Solid H1 showing for Hyprop’s South African, South-Eastern Europe portfolios

1st March 2019 By: Tasneem Bulbulia - Senior Contributing Editor Online

Specialised shopping centre real estate investment trust Hyprop Investments’ distributable income from its South African portfolio increased by 8.8% year-on-year for the six months ended December 31, 2018.

Hyprop operates a portfolio of shopping centres in major metropolitan areas across South Africa, sub-Saharan Africa and South-Eastern Europe.

The company highlighted that its South African growth was achieved despite the headwinds faced by the South African property sector, which included reduced consumer demand and the resultant pressure on South African retailers.

During the period, Hyprop also sold its last noncore asset, the Lakefield office park. The sale was finalised on January 4, and the sale proceeds have been received.

For its South-Eastern European portfolio, Hyprop achieved a 16.6% growth in distributable income.

Hyprop indicated that this portfolio continued to perform well during the period.

Average rental rates and trading densities at all of the malls have increased from 2017, despite the low inflation environments, contributing to growth in net operating income and distributions. Turnover rentals increased as a result of the success of many of the larger retail tenants in the portfolio.

Meanwhile, at a media briefing on Friday, newly appointed CEO Morné Wilken commented that the group was mindful of its exposure to embattled fashion retailer Edcon and was working proactively to mitigate against any impact.

The company’s exposure to Edcon at a rental income level is 7.7%, and almost 7 600 m2 of Edcon’s total 76 000 m2 of floorspace has already been taken back, and, in the majority, retenanted by Hyprop.

Wilken noted that, in principle, Hyprop has agreed to support the Edcon restructuring proposal with a reduction in rentals, compensated for by equity participation in Edcon.

This will impact the company’s distributable earnings by 0.8% in 2019 and 2.3% in 2020; however, Wilken indicated that this was considered an acceptable limitation of the risk.

Following the acquisitions of The Mall in Sofia, Bulgaria, and City Centre One East and City Centre One West in Zagreb, Croatia, in the second half of the 2018 financial year, Hyprop subsidiary Hystead attained critical mass in the region.

Capital projects of €25-million have been approved, or are planned, for the coming year.

Vacancies in the South African portfolio reduced to 1.6%, and to less than 0.1% in the South-Eastern European portfolio.

Hyprop’s investments in sub-Saharan Africa comprise six shopping centres in Nigeria, Zambia and Ghana, with a total value of R3.9-billion as at December 31, 2018.

Hyprop is reviewing its portfolio of investments in Africa, with a view to reducing its exposure, owing to difficult trading conditions and challenging conditions for tenants.

Hyprop's net asset value as at December 31, 2018, was R99.87 apiece, equating to a premium of 22.5% to the share price on that date of R81.50.

Hyprop declared a dividend of 385.6c apiece for the six months ended December 31, 2018, compared with a dividend of 376.3c apiece for the six months ended December 31, 2017.

This dividend is based on cash earnings from the group's operating portfolios. 

Hyprop expects growth in distributions a share for the financial year ending June 30 of about 2%.

This is a downward revision from the guidance provided in August 2018 of 5% to 7%, with the main reasons being the decrease in distributable earnings from operations in sub-Saharan Africa (other than South Africa), the anticipated impact of the restructuring of South African retailer Edcon and the current difficult economic conditions in South Africa.

CREDIT RATING
Hyprop on Friday noted that it has taken cognisance of ratings agency Moody’s comments and is taking steps to address the issues raised, including a review of its local and offshore funding strategies.

Moody's in March 2018 put Hyprop on a negative outlook.

On February 13, following a further review, Moody's lowered Hyprop’s credit rating from Baa3 to Ba1.

Concurrently, Moody's lowered Hyprop’s long-term national scale issuer rating to Aa3.za from Aa1.za and affirmed the short-term national scale rating of Prime-1.za.

The main reason cited for the decrease in the rating is that Moody’s estimates that the debt-to-asset ratio, adjusted for the full consolidation of Hystead, had increased to 41% as at June 31, 2018, from 33.4% the year before, owing to debt funded acquisitions in Eastern Europe.

Moody’s calculates this ratio at 38.6% when adjusted only for the Hystead gross debt guaranteed by Hyprop.

Hyprop on Friday stated that the group has historically been able to refinance its debt with no difficulties and, based on interactions with its major lenders, it remains confident of its ability to continue to do so.