Hyprop’s prime SA portfolio devalued by R4bn

Covid-19 exacerbates property devaluations, as distributable income takes a R434m overall knock.
Canal Walk – Hyprop's flagship super-regional shopping centre in Cape Town. Image: Supplied

Once the darling of South Africa’s listed retail property sector, Hyprop, has seen its local portfolio of prime shopping centres being devalued by a whopping R4 billion for its full-year ending June 2020.

Hyprop, which owns Rosebank Mall in Johannesburg and Canal Walk in Cape Town, published its worst set of annual results on the JSE after the market closed on Monday as Covid-19 dealt a devastating blow to distributable income and property valuations.

Despite the R4 billion or 13.9% devaluation of its South African portfolio, the group said that its balance sheet remains healthy.

It also noted that all banking covenants were met at 30 June 2020.

To put the devaluation into context, Hyprop’s current market cap is just over R4.6 billion. The group’s share price has lost more than 68% of its value this year and is likely to come under further pressure on Tuesday following the release of its latest full-year results.

“The operating environment in South Africa, which was difficult pre-Covid-19, was exacerbated by the virus outbreak, particularly after a very strict lockdown was imposed on 26 March 2020,” Hyprop said in a media statement.

The group is set to host its results presentation webcast with listed property analysts and media on Tuesday.

Read:

Headwinds for Hyprop as SA portfolio devalued by R1.1bn

Growthpoint warns of up to 20% decline in SA property values

For its half-year results to the end of December (before Covid-19 broke out in South Africa), Hyprop had reported a R1.1 billion devaluation of its local property portfolio.

“Despite the stalled economy, management made progress towards achieving the group’s strategic objectives, which included growing trading densities by repositioning the South African portfolio and introducing capital-light revenue streams,” it added in its results statement.

Hyprop noted that the impact of Covid-19 saw a reduction in distributable income by R434 million, to 493 cents per share. In line with several of its listed property peers, the group has deferred its decision to declare a dividend to December this year.

“The group’s distributable income before the impact of Covid-19 was in line with guidance provided in September 2019, at 664 cents per share… Revenue lost on the South African portfolio, due to Covid-19 totalled R267 million – mainly R242 million of rental discounts and deferrals granted to tenants between April and June 2020,” Hyprop said.

“An additional estimated R25 million was lost on parking and Non-GLA [gross lettable area] income during the same quarter,” it added.

Morné Wilken, Hyprop’s CEO commented: “This year will be recorded in history as one of the toughest years globally. The safety and wellbeing of our staff, tenants and service providers were our top priorities during all levels of lockdown and we worked very hard with tenants to survive the challenging circumstances as a collective.”

Read:

Vukile boss plays down pandemic pressure on property valuations

Liberty Two Degrees hit by R1.5bn portfolio devaluation

Hyprop pointed out that significant steps have been taken to strengthen the group’s balance sheet.

“The group’s dollar-denominated debt was reduced by $271 million over the last two years, from the proceeds of the sales of the African assets and refinancing dollar-denominated debt in rands while R1.2 billion of cash was retained from the 2020 financial year to repay debt,” it said.

Hyprop’s loan-to-value (LTV) ratio at 30 June 2020 was 41.4%.

“It [LTV] was negatively impacted by the decrease in the value of investment property as a result of Covid-19, some impairment on the African assets and the devaluation of the rand. The group’s interest cover ratio (ICR) was 3.0 times at period end,” it noted.

Read: Growthpoint’s debt surges to almost R70bn

“Strengthening the group’s balance sheet and its exposure to euro- and dollar-denominated debt secured by rand-denominated assets are high priorities. These objectives will be achieved by lowering cash distributions, the exit strategy from sub-Saharan Africa and recycling assets,” commented Hyprop CFO Brett Till.

In reaction to the performance, senior listed property fund manager at Stanlib, Nesi Chetty said: “These reported results from Hyprop will probably be the worst in the company’s history.”

Chetty noted that Hyprop had rebased its rentals last year a lot earlier than some of the other South Africa property companies.

“While significant steps have been taken to strengthen Hyprop’s balance sheet, including reducing dollar-denominated debt and also retaining cash of R 1.2 billion to pay down debt, the company could not have been able to avoid impairments on their portfolio,” he said.

“Weaker income assumptions in some properties and rising capitalisation rates would have resulted in the devaluation of around R 4 billion… While significant, the company is probably reaching the tail end of these in the current cycle. LTV has increased to 41% post the impairment and the company will look to sell non-core assets as well to bring down LTV,” added Chetty.

Hyprop’s JSE-listed peer and majority owner of Mall of Africa, Attacq, will release its latest results today (Tuesday, September 22).

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It’s simple supply and demand economics.

In 12 months hence, the headlines will read
“Hyprop’s prime SA portfolio increased by R4bn”
“Hyprop’s loan-to-value (LTV) ratio at 30 June 2021 is 20.7%.”
“Liberty Two Degrees hit-and-run by R1.5bn portfolio appreciation”

Most of these organisations are ‘too big to fail’ and have all the tools at their disposal to ensure their survival i.e
– rights issues;
– bailouts from major stakeholders who will buy their distressed assets
at market values and sell it back to them one the weather improves;
– connection to banks who will waive interest rates in exchange for equity; and
– government bail outs.

I probably gave a good investment case for this (reiv) sector for about 12 months.

At only 13.9% drop in valuation means that they are trying to spread the devaluation over a number of reporting periods and to help that illusive LTV number. Yet another big player not quoting LTC and just LTV.

Question is how pliable will valuations be over the next few years.

Sure one can calculate those themselves if they are a keen reader of the books. I for one felt Discovery left out some useful information with their recent results and by going to their investor relations page on their website. I found all of what I was looking for. The only issue was that the document was more colourful than a SENS pdf, actually too colourful. Granted I was able to see that their huge 94% profit drop was just them redirecting funds, mostly to the bank.

We need a nod back to the old accounting rules : even if only in property companies and investment holding companies.

The reserves should show revaluation reserves separately from plain old retained profit. It cannot be hard to do – basically just mandate that revaluation journal entries (up/down) can only go against the revaluation reserve. Those entries should not features in any form of eps (headline, core, normalised, operating, greek, whatever)

In addition, the notes to AFS must show for the asset the cost and the revaluation.

Imagine how different the AFS of property companies and investment companies the likes of ARC, Prosus willl look.. It should also be a bit more uncomfortable declaring hired help bonuses that take real reserves negative, but nowadays the hired help has no shame, so who knows.

And then we are still worried about Expropriation Without Compensation? The ANC has already expropriated almost the entire market cap of listed property companies through the combined effect of redistributive rates and taxes, load-shedding, the cost of electricity and lockdown. The ignorant socialists have squandered the value of the property even before they could expropriate it!

These fools are destroying their own tax base. The ANC policies are the surest recipe for hyperinflation of the currency.

Sensei:

Have you stopped to consider whether the “value” was a bubble?

The valuation they use is very simple:
GLA x market rental less a vacancy factor less opcost and overhead, capitalized at a cap rate.

Basically : what would you like the valuation to be sir? Only the GLA is a hard number in that formula. Change vacancy assumption up due to covid, change rental rate down because after 5y of standard increases most tenants cannot afford the renewal, increase the opcost ratios to something resembling real life and then change the cap rate from a silly 8% to more like 11% as a fair WACC. Suddenly the same building valuation from last year drops by 40%

Yes, administered prices are a killer but they are a recognizable reality for captive audience that no Excel spreadsheet can wish away.

I am not sure these spreadsheet jockeys even compare to actual realised market values. They look at what Johnny next door invested for his new ego project. Wow R65k/sqm for an office building going up next door, ours must be similar.

The Hyprop share price has been in freefall since the latter half of 2018. It has lost 85% of its market cap since then. This is on par with the Steinhoff disaster. Something like this is not supposed to happen to the “safe, brick and mortar” investments that are “uncorrelated with equities” and “fit for retirees and investors who need an income”.

It pains me to say that the JSE is looking more and more like a dilapidated spaza shop in rural Transkei than the world-class financial exchange we had before the socialists took over.

I just have a feeling it has gone down slightly to much. Yes. Lots of problems and technically no sign of a reversal yet.

Building costs did not fall that much and when it turns it will turn big time.

I don’t invest in SA but I might just start building a little position should there be some sort of technical reversal. Beer money.

Very well written and factual article. Thank you for your excellent journalism. May God always bless your writing. Please be positive and if not positive, be factual.

nothing lasts forever and lasts for a very short period in africa when incompetent meglomaniacs are greedily destroying value in all they touch- CancER

End of comments.

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