Although JSE-listed Accelerate Property Fund’s performance for the financial year ended March 31, reflected early signs of recovery from the impact of Covid-19, management contextualised the pandemic’s severe impact and the group’s strategy to focus on nodal strength as a beachhead for growth in a post-pandemic market. 

The diversification of Accelerate’s portfolio during the year under review, resulted in a reasonable performance despite the impact of Covid-19 on trading densities at super-regional malls, the company said, though this was balanced by the resurgence in trade at regional and neighbourhood centres.

“The financial year has no doubt been one of the most challenging in Accelerate's history as a listed company. Notwithstanding the structural shifts within the sector and Covid-related headwinds, we have used this time to stabilise the fund and are busy positioning it for growth as the economy starts to recover,” commented CEO Michael Georgiou in a statement on June 30.

However, he highlighted that, considering that South Africa is currently experiencing its third wave of infections, the recovery will “largely depend on effective vaccine roll-outs”. As a result, Accelerate continued to focus its nodal investment approach with 36 diversified assets with a retail bias located in Fourways and Charles Crescent, in Johannesburg; Foreshore, in Cape Town; and Eden Meander, in George.

“We will further strengthen revenue streams and enhance our offering in line with changing market dynamics by repurposing vacant space and utilizing existing bulk at our shopping centres for storage, shared offices or residential,” Georgiou commented.

Revenue for the reporting period decreased to R742.7-million, from just over R1-billion in the prior financial year, mainly owing to Covid-19 rental relief assistance of R182.5-million and a negative straight-lining rental adjustment of R78-million.

Other factors that impacted on the revenue line include successful property disposals during the year, and lower utility recoveries owing to lower consumption, especially during the economic lockdown period. Property expenses commensurately reduced by R30-million.

Management's focus on cost savings resulted in an R11-million saving in other operating expenses during the year. 

Fair value adjustments include the R660-million write-down in investment properties as a result of Covid-19 impacts, as well as a positive mark-to-market revaluation on swaps of R63-million.

This increased loan-to-value (LTV) ratio from 46% to 48.5% in the year under review was owing to additional valuation write-downs counteracting the effects of property sales, while the interest cover ratio remained stable at 2 times.

Key to Accelerate’s tenant retention strategy was engaging with tenants on their cash flow challenges on a case-by-case basis, the company explained, noting that this strategy resulted in tenant sustainability and strong tenant retention of 86.7% by gross lettable area (GLA).

As a result of this proactive engagement, the lease expiry profile was extended to beyond six years during the period as part of the rental relief programme.

Further long-term renewals of the European portfolio significantly increased the weighted average lease profile for that portfolio from 8.9 years to 12.5 years.

Rental escalations remain under pressure, with contractual escalations of 6.6% on newly concluded contracts, excluding the offshore portfolio. Considering the low inflationary environment in Europe, the average lease escalation drops to 6.2% for the overall portfolio.

Overall rental reversions for Accelerate were down by 1.7% and are reflective of current economic conditions, driven primarily by the office sector, where negative reversions of 15.6% were reported.

The retail portfolio on the other hand showed positive reversions of 6.3% as demand started to recover during the reporting period.

Vacancies by GLA comprise 15% of the portfolio and 7.2% of revenue, excluding the vacancies under a head lease at Fourways Mall. Office vacancies were reduced slightly, with the remaining vacancies mainly relating to B-grade properties and office space at neighbourhood centres.

The offshore portfolio had zero vacancies, Accelerate said.

The significant rise in vacancies in the industrial portfolio is as a result of one industrial tenant going into liquidation. Post the reporting period, vacancies were further reduced to 14% of GLA.

“For us to achieve our goals, we have to execute in two areas, namely the selling of non-core assets and secondly, the unlocking of additional income and value on existing assets,” commented COO Andrew Costa.

He added that, in 2018, the company embarked on a balance sheet strengthening exercise in anticipation of payments it would have to make for the equalisation of ownership at the redeveloped Fourways Mall. Since then, Accelerate has successfully disposed of R1.3-billion worth of assets.

In 2020, however, Accelerate completed disposals worth R188-million with another R200-million in disposals currently awaiting transfer, while R759-million of noncore assets remain in the company’s disposal pipeline.

To further strengthen the balance sheet by reducing gearing levels and creating additional liquidity buffers, Accelerate is actively marketing its offshore assets and is currently engaged with a number of interested parties in this regard.

“We are also exploring numerous opportunities that will unlock additional value at existing assets, including adding storage, hospitality, flexible office and residential space to the portfolio,” Costa remarked.

The company’s disposal strategy supports its strategic step-change in focusing on key nodes in Johannesburg, Cape Town and George.

The group expects that a purely nodal strategy will allow for greater diversification across asset classes and economies of scale, while allowing the group to focus on nodes with the strongest property fundamentals, it said.

Fourways Mall, the Group’s flagship asset, in which it holds a 50% stake, received strong demand for space with the head lease reducing from about 22 000 m² at equalisation date to about 15 000 m² currently. Vacancies excluding the head lease are about 3%.

During the review period, the new La Liga flagship store opened at the mall, as did Wickleys Steakhouse. DisChem is expanding its footprint in the mall with Food Lovers Market upgrading to a premium store.

During the development of Fourways Mall, the developer built excess parking and bulk space for future development not yet owned by Accelerate on a 50/50 basis. Accelerate is able to acquire the additional parking and bulk space for about R250-million, payable only once the bulk is being developed.

Accelerate is currently in discussion with the developer on this acquisition and to ensure that all future developments at Fourways Mall are done on a 50/50 basis, subject to shareholder approval.

The company did not report distributable income for the year ended March 31, owing to Covid relief granted to tenants, one-off bad debt write-offs related to the pandemic and other tax-deductible items and said it expected another difficult 12 months considering the third Covid wave, slow vaccine rollout and continued consumer pressure.