Property heavyweight Growthpoint has seen its debt levels spike 41.5% from around R49.5 billion to just shy of R70 billion by the end of its financial year to June 30, its latest results published on Wednesday show.
This has contributed to the group’s loan-to-value ratio also surging – to 43.9% from a much more palatable 36.7% for its 2019 financial year.
The impact of the Covid-19 pandemic on income streams and property valuations is a huge headache for Growthpoint and many of its peers. However, for Growthpoint its acquisition of a majority stake in UK retail fund Capital & Regional for R2.9 billion last December has also contributed to the group’s much higher debt and loan-to-value or LTV.
To put Growthpoint’s R70 billion debt in context, it is worth noting that the group’s South African property portfolio is worth R73.4 billion (excluding its 50% stake in the V&A Waterfront, which is valued R7.16 billion and is treated as an equity investment).
Growthpoint’s full-year results presentation reveals that overall finance costs have consequently also surged 19.3%, from around R2.6 billion at the end of its 2019 financial year to R3.1 billion in 2020.
Despite the spike in its debt and LTV, Growthpoint Group CEO Norbert Sasse, speaking during a results media webcast, maintains that the property fund’s balance sheet is strong and will enable it to weather the Covid-19 crunch.
The group has opted to defer payment of its final dividend for the year – to December at the latest. However, it may pay out 75% of this and withhold the rest to shore up its balance sheet amid pandemic pressure. Most of its peers are either withholding dividends or deferring payouts.
“We at all times seek to strike a balance between a conservatively managed and sustainable business and the interest of our investors in optimising distributions,” said Sasse.
“While no final dividend has been declared for FY20, subject to there being no material regulatory changes or market disruptions which may have a substantially negative impact on our overall financial position between the date of publication of our results, and the date of declaration of the final dividend for FY20, the Growthpoint board is considering declaring a final dividend based on a payout ratio of not less than 75% of distributable income for FY20 which will ensure compliance with current Reit [real estate investment trust] legislation,” he noted.
This is the first time in 16 years that Growthpoint has been unable to deliver a growing dividend to its shareholders.
Sasse said the results were significantly impacted by Covid-19 lockdown restrictions, largely in the final quarter of Growthpoint’s financial year to the end of June. However, he stressed that South Africa’s economy was already in recession before Covid-19.
“Never before has Growthpoint experienced such a challenging operating environment. Following a detailed strategic review of short and long-term strategies, the Growthpoint board is prioritising liquidity and balance sheet strength in the short term, considering the weak property fundamentals in South Africa in particular, and the current cycle of falling asset values and rising gearing levels,” he said.
Growthpoint has a South African, Australian, British and Eastern European (Poland and Romania) property portfolio, held directly or via equity investments, worth more than R160 billion.
The group’s South African portfolio of 440 retail, office, industrial and healthcare properties was devalued by 8.8% or R7.1 billion during the financial year.
Even Growthpoint’s local trophy asset, the V&A Waterfront suffered a devaluation, with the group’s stake declining by R420 million.
Sasse conceded that Growthpoint’s overall LTV was also impacted by the South African portfolio devaluation, however, he said that the group’s Capital & Regional stake also took a significant knock.
With the UK economy effectively taking a double-whammy hit from Brexit and the Covid-19 fallout, he noted that Growthpoint’s 52% Capital & Regional stake is currently valued at R1.1 billion.
“Growthpoint’s consolidated LTV increased during the year to 43.9%. The higher figure is partly due to Growthpoint’s early adoption of the second edition of the SA Reit [Association] Best Practice Reporting guidelines, which includes a new standard calculation for SA Reit LTV that increases this number for Growthpoint by 1.7%. Using the previous calculation basis, Growthpoint’s LTV is 42.2%.”
Keillen Ndlovu, Stanlib’s head of listed property funds, tells Moneyweb that both the drop in distributable income and property values at Growthpoint were “pretty much in line with expectations”.
He adds: “Given the challenges, changes and uncertainty, commercial property values will continue to come under pressure over the short-to-medium term… However, the listed property sector is trading at around 50% below its net asset values, which means the devaluations have already been priced in.”
Ndlovu notes that while Growthpoint’s LTV has spiked, it is not in breach of any debt covenant levels.
“The LTVs of a number of major SA Reits are likely to rise to between 45% and 50%… Many are looking to sell assets, but it’s not easy in this environment. Raising equity is also not ideal, thus the most viable option is to retain income to try to limit increased debt and reinforce balance sheets.”