Growthpoint raises HY dividend despite decline in revenue

‘In certain segments of the business it is pretty tough … our economy has taken a heavy knock,’ and Gauteng hasn’t recovered as speedily as Cape Town and Durban: CEO Estienne de Klerk.

FIFI PETERS: Growthpoint, which is South Africa’s largest property company that’s listed on the JSE today came out with its interim results, raising its first-half dividend despite the decline in revenue. If you look at the vacancies across its retail portfolio, the shopping centres, things are looking a little bit better there, as well as the industrial portfolio. But the office space is still seeming pretty tough.

We have Estienne de Klerk, the CEO of Growthpoint Properties South Africa, on the Market Update for more. Estienne, I think you were listening to the previous commentator, just talking about the property sector and the challenges that the sector still has, and how it might take some time to work through them. What’s your take on that, if you can just describe your lived reality in the past six months?

ESTIENNE DE KLERK: Yes. Good evening, Fifi, and to your listeners. I think the first thing to understand is that Growthpoint is having quite a significant discount to its stated NAV. If you go and add up all the different segments of this quite diversified business, which actually goes broader than just the South African office, retail and industrial, it also includes a half share of the Victoria & Alfred Waterfront, it includes 60% of our subsidiary in Australia called Growthpoint Properties Australia, a business [with] a third investment in Romania and Poland called Globalworth, and then a very small investment into a region in the UK called Capital & Regional.

If you take all those into account, there are various income streams. So even just looking at the revenue line can be a bit misleading because some of these investments we don’t consolidate. They in fact are equity-accounted, so their revenue doesn’t come into the revenue line per se.

Read: Growthpoint ups interim dividends

The reality is that in certain segments of the business it is pretty tough. Certainly the South African environment, broadly speaking our economy, has taken a heavy knock and certainly in Gauteng that hasn’t really recovered as speedily as it has in Cape Town and Durban.

Parts of the business are doing better, like the Victoria & Alfred Waterfront, and Australia is performing very, very strongly.

So we are at this point not comfortable in saying there’s a full recovery on the way, but I think to some extent I have to agree with David [Shapiro] that there are parts of the business that are improving and there is quite a lot of value on the table for investors with a very decent yield underpinned by a very good quality business.

FIFI PETERS: On Australia it has been quite interesting to see how various South African companies have performed, just given the extent and the tightness of the lockdown that some have described and ascribed to the bottom line, showing pressure there. Yet you seem to have had a different experience with Australia. Just talk to us about what the situation is looking like now and what the plans for that part of the business are.

ESTIENNE DE KLERK: Yes. Our Australian business is a company called Growthpoint Properties Australia. It invests in all the metropolitan areas, in industrial and metropolitan office. That wouldn’t be your CBD per se, but more the Sandton equivalent of Johannesburg, if you like – the metropolitan office investments. As fate would have it, those two segments have actually been the best performing in Australia. Across the board the Australian fundamentals have strengthened very, very well.

So if we’re going to look at valuations in the past six months, the like-for-like increases in valuations on industrials 9.2%, and offices being 5.2%-odd. So now you get 6.6%-odd, the firming of valuations, and they’ve also increased their distribution by 4% to us in South Africa and all their shareholders. So fundamentally the business is performing well. It’s quite competitive to acquire additional assets so, in this market, they’ve only acquired a few additional assets in this time. But from our perspective it’s a solid business. It diversifies our income streams very well away from the South African difficult economic environment, and has served us well through this period.

FIFI PETERS: What about Eastern Europe, the world’s focus on what is happening in terms of the conflict between Ukraine and Russia right now? What can you tell us about the impact that this has had on your business so far, and how concerned you are about the events unfolding?

ESTIENNE DE KLERK: We are clearly concerned. The situation is very unfortunate in the Ukraine as we speak, and for the whole region it can’t be positive economically. At this point it is business as usual for Globalworth. The company has office properties and industrial properties in the major metropolitan areas or major cities, if you like, in Poland and in Romania.

At this point those assets haven’t really been affected. You’ve got very, very good quality tenants in the best-of-class buildings in these cities and those businesses are carrying on as usual at this point. Certainly that business hasn’t really been affected and sits on a very large cash stash, if you like, of over €400 million. So it’s very defensively positioned. But ultimately it is unclear how the economies of Poland and Romania would be impacted at this point. Hopefully this conflict will be resolved peacefully soon and business can carry on as usual.

FIFI PETERS: And if it’s not?

ESTIENNE DE KLERK: Look, if it’s not, the reality is that as South Africans we are used to operating in very, very difficult environments. As you are aware, not so many months ago we experienced quite severe riots in Natal. Growthpoint had seven of our properties impacted, and we managed to work through at that point  together with the communities in those areas. Our assets suffered really minimally. I think our aggregate loss was about R29 million-odd, and we’ve recovered all that from Sasria at this point.

The reality is, when the chips are down, we back our management team and our staff to manage through those difficult periods. If you go and look at the past two years, Growthpoint I think has been at the forefront of trying to manage through what is arguably the toughest economy that we have had to ever face.

FIFI PETERS: Just shifting on [to] the retail or the shopping centres, it looks like you are getting new tenants coming into some of your malls, and perhaps you’ve even been able to hold onto some of the existing ones. Tell us at what cost, and what kind of relief you still have on the table for some tenants who are finding it difficult.

ESTIENNE DE KLERK: Fifi, I think conditions have improved significantly. Trading densities, which is effectively the sales in the stores per square metre, has increased by 7%-odd over the past six months. So fundamentally the retailers are in a much better place. What we have seen is that many of the larger retailers have used this difficult market to improve their cost of occupancy by squeezing their landlords for lower rentals, but at the same time expanding their offerings because, in these markets, they have acquired different brands and they’re looking to roll those out.

That has helped the retail market. Growthpoint owns 43-odd shopping centres spread through the main metropolitan areas in South Africa, and what we have seen is that the smaller-format shopping centres have performed a little better than the larger ones.

But we’ve seen that the regional malls are coming back strongly. Even though the footfall isn’t quite where it used to be pre-Covid, the basket sizes are significantly larger. So people are going [there] a little less, but they’re spending more when they are in the malls – and we are starting to see that the larger malls are performing well.

Of course at the same time, as a result of that, we haven’t had to really spend a lot of money from the company on supporting the smaller tenants, because they’re starting to trade well, and they’re much less reliant on relief at this point. So hopefully we are starting to see the market turn there. At this point on renewal of leases we are still seeing [rental] aversions, so rentals are going down at the point of renegotiating those leases; but we see, as the trade increases, that will ultimately support higher rentals, and that will be good for our retail portfolio.

FIFI PETERS: The picture looks quite different when it comes to your office portfolio. I’m wondering if this is because companies are still working from home, or if some of your existing clients in the office space have relocated elsewhere.

ESTIENNE DE KLERK: Yeah. It’s a whole combination of different things, Fifi. I think firstly, once again, Cape Town and Durban, I would say within the next six months or year, should be on normalised levels. The fundamentals in those two markets are significantly stronger than in Gauteng. Once again, it speaks to the weak Gauteng economy and the impact that Covid and economic policy has had in and around Gauteng.

If we look at Gauteng specifically, we’ve got quite a large concentration of offices in Sandton, which is obviously the largest office market in the country – and, yes, there is a significant amount of oversupply in that specific market. In many cases we are also competing against our tenants that have been subletting their existing buildings. So, with the market being oversupplied, [and] demand effectively being negatively impacted by the economy, it has been difficult.

I think the work-from-home dynamic certainly is a factor in the short term. But seeing through the cycle we do think that quite a large component of that will reverse and that ultimately people will like working together. Big corporates like to have a place of being where they can work with their staff and create a corporate culture, and where education and training happens for new staff members, and where there are opportunities for young staff members to progress by having older staff members, or more experienced staff members, assist them. In the current environment that is quite difficult.

I think what we will see is that buildings will have to adapt to flexible arrangements and also providing for scenarios where some people are working from home and some people are working from the office. So [many] more facilities for online kind of meetings will be required, and also [Many] more amenities in these facilities because, if those amenities aren’t there, then you might find it more difficult to get your staff back.

We are seeing that there’s significantly improved traffic to Sandton from the perspective that it’s clear that businesses are starting to go to work. It’s quite important, not just for the office sector, but also broadly for that Gauteng economy that feeds off those office markets, the retailers in that area, the restaurants, all the amenities – they’ve all been suffering along with this market. Then you’ve seen the [dispersal] of trade into different markets where, in certain metropolitan shopping centres, trade has picked up as a result of people rather moving from home.

I think those dynamics will play out and it’s important for us to be able to adapt and provide the right quality service to this …..14:15. Interesting enough, the industrial market’s been very, very strong and we’ve seen vacancies come down significantly in that market. So it certainly does look like that sector is performing quite strongly and turning.

FIFI PETERS: Estienne, we’ll have to leave it there. I know too well the increased traffic to Sandton that you’re talking about; I often get stuck in it. But I think that perhaps what could help the return to the office also is the situation around load shedding. If it persists, many of us don’t have backup power at our homes, and it certainly does affect working efficiency – but that’s just my two cents. So we’ll leave it there.

Estienne de Klerk, CEO of Growthpoint Properties in South Africa.

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