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Feb 25

Redefine bulks up balance sheet

JSE-listed diversified real estate investment trust (REIT) Redefine Properties’ results came just days after it gave KPMG the old heave-ho, joining an already-long list of companies that have cut ties with the beleaguered auditing firm.

“We felt KPMG did not go deep enough in working through corrective measures,” explains Redefine CEO, Andrew Konig.

Posting a 5.5% increase in distribution to 47.30c/share for the interim period to 28 February and maintaining that for the full financial year might appear lacklustre, but not unexpected given the continued tough economic climate.

“It’s a good set of results,” says Naeem Tilly, investment analyst at Catalyst Fund Managers, adding that the impact of improved confidence following the appointment of Cyril Ramaphosa as president will only come through in property stock numbers in a year or so.

Still, Redefine lowered its loan-to-value (LTV) level from 41.1% to 40.1%, grew distributable income by 8.6% to R2.5bn and improved overall occupancy to 95.8%. Net asset value (NAV) also grew by 31c to R10.54.

The REIT expanded its assets by R1.9bn taking total assets to R93.4bn, with the R85.6bn property platform remaining biased towards retail at 41% of sectoral value spread. Offices comprise 37%, industrial 14%, student accommodation and specialised assets 3% and hotels 2%. Disposal of non-core assets amounted to R2.6bn, bolstering liquidity.

On the local front, which accounts for 80% of its portfolio value, lease renewals have been under pressure but despite this the REIT managed a 94.7% retention rate. But it comes at the cost of rental renewal growth.

“Cash flow in this environment is very important. We would rather hold on to a tenant than hold out for the best possible rental,” says Konig.

Retail vacancies, up from 3.3% in the previous period to 4.4%, are increasing in large shopping centres, says Redefine. And there is pushback on parking costs, a high revenue generator, causing Redefine to implement a R5 fixed fee for longer hours, a measure already introduced at top retail asset, Centurion Mall, in Gauteng.

Diversified income streams come from Redefine’s interests in alternative asset classes like its 53.6% share in student accommodation provider Respublica and Park Central residential development in Rosebank.

With a strategy to provide 10 000 student beds by 2019, the joint venture with Respublica currently boasts a 6 541-bed capacity.

Student accommodation, while still profitable, is not as lucrative as initially anticipated, says Konig. He attributes this to the #FeesMustFall campaign that he says has put pressure on rates. Still, they aim to continue providing a quality offering ranging between R4?500/month to R9?000/month rather than grow bed numbers with a lower quality and cost offering.

Park Central is Redefine’s first and only venture into the residential space, the consequence of an office building conversion. But plans for the exclusive development have been scaled back. “We did tweak the offering to get the price down,” Konig tells finweek.

Ditching four storeys and reconfiguring rooms brings the Rosebank high-rise down to 20 storeys and reduces the number of planned units from 445 to 150. And certain offerings like central air conditioning, which were cited at launch in 2015, have been scrapped.

Still, only 39% by value has been sold, the first of which were the lower-priced units. Park Central’s entry price point currently sits at R2.1m.

Building Park Central to sell represents non-recurring income, something investors don’t particularly like.

“Investors don’t like once-off income streams. They want to buy into the rental income business,” Tilly tells finweek. “Historically, Redefine has had these lumpy sources of income, but reducing non-recurring income is a focal point and that’s encouraging. This will improve the quality of earnings and unlock a lot of value for the company.”

Redefine’s offshore exposure sits at 20% with a presence in the UK, Australia, Poland and the rest of Africa. The international footprint contributes 25% to distributable income.

Disposing of its non-core Africa interests, inherited via the Pivotal Property Fund buyout, remains on the agenda. Redefine is also downscaling its Australian presence.

“Reducing exposure to Australia is not necessarily a macro call, but rather about selling assets where good value could be realised,” says Tilly. “The capital will be used to strengthen Redefine’s balance sheet. It’s a good move and a step towards reducing LTV to the industry norm of 30% to 35%.”

Redefine has a 36.2% interest in Poland-focused Echo Polska Properties (EPP) and is continuing to bolster its Polish footprint.

During the period Redefine acquired a 25% stake in Chariot Top Group for R907.9m, giving it direct access to a retail portfolio of 28 assets across Poland, 12 of them to be on-sold to EPP. Redefine anticipates a pre-tax return on equity in the region of 15%.

“It’s about allocating capital into a much faster-growing economy,” says Tilly.

Yet Poland is also introducing a ban on Sunday trading and wants to impose a supermarket tax, policies that are neither pro-retail nor pro-business.

Redefine though has the advantage of EPP’s knowledge, says Tilly. “EPP has been in Eastern Europe a long time. They understand the market and how to navigate around those issues.”

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