CHIEF EXECUTIVE OFFICER’S REVIEW
Growthpoint exceeded its budget (6.8%) to deliver distribution
growth of 7.5% per share for our investors, at the upper end of
our market guidance. We are pleased to have further extended our
robust track record of uninterrupted growth in distributions to our
shareholders since 2003.
Annual distribution to shareholders exceeded R4 billion for the first time |
OUR FINANCIAL PERFORMANCE
Growthpoint finalised the acquisition of Acucap
and Sycom during the year. Both became
subsidiaries of Growthpoint from 1 April 2015,
adding
46 properties to our portfolio, and
defensively growing our property portfolio with
complementary and quality enhancing assets.
For the first time, Growthpoint’s annual
distributions to shareholders exceeded
R4 billion for the year. This includes the
R1 billion paid to investors five months early
as part of our R18,6 billion acquisition of
Acucap Properties Limited and Sycom Property
Fund portfolios. Taking into account the early
payment, Growthpoint’s distribution growth
would have been 8.4% for the financial year.
We boosted our consolidated property
assets and property related investments to
R100,4 billion, and remain the largest South
African listed REIT on the JSE.
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A significantly bigger asset base is evident
throughout our business and our results, such
as our gross revenue, which grew by 20.7%,
and our employee headcount, which has grown
around 50% over the past two financial years.
We also faced big challenges against the
backdrop of an extremely tough operating
environment. We operated in a weak economy
with negligible GDP growth, the electricity crisis,
a commodity crisis, job losses, labour unrest, consumer confidence at the lowest level it has
been in nearly 15 years, international tourist
numbers dropping and interest rates rising.
Achieving our performance and progress against
this backdrop makes it even more pleasing.
All three areas of our business, being our
South African portfolio, GOZ and the
V&A Waterfront, again contributed positively
to our results.
OUR SOUTH AFRICAN
PORTFOLIO
This portfolio of properties contributed 75.8%
or R3,2 billion to our total distributable income
of R4,2 billion. Despite on-going tough local
conditions, it delivered a substantial increase in
gross revenue of 22.8%. This was largely due to
our Acucap and Sycom acquisition. Growthpoint
won the 2015 IPD Direct Property Investment
Award, which considers performance across
all property market sectors – office, retail and
industrial – for the highest annualised direct
property return over three years. We received
this top award for the second year running.
TIBER AND ABSEQ
We’ve bedded down these good acquisitions
and integrated the people and properties that
made up these transactions. All properties have
been added to our systems and have performed
better than expected, adding value to our
portfolio.
ACUCAP AND SYCOM
Growthpoint finalised the acquisition of Acucap
and Sycom during the year.
The Acucap and Sycom properties were
included in Growthpoint’s portfolio for three
months of its financial year. With only one
quarter of performance, it is early days in
assessing the merits and opportunities of each
property. We are already aware there will be
earnings pressure on the Acucap and Sycom
portfolio linked to developments, extending
debt maturities and interest rate hedges.
Integration of Acucap’s and Sycom’s people
into the business, merging offices and adding
their properties onto the same system as
our core portfolio will take time, but should
be complete before the FY16 year-end.
Operationally, this is a real challenge and will be
a key focus area in the coming year. We are also
well advanced with our objective of eventually
delisting Sycom, of which we hold 99%. Should
we be successful in securing 100% ownership,
Sycom will become an unlisted subsidiary of
Growthpoint.
PERFORMANCE
The domestic market remains challenging,
in fact more so than in recent years. It is
comparable to the recessionary times we
experienced after the onset of the global
financial crisis, with really low GDP growth,
and clients seeking to shrink or right size
their businesses and reduce their space
requirements. Companies are not making
long-term decisions nor are they embarking on
growth strategies.
On a macro-economic level, all economic
indicators are negative. On top of that, the
listed property sector is more competitive than
ever. The sector comprises mainly diversified
funds, in one form or another, invested in
the retail, office and industrial sectors. This
means everyone is fighting to retain whatever
clients they have but also attract each other’s
clients too.
We’re also facing weakened property
fundamentals in the form of increased
vacancies, higher expense ratios, lower rental
growth numbers, and challenging lease renewal
dynamics, including the fact that the lease
periods clients are prepared to commit to are
getting shorter and shorter, reflecting the loss
of confidence in the economy.
Administered cost pressures remain at elevated
levels with further increases in utilities costs and rates and taxes. We also face the triple-negative
of higher costs for municipal services,
less service delivery and having to replicate the
service privately at our own cost.
This operating context demands more than
conventional property management to
succeed. So Growthpoint has increased its
customer-centric approach to offer added
services and ensure a better client experience.
We offer businesses space to thrive. Thanks
to our innovative approach and talented
teams, we delivered solid results in many key
performance areas, even with tough market
conditions.
Growthpoint’s South African portfolio achieved
like-for-like net property income growth of
6.2%. Overall vacancies increased from 4.9%
to 5.7% during the year. Vacancies in the
industrial portfolio moved up from 3.0% to
5.3% and were largely a result of the Ellerines
demise. However, retail vacancies improved
from 4.5% to 3.3% and office vacancies
remained steady at 8.0%, outperforming the
SAPOA national office vacancy benchmark
of 10.6%.
In the face of continued increasing cost
pressures, we tightened our cost-to-income
ratio from 24.8% to 24.0% and our overall
expense ratio improved from 28.6% to 27.8%.
In step with our larger portfolio, arrears, bad
debts and provision for bad debts increased. We
kept our weighted average future escalations
on renewals at 8.3% and our weighted average
renewal growth remained positive at 4.1%.
Our retail portfolio net property income
increased to R284 million, mainly through
acquisitions. Like-for-like portfolio net property
income grew 7.2% and vacancies improved to
3.3% with the sale of Arcadia and the inclusion
of the Acucap and Sycom portfolios, which
benefited the retail sector with its slightly lower
vacancy levels.
Our core retail portfolio vacancy, excluding
space under development and the office
component of our malls, is at a low 1.9%. Retail
arrears deteriorated to 10.2% of collectables.
This results from the inclusion of Acucap and
Sycom properties, Post Office and Platinum
Group. Some R4,2 million of arrears are
made up of outstanding deposits. Our retail
leasing success rate improved to 87%, with
renewal growth of 6.0% negatively affected
by lower renewal rentals at City Mall,
Klerksdorp, resulting from new competition in
its area. Portfolio trading densities increased
by 4.7%.
The trading performance of our malls was
diluted by negative growth at City Mall
Klerksdorp and Lakeside Mall Benoni. However,
centres serving affluent markets — Brooklyn
Mall, La Lucia Mall, Walmer Park Shopping
Centre, The Constantia Village and Gardens
Shopping Centres — achieved 7.7% growth.
Growthpoint won the 2015 IPD Direct
Property Investment Award for office property
market sector performance, demonstrating
the stand-out results we are delivering in
this highly competitive area of commercial
property.
During the year, our office net property income
and portfolio value increased 33.5% and
35.5% respectively, mainly because of the
Acucap and Sycom acquisition. We kept
vacancies in check and unchanged with
reasonable retention and letting of space,
as well as disposing of non-core buildings
with large vacancies. Core portfolio arrears
remained constant at 3.5% while overall,
including the new portfolios, arrears grew
to 5.0% of collectables. Our leasing renewal
remained largely unchanged at 62.0%.
However, renewal growth of 1.5%, down
slightly from last year, continues to reflect
tough market conditions.
Our office team is undertaking nearly
130 000m2 of developments in high-demand
locations in Sandton, Century City, Umhlanga
and Bryanston. A conservative 77% of this
space is pre-let. Over 107 000m2 of space under
development is in joint venture.
Our industrial portfolio recorded net property
income growth up 6.3%, despite difficult
conditions with GDP shrinking 1.3% in Q2:15,
as mining and manufacturing came under
more pressure. In tandem with this stress, the
portfolio’s arrears and provision increased, but
remain favourable considering the economic
context. Its vacancies deteriorated from 3.0%
to 5.3% and, while positive letting activity
progress is being made, the failure of Ellerines
left a 30 000m2 vacancy. This accounts for
1.4% of the industrial portfolio vacancy. The
portfolio’s renewal success was marginally
down, but this was offset by renewal growth and
higher escalations. Our industrial development
pipeline remains healthy and we continue to
extract value from our core portfolio.
As an interesting addition to our industrial
portfolio, through the Acucap and Sycom
acquisition we gained exposure to two large
development joint ventures, introducing selfstorage
as an asset class in our portfolio with Stor-Age. Its market share is set to increase with a significant development pipeline.
The acquisition of Acucap and Sycom
defensively grew our
property portfolio
with complementary
and quality enhancing
assets
Delivering on our objective to grow and nurture
a quality portfolio of properties, besides the
Acucap and Sycom acquisition, Growthpoint
acquired the remaining 50% interest of Inyanda
1, 2, 3 and 4 in Parktown, Johannesburg for
R388 million. We also acquired two office
properties for R95 million and the industrial
property Monte Carlo in Pinetown, KwaZulu-Natal, for R21 million. Growthpoint invested
R1,9 billion developing and improving its South
African portfolio. We also disposed of 18 non-core
properties for R621 million, achieving a
combined R205 million profit on cost.
DEVELOPMENTS
Growthpoint has secured a R3,3 billion
acquisition and development pipeline in South
Africa to drive its immediate growth. We will
continue to deliver on our strategy of developing
good quality properties, specifically in the office
and industrial sectors, in established nodes and
essentially on a turnkey basis for customers.
We minimise speculative development and are
cautious to avoid adding to the overhang of the
overall vacancy in both sectors. By developing
our own properties, we are able to achieve
higher yields while also creating assets that are
ideal for our portfolio.
More detail is available in our South African
property portfolio’s sector performance
overviews in this report and our Future
Property Focus report has more information on
our developments.
V&A WATERFRONT
Revenue from Growthpoint’s R6,0 billion
– 50% investment in the V&A Waterfront
contributed 8.7% to our total distributable
income, and was up 10.8% from the prior year,
despite a slowdown in tourism. Its performance
was driven by continued good results from its
retail. Business conditions in the Western Cape
seem to be more favourable than the rest of
the country. Year-on-year retail turnover at
the V&A Waterfront is still in the double digits
at 11.0%. While the extent of this growth is
slowing somewhat, this is because it is coming
off a much higher base. Overall vacancies
remain
low at 2.6%.
The V&A Waterfront improved on many of
its key operating metrics with an impressive
92.7% renewal success rate, weighted average
rental growth at 7.1%, weighted average future
escalations on renewals of 7.6% and in force
escalations increasing to 8.3%.
| R3,3 billion
acquisition and
development pipeline
in RSA to drive
immediate growth |
| Distributions are
based on sustainable
income generated
from rentals |
It continued its roll-out of an exciting pipeline of
development opportunities, with new projects
for H&M and Hamleys, which will open later this
year. Development momentum continued in
the Silo district with over 18 500m2 earmarked
for PwC, Werksmans and Virgin Active. The
77 luxury residential apartments to be
developed at Silo 3 will be launched for sale
later this year and the first Radisson Red Hotel
in South Africa confirmed it will also open
in the Silo district in 2017. With the
development potential of the Silo district
largely realised, we have moved our focus to
the Gateway precinct, which is closest to the
Cape Town CBD. The development of a further
18 000m2 of office space has kicked off the roll-out
of the Gateway precinct.
V&A Waterfront enjoys good demand from
corporates and retailers. Its hotel occupancies
improved during the year. Our Breakwater
residential property developed to let exceeded
projections with a rapid start to letting. It is
now 55% let. However, there is a lot of new
residential stock across Cape Town resulting
in high levels of competition. Our Portsedge
apartments, which have traded for a year
and were fully let for the short term, are now
undergoing a phased re-letting.
In the Dockside precinct, V&A Waterfront was
named the preferred bidder for a cruise liner
terminal, which creates the opportunity to
link the V&A Waterfront to the terminal itself.
This will involve a 28 000m2 extension
and we plan to take a phased approach
to the associated redevelopment and letting of
space.
Please see our detailed report on the
V&A Waterfront.
GROWTHPOINT PROPERTIES
AUSTRALIA (GOZ)
Our strategic holding in GOZ continued to
deliver good performance for Growthpoint.
GOZ had a spectacular year, delivering a 36.4%
total return to shareholders on the ASX. It was
one of the best performing A-REITs in FY15.
Dividend contributions from GOZ grew 28.3%
in Rand compared with the prior year, with
GOZ contributing 15.5% to Growthpoint’s total
distributable income. Growthpoint invested an
additional R607 million into GOZ during the year
by electing to reinvest its distributions. GOZ
made AUD67,4 million of acquisitions during
the year. It now has a market capitalisation of
around R17,0 billion and gross assets valued at
around R22,0 billion.
GOZ remains a core investment for us. The
market there however is also becoming very
challenging for the office space in general, and
in Brisbane in particular. The weak commodity
cycle is behind a number of tenant liquidations.
Office vacancies are rising in the market and it is
challenging for us to retain existing tenants and
sign new leases on vacant space. Fortunately
leases expiring in these areas over the next two
years represent only a small amount of space.
Besides this, the business is in a good position.
Its gearing has decreased and funding costs in
Australia are coming down, creating positive
gearing scenarios to support good accretive
acquisition opportunities. Among the biggest
challenges for GOZ is the extremely high
level of global competition for good quality
Australian property assets. Although the
investment market in Australia remains fiercely
competitive, good opportunities exist for GOZ
to make accretive acquisitions.
One of GOZ’s key objectives of being included
in the main indices was achieved this year. It
achieved the major milestone of becoming
a component of the S&P/ASX200 Index.
This has resulted in a marked improvement
in its liquidity and tradability and delivered
additional shareholder value.
Growthpoint remains supportive of the
growth of G0Z, which has forecast to grow its
distributions per share in AUD at 4.0% for the
year to June 2016.
A weaker AUD and increased
withholding tax on distributions payable by
non-Australian shareholders is however likely
to contain the growth in Rand that Growthpoint
can expect from its Australian subsidiary
in 2016.
QUALITY OF INCOME
Growthpoint’s distributions are based on
sustainable income generated from rentals. We
do not distribute capital profits.
OPERATIONS
With our business becoming so much bigger
over the past two years, our operational
pressures became much larger and we realised
we needed to create more capacity to focus
on strategic issues and growing the company,
while also having an executive focused on our
operations. In March 2015, Estienne de Klerk
was appointed Managing Director, introducing
this role at Growthpoint for the first time.
We also changed some internal reporting
structures, reducing the business areas
reporting directly to myself from 13 to seven. Now, our shared services teams and
regional offices report to our MD, including
marketing, human resources, legal, IT, facilities
management, and investor relations. Our
treasury, secretariat and corporate social
responsibility teams report to our FD. Our MD,
FD, sector teams, GOZ and V&A Waterfront
report to me, who will continue to lead
Growthpoint’s strategy.
Our operations continue to innovate and
find the best ways to serve our clients and
support our business in South Africa and
our own sustainability. By putting our
stakeholders at the heart of everything we
do, we remaining keenly focused on providing
excellent service.
For more information on how we are
constantly improving our operations and
innovating, please read our Key Matters and
Sectoral Reviews in this report.
FUNDING AND BORROWINGS
We optimise our performance with effective
financial management structures. Growthpoint
continues to benefit from significant access to
capital from diverse sources including debt and
equity funding.
We were able to raise both, thanks to the
strength of our balance sheet, quality and
diversity of our properties and clients, our
investment-grade credit rating, which was
upgraded during the year, our strong culture
of good corporate governance, respected
and experienced management and our good
track record of consistently delivering on our
promises.
To fund our substantial growth in investments
during the year, we raised R11,7 billion in
equity, including our distribution reinvestment
programme. We also increased our debt by
R8,9 billion and introduced a new institutional
funder.
Our balance sheet remains well capitalised
and we kept gearing at conservative levels,
moving from 27.4% to 32.1% after including
Acucap and Sycom, which had slightly higher
debt levels, shorter debt maturity, lower fixed
interest rate exposure, a shorter fixed interest
rate maturity profile and a lower weighted
average interest rate. Most of the Acucap and
Sycom debt will be re-structured. Some 76.0%
of Growthpoint’s debt is hedged for 3.5 years
on average, in line with our treasury guidelines,
placing us in a good position in an increasing
interest rate environment.
We are firmly in a rising interest rate cycle,
having seen a 25 basis points increase during
FY15, and another 25bp increase early in
FY16. This gives rise to higher funding costs in
our domestic business. Banks remain keen to lend and are more competitive than the bond
market, which is not as fluid and liquid as we’ve
been accustomed to in the past, especially
off the back of corporate failures like ABIL. Its
pricing is also not conducive to listing significant
amounts of long-term corporate bonds and in
the past year we only used it for three-month
short-term paper.
We are also exploring other avenues of funding,
which could include funding in the international
debt markets, now that we are of a size to enter
these markets.
During the year, Moody’s Investors Service
upgraded Growthpoint Properties global scale
issuer and senior unsecured ratings to Baa2/P-2
from Baa3/P-3, its national scale issuer ratings
to A1.za/P-1.za from A2.za/P-2.za. Moody’s also
upgraded Growthpoint’s national scale senior
unsecured Medium Term Note Programme
(MTN) ratings to (P)A1.za/P-1.za from
(P)A2.za/P-2.za.
GOZ maintained its Moody’s investment grade
credit rating (Baa2), which was first issued
in August 2014. GOZ’s reduction in gearing
and new credit rating enabled it to raise an
AUD200 million 10-year bond and diversify
its sources of funding. It also brought down its
debt levels, and cost of debt, in line with its
strategy. Its gearing was reduced to 36.8%
from 40.6% last year.
The Key Matters – Treasury Management and
our AFS contain detail information on our
funding and borrowings.
SUSTAINABILITY
As a property investment company,
Growthpoint is a long-term business. This
means that being a sustainable business is a
priority for us. Our aim is to deliver growth in
distributions on a sustainable basis and provide
capital appreciation over the long term. We
achieve this through our strategies, including:
| • |
growing our investment portfolio through acquisition or development of quality, well-located
properties |
| • |
continually investing in, maintaining and
upgrading our portfolio |
| • |
optimising the sectoral and geographic
diversity of our portfolio |
| • |
disposing of properties that no longer meet
our investment criteria. |
The effectiveness of our internal strategies is underscored by a variety of external
recognitions. In FY15, Growthpoint was included in the JSE’s SRI Index for the fifth
consecutive year. Inclusion in this index is
based on environmental, economic and
social sustainability practices and corporate
governance of listed companies. We have
continued to put into action our commitment
to measuring and monitoring our carbon
footprint by again participating in the Carbon
Disclosure Project, with our fifth submission
to date.
Environmental, social and governance research
by MSCI rates our governance metrics at
8.5/10, placing us in the highest scoring range
for all companies assessed, relative to global
peers. This shows we have leading corporate
governance practices that are well aligned with
shareholder interests.
Our considered approach to environmental
responsibility takes into account where we
can make the most impact. Helping our
clients reduce their utilities consumption, like
electricity and water, can support them to be
more profitable. Because we have a large client
base, this has a big impact, so it is a business
imperative for us. We monitor electricity
consumption and have initiatives in place to
help clients reduce costs.
This year we approved our environmental
policy which encapsulates Growthpoint’s
commitment to responsible environmental
conduct, which is essential to our business
strategy. Regulatory requirements are only
the starting point for our priority areas and the
targets we have set to reduce our company’s
environmental impact. Our policy goes beyond
the basics and is designed to continually
improve our environmental performance.
Our sustainability approach is also supported
by our pillars of sustainable management and
matters of importance which are presented
the Organisational Overview section of
this report.
CONCLUSION
Growthpoint continued its pleasing
performance during the year to 30 June 2015.
We remain committed to delivering distribution
growth and enhancing our portfolios of
investment assets to create shareholder value.
Growthpoint will continue to create sustainable
value for our shareholders. We will remain
driven by opportunity and demand as we grow,
and will actively seek ways to outperform.
The South African domestic market is
exceptionally challenging and more competitive than ever. There is continued weakness in
the economy and pressure on property
fundamentals, with soft demand and increasing
competition. Interest rates are rising and
negative gearing is limiting our opportunities
for acquisitive growth, in addition to there
being few assets available of the quality we
would consider investing in. We are focused on
integrating the Acucap and Sycom acquisition,
bedding down our growth and consolidating,
unlocking value in our larger portfolio, and
being even more competitive by offering clients
the most attractive buildings and the best
service.
Fortunately our investments in the V&A
Waterfront and GOZ are benefiting from better
operating environments.
We are still seeing strong retail sales growth
at the V&A Waterfront and have exciting
development opportunities underway.
Its hotel and residential sectors are now
making improved contributions. All in all, it is
experiencing strong property fundamentals.
While Australia’s commodity-based economy
is coming under pressure, it has stable
interest rates, with the possibility of rate cuts.
Positive gearing supports opportunities for
accretive acquisitive growth. GOZ has forecast
distributions growth per share in AUD at 4.0%
for FY16. While the ZAR remains relatively
stable against the AUD, a likely increase in
withholding tax on distributions payable by
non-Australian shareholders will contain the
growth in Rand that Growthpoint can expect
from GOZ.
The combined effects of these dynamics create
short-term earnings pressure but, despite
this, Growthpoint expects to deliver positive
distribution growth of between 5.0% and 6.0%
for the coming financial year.
LN Sasse
Chief Executive Officer
8 September 2015
