For the third consecutive year, the Nova Property Group’s auditors have expressed concerns about whether the company can continue to operate as a going concern.
The auditor, Mkiva, also qualified Nova’s 2020 annual financial statements (AFS), which means the Sharemax rescue vehicle’s AFSs have also been qualified for three years in a row.
As in previous years, Nova has however claimed that these going concern fears are “without merit” and that the company is in a “sound financial position”.
In its qualified audit opinion, Mkiva questioned the fair valuations of the bulk of Nova’s investment portfolio, the key to the solvency of any property company, and claimed that Nova had used the proceeds of the sale of properties to fund operational expenses.
Mkiva is not the only party concerned about Nova’s financial future.
The Companies and Intellectual Property Commission (CIPC) also issued a notice to Nova this year, asking the company to show why it should be allowed to continue trading as a going concern. If Nova fails to convince the CIPC of this, the commission may shut its operations down.
Despite these concerns, Nova announced that it will commence the settlement of debentures in terms of the Section 311 Scheme of Arrangement during the course of this year.
When Nova was established as the Sharemax rescue vehicle in 2012, the company issued debentures to virtually all of the 18 700 former Sharemax investors. The idea was that Nova, through Frontier Asset Management, would manage the properties and use the proceeds to repay investors within a 10-year period, which terminates in 2022.
In an extensive response to Moneyweb’s questions, Nova CEO Dominique Haese said the going concern fears of Mkiva, as well as those of Nova’s previous auditor, were “without merit”.
“The content of the 2020 AFS demonstrates that the auditors’ concerns, as expressed in the 2019 AFS, proved to be without merit and that the group, during the financial year ended February 2020, not only traded in solvent circumstances but generated a profit of R1.9 million. One year on, from the auditors’ report to the 2020 AFS, the group is still able to operate as a going concern for the year going forward, again demonstrating the auditors’ concerns proving to be without merit,” she said.
In the board report attached to the 2020 AFS, the board stated that it has “satisfied themselves that the group is in a sound financial position and that it has access to sufficient resources to meet its foreseeable cash requirements”.
Concerning the CIPC notice, Haese stated that Nova has “dealt” with it and submitted the 2020 AFS and other supporting documents to the CIPC to prove the company is solvent. The CIPC is yet to make a final decision about this. (Read the full response at the end of the article).
Qualified audit report
Mkiva is a Johannesburg-based audit and consulting firm led by Unathi Mkiva. It was Mkiva’s first Nova audit, and means Nova has had three auditors in four years. Mkiva took over from Nexia SAB&T, which was the auditor for the 2018 and 2019 financial periods. BDO preceded Nexia but resigned in 2017.
Mkiva’s qualification of the 2020 AFS follows Nexia SAB&T qualifying the 2018 and 2019 statements, also based on concerns about the assumptions used to determine the fair value of properties.
An auditor typically qualifies the financial statements of a company if there are apparent discrepancies in the statements. The auditor reports these discrepancies as ‘qualifications’.
Mkiva reported the assumptions used to value seven of Nova’s remaining 11 investment properties as discrepancies.
Two of these properties are the half-built and unoccupied Villa Mall and the Zambezi Mall in Pretoria. These properties, which do not contribute any revenue to the Nova group, are collectively valued at R1.328 billion and represent 60% of Nova’s total investment property portfolio. The collective valuation of the seven properties the auditor expressed its concern about is R2.05 billion, representing 96% of Nova’s investment portfolio.
In response, Haese said there are not only 11 properties in the group, but 21. (The additional properties are primarily residential developments and other properties which Nova does not categorise as investment properties.)
“The seven properties, with modified audit reports … were collectively fair valued at R2,042 billion, representing some 79% of the group’s total portfolio value of R2,471 billion.”
Haese also said the actual valuations of the independent valuers were used in all instances apart from three, “where the board valued the properties by incorporating valuations, assumptions and calculations sourced from independent valuers and other experts”.
Auditor to blame
Haese laid the blame for the qualified audit opinion at Mkiva’s door. “Auditors are careful in expressing an unmodified opinion when they cannot reach an adequate level of comfort as to the correctness of assumptions applied. Ordinarily, auditors, as part of their pre-engagement audit process, would factor in the obtaining of their own independent experts, which come at a cost.
“Unfortunately, the current auditors did not make use of such independent experts, which the group was very unhappy about as this left the auditors with no choice, as they are not property valuators themselves, but to qualify their opinion.”
Asked for comment, Mkiva said it could not respond to Haese’s remarks due to a confidentially agreement. However, Unathi Mkiva said his firm stood by the audit opinion: “We do believe that the publicly available information and documents, including our report, are based on the evidence collected during our audit, which remains true as of the date of this letter.”
Repayment of debentures
In a surprising revelation, Haese said Nova would start to repay debentures in terms of the Section 311 Scheme of Arrangement (SoA) this year.
When Nova was established in 2012 through the SoA, virtually all the former Sharemax shareholders elected to receive debentures in Nova. These debentures were linked to the former Sharemax properties they were initially invested in and mirrored their initial investment amounts.
The SoA projected that debenture holders would be repaid within 10 years. Nova has not repaid the debentures in terms of the original projections, and it suspended interest payments in 2016, as the board has the discretion to delay such payments.
Haese said the Nova board decided in February to commence with the repayments, despite having the discretion to delay the payment to after the 10-year period. “Notwithstanding, that not all debenture classes have achieved their maximum possible value, most of the debenture fair values were, in fact, higher, when compared to some nine years ago, when the group … fended off liquidations,” Haese said.
She added that the process is extensive. “Even properly coordinated, it will take time and even a year or two. The group will communicate in more detail to all relevant Stakeholders and Debenture Holders what this process will entail.”
No replacement for Derek Cohen
Despite the Nova board’s stated intention to start repaying debenture holders, the Nova Debenture Trust remains without a trustee, as the previous trustee Derek Cohen resigned in July 2019. The Nova Debenture Trust is an integral part of the SoA and guides the implementation of the scheme, such as the repayment of debentures.
The trustee is mandated to ensure payments are made to debenture holders in terms of the scheme.
According to the trust deed provisions, as well as legal opinions obtained by Moneyweb, Cohen’s resignation should have led to the board informing debenture holders of the resignation and then convening a meeting to allow investors to elect a new trustee. This never happened.
Haese did not respond to a question put to her last month about whether the company will initiate a process to replace Cohen. However, in 2019 she claimed Cohen’s resignation was unlawful and that “no action is required to be taken following such unlawful action by Mr Cohen”.
In addition to the vacant trustee position, the trust has two receivers, Connie Myburgh, also the chair of Nova, and Hans Klopper, the former business rescue practitioner of the Highveld Syndication companies and the current head of restructuring of BDO. According to the SoA, they are tasked “to administer the implementation of the scheme, in consultation with the board”.
Neither individual responded to questions about the Nova board’s inaction following Cohen’s resignation.