JSE-listed REIT, Redefine Properties, has reported a lower distributable income per share of 26.2c for the interim period to 28 February 2021, driven principally by the impact of Covid-19 on the property sector and broader economy.
However, the company is in a strong position to benefit from an anticipated uptick in property fundamentals as conditions begin to improve in line with the expected vaccine rollout in the latter half of the year.
The current reporting period covers six months during which the economy was battered by one of the world’s strictest lockdowns. Consequently, when compared with a pre-Covid prior reporting period, the distributable income is down 21.8%.
CEO Andrew König says while the jury is out on the exact point at which the upward cycle will begin, an improvement back to pre-Covid levels should take place once vaccines are broadly rolled out.
“We believe the bottom of the cycle has been reached. What we are expecting – and this is also what has happened in other countries who have made good strides on their vaccine programmes – is that the rollout of vaccines will lead to more mobility in the system. This means more people going out, to work, to shop and to play and that quickly translates into confidence, which is the cheapest form of economic stimulus,” he says.
König says until an accelerated turnaround begins, however, weaker property fundamentals and low economic growth have to be factored in for 2021 and beyond.
As a precautionary measure ahead of a still nascent vaccine rollout in SA, Redefine’s board has decided to take the prudent step to defer its dividend decision to year end.
“We did not take this decision lightly at all and took all stakeholder interests into account. It is fundamental to our investment proposition to pay dividends, but unfortunately there is just too much uncertainty to factor in right now. We hope to have better news towards the end of the year, but as always we must act prudently,” he says.
Ntobeko Nyawo, Redefine’s new CFO, says Redefine is in a strong position to benefit from future growth thanks to its focus on managing risk and optimising its balance sheet. At the previous year end, Redefine’s loan to value ratio (LTV – a key indicator of balance sheet risk) was at 47.5%, but by half year it was reduced to 44.3%.
“We have continued to strengthen our balance sheet, through disposal of non-core assets. By doing the right things now we have access to ample liquidity (R4.8 billion) and achieved a pleasing 98% of gross billings in collections. Our net asset value per share also increased to 719.74 cents per share. This means our business has remained highly cash generative, despite the pandemic,” he says.
Apart from the obvious Covid-19 impact, he says the decrease in revenue for the period was largely attributable to the deconsolidation of European Logistics Investment B.V. (ELI) during the second half of 2020, the sale of Leicester Street and the disposal of non?core local properties during the period. Dividends were also not forthcoming from Redefine’s 45.4% holding in EPP, who acted to preserve financial flexibility and bolster their own liquidity.
Chief Operating Officer, Leon Kok, says Redefine managed to deliver positive outcomes during a difficult six months, thanks to its strategic intent of repositioning the asset platform to maintain relevance.
“We focused on execution and this half is a clear demonstration of our strategy delivering the desired outcomes,” he says.
Redefine’s total property assets under management are valued at R75.3 billion, with 84% invested in SA.
Kok says concluded non-core property asset disposals realised R4.0 billion, with a further R2.7 billion currently at an advanced stage.
“A further highlight was the completion of two new local logistics developments totalling R229.7 million, while the estimated cost of a new domestic retail and a logistics development in progress totals R293.2 million,” he says.
König says the 16% of the portfolio now held offshore incorporates the recent sales of non-core assets like student accommodation in Australia, but he expects the offshore portfolio to grow through continued development expansion in the Polish logistics platform.
“There will be an uptick – we just do not know how aggressive it will be. However, in Poland, the strong economic fundamentals mean they could bounce back to pre-Covid levels far quicker. In SA, it might take longer as the local economy was already fragile going into the Covid-19 crisis,” he says.
Redefine is focusing on expanding into the logistics space through development locally and in Poland. It completed two local logistics projects and in Poland, where 67,343 square metres were completed at a cost Euro 40 million, with developments under construction of 173,240 squares, at a cost of Euro 120 million.
Significant land holdings in strategic locations like Cape Town and Johannesburg will be harnessed for the local development. König says this growth will not be done speculatively, but rather through on-demand development for tenants.
Redefine’s results paint the picture of a fairly stable retail and industrial space, but with offices struggling with weakened demand and oversupply of space.
“What we have found is there is a flight to quality, with key locations and conditions proving more defensive and attractive,” says König.
Redefine is positive that some normality will return to the office space despite talk of far less demand in a “new normal”.
“Young people wanting to learn and be mentored are suffering the most. Corporate ethos and culture as-well-as collaboration also can’t be properly nurtured. Some service sectors like banking are also bemoaning the slip in turnaround times. I think this is why more people want to return to an office environment, and why a more hybrid model is likely. A 100% work-from-home simply does not suit a fully productive, engaged and connected workforce,” says König.
“Our results reflect the important strides we are making in the creation of a more inclusive, sustainable and resilient operating context. Covid-19 has provided us with a unique opportunity to reset every aspect of what we do and the execution of our strategic priorities will position Redefine for the eventual upward cycle,” concludes König.