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In a challenging environment, our South African portfolio performed soundly as we continue the transition from a capital growth company to a REIT.
It has been another tough year for the real estate industry in South Africa, reflected in below-par returns for most of the listed REITs versus the JSE All Share and All Bond indices at 30 June 2019. These returns, however, obscure the long-term benefits of investing in real estate.
There is a correlation between our industry and the national economy, where a protracted lack of growth due to structural and cyclical challenges remains a major concern. There seems to be little prospect of the lack of growth being reversed in the near future as factional divisions in the ruling party hamper reform efforts.
South Africa urgently needs strong leaders, willing to make the tough decisions required to restore the trust and confidence that will in turn make economic growth a reality. Equally, the country needs the co-ordinated efforts of government, business and labour working to effect change. The macroeconomic conditions are a challenge.
In the face of these significant local headwinds, Attacq has delivered good results and management has made progress in transforming the company from a capital growth company to a REIT.
Strategically, we continue to focus on our core assets and capabilities to deliver sustainable income and capital growth. We take a disciplined approach to the key drivers that underpin our business model: the South African portfolio, Developments at Waterfall, Investment in MAS and the Rest of Africa retail investments. These are detailed below.
For the year ended 30 June 2019, Attacq improved on most key metrics:
On several of these metrics, Attacq outperformed its industry peers, although we acknowledge we are coming off a lower base as a new REIT.
Importantly, the quality of our South African properties, dominant in their respective nodes, makes them defensive assets in the current economic environment. To illustrate, the Mall of Africa performed very well in its third year, with tenants benefiting from steadily higher footcount that improved trading densities and lowered the rent-to-turnover ratio.
In addition, each completed development in Waterfall will be contributing to distributable income. During the period under review, we launched Ellipse, our first residential development in Waterfall City, which will entrench the city's attractiveness as a resident destination and provide valuable growth opportunities for retail tenants. Attacq also has an attractive pipeline of commercial and industrial developments in Waterfall.
We believe that in uncertain times, a focused strategy provides clear direction. Equally, in uncertain times, we understand the need to be very astute in allocating capital and continually reviewing the performance of all our assets. Optimising our balance sheet is key to ensuring long-term growth and sustainable returns for shareholders.
Given these difficult trading conditions, we remain focused on our key drivers and long-term objective to create value through sustainable income and long-term capital growth. Strategically, we are concentrating on:
Our diversified operational portfolio has a total value of R20.5 billion, or 75.6% of total gross assets.
During the year, we completed seven buildings in Waterfall, predominantly occupied by blue-chip tenants. This supported a 10.4% increase in rental income (like-for-like growth of 5.0%) and well-managed property expenses. By securing new tenants and renewing 80.6% of leases that expired during the year, vacancies declined to 6.2% from 7.7%.
We reduced our exposure to the struggling Edcon Limited (Edcon) group and participated in its recapitalisation programme, detailed in the chief financial officer's review.
Attacq is a significant landlord in one of South Africa's fastest-growing nodes, Waterfall City, in the heart of Gauteng, South Africa's economic hub (see map below). This will be an integrated and highly efficient 'live, work, play' city environment, anchored by the Mall of Africa, surrounded by commercial and light industrial properties and complemented by a range of residential and hospitality offerings.
Mall of Africa's trading density growth of 13.1% is exceptional for a super-regional mall that has only been operating for three years. It has become a leading lifestyle, entertainment and shopping destination, providing a holistic retail experience that supports tenant and consumer aspirations. Key to Mall of Africa's success is its central location in the heart of Gauteng, ease of access, and the growing number of corporates moving into Waterfall City will contribute to the mall performing even better with time.
Across Waterfall, we completed seven buildings with over 42 615m2 in PGLA (our effective share 27 701m2) in the review period. New tenants include Accenture, Cummins, Pirtek, Superga and Zimmer Biomet.
At year end, nine buildings were under construction, with our attributable share of the roughly 72 000m2 PGLA being 48 000m2. New tenants include Deloitte head office, PSG Wealth, ContinuitySA and, in 2021, the 4-star Waterfall Courtyard Hotel - a 'new concept' facility from the City Lodge Hotels Limited (City Lodge). All these buildings are targeting green certification.
Post-year end we broke ground at Ellipse, in partnership with Tricolt, the first high-rise residential development in Waterfall City. Comprising four deluxe towers, Ellipse has exceeded market expectations for sales despite the prevailing economy. Since its launch in late 2018, we have entered into sale agreements for over 80.0% of the 272 apartments in the first two towers, a total value of over R565.0 million. Due to the success of phase I, the first tower of phase II will launch on 26 October 2019.
With around 949 000m2 of developable bulk in Waterfall remaining, the opportunity is significant. A strong in-house development team gives us the flexibility to establish appropriate joint ventures. We currently have joint ventures with Zenprop Property Holdings Proprietary Limited (Zenprop), Atterbury Property Holdings Proprietary Limited and its subsidiaries (Atterbury), the Moolman group and Sanlam with some as co-investors and others as co-developers.
Map showing Waterfall in the heart of Gauteng
Our development roll-out spans the next 21 years, and we are confident that Waterfall will be a strong driver of capital and dividend growth for years to come. Prudently, given the prevailing economy and more subdued demand, we have revised our target of rolling out 60 000m2 of developable bulk per annum to concentrate on the land parcels for which there is higher immediate demand.
Across our Waterfall portfolio - retail, office and mixed-use, light industrial, hotel and residential - our focus remains on densification. We are effectively populating a new city by attracting tenants keen to take advantage of all the benefits offered by our 'live, work, play' concept.
Our European investment is concentrated in our strategic 22.8% shareholding in MAS, which remains a significant part of our portfolio at R3.2 billion or 11.8% of total assets. In recent years, we have exited all our European investments, except for our stake in MAS.
For the June 2019 financial year, MAS exceeded its distributable earnings performance guidance in a more competitive market and, in May 2019, its board made the strategic decision to focus on high-growth Central and Eastern European (CEE) markets. MAS has now set a three-year target of growing dividends per share by 30.0% to June 2022.
Post Attacq's year end, MAS announced its intention to purchase a 20.0% economic interest in the investment joint venture from its joint venture partner, Prime Kapital Limited, as well as the latter's property management platform with a view of increasing its geographical focus on CEE markets, subject to obtaining the requisite shareholder approval.
Our Rest of Africa retail investments contributed R86.2 million to our 2019 distributable earnings. The year-end book value, including cash balances, places this at 3.0% of total assets in our portfolio. The decrease reflects the disposal of Achimota Retail Centre and loan impairments of R467.5 million. AttAfrica's interest in Manda Hill Mall was sold and transferred post-year end at the December 2018 book value, reducing our exposure, excluding cash balances, to this key driver to under 2.0% of total assets.
Given the pressure on regional economies, we have reviewed this investment with our co-shareholders. Our intention is to exit in an orderly manner in the near future. Importantly, we have no debt against these investments, so realised proceeds from disposals can be fully recycled into our South African portfolio.
In the review period, Attacq's governance standards received full marks (5/5) in the prestigious FTSE4Good ratings, for a second year. While this independent assessment of our governance is gratifying, we continue to evaluate our standards and the composition of our board to improve oversight of our business in the interests of all stakeholders.
In line with King IV, we strengthened the capacity, depth of skills and diversity of our board and appointed a lead independent non-executive director in 2018. All committees are structured and resourced to effectively support the board in meeting its mandate.
In April 2019, Keneilwe Moloko resigned as an independent non-executive director and member of the transformation, social and ethics committee. Tasja Kodde resigned as company secretary in the same month and Peter de Villiers was appointed in an interim capacity until a new appointment is made. The recruitment process is nearing completion.
The board's performance is externally reviewed every two years, with the 2019 review scheduled for November. The previous evaluation (2017) concluded that the board functions well and the skill set is appropriate. Refer to our sustainability report for more detail.
The board has full confidence in Attacq's new management team, validated by results for their first full year in office. Their knowledge of the company and extensive experience in the property sector positions this team well to lead Attacq to the next level of growth and development as it matures as a REIT.
We understand the complex interplay between the capitals or resources that underpin our long-term sustainability as a company. The way we manage this interplay was independently assessed during the year in the prestigious FTSE4Good ratings, with Attacq scoring 4.1 out of 5.0 for its environmental, social and governance standards. This rating also catapulted Attacq into the FTSE/JSE Responsible Investment's Top 30 index - the only property company to achieve this accolade.
Our approach is detailed in our first standalone sustainability report, but we comment here specifically on the natural, human and social and relationship resources.
We are committed to managing our natural resources efficiently and responsibly. The key challenges at present are the cost and security of supply for water and electricity. While our new developments meet world-class standards of environmental efficiency, managing water and electricity consumption in our older assets is more challenging. Where practical, we have retrofitted lighting, air-conditioning and water systems to optimise re-use and recycling. This is an ongoing process that requires careful attention to balancing the trade-offs between capitals, particularly the natural and financial capitals, but we are committed to the process as a responsible corporate citizen.
We consider Waterfall as a natural resource, and we are concentrating on protecting its ecosystems as we develop the city and surrounding areas. In terms of our buildings, because we control the design and construction, we can guarantee the standards of quality and efficiency throughout their life cycles. By integrating design and construction with asset management criteria, we deliver smarter, more efficient buildings that minimise environmental impacts and lower operating costs.
Environmental sustainability is both an ethical responsibility and good business. We therefore take a long-term view on our potential impacts - negative and positive - in all project design and planning by minimising resource consumption, introducing alternatives such as solar power, and maximising re-use and recycling.
To illustrate this approach in action, 20.8% of our South African portfolio is green-certified. Certification is underway for the Mall of Africa. Although green-rated buildings may cost more to develop initially, their users and broader society benefit across the life cycle.
We believe a motivating and collaborative culture will naturally attract the right people. We are making good progress in aligning our corporate culture to ensure we attract and retain the people we need.
We understand that more needs to be done to build a sustainable base of skills, and we are committed to this goal by developing the full potential of every person and rewarding them appropriately. To retain staff and create an owner-manager culture, we began issuing share awards to all employees in 2017. This was repeated in October 2018 and 2019.
Equally, we view a diverse workforce as a goal in itself, beyond compliance. Given that diversity has been proven to stimulate creativity and support balanced decisions, building a representative workforce is a key performance indicator for executive management.
Our ambition to be South Africa's premier property company depends on attracting the best talent from all parts of society to be part of the motivating culture our leadership is creating. Our performance management and reward systems are therefore aligned with our strategic objectives, enabling the board to proactively drive strategy implementation and performance. Our remuneration policy and implementation plan are annually presented to shareholders for an advisory vote. Changes detailed in the 2019 remuneration report included in the sustainability report from page 60 reflect valuable shareholder input.
Our stakeholders are a cornerstone of our business. As detailed in key relationships, each group contributes in different ways to our success, and has different requirements. How we anticipate and respond to these requirements contributes as much to our sustainability as our financial results.
We continue to invest in our local communities through the corporate social investment initiatives of our individual assets. Given the state of the South African economy, the most pressing need identified by these communities is employment. In response, we are helping to create jobs by providing training and funding through the Attacq Foundation, detailed in our sustainability report. We continue to engage with these stakeholders to determine real issues and develop appropriate solutions.
Attacq has a level 3 B-BBEE rating under the new property sector charter and we are focused on improving this performance.
In addition to statutory requirements imposed on a REIT, as a responsible company, we have adopted voluntary standards to further benefit our stakeholders -particularly our people, our communities and our tenants – as detailed under the relevant resources of our sustainability report.
The board's primary responsibility is strategy and ensuring that management delivers on the strategic objectives of sustainable growth in distributable income and capital for shareholders. The board included a minimum interest-cover ratio, Waterfall bulk roll-out and long-term transformation targets for management (see our strategy). Accordingly, we continue to focus on protecting our shareholders' investments while creating lasting value for all stakeholders.
In achieving these multidimensional goals, we need to find the right balance between managing factors outside our control, such as the poor performance of the local economy, and factors we can control, like optimising our balance sheet.
We are strategically focused for sustainable growth because we are actively involved in both property management and property development. Combined with our thorough understanding of asset management, this will serve us well for the long term.
Attacq has collective strengths: a quality portfolio of assets, an unrivalled development pipeline, expert management team and a strategy focused on delivering sustainable income and capital growth. In addition, competitive remuneration structures attract and retain skilled professionals focused on performance, while corporate policies align the interests of management and shareholders.
Our strategy includes owning and controlling a long-term development pipeline at Waterfall. This pipeline, split between Waterfall City and Waterfall Logistics Hub, creates the platform for above-market average growth in distributable earnings and capital.
Since listing on the JSE six years ago, we have completed 45 developments, including the Mall of Africa, adding over 526 000m2 of gross lettable area to our portfolio.
As a REIT, our focus has shifted from only capital growth to cash yields to support the dividends and dividend growth. To compete more effectively with our REIT peers, we need to improve our income yield and interest-cover ratio by increasing net rental income and reducing debt. We have made excellent progress by increasing distributable earnings per share by 17.0% in the last year and improving our interest-cover ratio from 1.10 times in 2017 to 1.85 times in the review period. We are targeting a minimum 2.0 times ratio in the medium term by recycling capital after exiting investments and reducing debt with the proceeds.
South Africa's phase of low economic growth is constraining consumer spend and corporate expansion, translating into weak property fundamentals and headwinds for our sector. Accordingly, we are paying close attention to the key metrics of vacancies, arrears and trading densities.
We are targeting distribution growth of 8.0% to 10.0%, or 88.0 to 90.0 cents per share, for the next financial year.
This guidance is based on the following assumptions:
The prospects have not been reviewed or reported on by our auditors.
In a difficult market, our people are proving their commitment and we are most grateful for their contributions. We also value the input and support of our other stakeholders, which underpins our continued growth.
Our board members are a valuable source of ongoing counsel and expert input. We thank all our directors for their contributions.
23 October 2019
Chief executive officer