Growthpoint Properties achieves 6.1% distribution growth
Growthpoint Properties Limited (JSE:GRT) posted a 6.1% growth in distribution per linked unit for its interim six-month period to 31 December 2011, continuing its solid record of distribution growth for investors.
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CEO of Growthpoint Properties Limited Norbert Sasse attributes this positive performance to growing revenue streams, tight cost controls, aggressive leasing, astute financial and asset management, as well as solid contributions from it’s investments in the V&A Waterfront and Growthpoint Properties Australia (GOZ) (ASX share code: GOZ).
“Economic conditions continued to improve, albeit at a slow pace. Positive indications are evident in several areas, specifically decreased property vacancies in our portfolio,” says Sasse. “These signs are encouraging and Growthpoint’s full-year distribution should be in line with this result.”
Growthpoint Properties is the largest South African listed property company and is included in the JSE ALSI Top 40 Companies Index, with a market capitalisation of R31,6 billion at 31 December 2011. For the first time ever, Growthpoint’s property assets exceed R50,0 billion.
Its quality portfolio of 412 directly-owned properties in South Africa is valued at R33,6 billion and, through its 61.0% held subsidiary GOZ, it has a stake in 40 properties in Australia which are valued at R11,7 billion. It also has a 50% interest in the V&A Waterfront with properties valued at R9,7 billion.
Growthpoint’s distributable earnings grew 14.8% during the period. Revenue increased by 26.1%, driven largely by its acquisition of the V&A Waterfront and greater revenue from the GOZ portfolio, as well as contractual rental escalations from its SA property portfolio.
Over the past 12 months, GOZ has acquired nine office properties as part of its growth and diversification drive, partly paid for through two successful rights offers of R102,6 million in July 2011 and R166,4 million in January 2012. GOZ’s portfolio value has more than doubled over the last three years. The portfolio has also diversified from purely industrial property to a spread of 41% offices and 59% industrial property.
Growthpoint’s total distributions income received from GOZ grew by 43% during the period following its increased investment, and we received a total annualised return of 43.6% on our investment,” reports Sasse. Growthpoint’s 61% holding in GOZ, valued at R2,8 billion, was acquired at a total cost of R2,0 billion.
Growthpoint’s earnings from the V&A Waterfront were in line with expectations for the period. Growthpoint bought 50% of the V&A Waterfront in Cape Town for R4,9 billion in partnership with the PIC on behalf of the GEPF and took transfer of the property in June 2011. “The overall transaction, including debt funding, has not proven dilutive to Growthpoint due to debt funding and capital raising secured at better levels than anticipated at the time of the acquisition. It’s a prime asset that is performing positively, at original projection levels,” says Sasse.
He reports overheads at the property have been tightly managed and, consistent with development plans for the precinct, construction of the Allan Gray head office at the V&A Waterfront is underway.
Sasse points out that during the period, Growthpoint elected to expense the interest cost on the bulk it purchased at the V&A Waterfront, instead of capitalising it. “Capitalisation of the interest would have resulted in distribution growth of around 8%, however we felt that it would artificially increase the value of the bulk,” explains Sasse. “We continue to base our distributions on sustainable income from rentals.”
Tight cost controls saw Growthpoint’s cost-to-income ratio reducing from 23.0% to 22.7%. This is not withstanding notable growth in multi-tenant offices in its GOZ portfolio, characterised by higher cost to income ratios, and the fact that soaring administered costs continue to drive up property expenses, especially electricity and rates and taxes.
“We continue to face administered costs that are increasing at levels much higher than inflation and contractual lease escalations,” says Sasse. This has a triple negative effect on property owners. “We pay more and get less. In addition, we’re forced to use our own funds to deliver these services ourselves, from providing refuse removal to electricity meters”.
Growthpoint Properties’ SA portfolio is well diversified across retail, office and industrial property sectors. Sasse reports that all sectors are performing ahead of budget and the total SA portfolio vacancy level reduced by a full percentage during the period, to a healthy 4%.
“The retail portfolio continues to unlock portfolio value through expansions and refurbishments,” says Sasse. While the retail portfolio’s vacancy level has increased from 2.9% to 3.6%, this vacancy includes space set aside for development in three shopping centres – Brooklyn Mall, Longbeach Mall and River Square. Excluding this, the vacancy level is 2.7%.
Solid demand dominates in Growthpoint Properties’ industrial portfolio, with vacancies falling from 4.1% to 2.7%, and several new demand-driven redevelopments improving portfolio quality. Disposal of non-core industrial properties also contributed to improved occupancy levels.
During the period Growthpoint sold 13 properties for a total R290,6 million, realising a profit of R129,3 million on cost. As part of Growthpoint’s Brooklyn Mall asset swap deal in respect of the adjoining Design Square, Growthpoint now owns 75% of the combined asset.
Lacklustre demand continues to prevail in the office sector, but Growthpoint’s aggressive leasing has resulted in its office vacancies decreasing from 8.1% to 6.7%.
Growthpoint’s property assets continued to benefit from the strong support of its financial structures. In July 2011 Growthpoint successfully completed a R1,8 billion equity raising, which was used to repay R2,0 billion CMBS notes. During the period it also undertook two further bond issues totalling some R760 million, and three commercial paper issues totalling R900 million. The additional equity raised in July 2011, reduced the SA loan-to-value (LTV) ratio from 37.8% to 33.1%. A number of forward-starting interest rate swops concluded in prior years, became effective from 1 July 2011 and results in Growthpoint’s SA fixed debt increasing from 77.1% at June 2011 to 93.1%.
“Increased participation in the bond market diversifies our debt funding sources and levels of unsecured debt. The bond market is also providing cheaper funding than traditional funding in the current climate,” says Sasse. “Growthpoint continues to enjoy good access to liquidity, from both bond and bank markets.”
Growthpoint’s first BEE transaction was refinanced during the period and it received R306 million as partial repayment of the loan. AMU Trust, Growthpoint Properties Limited’s largest BEE shareholder, refinanced debt originally raised in 2005 and, by doing so, reduced Growthpoint’s mezzanine debt participation to R200 million. This remaining debt will be serviced by the AMU Trust semi-annually. The trust owns around 5.9% of Growthpoint Properties and represents the interests of Amabubesi Investments, Miganu Investment Holdings and Unipalm Investment Holdings.
Growthpoint continued to achieve admirable levels of tradability and liquidity in the property sector. On average more than 72 million Growthpoint Properties linked units traded each month during the period. The monthly average value traded grew from R1,1 billion at 30 June 2011 to R1,3 billion at 31 December 2011.
Growthpoint Properties’ continued inclusion in the JSE’s Socially Responsible Investment Index (SRI Index), announced in December 2011, follows its positive environmental, social and economic sustainability practices and corporate governance. This is the third consecutive year of Growthpoint’s inclusion in the JSE SRI Index.
With its SA retail and industrial portfolio’s almost fully let, Growthpoint has targeted increased developments to grow its portfolio. “Acquisition, development and redevelopment projects approved and underway currently total some R1,4 billion,” reports Sasse. “Growthpoint has also picked up a few strategic land parcels, including a prime site opposite the Rosebank Gautrain Station.”
Sasse explains that besides growth opportunities, developments offer yields of up to 2% higher than acquisitions of completed properties that are fully tenanted. “Development risks are mitigated and, in the current market, we are confident that this is an effective strategy for portfolio and distribution growth,” says Sasse.