Fourways Mall joint owners – JSE-listed Accelerate Property Fund and the Special Purpose Vehicle (SPV 1) company that led the multi-billion-rand expansion of the centre – have secured a relaxation of debt covenant levels with lenders in the face of the Covid-19 crunch.
Accelerate’s head of treasury, Pieter Grobler, revealed the move on Wednesday during the group’s interim results webcast presentation for the half-year to September 30, 2020.
He said the group applied to lenders for a covenant relaxation due to Covid-19 risks related to (property) valuations and reduced income.
Accelerate, which is majority controlled by the Georgiou family (led Michael Georgiou), saw its gearing or loan-to-value (LTV) ratio hit 46% at the half-year, just four percentage points below its covenant ceiling of 50%.
“We felt it prudent to approach our bank and capital markets lenders to proactively [and] temporarily change covenants to create some headroom in case of temporary blowouts in terms of valuations and reductions in income,” said Grobler.
He noted that the agreement with lenders meant that the normal covenant of a 50% LTV on a fund level and 45% LTV on a SPV 1 level be increased to 55%. The fund level increase is until September 30, 2021, while the SPV 1 level is expected to reduce to 50% by September and thereafter revert back to 45%.
Accelerate reported an interest cover ratio (ICR) of 2.1 times at the end of its interim period. ICR is another key covenant measure used by banks and property analysts to evaluate a fund’s ability to pay its debt.
Grobler noted that the ICR for both Accelerate and SPV 1 had also been relaxed to 1.8 times as an interim support measure by its lenders. The ICR level will revert to two times after September next year.
“These covenant changes were formally approved on 28 September 2020 and are now in effect … In terms of [Accelerate’s] capital market debt raised during the August /September period, those covenant changes were already built-in as we concluded those notes,” he said.
Other measures Accelerate is taking to boost its balance sheet and liquidity in light of the impact of Covid-19 include:
- Withholding dividends for both its full-year to the end of March 2020, and now for its latest interim period to the end of September;
- Selling non-core assets – almost R600 million of these properties are held for sale; and
- Reducing its LTV, with a plan to bring it down to around 40%.
Reacting to Accelerate’s covenant relaxation move, Bridge Fund Managers’ chief investment officer Ian Anderson, was not surprised.
“I think most companies with exposure to offices and/or regional and super-regional malls have sought temporary relief on debt covenants given the uncertainty posed by property valuations in the short and medium-term. We know they’ll be going down, we just don’t know by how much,” he told Moneyweb.
Tenant rental relief
“At the same time, cash flows are under pressure in the short-term [particularly for companies reporting for the six months ending September] given the quantum of rent relief, particularly to retail tenants …
“In the case of Accelerate that amounted to around R100 million– a fifth of its ‘normal’ six-month revenues,” noted Anderson.
“The uncertainty posed by the pandemic and the potential for a further round of lockdowns like we’ve seen in Europe and the UK means retail landlords need to keep as much cash on their balance sheet as possible. Deferring or not paying a dividend is the obvious way to retain cash and ensure adequate liquidity, just in case,” added Anderson.
Accelerate’s revenue decreased in the half-year (April to September) to R416 million, from R555 million in the prior comparative six months, while its operating profit reduced to R232 million from R339 million. This was mainly as a result of the rental relief granted to tenants and provisions for doubtful debts of R33 million.
“We recognise that our success as a business is inextricably linked to that of our tenants. As such we negotiated rental relief packages to the value of approximately R100 million to date,” Accelerate chief operating officer Andrew Costa said in a results statement.
“The quid pro quo of these negotiations is locking in longer lease terms and allowing us to rebalance the tenant mix,” he added.
“Pre-Covid-19 we have spent considerable effort in refinement of our strategy to focus on nodal strength and tenant centricity across our portfolio. This focus has stood us in good stead during the worst of the pandemic, as we maintained a tenant retention ratio of 84%. We managed reversions and vacancies very well in the circumstances,” he noted.
Accelerate reported positive retail rental reversions of 5.1% for the period. Retail properties make up around 75% of its portfolio. Besides Fourways Mall, some of its other retail assets include the likes of Cedar Square and Eden Meander shopping centres.
The group’s overall portfolio, including offices and industrial, showed a -4.3% reversion in renewed leases and contractual escalations averaging 7.4%, excluding its international portfolio.
Overall vacancies ticked up marginally from 10.8% to 11.5%.
Accelerate’s share price was down just over 1.3%, to R0.75, at the close of the JSE on Wednesday. The stock has seen a slide of over 58% for the year to date, with its market cap at around R750 million.
Following the plunge in most real estate stocks in the wake of the hard Covid-19 lockdown between late March to the end of May, the sector has recovered a bit. Accelerate is up some 5.6% over the last 90 days, but the stock is significantly below what it started the year trading at – around R1.80 a share.