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Redefine delivers growth despite local challenges

Over a quarter of its income now stems from international operations.

NOMPU SIZIBA: Property group Redefine released its interim results today [Monday] for the six months ended February. The company reported that its distributions or dividends to shareholders rose by 4% to 49.2 cents/share. The company says that assets under management grew by R500 million in the period under review.

Well, to give us the story behind the numbers, I’m joined on the line by Andrew König, the CEO at Redefine. Andrew, I see that of your total income, a quarter of that now comes from your international operations. How are those going? And I see you’ve made some further investment in Poland.

ANDREW KÖNIG: Offshore exposure is doing very nicely for us. It is buffering against the headwinds that we are facing here domestically. So if you have a look at the bumps, 21% of our asset base is invested offshore; but, as you rightly say, 25% of our distribution is from offshore sources, which are far more predictable and stable than they are back here in South Africa at the moment.

NOMPU SIZIBA: The UK has been problematic for property counters, what with the uncertainty that’s come with the Brexit process. What assets do you have there, and do you plan to remain invested there?

ANDREW KÖNIG: We have a 29%-odd investment in a listed property counter called RDI Reit Plc. It is also listed here in South Africa, so there’s a dual listing. Its primary listing, though, is in the UK. Given the liquidity of the counter and our exposure, we are in for the long haul. Its share price hasn’t done well over the last while; as you point out, Brexit and also a fundamental shift in retail behaviour from a consumer point of view has put a lot of pressure on property counters in that market. So we would pursue some sort of corporate activity to try and remedy the situation, as opposed to simply selling out in an environment which is distressed at the moment, and we would realise quite a significant loss in that process.

NOMPU SIZIBA: The South African market has been a tough terrain – which you’ve already alluded to – for most sectors, and we’ve heard from your peers that things have been tough. What was the performance of your various portfolios, and how are you doing in terms of things like vacancy rates?

ANDREW KÖNIG: Well, in the constrained environment in which we are operating there is always a flight to quality, and we believe at Redefine that our portfolio is one of quality and is very well positioned to withstand the current environment.

From a retail point of view, which most of our domestic portfolio is invested in, we are doing okay in a tough market. We recorded sales growth, for example, of 4.5%, which is good in relation to where retail spend sits at the moment, from a growth point of view.

Our foods and our health and beauty retailers, in particular, are trading very well, which is driving that percentage upwards.

Our offices are doing well in an environment that is very constrained from a supply point of view – there is an oversupply in the market at the moment – and very low demand, and [the market is] very competitive at the same time.

However, we’ve invested over the last seven or so years in upscaling the quality of our portfolio. By that I mean if you look at the T- and A-grade components of our portfolio, about 70% our portfolio is in that category, which we believe will stand us in good stead over the long term in terms of attracting and retaining top tenants.

If I move on to the industrial portfolio, it’s our portfolio that’s probably doing the best in terms of its overall vacancy sitting at 2%. But what is a feature is that rental growths in this sector have been very low over the last couple of years. So when you have leases that escalate on an annual basis, which is contractual, you will find that, when your leases come up for renewal, there is a very good chance that you are going to go backwards on the renewal rental. In our case we went backwards 17% on just two leases in the period, despite the fact that we’ve got such a good overall vacancy.

NOMPU SIZIBA: I see that you are going to be leasing property to the flexible office people, WeWork. Are you not worried about potentially higher vacancy rates? Or, presumably, that’s not your problem – it will be WeWork’s problem.

ANDREW KÖNIG: Well, in a way it’s actually our problem too, in that we have assumed an element of operational risk with WeWork. We are co-partners in this venture in the sense that we set them up in two of our office buildings – one here in Rosebank, and the other in Sandton. But we are very confident that they will be targeting a market outside our usual tenant base. So we don’t see cannibalisation occuring in terms of WeWork luring tenants out of our premises, but we see it as an add-on where we are going to be growing the market and attracting those people who generally aren’t in a fixed-lease environment, but prefer flexible leasing, to our properties. So we see it as an extension of our current offering.

NOMPU SIZIBA: Andrew, load shedding has been a major issue for number of years, and Eskom is still in unknown territory. So, when you invest in property these days, how much of a factor is it for you to invest in renewable energy facilities, to save you and your tenants costs down the line?

ANDREW KÖNIG: Well, this is an area where we actually see a lot of opportunity, in that the costs of solar PV is getting more and more competitive, as well as the efficiency thereof improving. Courtesy of Nersa we have increased tariffs from Eskom, so in all it makes for a very good investment case to be investing in solar PV across all our buildings. Having said that, certain buildings can’t be retrofitted because of the weight or the load-bearing capacity of our roofs. But, where we can, we definitely do offer solar PV as an alternative to electricity provision. We are busy exploring the use of batteries as well to store electricity for use in high-demand periods, when the tariffs will be higher.

The only challenge we really have with solar PV at the moment, apart from limitations on how much we can put on our roofs, is the fact that Nersa has limited the output that we can provide on our solar PV facilities, on a per-facility basis of one megawatt. Hopefully that will lift in due course and then it will make a significant difference. Currently we generate about 5% of our electricity consumption through solar PV technology.

NOMPU SIZIBA: And lastly, Andrew, having invested – correct me if I’m wrong – over R3 billion in the period under review, what’s your debt picture looking like, and how are you managing it?

ANDREW KÖNIG: Well, our loan-to-value ratio at the moment is around 42%. It’s on the high side. Ideally we would like it at 40% and below. During the next six months we will definitely be looking to reduce our debt, and that will be through a combination of equity-raising. It will also be looking to source an equity partner to expand our logistics platform in Europe.

And then we will also be looking at issuing shares as and when we can, by way of acquiring assets for shares, or raising capital in the market – that is, issuing shares for cash as well.

As part of our dividend we are offering a reinvestment plan, but that will be assessed on May 14, nearer the time of payment. So we will have to just watch carefully where the pricing goes to make sure we are raising capital at a cost-effective yield.

NOMPU SIZIBA: Thank you very much, Andrew, for your time this evening.

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