on. The capital together with proceeds realised from disposals was utilised for acquisitions, property developments and capital expenditure, as well as to fund the additional investment in GOZ and Growthpoint’s share of the development expenditure of the V&A Waterfront.

INTEREST BEARING LIABILITIES

	FY15 R’m		% of total debt		FY14 R’m		% of total debt
South Africa1
Secured debt:	17 905		70.4		10 394		63.0
Bank debt	15 852		62.3		8 944		54.2
Institutional financiers	2 053		8.1		1 450		8.8
Unsecured debt:	7 539		29.6		6 105		37.0
Bank debt	4 480		17.6		1 796		10.9
Corporate bonds	2 659		10.4		3 909		23.7
Commercial paper	400		1.6		400		2.4
Total South African debt	25 444		100.0		16 499		100.0
Australia2
Secured debt:
Bank debt and loan note	8 367		100.0		8 677		100.0
Consolidated debt	33 811				25 176

1	Includes debt from equity-accounted Tiber entities.
2	Includes a cumulative foreign exchange difference of R1,9 billion (FY14: R2,3 billion).

The significant increase in Growthpoint’s nominal liabilities was mainly due to the acquisition of Acucap, which resulted in the consolidation of the debt of Acucap and Sycom. This consolidation impacted the debt profile as the characteristics of Acucap’s and Sycom’s debt were different from that of Growthpoint.

The challenges in the macro-economic environment together with the woes of African Bank negatively impacted the liquidity in the debt capital markets for the year under review. Institutional investors became inwardly focused and had less appetite for corporate bond issues. We found the funding from the banks competitively priced compared to funding from the debt capital markets. This was the reason we chose to repay two bond issues in the capital market (R1,25 billion in total, maturities in December 2014 and January 2015), which were refinanced with bank funding. We successfully continued to roll the R400 million commercial paper programme, although the margins increased from 20 basis points in June 2014 to 36 basis points in June 2015. There are some indications that the appetite for corporate issues in the bond market is returning. There has been a lack of supply of listed corporate paper in the debt capital market, which should support demand for high-quality issuers, like Growthpoint.

Growthpoint introduced an institutional investor as a new funder, with unsecured funding of R1 billion for a term of up to seven years. This, together with other new unsecured facilities, resulted in an increase of total unsecured debt to R7,5 billion. However, Acucap’s and Sycom’s debt consisted largely of secured funding, which resulted in the ratio of secured loans to property value increasing to 22.8%. Total unencumbered assets, including the equity-accounted investments, as well as listed investments (but excluding the investment in GOZ) amounted to R35,1 billion. We will continue to focus on negotiating the best possible terms for our debt.

COST OF FUNDING

The average cost of funding materially reduced to 8.9% in June 2015 from 9.4% in June 2014. This was mainly as a result of the lower cost of funding of Acucap and Sycom (due to the average shorter maturity of the debt and the secured nature of the debt) and a reduction in the percentage of fixed interest rate exposure to total debt. Base interest rates however increased during the year under review and are expected to increase further in anticipation of inflation pressures and interest rate hikes in the United States.

Growthpoint has experienced pressure on the credit spreads in newly negotiated loans. The outlook on the local macro-economic environment is not positive. It is therefore our view that South African credit spreads will continue their widening trend in the near future. However, the demand for corporate credit paper might counteract the increase in margins somewhat.

MATURITY PROFILE

The weighted average term of the liabilities has reduced from 3.5 years at 30 June 2014 to 2.9 years at 30 June 2015. Although Growthpoint successfully managed to negotiate longer-term debt, the average term of the liabilities reduced mainly as a result of the weighted average term of the debt of Acucap and Sycom (1.7 years at date of acquisition). A significant amount of loans mature in FY16 and Growthpoint has commenced with a re-financing strategy in this regard, with a number of banks having already agreed to extend the maturity date of loans amounting to R1,4 billion, which are expiring in the next twelve months.

In various discussions, financial institutions have indicated their commitment to Growthpoint and Growthpoint is confident that it will be able to raise sufficient funding from the banking sector and debt capital markets for its on-going investment programme as well as the re-financing of maturing loans.

DEBT MATURITY PROFILE AT FY15 (EXCLUDING GOZ)

CREDIT RATINGS AND COVENANTS

Growthpoint was extremely pleased with the upgrade of its Moody’s credit ratings in May 2015:

Issuer – Global scale rating	Baa2
Short-term – Global scale rating	P-2
Issuer – National scale rating	A1.za
Short-term – National scale rating	P-1.za

The outlook on all ratings is stable. The upgrade of our investment-grade ratings shows increased confidence in Growthpoint’s core credit quality on a globally comparable basis for REITs and other commercial property firms.

Growthpoint remains well within the covenant ratios that it is exposed to through its loans. The most constraining contract limits are reflected in the table:

Covenants	Limit		FY15				FY14
			Incl. GOZ		Excl. GOZ		Incl. GOZ		Excl. GOZ
Loan-to-value [Nominal debt (net of cash)/ Property fair value]	≤55%		33.2%		32.1%		30.8%		27.4%
Interest cover [Net property income/ Net interest expense]	≥2.0		3.4x		3.4x		3.3x		3.5x

Although Acucap was acquired on a share swap basis, Acucap’s loan to value (41.9% for FY15) was higher than that of Growthpoint, which resulted in an increase in Growthpoint’s loan-to-value ratio. We are targeting to maintain a loan-to-value ratio below 40%.

INTEREST RATE RISK MANAGEMENT

At the end of June 2015, 76.0% of the interest exposure on the liabilities was fixed (including forward starting swaps) compared to 78.4% in June 2014. As Acucap had a different hedging policy, its debt was only 48.1% hedged as at date of acquisition. This resulted in a reduction in Growthpoint’s overall hedged percentage. The weighted average maturity of the fixed interest rate profile reduced from 4.3 years to 3.5 years, mainly as a result of the shorter-term nature of Acucap’s swaps.

Growthpoint believes it is well positioned for anticipated interest rate increases as a 1% increase in interest rates would increase Growthpoint’s interest expense by R61,1 million, which represents 2,3 cents of dividend per share. In order to reduce the volatility in its interest expense, Growthpoint has a conservative policy of maintaining a fixed interest rate profile on at least 75% of its total outstanding debt.

EXCHANGE RATE RISK MANAGEMENT

Due to the investment in GOZ, our results are subject to changes in the AUD/ZAR exchange rate. The bulk of the actual investment is not hedged on the balance sheet, however the future distributions from GOZ are partially hedged through forward exchange rate contracts for up to three distribution periods to achieve less volatility in our income. It is estimated that for FY16 distribution from GOZ, a strengthening of R1 to the AUD would decrease our earnings by R37,8 million as 46% of the anticipated distribution is hedged. This represents approximately 1.4 cents in dividend per share.

Growthpoint’s earnings are minimally impacted by volatility in the EUR/ZAR rate, which could potentially impact the earnings from the investment in the Stenham European Shopping Centre Fund (SESCF).

FY15: FIVE-YEAR SWAP RATE

FY 15: FIXED INTEREST RATE EXPIRY PROFILE RSA

FY15: AUD/ZAR