Despite offering R270 million in rental relief to hard-hit retail and commercial tenants, Redefine Properties has seen a surge in rental arrears totalling around R400 million since April, due largely to the economic fallout from the Covid-19 pandemic.
Highlighting the issue during a pre-close media briefing on Monday, Redefine CFO Leon Kok said the group had “seen a dramatic increase in arrears” of approximately R400 million over the five months (April to August) of the various Covid-19 lockdown levels.
“This is outstanding rentals which have not been paid. [But] clearly the management of this needs to be approached pragmatically … We’re in it for the long-term, so for us the sustainability of our underlying tenant base is critically important,” he said.
“We will jointly agree with our tenants how best to approach these outstanding amounts. But, no doubt, it will continue to have a significant impact on [Redefine’s] underlying profitability and cash flow.”
Kok’s comments mean that Redefine, South Africa’s second largest real estate investment trust (Reit), is likely to see its second-half revenue take a major hit due to the impact of Covid-19.
With its financial year ending on August 31, the group goes into a ‘closed period’ from September 1 until its full-year results are released in November.
“We have, however, not yet seen a dramatic loss or material increase in lease cancellations – which is why our attitude towards rental relief has been generous. While we realise there may be short-term pain, our emphasis remains on sustainability as we would rather retain tenants for the long term,” Kok added.
To strengthen its balance sheet and liquidity in the face of the Covid-19 crunch, Redefine has announced disposals of its UK and Australian assets in recent months.
The group wants to place all its current offshore focus on Poland, where it has retail and logistics property assets.
“Our actions on balance sheet strengthening and selling non-core assets means Redefine has undrawn access to R3.8 billion in cash, while having liquidity headroom to absorb as much as a 50% rental decline and 100% dividend withholding from foreign investments,” Kok pointed out.
“We are fortunate to have sufficient headroom to absorb headwinds if the recovery is slow.”
According to Redefine, average cash collections over the five-month period of Covid-19 restrictions thus far have amounted to about 82% of monthly gross billings.
“However, the brunt of this occurred during the hard lockdown in April and May and it has since recovered to some extent,” said Kok.
Redefine CEO Andrew Konig reiterated his views that “property fundamentals are going to be challenged for the rest of 2020 and beyond” due to the “unprecedented and evolving market conditions”.
He said Redefine’s offshore asset platform has been significantly readjusted for prevailing conditions. “The company is now more focused on a single external geography offshore in Poland … This reduces our risk profile, improves our liquidity position and eases our loan-to-value ratio, which has been under a lot of pressure.”