Commentary

NATURE OF OPERATIONS

Vukile is a high-quality, low-risk, retail-focused Real Estate Investment Trust (REIT), operating in Southern Africa and Spain. Our results are reflective of a strong operational focus and a hands-on, proactive approach to property asset management, as well as balance sheet risk management.

Total assets amount to R36.0 billion at 31 March 2021 (31 March 2020: R40.1 billion). Direct property investments account for R32.8 billion at 31 March 2021 (31 March 2020: R35.3 billion). Following the sale of Vukile's interest in Atlantic Leaf, total indirect property holdings (listed property investments) were R0.8 billion at 31 March 2021 (31 March 2020: R2.1 billion).

FINANCIAL PERFORMANCE

Executive summary

For the year ended 31 March 2021, Vukile sharpened its focus on robust balance sheet management and strategic initiatives, while at the same successfully navigating the challenges presented by the COVID-19 pandemic. Despite volatile market conditions and uncertainty brought about by the pandemic, the portfolio performed remarkably well to limit the short-term impacts of COVID-19. Our asset management interventions and strategic initiatives allowed us to withstand multiple unforeseen shocks to the Southern African and Spanish economies.

With a potentially powerful economic restart underway, Vukile continues to focus on sustainable earnings through a simple and transparent corporate structure that emphasises long-term results. Vukile continues to draw on its prudent financial management and capital markets expertise to preserve financial flexibility and bolster liquidity. Vukile remains focused on its core retail strategy, with a view of creating enduring, sustainable value for all stakeholders.

Our ongoing investment in human capital has been rewarded, with Vukile being awarded Platinum recognition in the Deloitte Best Company to Work For™ survey in South Africa. Similarly, Castellana was awarded the Great Place to Work™ certification in Spain.

Please note: the calculation of all ratios referred to in this document is consistent with prior years. The SA REIT ratios, together with comparatives, are included in a separate section, following the condensed financial statements.

The following significant events and transactions took place during the year ended 31 March 2021:

  • In line with Vukile's strategy of disposing of non-core assets, Vukile sold the following properties:
    • Welgedacht Van Riebeeckshof Shopping Centre on 1 September 2020 for R80 million
    • Pinetown Richmond Industrial Park on 19 March 2021 for R37 million
    • Sandton Linbro 7 On Mastiff Business Park on 29 March 2021 for R114 million
  • A further R49 million in property sales after year-end and awaiting transfer of assets totalling R513 million subject only to Competition Commission approval
  • During August 2020, Vukile disposed of its shares in Atlantic Leaf (R1.1 billion), also in line with Vukile's strategy of exiting its non-core investments
  • In Southern Africa, rental relief of c.R141 million was granted to tenants
  • In Spain, rental relief of c.€18.8 million was granted to tenants
  • Vukile acquired a 31% interest in Fetch Analytics, an entity providing insights into shopper behaviour through artificial intelligence and geolocation technology
  • Vukile acquired a 25.1% interest in Diversified Real Estate Asset Management S.L. (DREAM), a Spanish property asset management business founded by Lee Morze, Vukile's partner in the founding of Castellana
  • Vukile has repaid/converted R2.1 billion of foreign-denominated debt into Rand debt, with a further €137.6 million (R2.4 billion equivalent) of Vukile EUR debt being repaid or converted into ZAR facilities after year-end, such that the total Vukile EUR debt has reduced to €26.5 million, a 90% reduction from total Vukile EUR debt of €255 million at 31 March 2020
  • Vukile extended the MEREV put option (after year-end) for three years. Rand Merchant Bank (RMB) will provide R1.0 billion of new facilities to Vukile, which allows Vukile to acquire a portion of MEREV's Castellana shares, if desired.

DIVIDEND

The board approved a final dividend of 101.04391 cents per share for the year ended 31 March 2021. The total dividend is R966.2 million. A dividend declaration announcement in respect of the dividend, containing information relating to the salient dates and tax treatment of the dividend will be released separately on SENS.

Calculation of distributable earnings

31 March
2021
Rm
 
31 March
2020
Rm 
Variance
Property revenue  2 242  2 635  (14.9)
Property expenses (net of recoveries) (379) (318) 19.2 
Net profit from property operations  1 863  2 317  (19.6)
Corporate administration expenses  (286) (279) 2.4 
Investment and other income  318  422  (24.8)
Operating profit before finance costs  1 895  2 460  (23.0)
Finance costs  (707) (615) 14.9 
Profit before equity-accounted income  1 188  1 845  (35.7)
Share of income from associate and joint venture  17  127  (86.0)
Profit before taxation  1 205  1 972  (38.9)
Taxation  (40) (40) 0.4 
Profit for the year  1 165  1 932  (39.7)
Net profit attributable to non-controlling interests  (49) (130) (62.4)
Attributable to Vukile group  1 116  1 802  (38.1)
Non-IFRS* adjustments  104  (11)
   Antecedent dividend  – 
   Accrued dividends  98  (19)
   Non-cash impact of IFRS 16 – Leases 
Available for distribution  1 220  1 791  (31.9)
Number of shares in issue at year-end  956 226 628  956 226 628 
* International Financial Reporting Standards (IFRS)

Revenue and net income from direct property portfolio

Geographical segment  Revenue(i)
31 March  
2021  
Rm
  
Revenue(i)
31 March  
2020  
Rm  
% change  Net property
income
31 March
2021
Rm
Net property
income
31 March
2020
Rm 
% change 
Southern Africa  2 099   2 136    (2) 1 228  1 330  (8)
Spain  1 018   1 310    (22) 635  987  (36)
Total  3 117   3 446    (10) 1 863  2 317  (20)
Split percentage 
Southern Africa  67.3   62.0    65.9  57.4 
Spain  32.7   38.0    34.1  42.6 
(i) Excludes straight-lining.

The majority of the impact of COVID-19 on operations and rental income (in both Southern Africa and Spain) was felt in the year ended 31 March 2021. Net property income decreased by 19.6% from R2.3 billion to R1.9 billion, largely due to rental relief provided to tenants in Southern Africa and Spain during the lockdown period in both portfolios. Portfolio-specific measures, operational results and trading are discussed more fully in the relevant Southern African and Spanish portfolio reviews hereafter.

Group investment and other income

31 March
2021
Rm 
31 March
2020
Rm 
Movement 
Rm 
Investment and other income  85.5  177.3  (91.8) (51.8)
Interest income  36.6  60.1  (23.5) (39.1)
Net interest received on cross-currency interest rate swaps (CCIRS) (after deducting finance costs) 195.6  185.0  10.6  5.7 
Total  317.7  422.4  (104.7) (24.8)

Further commentary relating to investment income is provided under "listed investments". The CCIRS ratio to total international investments (on a consolidated basis) has increased to 37.7% (31 March 2020: 32.4%). The primary reason for the increase in the CCIRS ratio was as a result of the sale of Atlantic Leaf. No new CCIRS were entered into during the period. Vukile limits CCIRS to 45% of the total value of international investments. At 31 March 2021, the CCIRS nominal value was €182.5 million. €117 million (64%) of this amount will be settled on 14 June 2021. The mark-to-market (MtM) settlement amount has been fixed (hedged) and will be net settled for R235 million.

Listed investments

31 March 2021 31 March 2020
Entity Carrying
value
Rm
Number
of shares
held
% held Carrying
value
Rm
% held
Fairvest 538.1 270 394 812 26.6 338.0 26.6
Arrowhead 309.0 11.0 245.9 11.3
   Arrowhead – A shares 39.9
   Arrowhead – B shares 309.0 114 438 564 206.0
Atlantic Leaf 1 518.2 34.9
Total 847.1 2 102.1
Fairvest – 26.6% shareholding

Fairvest Properties Limited (Fairvest) is a Johannesburg Stock Exchange (JSE)-listed REIT with a retail-focused portfolio, located primarily in rural and non-metropolitan areas of South Africa, including convenience and community centres. The carrying value of the investment in Fairvest increased by R200 million over the period, with its share price increasing from R1.25 at 31 March 2020 to R1.99 at 31 March 2021. Dividends received from Fairvest for the year to 31 March 2021 were R57 million (31 March 2020: R59 million). Dividends from Fairvest, included in distributable earnings for the year to 31 March 2021 were R56 million (31 March 2020: R61 million).

Vukile is supportive of the recent announcements by Fairvest relating to a potential Fairvest offer to Arrowhead B shareholders. Vukile supports the view that investors generally favour larger, more liquid REITs and has confidence in Fairvest's ability to unlock value operationally, within its traditional low-income retail focus, as well as from other sub-classes of investment property.

Arrowhead – 11.0% shareholding

Arrowhead Properties Limited (Arrowhead) is a JSE-listed REIT with a dual share structure, comprising A and B shares. During the year, Vukile disposed of its A shares, in line with its strategy to recycle non-core assets. The carrying value of the remaining investment in Arrowhead increased by R103 million over the year, with the price of B shares increasing from R1.80 at 31 March 2020 to R2.70 at 31 March 2021. Dividends received from Arrowhead for the year to 31 March 2021 were R38 million (2020: R85 million). Dividends from Arrowhead, included in distributable earnings for the year to 31 March 2021 were R34 million (31 March 2020: R74 million).

Atlantic Leaf (sold)

Atlantic Leaf Properties (Atlantic Leaf) is a UK property company focusing on industrial and warehouse distribution centres in the UK. During the year, Vukile disposed of its shares in Atlantic Leaf for R1.1 billion. The proceeds from the transaction were applied to the reduction of debt and provide further strength and optionality to the Vukile balance sheet. The disposal was in line with Vukile's strategy of exiting its non-core investments. Dividends from Atlantic Leaf for the year to 31 March 2021 were R54 million (net of dividend withholding tax) (31 March 2020: R102 million). Dividends from Atlantic Leaf, included in distributable earnings for the year to 31 March 2021 were R51 million (31 March 2020: R104 million).

Group corporate expenditure

31 March 
2021 
Rm
 
31 March 
2020 
Rm 
Variance 
Rm 
Variance 
Southern Africa  153.5  160.8  7.3  4.5 
Spain  132.3  118.2  (14.1) (11.9)
Group total  285.8  279.0  (6.8) (2.4)

The net increase in corporate costs in Spain was primarily due to exchange rate movements. Spain's corporate costs (in Euro) remained largely unchanged. The primary factors giving rise to savings in corporate costs in Southern Africa were as follows:

  • Cost savings of R4.1 million, in part due to reduced local and international travel, and due to employees working remotely during the COVID-19 lockdown
  • Rent expense reduced by R3.8 million, following the purchase of the Vukile head office building in Johannesburg.

These cost savings were partly offset by:

  • R2.4 million spent on COVID-19 relief and related costs, for initiatives such as food programmes and community projects.

Corporate expenditure equates to 0.79% of total assets (31 March 2020: 0.70%), being 0.84% attributable to Southern Africa (31 March 2020: 0.84%) and 0.75% attributable to Spain (31 March 2020: 0.56%).

Group cash flow

The major items reflected in the composition of cash generated and utilised during the period under review are set out below:

2021 
Rm
 
2020 
Rm 
Cash from operating activities 1 178  2 417 
Dividends paid  (556) (1 867)
Net finance costs paid  (359) (147)
Increase in borrowings  2 647  3 102 
Borrowings repaid  (4 173) (448)
Net proceeds from sale of interest in Atlantic Leaf  1 103  – 
Disposal of investment property  211  56 
Acquisitions/improvements to investment property  (665) (2 920)
Other cash movements  (17) 112 
Net (decrease)/increase in cash and cash equivalents(1) (631) 305 
(1) Excluding foreign currency movements of R75 million (2020: R117 million).

Net asset value (per share)

The net asset value (NAV) of the group decreased by 1.0% from R18.34 per share to R18.16 per share at 31 March 2021, as set out in the table below.

Rand 
per share 
NAV 1 April 2020  18.34 
   Net property income  1.88 
   Additions to investment property (net of disposals) 0.47 
   Decrease in borrowings  1.60 
   Disposal of investments in listed property securities  (1.24)
   Change in fair value of investment property  (0.96)
   Dividends paid  (0.48)
   Foreign currency and other movements  (1.45)
NAV 31 March 2021  18.16 

Vukile's share price of R8.65 per share at 31 March 2021 represents a 52.4% discount to the NAV per share of R18.16.

Share trading and liquidity

During the year, 743.5 million Vukile shares traded, equating to approximately 62 million shares per month. The shares traded represent 77.8% of shares in issue, demonstrating the high liquidity of Vukile's shares in the market.

Treasury management

Balance sheet and treasury risk management remains one of Vukile's key focus areas. At 31 March 2021, consolidated group LTV net of cash was 42.8%, which should be viewed in the context of a healthy group ICR of 3.3 times, after providing significant rental relief given over the period. Vukile's debt metrics are all within covenant levels at a group (consolidated) and subsidiary level. The 3.3% reduction in LTV to 42.8% (from 46.1% at 31 March 2020) can largely be attributed to debt reduction (facilitated by asset sales), ZAR strength and an improvement in listed investment share prices. The reduction in LTV was marginally offset by downward valuation movements in Castellana.

Funding, debt and treasury metrics are monitored on an ongoing basis. Extensive forecasting, stress testing and modelling of various scenarios, including sensitivities arising from the COVID-19 pandemic, are also undertaken.

Stress testing of earnings (after taking into account the impact of the COVID-19 pandemic) indicates that the portfolio would need to undergo a further 40% reduction in group EBITDA before reaching the two times bank group interest cover covenant level. Vukile and Castellana continue to benefit from very strong relationships with their diversified funding providers and have made significant progress, by concluding agreements to extend expiring debt.

Stress testing of LTV indicates that the Southern African portfolio would need to undergo a further 24% reduction in asset value to reach a 50% Southern African LTV ratio and the Spanish portfolio would need to undergo a further 27% reduction in asset value to reach a 65% Spanish LTV ratio.

Vukile has extended the MEREV put option for three years (after year-end). Key terms are as follows:

  • New maturity date 31 July 2024 (three-year extension)
  • No adjustment to strike price (€6.50)
  • Vukile to guarantee a 6% yield on Castellana's dividend
  • RMB will provide R1.0 billion of new facilities to Vukile, which allows Vukile to acquire a portion of MEREV's Castellana shares, if desired.
Group borrowings summary

The group's funding strategy is to optimise funding costs while minimising refinance risk. Total debt at 31 March 2021 amounted to R15.4 billion (31 March 2020: R18.5 billion). A summary of funding by currency is provided below:

Funding breakdown Number of
funders
Rm
Foreign Spanish funders (EUR) 6 8 705 Secured against Castellana's balance sheet with
no recourse to Vukile
South African bank funders (EUR) 4 2 843 Partly secured against Vukile's South African
balance sheet
South African bank funders (ZAR) 5 1 927
Domestic medium-term note (DMTN) programme (ZAR) 1 929
Grand total 15 404
Sources of funding

Vukile's debt funding is well diversified across a number of funders, in line with the group's strategy to manage concentration and refinance risk.

Group debt and hedging exposure per bank (ZAR) Debt(1)
Rm
   
Debt 
exposure 
per bank 
%
 
Hedging and   
fixed debt(2)
Rm
   
Aareal(3)  5 640    36.6  5 166   
Absa  2 215    14.4  2 123   
DMTN - corporate bonds  1 929    12.5  –   
Caixabank(3)  1 403    9.1  1 317   
Banco Santander(3)  1 069    6.9  1 017   
Investec  984    6.4  730   
Standard Bank  824    5.4  306   
RMB  400    2.6  43   
Nedbank  346    2.2  985   
Liberbank(3)  260    1.7  –   
Banco Popular(3)  195    1.3  195   
Pichincha(3)  139    0.9  –   
Grand total  15 404    100.0  11 882   
(1) Foreign currency-denominated debt is converted at a EUR/ZAR spot rate of R17.32 at 31 March 2021. All amounts are nominal debt exposure and exclude amortised transaction costs and accrued interest.
(2) Hedging exposure is represented by exposure per banking relationship.
(3) Group exposure includes Castellana debt of €503 million (R8.705 billion equivalent), and swaps of €146.0 million (R2.528 billion equivalent).

Vukile group loan and swap expiry profile at 31 March 2021 

As part of the group's funding strategy, Vukile targets no more than 25% of total group debt expiring in any single financial year.

2022 2023 2024 2025 2026 2027
and
beyond
Total
Loan expiry profile including access facility (%) 16.9 22.9 18.1 3.4 36.7 2.0 100.0
Term loan expiry profile (Rm) 2 604 3 347 2 783 517 5 660 315 15 226
Access facility expiry profile (Rm) 178 178
Hedging (swap and fixed debt) profile (Rm) 932 818 7 728 1 205 649 550 11 882

More than 25% of debt will mature in 2026, however, it is Vukile's intention to re-new debt facilities at least 12 months prior to their maturities.

A summary of group debt ratios at 31 March 2021 is provided below:

31 March 2021 31 March 2020
Group Southern
Africa
Spain Group Southern
Africa
Spain
Total debt (excluding access facilities) (Rm) 15 226 6 521 8 705 17 720 7 992 9 728
Hedged portion (interest rate swaps and fixed debt) (Rm) 11 882 4 187 7 695 14 409 5 656 8 753
Interest-bearing debt fixed/hedged (%) 78.0 64.2 88.4 81.3 70.8 90.0
Hedged (swaps and fixed debt) maturity profile (years) 2.6 3.3 2.2 3.4 3.8 3.2
LTV ratio (net of cash)(1) (%) 42.8 37.9 47.6 46.1 48.1 44.4
LTV covenant level (%) 50 50 65 50 50 65
ICR(2) 3.3 times 4.7 times 2.1 times 5.8 times 7.7 times 4.2 times
ICR covenant level 2.0 times 2.0 times 1.15 times 2.0 times 2.0 times 1.15 times
(1) LTV ratio (net of cash) is calculated as a ratio of nominal interest-bearing debt less cash and cash equivalents (excluding tenant deposits and restricted cash) divided by the sum of: (i) the amount of the most recent directors' valuation (external valuation in the case of the Spanish portfolio) of all the direct property portfolio on a consolidated basis; and (ii) the market value of listed investments.
(2) ICR is based on operating profit excluding straight-line lease income plus dividends from equity-accounted investments and listed securities income (EBITDA) divided by finance costs, after deducting all finance income (net interest cost) over the respective period.

Group finance costs

The group's average cost of finance (including amortisation of capitalised raising fees) for the year ended 31 March 2021 was 3.9% (31 March 2020: 4.0%).

Interest-bearing debt (excluding access facilities) is 78.0% hedged with a 2.6 year hedged maturity profile (31 March 2020: 81.3% with a 3.4-year hedge maturity profile).

The average cost of finance reduced for the year to 31 March 2021, in part due to the significant reduction in ZAR base rates (a 125bps reduction in the three-month JIBAR since 31 March 2020). Vukile has repaid/converted R2.1 billion of foreign-denominated debt into Rand debt, with a further €137.6 million (R2.4 billion equivalent) of Vukile EUR debt being repaid or converted into ZAR facilities after year-end, such that the total Vukile EUR debt has reduced to €26.5 million, a 90% reduction from total Vukile EUR debt of €255 million at 31 March 2020. Finance costs by currency, using the historical weighted average cost of debt, is indicated below:

FY21
historical
cost
of debt
%
Debt at
31 March
2021
Rm
FY20
historical
cost
of debt
%
Debt at
31 March
2020
Rm
ZAR 8.1 3 856 9.3 3 450
EUR 2.6 11 548 2.5 14 754
GBP 3.6 318
Total 3.9 15 404 4.0 18 522

Undrawn facilities

Undrawn facilities at 31 March 2021 amount to R1.9 billion (31 March 2020: R1.1 billion), which increased by a further R1.6bn to R3.5bn after year-end. The R3.5bn in undrawn facilities includes a new R1bn facility which can be utilised by Vukile to purchase a portion of MEREV's Castellana shares (if desired). This significantly underlies Vukile's strong liquidity position, with sufficient undrawn facilities to repay debt capital markets maturities in FY22 (R535m), if required.

Unencumbered assets 31 March
2021
Rm
30 March
2020
Rm
Property assets (external valuation) 3 795 4 177
Listed shares 2 811 4 997
Unencumbered assets 6 606 9 174
Unsecured debt 2 194 2 080
Unsecured debt to unencumbered assets ratio (%) 33.2 22.7

The reduction in unencumbered assets is primarily as a result of the sale of Atlantic Leaf (R1.1 billion), Van Riebeeckshof SC (R80 million), Pinetown Richmond
(R36.5 million), Libro 7 on Mastiff (R114 million) and downward Castellana share price movements.

Movement in group debt

During the year, total group debt decreased by R3.1 billion. The most significant movements in debt were as follows:

Nominal 
debt drawn/ 
(repaid) 
Rm 
Foreign 
exchange 
movements 
Rm
 
Net 
Rm
 
Vukile ZAR DMTN debt  (578) –  (578)
Vukile ZAR bank debt  984  –  984 
Vukile GBP debt  (309) (9) (318)
Vukile EUR debt  (1 768) (415) (2 183)
Castellana EUR debt  158  (1 180) (1 022)
Grand total  (1 513) (1 604) (3 117)

During the year ended 31 March 2021, Vukile repaid R578 million of secured corporate notes, comprising VKE07 (R200 million) and VKE09 (R378 million), in June and July 2020, respectively. After year-end a further VKE12 (R150 million) of unsecured corporate notes were repaid (May 2021). No ZAR interest rate swaps were rebalanced/extended. €66.5 million of EUR interest rate swaps were terminated at a once-off cost of R4.5 million, and GBP14.35 million of GBP interest rate swaps were terminated at a once-off cost of R4.3 million. The group has complied with all bank and DMTN covenants.

Group foreign exchange currency hedges

Vukile has adopted a strategy of hedging at least 75% of its foreign dividend exposure (in aggregate) over a three to five-year period, in line with anticipated dates of dividend receipts, to minimise adverse foreign exchange fluctuations and to provide stable, predictable income streams for investors.

At 31 March 2021, Vukile EUR income was over-hedged as a result of Castellana's dividend forecasts and payout policy being revised because of COVID-19. After year-end, the over-hedged position in forward exchange contracts (FECs) was reduced, resulting in a cash inflow of R102 million. In line with historical treatment of these types of cash flows, the inflow from unwinding the FECs will not be included in distributable earnings. Assuming that in future years Castellana's dividend will be based on 80% of Spanish Generally Accepted Accounting Practices (the minimum dividend required to retain Spanish REIT status), 89% of Castellana forecast dividends are hedged over the next five years.

GBP net income exposure

Vukile disposed of all its Atlantic Leaf shares for a net consideration (after the settlement of transaction hedges) of c. R1.1 billion. The proceeds from the sale were primarily used to repay GBP debt.

Cross-currency interest rate swaps (CCIRS)

At 31 March 2021, the following CCIRS were in place:

EUR 
nominal 
€m
 
ZAR 
nominal 
Rm
 
EUR/ZAR 
initial rate
 
EUR fixed
rate over
term
%
 
ZAR
average
rate over
term
%
 
Maturity  Mark-to- 
market 
Rm
 
Nedbank CCIRS June 2018  93.2  1 346  14.4446  1.90  8.81  14 June 2021  (250)
Nedbank CCIRS June 2018  23.8  361  15.1420  1.29  8.81  14 June 2021  (46)
Absa CCIRS July 2018  40.0  630  15.7465  3.70  11.88  13 June 2022  (25)
Investec CCIRS July 2018  25.5  401  15.7400  3.72  11.88  13 June 2022  (16)
Total  182.5  2 738  (337)

The board limits CCIRS to 45% of the total value of offshore investments. At 31 March 2021, CCIRS were 37.7% of total offshore investments on a consolidated basis. No new CCIRS were entered into during the period. The MtM of CCIRS at 31 March 2021 was -R337 million. In addition, on initiation of the Nedbank contracts, Vukile placed R100 million cash on fixed deposit in order to mitigate against MtM losses on maturity of the CCIRS. The net settlement amount of the CCIRS will be -R235 million on the maturity date in June 2021(compared with an MtM of -R575 million at 31 March 2020 for the same CCIRS contracts).

Response to COVID-19

At the onset of the COVID-19 crisis, Vukile conducted extensive stress testing across its business in order to understand the potential impact on its solvency and liquidity. Vukile engaged with all its bank funders both in South Africa and Spain to ensure clear lines of communication, which assisted with a smooth navigation through the crisis.

76% of debt maturing in FY22 has been repaid or extended, this includes R0.9 billion Vukile debt and €44 million Castellana debt which was repaid or extended after year-end.

Credit rating

Global Credit Ratings Co. (GCR) reviewed Vukile's credit rating in September 2020 as part of their annual review, and all of Vukile's ratings remained unchanged. GCR affirmed the national scale issuer rating of AA-(ZA) and A1+(ZA), for the long and short term respectively, with a stable outlook. Concurrently, the ratings assigned to outstanding Senior Secured Group 1 Notes issued by Vukile has remained unchanged and been affirmed at AAA(ZA)(EL).

PORTFOLIO REVIEW – SOUTHERN AFRICA

The full year results for the Southern African portfolio were delivered entirely in the unprecedented COVID-19 environment. The overarching goal and approach throughout this crisis has been to ensure the safety of our stakeholders while fostering an environment of constructive discourse with a shared value ethos, resulting in a sustainable value chain over this incredibly tough period.

The Southern African total direct property portfolio at 31 March 2021 consisted of 56 properties with a total value of R15.6 billion, and gross lettable area (GLA) of 987 768m², with an average value of R278 million per property.

The Southern African retail portfolio, which accounts for 95% of the value of the assets, was valued at R14.7 billion and consists of 45 properties with an average value of R327 million. In total, 84% of retail space is let to national tenants. Very pleasingly, vacancies were limited to 3.2% versus the 2.9% reported in March 2020.

Operating environment

Portfolio overview

The Southern African retail portfolio has held up remarkably well over an incredibly tough year. The foot count of our malls is trending towards pre-COVID-19 levels, with the rural portfolio and township shopping centres leading the recovery. The operational metrics of the portfolio although, under pressure, continue to produce sustained value for our stakeholders despite the challenging environment. The primary pillars, which have ensured that the like-for-like net operating income of the stable portfolio is only 9.8% down when compared to FY20, have been our nodally dominant portfolio composition, and the endeavour and application exhibited by our talented team which, across the entire value chain, has put in a significant effort to ensure that our malls were productive and safe spaces for our shoppers to visit. The decrease in like-for-like net operating income is primarily attributable to the COVID-19 impact of rental concessions, delayed transactions, increased cleaning and security expenses and bad debt. Excluding the COVID-19 impact, the like-for-like growth would be a pleasing 3.9%.

We have been resolute in executing our inwardly focused operational efficiency strategy and gearing our team for the future of retail in how we now manage our portfolio. As usually measured, the trading density of the portfolio grew by 1.7% on a 24-month like-for-like basis. The value centres and rural portfolio showed growth of 16.4% and 6.5% respectively, while the township portfolio remained flat and urban portfolio declined by 6.3%. Groceries, food specialty, pharmacies, electronics, and home furnishings/décor showed growth during the period under review, with fashion, fast foods and restaurants showing negative growth. The portfolio has seen significant improvement in trading metrics over the past six months, with most categories trending upwards.

Retail vacancies have held firm under a very difficult trading environment, increasing by only 30bps from 2.9% to 3.2%. Although the movement is not material, there has been vibrant and significant letting activity over this period. In total 12 601m² of vacant space (1.4% of total retail GLA) has been let, when contrasted with 13 628m² worth of tenants who vacated. An important observation is that, out of the total number of tenants which have vacated over this period, c.60% of them have been small, medium and micro enterprises (SMMEs).

Looking forward to the next 6 to 12 months, we anticipate an environment of continued tough trading conditions, particularly for discretionary goods. We remain cautiously optimistic of further improvement in the prospective trade of our rural, township and value portfolio, but remain guarded pending progress of the national vaccination programme. Structural fiscal reforms, which will directly impact the macro-economic drivers and job absorption in our market segment, remain a significant concern. We will also actively monitor the upcoming local government elections, particularly in municipalities where water and energy supply remain a significant challenge.

Our sustained operating metrics, focus on continuous operational improvements, symbiotic tenant relationships and forward-looking investment into sustainable energy and customer-centric technology will be the bedrock off which we will navigate the uncertain COVID-19 and macro-economic environment, to position the business for ongoing and sustainable growth.

Operational highlights
  • Footfall trending towards pre-COVID-19 levels, with rural centres recovering to 104%. Commuter centres are slower to pick up, at 89% of prior year trends
  • Retail vacancies marginally up from 2.9% to 3.2% 
    • 13 malls fully let
    • 23 malls with vacancies less than 1 000m²
    • Rural vacancies decreased to 2.3%, the lowest in three years
  • Retail reversions have slowed from 1.1% in the prior period to negative 3.3% in the current period. However, it remains encouraging to note that out of the 354 leases renewed, 61% were positive, 13% flat, and only 26% were negative. An average lease term of 3.9 years with an average in-contract escalation of 6.5% has been attained on recent transactions
  • Strong rebound in rental collections following the lockdown; now sitting at 98% of billings
  • In-contract escalations declined marginally from 6.9% to 6.7%, but are still ahead of inflation
  • 90% retail tenant retention rate with the majority (60%) of vacated tenants falling in the SMME category
  • WALE down to 3.3 years from 3.7 years
  • Alternative income management strategy of opt-in database now increased to 3.7 million registered users, whose behaviour we can now actively track
    • Opens up advertising opportunities for tenants to effectively communicate directly with shoppers
    • Enables management to more accurately track shopper behaviour
  • All 25 Jet stores, as well as the five Edgars stores, have been absorbed by Foschini and Retailability respectively.
Operational efficiencies

Our inwardly focused operational strategy has yielded positive results. We have focused on low capital-intensive interventions that return sustainable savings into the future. Below are some of the positive outcomes:

  • 7.5% of the electricity is now generated through 16 PV projects. The goal of producing 8% of the portfolio's electricity will be achieved in FY22 by completing the PV project that is presently under construction
  • The integrated service delivery model for soft services was successfully implemented. The major thrust going forward is to maintain the model, continuously drive financial benefits, entrench best practice service delivery based on technology, ensure compliance and develop SMMEs
  • The integrated service delivery model also proved to be invaluable during the lockdown period. Precautionary action steps were seamlessly and coherently implemented involving only three service providers and web-enabled platforms.
Continuous investment in high-yielding PV projects
  • Total installed PV plant capacity to date is 12.3MW (16 PV plants installed)
  • New PV projects in progress at Gugulethu Square (837kWp), Bedworth Phase 2 (300kWp), Atlantis Phase 2 (500 kWp) and Ermelo Game (250kWp).
Continued energy management spend
  • Billing and metering optimisation through remote metering remains a key focus area. Bulk conversions resulting in lower municipal charges are in progress on two properties, resulting in annual savings of R1.4 million
  • Water outages in rural areas have been addressed by linking boreholes and water treatment plants to the centres providing 85 000kl (3 400 swimming pools) of water, resulting in annual savings of R1.4 million.
Footfall and turnover

Compared to the corresponding period in the prior year, footfall is trending towards pre-COVID-19 levels, with brisk recovery in rural areas and urban areas slower to recover.

  Footfall during and post-lockdown – compared to corresponding period in the prior year
Level 5 Level 4 Level 3 Level 2 Level 1 Adjusted lockdown levels
26 Mar 20
to
30 Apr 20
%
1 May 20
to
31 May 20
%
1 Jun 20
to
17 Aug 20
%
18 Aug 20
to
20 Sep 20
%
21 Sep 20
to
31 Oct 20
%
Festive
season
2020
%
Jan 21
%
Feb 21
%
Mar 21
%
Rural 46 68 81 86 90 86 93 104 104
Township 43 58 79 85 88 89 90 98 100
Urban 29 62 80 84 88 85 87 92 100
Commuter 16 41 66 71 78 85 69 72 89
Total portfolio 33 58 77 82 86 87 86 93 99

Annual turnover contracted by 3.7% during the previous 12 months compared to the preceding 12-month period. Turnover of groceries and pharmacies increased by 5.7% and 10.0% respectively. Restaurants, coffee shops, bottle stores and health and beauty showed substantial decline.

Movement in 
annual turnover 
Portfolio 
exposure based 
on turnover 
Total  (3.7) 100.0 
Grocery and food  4.8  43.8 
Fashion, department and home  (9.1) 37.5 
Other categories  (10.1) 18.7 
Grocery and food 
  Grocery/supermarket  5.7  33.7 
  Food  2.2  10.1 
Fashion, department and home 
  Fashion  (8.9) 24.9 
  Department stores  (19.2) 6.4 
  Home furnishings/art/antiques/décor  3.3  6.1 
Other categories 
  Pharmacies  10.0  5.5 
  Sporting/outdoor goods and wear  (10.2) 2.4 
  Bottle stores  (31.5) 1.8 
  Cell phones  1.0  1.8 
  Restaurants and coffee shops  (31.6) 1.3 
  Electronics  (2.7) 0.9 
  Accessories  (11.5) 0.8 
  Health and beauty  (22.9) 0.3 
  Other  (15.2) 4.0 

Annualised trading densities (annualised turnover per m2 of occupied space) increased by 1.7%, with groceries, food and pharmacies showing consistent growth prior to and during the pandemic.

  Rural
Township 
Urban 
Value 
Centre 
Commuter 
Total 
Total 6.5 0.0  (6.3) 16.4 (12.3) 1.7 
Grocery and food 8.3 2.9  1.3  20.0 (15.3) 6.4 
Fashion, department and home 5.1 (4.9) (9.1) 17.3 (11.0) (1.7)
Other 4.7 (2.4) (5.1) 4.6 (12.1) (1.3)

Annualised
trading density
growth
%
Total 1.7
Pharmacies 10.0
Home furnishings/art/antiques/décor 14.6
Cell phones 10.8
Food 9.2
Grocery/supermarket 5.5
Electronics 8.8
Fashion (0.6)
Sporting/outdoor goods and wear (1.6)
Other (4.6)
Accessories (0.8)
Health and beauty (13.6)
Department stores (17.1)
Bottle stores (14.2)
Restaurants and coffee shops (19.8)

Short-term focus areas

The key focus areas for the portfolio in the short term will be on strengthening tenant relationships, further understanding customer behaviour and continuing our pursuit of operational excellence.

Tenant relationships
  • Continue to be a partner of choice through providing well managed and a safe shopping environment for our retailers to thrive
  • Be the home of innovation allowing low barriers to entry for innovative game-changing retail offerings
  • Execute on renewal programme without changing the key tenets of current lease covenants and agreements
  • Continue to incubate new entrants and SMMEs into the portfolio via our retailer academy programme.
Customer insights
  • Utilise accumulated data on consumers to improve shopper journey in a tangible and meaningful way
  • Integration will include current portfolio metrics, psychographic information, nodal dynamics and individualised customer data from Wi-Fi database
  • This will enable the business to respond in real time to consumer behaviour changes
  • It will open other avenues for alternative revenue sources.
Operational excellence
  • Continue exploring sustainable solutions to manage costs through integration, efficiency of operations, and cashflow management
  • This will be across soft-services, hard-services, marketing and promotions, property, utility and alternative income management
People and communities
  • Empower community-based service providers to become partners in mall operations
  • Continue to invest in CSI initiatives that make a difference in communities in which we operate
Key risks
Utility supply

Water scarcity remains a risk across the portfolio with interruptions in most cases linked to either local municipal capacity challenges or regional droughts. To protect our assets, fire and domestic water backup tanks have been constructed in high-risk areas. Boreholes have been drilled at shopping centres with consistent water outages. This will ensure that the centres will be able to trade should there be water outages. We identified centres with high water consumption, with a focus on common areas and cooling systems and installed smart water meters, enabling us to quickly detect abnormal consumption and take remedial action where necessary.

Tenant arrears

Tenant arrears (net of provisions) amounted to R75.8 million at 31 March 2021 compared to R63.5 million at 31 March 2020. Excluding provisions, the balance at 31 March 2021 amounted to R118.1 million compared to R75.7 million at 31 March 2020.

A significant portion of the arrears balance is fully provided for in terms of IFRS.

In Southern Africa, due to difficult trading conditions having persisted through the COVID-19 lockdown period, our tenants continue to experience headwinds as can be seen in the macro-trends to which our portfolio is exposed. Management remains critically focused on arrears, demonstrated further in the collection statistics provided.

Consequently, the allowance for the impairment of tenant receivables at 31 March 2021 increased to R42.3 million from R12.2 million at 31 March 2020. The increase is partly attributable to Edcon arrears being fully provided to the extent that there will be no settlement emanating from business rescue proceedings, as well as increased credit risk on other tenants.

Bad debts written off for the year ended 31 March 2021 amounted to R18.2 million (31 March 2020: R42 million). Total tenant deposits held amount to R60 million (31 March 2020: R71.6 million).

Sales

Three properties were transferred at a total sales price of R230.5 million during FY21:

  • Sandton Linbro 7 On Mastiff Business Park R114.0 million
  • Welgedacht Van Riebeeckshof Shopping Centre R80.0 million
  • Pinetown Richmond Industrial Park R36.5 million

Two properties were transferred at a total sales price of R48.8 million post-year-end:

  • Pretoria Rosslyn Warehouse R25.0 million
  • Kempton Park Spartan Warehouse R23.8 million

Three properties are in the process of being transferred at a total sales price of R513.6 million:

  • Ulundi King Senzangakona Shopping Centre R306.4 million
  • Letlhabile Mall R161.0 million
  • Centurion Samrand N1 R46.2 million

In aggregate, all these sales represent a total value of R793 million, at a yield of 10% and collectively sold at a 3% premium to book value.

Valuation of Southern African portfolio

The Southern African portfolio consists of 56 properties with a total GLA of 987 768m².

The accounting policies of the group require that the directors value the entire portfolio every six months at fair value. Using a discounted cash flow (DCF) methodology, approximately half of the portfolio is valued every six months, on a rotational basis, by registered independent external valuers. The directors have valued the Southern African property portfolio at R15.6 billion(i) with a forward yield of 9.0% at 31 March 2021. This is R66.6 million or 0.4% less than the valuation as at 31 March 2020. The value of the stable portfolio (excluding sales) is R159.7 million or 1.0% higher than the March 2020 value.

The external valuations by Quadrant Properties (Proprietary) Limited and Knight Frank (Proprietary) Limited are in line with the directors' valuations.

(i) The Southern African property portfolio value takes into account Moruleng Mall at 80%, whereas in the summarised consolidated interim financial statements the group property value reflects 100% of Clidet No 1011 (Proprietary) Limited, which owns Moruleng Mall.
Top 15 properties by value

Vukile's top 15 properties are all retail assets. They are 84% exposed to national, listed and franchised tenants. These properties comprise 60.3% of the total portfolio value and 46.2% of the total portfolio GLA.

Property Location GLA  
m2
Value
Rm
% of
total
portfolio
Valuation  
R/m2
Boksburg East Rand Mall(i) Gauteng 34 284   1 187.5 7.6 34 637  
Pinetown Pine Crest KwaZulu-Natal 43 333   1 153.1 7.4 26 610  
Durban Phoenix Plaza KwaZulu-Natal 24 072   851.4 5.5 35 369  
Phuthaditjhaba Maluti Crescent Free State 35 733   785.1 5.0 21 971  
Pretoria Kolonnade Retail Park Gauteng 39 665   605.8 3.9 15 273  
Soweto Dobsonville Mall Gauteng 26 438   591.5 3.8 22 373  
Gugulethu Square Western Cape 25 699   558.3 3.6 21 725  
Queenstown Nonesi Mall Eastern Cape 27 922   539.3 3.5 19 315  
Mdantsane City Shopping Centre Eastern Cape 36 308   537.1 3.5 14 793  
Germiston Meadowdale Mall(ii) Gauteng 33 156   457.5 2.9 13 798  
Thohoyandou Thavhani Mall(iii) Limpopo 17 780   444.1 2.9 24 978  
Daveyton Shopping Centre Gauteng 17 709   432.7 2.8 24 434  
Moruleng Mall(iv) North West 25 246   426.9 2.7 16 910  
Bloemfontein Plaza Free State 43 771   409.6 2.6 9 358  
Oshakati Shopping Centre Namibia 24 632   408.1 2.6 16 568  
Total top 15 properties 455 748   9 388.0 60.3 20 599  
% of total portfolio 46.2   60.3
% of retail portfolio 51.0   63.9
(i) 50% undivided share in this property.
(ii) 67% undivided share in this property.
(iii) 33.33% undivided share in this property.
(iv) 80% share in the company.

Summary of portfolio changes

GLA reconciliation  GLA m2
Balance at 31 March 2020  1 015 536  
GLA adjustments  393  
Disposals  (28 161) 
Acquisitions and extensions  –  
Balance at 31 March 2021  987 768  
Vacancy reconciliation  GLA m2
Balance at 31 March 2020  34 017   3.4 
Less: Properties sold since 31 March 2020  (976)  3.5 
Remaining portfolio balance at 31 March 2020  33 041   3.4 
Leases expired  161 844  
Tenants vacated or relocated  19 271  
Moved from development vacancy  711  
Renewal of expired leases  (61 616) 
Leases to be renewed  (81 837) 
New letting of vacant space  (33 291) 
Balance at 31 March 2021  38 123   3.9 

Portfolio profiles

Geographic profile

Vukile's portfolio is well represented in most South African provinces and in Namibia. At the same time, it is focused on high-growth nodes and some 72% of the gross income comes from Gauteng, KwaZulu-Natal, Limpopo and Free State.

% of gross
income
% of
GLA
Gauteng 36 41
KwaZulu-Natal 21 15
Limpopo 8 7
Free State 7 8
Western Cape 7 6
Namibia 7 6
Eastern Cape 6 7
North West 4 5
Mpumalanga 4 5
Sectoral profile

Based on value, 95% of the Southern African portfolio is in the retail sector, followed by 2% in the industrial, 2% in the office, 1% in the motor-related sector and 0.4% in the residential sector.

Tenant profile

Large national and listed tenants and major franchises account for 80% of our tenants by rentable area. In the retail portfolio this is even higher, with 84% exposure to national, listed and franchised tenants.

  % of rent   % of GLA  
Retail Total
portfolio
Retail Total
portfolio
A – Large national and listed tenants and major franchises 72 70 75 72
B – National and listed tenants, franchised and medium to large professional firms 9 9 9 8
C – Other (1 192 tenants) 19 21 16 20
Lease expiry profile

Vukile's Southern African lease expiry profile shows that 34% of the leases based on rentals are due for renewal in 2022. Some 25% of leases are due to expire in 2025 and beyond.

March 2022 March 2023 March 2024 March 2025 Beyond March
2025
% of contractual rent 34 19 22 9 16
Cumulative 34 53 75 84 100

Vacant March 2022 March 2023 March 2024 March 2025 Beyond March
2025
% of GLA 3.9 29 15 21 9 22
Cumulative 3.9 33 48 69 78 100
Vacancy profile

The total portfolio's vacancy (based on GLA) increased to 3.9%. The focused in-house leasing drive to fill vacancies resulted in marginally increased retail vacancies amid turbulent times during the COVID-19 pandemic. Industrial and office vacancies remain under pressure.

Vacancies (% of GLA) March 2021
%
March 2020
%
Retail 3.2 2.9
Offices 7.5 3.5
Industrial 9.3 8.7
Motor related
Residential 30.9 4.3
Total 3.9 3.4

Including development vacancy, the 31 March 2021 vacant GLA is 4.1%.

Vacancies (% of gross rental) March 2021
%
March 2020
%
Retail 3.5 2.9
Offices 6.5 5.6
Industrial 12.2 6.9
Motor related
Residential 15.5 10.9
Total 3.8 3.1

Including development vacancy, the 31 March 2021 vacant rent is 4.1%.

Individual property vacancy profile

The properties with the highest vacancies as a percentage of GLA, where each had a vacancy higher than 1 000m2 during the period (excluding development vacancy), are:

   Vacancy  
31 March 2021  31 March 2020  Movement 
m2 m2  m2
Randburg Square Apartments  2 318   31  324  1 994  
Windhoek 269 Independence Avenue  3 817   30  2 236  17  1 581  
Roodepoort Hillfox Power Centre   3 743   10  2 229  1 514  
Mbombela Shoprite Centre  3 688   26  2 208  16  1 480  
Boksburg East Rand Mall  1 194   766  428  
Jhb Houghton 1 West Street  1 375   31  976  22  399  
Midrand Allandale Industrial Park  2 575   12  2 349  11  226  
Oshikango Shopping Centre  1 645   18  1 487  16  158  
Letlhabile Mall  1 846   11  1 925  11  (79) 
Randburg Square  2 476   2 819  (343) 
Roodepoort Ruimsig Shopping Centre  710   1 781  15  (1 071) 
Moruleng Mall  –   –  1 322  (1 322) 
Centurion Samrand N1  2 235   20  3 778  33  (1 543) 
Leasing profile

Vukile concluded new leases and renewals in excess of 112 000m² with a contract value of R725.3 million. Tenant retention on the total portfolio was 89%, with retail retention at 90%.

Rental profile

There were negative reversions of 3.3% on the retail portfolio. To retain tenants in difficult market conditions, focus had to be given to the total cost of occupancy of 63 specific stores which reduced the average retail reversion rate. If these 63 special transactions are excluded, the average renewal rate on the remaining retail reversions is positive 6.0%. Although transactions were limited in the industrial sector, positive reversions of 3.7% were concluded. Marginal leasing transactions were concluded on offices during the period.

The weighted average base rental rates (excluding recoveries) increased by 4.7% from R134.98/m² to R141.26/m2 during the year.

Base rental rates (excluding recoveries) 31 March 2021  
R/m2
31 March 2020  
R/m2
Escalation 
Retail  146.40   141.43   3.50 
Offices  110.23   106.52   3.50 
Industrial  60.05   61.41   *(2.2)
Motor related  183.90   171.87   7.00 
Residential  140.48   142.94   (1.70)
Portfolio weighted average base rentals  141.26   134.98   4.70 
* The lower average rental rate on industrial properties is due to the sale of Sandton Linbro 7 On Mastiff Business Park and Pinetown Richmond Industrial Park. Excluding the sold properties, average rental growth on the industrial portfolio is flat.

Retail escalations of an average 6.7% are easing with national tenants demanding lower in-contract escalations. Escalations, however, remain ahead of inflation rates.

March 2021
%
March 2020
%
Retail 6.7 6.9
Offices 7.5 7.6
Industrial 7.7 7.8
Motor related 7.0 7.0
Total 6.7 6.9
Retail tenant profile and exposure

Vukile's tenant exposure is well diversified and low risk, with national tenants representing c.81% of retail rental income.

Our top 10 tenants account for 45% of total rent and 52% of GLA. Pepkor and Foschini are our two single largest tenants, accounting for 8.0% and 6.9% of total rent respectively. Post the Jet acquisition, Foschini moved from fourth largest to second largest tenant in the portfolio.

Our data-driven asset management enables us to identify risk early. It is our strategy to mitigate the risk of overexposure to a single retail group or brand, and we have strategies in place where there is a potential risk. In this way, we mitigate risk but can also respond quickly to opportunities to introduce new retail brands to our portfolio.

Weighted average lease expiry (WALE)

Vukile has a retail tenant expiry profile based on rent of 2.7 years, with 25% of contractual rental expiring in 2025 and beyond.

Costs

The largest expense categories contribute 81% to the total expenses. These are government services (46%), rates and taxes (18%), cleaning and security (11%) and property management (6%).

We continuously evaluate methods of containing costs in the portfolio and urge our property managers to implement innovative solutions to achieve this.

The cost to income ratio increased materially over the period as a result of concessions granted to tenants and additional expenses brought upon by the COVID-19 environment.

Net cost to income ratio: remaining portfolio 2015
%
2016
%
2017
%
2018
%
2019
%
2020
%
2021
%
All expenses 18.2 17.8 16.0 15.3 16.1 15.5 18.5
All expenses excluding rates and taxes and electricity 18.0 16.4 15.3 15.1 15.0 15.3 18.1
Like-for-like net operating income growth
Like-for-like growth (stable portfolio) 31 March
2021
31 March
2020

change 
Property revenue (Rm) 1 416.0 1 511.2 (6.3)
Net property expenses (Rm) 265.1 235.2 12.7
Net property income (Rm) 1 150.9 1 276.0 (9.8)
Net cost to income ratio (%) 18.7 15.6

PORTFOLIO REVIEW – SPAIN

"The Spanish portfolio has demonstrated its quality in withstanding the current pandemic. With over 94% of our tenants comprising international and national tenants, the business continues to show strength in the new reality we face."

At 31 March 2021 the Spanish portfolio consisted of 18 properties with a total value of €987 million, and a GLA of 367 015m2, with an average value of €55 million per property.

The Spanish retail portfolio, which accounts for 97% of the value of the assets, was externally valued at €955 million and consists of 16 properties with an average value of €60 million. In total, 94.0% of retail space is let to international and national tenants with vacancies limited to 1.7%. The portfolio mandatory period (WAULT) is currently three years to first break and 13.6 years to expiry.

Operating environment

Operational highlights
Asset management in action

Castellana has continued to demonstrate the importance of having specialist retail management, with the portfolio continuing to show its strength and reliability despite the ongoing challenges posed by the pandemic. Castellana has strengthened its relationships with its key tenants over the period, which has enabled it to continue to open new stores and to keep vacancies low across the portfolio.

Highlights for the period include the following:

  • Increasing portfolio occupancy to 98.3% (vacancy limited to 1.7%)
  • Keeping portfolio WALE stable at 13.4 years, and WALE to break has increased to 3.3 years due to strong negotiations with tenants
  • Reversions have been achieved 7.5% above previous rentals during the period at an average rent/m2 of €25.03/m2 for renewals, relocations and replacements
  • Maintaining average base rentals at €14.2/m2 despite tough trading conditions
  • A strong rebound in footfall and sales was evident as soon as customers were able to return to centres. Larger basket sizes are contributing to strong sales performance with retail parks trading above pre-COVID-19 levels
  • Letting activity has kept pace despite the pandemic. In total 116 leases amounting to 34 975m² of GLA have been leased and renewed during the period, with an incremental annualised net operating income of €4.5 million
  • The redevelopment projects were completed with 92.8% tenants in place (by GLA)
  • Opening of new anchor units such as Zara and Lefties in Bahía Sur, Mercadona and Media Markt in Los Arcos, or Yelmo Cines Premium in Bahia Sur and El Faro have improved the portfolio tenant mix
  • Rental discount agreements were concluded in respect of 95% of the portfolio, allowing for visibility and predictability of future income
  • The retail park portfolio has maintained occupancy levels at 98.7%

Tenant arrears

Tenant arrears (including tenant recharge accruals) amounted to €3.3 million (R64 million) at 31 March 2021 (31 March 2020: €2.3 million). Castellana's in-house property administration team collected 95.23% of monthly rental invoices during the year.

The allowance for the impairment of tenant receivables at 31 March 2021 increased to €1.5 million (R26.1million) (31 March 2020: €0.3 million).

Projects

Castellana has secured 92.8% of the leases on its value-added redevelopment projects in Los Arcos, Bahía Sur and El Faro. The projects aim to strengthen the existing offerings and dominance of the centres through the addition of new and exciting retailers, the creation of pedestrianised open space, and the introduction of attractive fashion, food and beverage and leisure operators in the centres. These projects have already demonstrated their potential to enhance the customer experience and improve the number and quality of retailers in the centres, with a number of store openings that have already been completed.

In Los Arcos, 89% of the GLA has been signed and committed. There have been 11 new openings in Los Arcos SC due to the refurbishment project. Having commenced in mid-July with the opening of Mercadona, and followed by Etam, Movistar, Décimas, Soloptical, Espacio Casa and Media Markt, offering an enhanced experience for our customers. The centre has reinforced its position in the city as the best, most complete and most convenient shopping centre in the area.

El Faro has 92% of the project GLA secured under signed leases. There has been significant progress made and the project is essentially complete. Yelmo Premium cinema opened last December, the only premium cinema in the region, and new restaurants such as Burger King, Foster Hollywood, Pomodoro and Pepe Taco have opened their doors in the past few months. The offering includes bowling and video games by Galaxy Park, which add value for our customers and complement the food offering coming into the new space.

Bahía Sur has 95% of tenants signed and committed. The project offers a new and more complete fashion offer to customers with new openings such as the new Zara flagship, the biggest store in Cadiz region with a focus on the omnichannel strategy of the brand. The Primark store is already under works and will open at the end of 2021, highly anticipated by customers. Additional new brands Espacio Casa, Kiko, Primor or Yelmo Premium cinemas in the Bahía Sur shopping centre have opened their stores in the past few months, exceeding initial expectations on performance.

COVID-19 in Spain

As at 2 June 2021 Spain had vaccinated 40% of its population with one dose, with 20% fully vaccinated. The Spanish government announced the goal of vaccinating 70% of its population will be achieved by 18 August 2021. Cases in Spain are currently declining with incidence rates falling across most of the country.

The Spanish government recently ended the state of alarm that has been in place since March 2020, and there are currently no restrictions on inter-regional travel. However, each autonomous region is applying to impose its own restrictions in the form of, border controls, limits on the number of people able to gather, or other measures. The measures vary across each region.

Economic overview

While Spain's gross domestic product (GDP) fell by 10.8% in 2020, the rebound expected in 2021 will take GDP 5.5% higher, with further growth of 7.0% expected in 2022.

Employment seems to be holding steady with an unemployment rate of 15.98%. People in ERTE (Temporary Employment Regulation Filings) amounted to 743 628 people as at 31 March 2021, which has remained fairly stable since September 2020.

Spain's consumer confidence has increased in recent months, but uncertainty still remains on when the country will fully reopen, especially with regard to tourism over the coming months.

Spain, along with the rest of the EU, will continue to implement an expansionary macro-economic policy by keeping interest rates low. The European recovery programme (Next Generation EU) has made a total of €140 billion available to Spain in exchange for Spain implementing various reforms to its economy.

On 21 July 2020, the European Council agreed on a €750 billion recovery plan (Next Generation EU) and a €1 074 billion long-term budget for 2021 – 2027. With €140 billion in grants (€72.7 billion) and loans (€67.3 billion), Spain has been among the largest recipients of  benefits, second only to Italy. Overall, this deal is symbolically a major step for the EU because it overcomes two historic taboos of European integration: (i) long-term opposition to large-size EU common issuance or Eurobonds; and (ii) opposition to explicit fiscal transfers across countries.

Political environment

The main political event in Spain in the preceding months has been the comprehensive victory of the centre-right People's Party (PP) in the regional election for Madrid. Isabel Diaz Ayuso, the president of Madrid and the head of the PP in Madrid, beat the other parties with 45% of the vote achieving 65 seats at the regional parliament, increasing by 101% from the previous elections in 2019. The other right-wing party, Vox, gained 13 seats and, just with the abstention of this party at the investiture, Ayuso should lead the region for the next two years. The three left-wing parties, which were expected to form a coalition to rule, did not get to the majority (69 seats) together so they will not form part of the new government. Centrist party Ciudadanos did not reach the minimum number of votes to occupy a seat at parliament. Elections were called by Ayuso back in March 2021 in the face of a risk of having a vote of non-confidence from the left wing who would rule until the end of the legislature if the no confidence succeeded.

The primary impacts will be on taxation. The centre right parties tend to focus on employment and ease the creation of companies to create jobs, hence they maintain or even decrease taxes to promote new economic activity.

Castellana COVID-19 response plan

Castellana's portfolio is now fully open and trading following various regional restrictions on shopping centres implemented over the course of the past 12 months. Sales and footfall saw marked increases once restrictions were lifted, with customers immediately returning to our malls.

Shops in Castellana's retail centres closed on 14 March 2020 apart from essential services (mainly supermarkets and pharmacies), which have remained open throughout. On 25 May 2020, 12 of the 16 assets reopened with some restrictions, however, during the second and third waves some centres were closed for a few weeks at a time. Recently, with the state of alarm ending, Castellana's portfolio is completely open and trading.

Castellana continues to engage with all stakeholders to strategically manage the portfolio through the pandemic, including its tenants, banking partners and others, to ensure a smooth and consistent performance.

Business review

Castellana remains well capitalised and continues to operate from a position of strength due to the quality of its retail portfolio. Early engagement with tenants, banks and others at the start of the state of alarm in March supported the right strategic decisions, with the business having now recovered most of its footfall and sales compared to the prior year. Castellana continues to update its scenario modelling, which has confirmed and strengthened management's view that the business is well positioned to withstand the economic impact of the pandemic. Notwithstanding the current economic situation, Castellana has ensured a "business as usual" environment across the vast majority of its portfolio.

Tenant and industry engagement

Castellana granted 100% discounts in Minimum Guaranteed Rent (MGR) to tenants affected by the lockdown in April 2020 and some further discounts for May. Throughout the lockdown all tenants were invoiced 100% of their regular service charges. The MGR discounts were granted in exchange for longer lease terms, more regular sales reporting, and break option waivers. From 1 June 2020 onwards, normal invoicing resumed, with collections normalising over the remainder of the year. Notwithstanding the economic effects of the pandemic, Castellana's mandatory lease periods remained stable, offering long-term stability and predictability of cash flows. Castellana continues to engage regularly with its tenants, to gauge performance and to exchange strategic management ideas.

Debt provider engagement

Castellana continues to engage with its debt providers. The response has been positive, and they are satisfied with Castellana's balance sheet strength and cash position. We remain confident of Castellana's ability to remain well within its LTV and ICR covenant levels. Aareal and Allianz have agreed to waive all covenant tests until 30 September 2021 and have committed to continue financing the "El Corte Ingles value-add projects". The syndicated loan banks (Santander and Caixabank) have agreed to defer the amortisation schedule on the main facility of the syndicated loan, rolling the maturity for 12 months. While this deferral was not mandatory to undertake, these actions ensure that Castellana continues to be in a strong position to navigate the effects of the pandemic.

Footfall, sales and collections performance (October 2020 to March 2021)

Footfall and sales

2020 2021
Oct 
2020 
Nov 
2020 
Dec 
2020 
Jan 
2021 
Feb 
2021 
Mar 
2021 
Change in footfall October 2020 to March 2021 (vs corresponding month previous year) (16.4) (40.3) (23.6) (41.4) (50.1) 98.3

Castellana has seen a continuous improvement in footfall and sales since reopening centres. By 31 March 2021 footfall was at 74% of levels seen in 2019.

While further restrictions have been imposed since November 2020, our customers consider our centres to be safe places and continue to visit, albeit more frequently per week for shorter dwell times with larger basket sizes.

2020 2021
Oct 
2020 
Nov 
2020 
Dec 
2020 
Jan 
2021 
Feb 
2021 
Mar
2021
%
Change in sales October 2020 to March 2021 (vs corresponding month previous year) (5.7) (30.1) 15.9 (34.6) (41.9) 93.0

The recovery of sales has been faster than footfall, with average basket size increasing as a result of customers spending higher amounts more frequently. Retail parks are currently performing better than pre-COVID levels. Shopping centres continue to show consistent improvement each month. DIY, electronics, pets and household goods have shown the strongest performance. Portfolio sales in March were at 80% of levels seen in 2019.

94% of Castellana's tenants are national and international brands.

Collections

Collections April 2020 to March 2021 June    
2020**
July
2020
Aug
2020
Sept
2020
Oct
2020
Nov
2020
Dec
2020
Jan
2021
Feb
2021
Mar
2021
Total net invoiced amount (€m)* 4.4     4.7 5.0 5.2 5.2 4.9 5.5 5.8 5.3 5.6
Total collected (%) 96.7     98.5 98.0 96.6 96.4 95.4 94.1 95.6 92.2 91.7
Total outstanding (%) 3.3     1.5 2.0 3.4 3.6 4.6 5.9 4.4 7.8 8.3
* Not considering net turnover rent, €1.4 million invoiced in May 2020.
** June 2020 invoiced during October 2020.

What became evident in the collections process was that over time, the longer the administration team worked on collecting outstanding rents, the higher the recovery rate ultimately became.

Valuation of Spanish portfolio

The Spanish portfolio has been independently valued by Colliers at €987.0 million (R17.1 billion) at 31 March 2021 (31 March 2020: €1 003.5 million or R19.8 billion), representing a -1.6% decline in value over the last financial year.

Overall the portfolio has declined in value by 4% since 30 September 2019 if capex spent per annum is included. Excluding capex spent the decline has been 5.5%.

The fair values of commercial buildings are estimated using a DCF approach, which capitalises the estimated rental income stream, net of projected operating costs, using a discount rate derived from market yields. The estimated rental stream takes into account current occupancy levels, estimates of future vacancy levels, the terms of contractual leases and expectations of rentals from future leases over the remaining economic life of the buildings.

Real estate market in Spain

The retail investment market is undergoing a challenging period, where investors are predominantly taking a "wait and see" approach. In an environment of low interest rates, high liquidity and LTVs far below the levels of 2007 to 2012, sellers are resisting lowering prices for the moment, while buyers expect that the uncertainty should be reflected in the price. This is the main impediment to market activity. While the total retail investment volume reached €2.3 billion, this was mainly due to large shopping centre transactions that closed prior to the pandemic. The remaining portion of the transactions were largely long leased supermarket portfolios.

Yields are being driven more by sentiment rather than operational performance. In Q3 and Q4 2020, both prime shopping centres and good secondary centres have seen their yields rise between 25bps and 50bps, despite a very low level of transaction evidence available in the market. The retail assets that have transacted tend to be long-leased supermarket portfolios that tend to trade at lower yields of 5.5% to 6%. This is reflective of the preference for stability and safety from investors in an uncertain market environment.

Portfolio overview

Top 10 properties by value

All of our top 10 properties are retail assets. Cumulatively, 97% of their tenants are international and national tenants. These properties comprise 90% of the total portfolio value, 88% of the total portfolio rent and 80% of the total portfolio GLA.

Property Location GLA
Value
€m
% of
total
portfolio
Valuation
€/m²
El Faro Extremadura 40 318 159.0 16.1 3 944
Bahía Sur Andalucia 35 333 141.0 14.3 3 991
Los Arcos Andalucia 26 680 136.0 13.8 5 097
Granaita Retail Park Andalucia 54 807 106.0 10.7 1 934
Vallsur Castilla Leon 35 212 87.0 8.8 2 471
Habaneras Com. Valenciana 25 021 84.0 8.5 3 357
Puerta Europa Andalucia 29 783 65.0 6.6 2 182
Parque Oeste Madrid 13 604 49.0 5.0 3 602
Parque Principado Asturias 16 090 35.0 3.5 2 175
Marismas del Polvorín Andalucia 18 220 27.0 2.7 1 482
Total top 10 properties   295 068 889.0 90.0 3 013
% of total portfolio 80 90

Summary of portfolio changes

GLA reconciliation GLA m²
Balance as at 31 March 2020 373 419
GLA adjustments (6 404)
Balance as at 31 March 2021 367 015
Areas under development 5 212
Non-lettable area 7 038
GLA excluding areas under development 361 802
Vacancy reconciliation GLA m² %
Balance as at 31 March 2020 5 647 1.7
Vacancy movement 539
Balance as at 31 March 2021 6 186 1.7

Portfolio profiles

Geographic profile

The geographic distribution of the Spanish portfolio is indicated in the table below. Some 87% of the gross income comes from Andalucia, Extremadura, Com. Valenciana and Castilla Leon.

Geographic portfolio % of rental
income
% of
GLA
Andalucia 49 48
Extremadura 20 20
Com. Valenciana 9 8
Castilla Leon 9 10
Madrid 7 7
Asturias 4 4
Murcia 2 3
Sectoral profile

Based on value, 97% of the Spanish portfolio is in the retail sector and 3% in the office sector.

Tenant profile

Large national and international tenants account for 94% of tenants by rent and GLA.

% of rental
ncome
% of
GLA
Large national and international tenants 94 94
Local tenants (93 tenants) 6 6
Expiry profile

Castellana has a 13-year retail tenant expiry profile and 3.0 years to break with 52% (54% including the office tenant expiry profile) of contractual rental expiring in 2029 and beyond.

The expiry profile as a percentage of contractual rent is shown below:

Retail portfolio

March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
March
2031
%
Beyond
March
2031
%
% of contractual rent 7 5 5 8 6 3 5 5 4 4 48
Cumulative 7 12 17 25 31 34 39 44 48 52 100

Vacant
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
March
2031
%
Beyond
March
2031
%
% of GLA 2 5 3 2 6 3 2 4 5 3 3 62
Cumulative 2 7 10 12 18 21 23 27 32 35 38 100
Total portfolio

March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
March
2031
%
Beyond
March
2031
%
% of contractual rent 7 5 5 7 6 3 4 5 4 4 50
Cumulative 7 12 17 24 30 33 37 42 46 50 100

Vacant
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
March
2031
%
Beyond
March
2031
%
% of GLA 2 5 3 2 6 3 2 4 4 3 3 63
Cumulative 2 7 10 12 18 21 23 27 31 34 37 100
Break profile

The break profile (the date upon which the tenant has an option to terminate the lease prior to the expiry date) as a percentage of contractual rent is shown below. The break profile has improved due to the concessions granted to tenants at the start of the state of alarm in March 2020. Castellana negotiated more favourable lease terms in exchange for granting these temporary concessions.

Retail portfolio

March
2021
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
Beyond
March
2030
%
% of contractual rent 29 20 16 11 11 2 5 2 2 1 1
Cumulative 29 49 65 76 87 89 94 96 98 99 100
Total portfolio

 
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
March
2030
%
March
2031
%
Beyond
March
2031
%
% of contractual rent 28 19 15 11 11 2 5 2 2 2 3
Cumulative 28 47 62 73 84 86 91 93 95 97 100
Vacancy profile

The portfolio's vacancy remained at 1.7% at 31 March 2021.

Vacancies (% of GLA) March
2021
%
March
2020
%
Shopping centres 2.2 2.8
Retail parks 1.3 0.8
Offices
Total 1.7 1.7
Rental profile

The Castellana portfolio's weighted average rental is €14.22/m2. We believe that a significant portion of the portfolio is at below-market rentals. We anticipate rental growth to come through over the medium term. Shopping centre rents per sqm have decreased due to tenants with larger boxes entering the portfolio, while overall rental has increased.

31 March
2021
€/m2
31 March
2020
€/m2
Escalation 
(%)
Shopping centres 18.58 19.63 (5.3)
Retail parks 9.56 9.50 0.6 
Offices 9.89 9.60 3.0 
Portfolio weighted average base rentals 14.22 14.27 (0.4)

Costs

Service charges are the most significant expense and represent 78.76% of total property expenses. Service charges mainly include utilities, cleaning, marketing, security and management. Property tax is another significant expense and represents 13.86% of the total property expenses.

Like-for-like net operating income growth (without rent concessions)

Like-for-like growth (stable portfolio) 31 March
2021 
31 March 
2020 
%
change
Property revenue (€m) 59.28  55.95  5.95
Net property expenses (€m) (3.66) (2.84) 28.87
Net property income (€m) 55.62  53.11  4.73
Net cost to income ratio (%) 6.17  5.08  21.46

Like-for-like net operating income growth (with rent concessions)

Like-for-like growth (stable portfolio) 31 March 
2021 
31 March 
2020 

change 
Property revenue (€m) 40.48  55.95  (27.65)
Net property expenses (€m) (3.66) (2.84) 28.87 
Net property income (€m) 36.82  53.11  (30.67)
Net cost to income ratio (%) 9.04  5.08  77.95 

THE VUKILE ACADEMY

The Vukile Academy (www.vukileacademy.co.za) is a key component of Vukile's skills development, mentorship and transformation platform.

The academy's focus is to contribute highly skilled, motivated and passionate young black professionals and entrepreneurs to the South African property sector each year. It is a platform that improves access to quality education and by creating access to job opportunities for youth, facilitates education, work experience, career advancement and economic growth, and thereby reduces inequality.

The Vukile Academy is proudly a Vukile Property Fund initiative that continues to give back to our communities and South Africa as a whole. We endeavour to uplift the lives of our people and create a better environment for all.

The academy focuses on the following areas:

  • The Vukile Bursary Fund

    The Vukile Bursary Fund, in partnership with South African Property Owners Association (SAPOA), Women's Property Network (WPN), South African Institute of Black Property Practitioners (SAIBPP), as well as University of the Witwatersrand, University of Pretoria (UP), University of KwaZulu-Natal and University of Johannesburg, together contributed more than R6.5 million towards tertiary education tuitions for 65 students through bursaries for studies in property/real estate related fields. The students were primarily in their third or honours year of studies.

  • The Vukile Internship and Mentorship Programme

    Our internship programme welcomed eight young, passionate and driven candidates. Vukile undertook a rigorous and transparent selection process to identify and award deserving candidates a position in the Vukile Internship and Mentorship Programme. We received well over 70 applications. Our programme is designed as an integration platform into the real professional world for graduates who, in the main, are selected from our bursary recipients. The industry-leading programme is designed by curriculum experts and professionals from the industry and tertiary institutions like Gordan Institute of Business Science and the UP. It delivers over 10 modules, including a personal mastery programme, which forms a crucial element of the programme. The essence of the internship programme is to impart the Vukile Brand DNA to our candidates. They are each offered a fixed-term employment contract for one year. This past year, the programme was extended to two years, due to the impact of the remote working environment, which negatively impacted the programme. Each intern is allocated a mentor and receives 12 mentorship session and two life coaching block sessions during the year. This year, even prior to conclusion of the programme, 70% of the interns have received permanent placement positions in the property industry.

  • Training programmes for aspiring, young developers

    The Vukile Academy has partnered with uMastandi, a training programme for aspiring township developers managed by Avocado Vision. The main aim of this programme is to impart financial feasibility training to the respective developers. The programme currently has four participants, who have developed 58 backroom units in the township in Vosloorus and Soweto. The Academy will continue to transfer project management skills to these participants, an exciting initiative in a fast developing area in our townships.

Vukile BEE certification

Vukile Property Fund is a level 4 B-BBEE entity, with a 100% recognition level.

CHANGE TO BOARD OF DIRECTORS

Effective 1 September 2020, Dr Sedise Moseneke stepped down as an executive director of the company and assumed the position of non-independent non-executive director and member of the Property and Investment Committee.

PROSPECTS FOR THE GROUP

Vukile remains in very good shape operationally and financially, and with a clear strategic focus, the group is well positioned for long-term growth. The macro-economic benefits of diversification will continue to be advantageous for our South African investors. The clearly focused retail specialisation strategy, in Southern Africa and Spain, is providing benefits in each of these markets, as seen by the strong operational results delivered in the worst of the COVID-19 crisis.

Management's decision making is geared to making the right decisions for the long-term sustainability of the business and ensuring that we are not caught up in short-termism. We will continue to invest so that we make the transition to a customer-led organisation, with the right skills for a changing retail environment. We remain focused on balance sheet strength, risk management and the effective deployment of retained cash to ensure long-term growth and strategic strength.

We are very pleased with the operational performance of the business and how we have navigated the COVID-19 crisis so far, and believe we have the right platform and approach to restore profitability to pre-pandemic levels over the next few years. Given the ongoing uncertainty in the operating environment, the possibility of further
COVID-19 waves and uncertainty regarding the pace and extent of vaccine roll-outs, we believe it is prudent not to provide dividend guidance for FY2022. The dividend payout ratio going forward will approximate 60% – 70% of total group FFO (while still maintaining the minimum 75% of JSE defined distributable income requirement), thus lower than the current year's 79%.

SUBSEQUENT EVENTS

i. Declaration of dividend

In line with IAS 10 – Events after the Reporting Period, the declaration of the dividend occurred after the end of the reporting period, resulting in a non-adjusting event that is not recognised in the financial statements.

The board approved a final dividend on 4 June 2021 of 101.04 cents for the year ended 31 March 2021 (31 March 2020: 129.0 cents) amounting to R966 million (31 March 2020: R1 234 million). The dividend represents a payout ratio of 79% of total group FFO and 75% of the minimum JSE required SA REIT distribution.

ii. Sale of investment property

The following properties transferred after year-end and meet the definition of non-adjusting post-balance sheet events as per IAS 10 – Events after the Reporting Period:

  • On 14 April 2021, Pretoria Rosslyn Warehouse was transferred at a selling price of R25 million; and
  • On 9 April 2021, Kempton Park Spartan Warehouse was transferred at a selling price of R23.8 million.

iii. Extension of MEREV put option

Subsequent to year-end, Vukile extended the MEREV put option for three years to 31 July 2024. RMB will provide R1.0 billion of new facilities to Vukile, which allows Vukile to acquire a portion of MEREV's Castellana shares, if desired. Although the amended agreement does not adjust the strike price of €6.50, Vukile will guarantee a 6% yield on Castellana's dividend. Since the agreement was signed post-year-end, it results in a non-adjusting event that is not recognised in the financial statements.

iv. Settlement of CCIRS

Subsequent to year-end, Vukile entered into a derivative instrument to hedge the settlement of the two CCIRS that mature in June 2021. These two CCIRS will be settled on their maturity date (14 June 2021), with a net mark-to-market settlement amount of R235 million, after taking into account R100 million that was placed on deposit at inception of the CCIRS. The derivative instrument that was entered into (after the end of the reporting period) results in a non-adjusting event that is not recognised in the financial statements.

v. Investment in Arrowhead

On 18 May 2021, Fairvest concluded agreements with Arrowhead shareholders to acquire Arrowhead B shares in exchange for Fairvest shares, at a share swap ratio of 1.85 Fairvest shares per Arrowhead B share. Whilst Vukile is supportive of the proposed transaction, any transaction, if it proceeds, is still conditional on a number of regulatory requirements.

BASIS OF PREPARATION

The summarised consolidated financial statements for the year ended 31 March 2021, and comparative information, have been prepared in accordance with, and containing the information required by, International Financial Reporting Standards (IFRS), the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Reporting Announcements as issued by the Financial Reporting Standards Council, the JSE Listings Requirements, IAS 34, and relevant sections of the Companies Act, 71 of 2008, as amended (Companies Act). All accounting policies applied by the group in the preparation of these summarised consolidated financial statements are consistent with those applied by the group in its consolidated financial statements as at and for the year ended 31 March 2020, except where new standards have been introduced as disclosed in the notes.

These statements, which comprise the statement of financial position at 31 March 2021, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows for the 12 months then ended, are extracted from audited information, but are themselves not audited. The annual financial statements were audited by PricewaterhouseCoopers Inc., who expressed an unqualified opinion thereon. The auditor's report does not necessarily cover all of the information included in this announcement. Shareholders are therefore advised that, in order to obtain a full understanding of the nature of the auditor's work, they should obtain a copy of the audit report together with the accompanying financial information from the registered office of the company situated at 4th Floor, 11 Ninth Street, Houghton Estate.

The directors take full responsibility for the preparation of this report and that the financial information has been correctly extracted from the underlying financial statements. This report was compiled under the supervision of Laurence Cohen CA(SA) in his capacity as chief financial officer.

The directors are not aware of any matters or circumstances arising subsequent to 31 March 2021 that require any additional disclosure or adjustment to the financial statements and which are not disclosed in this announcement.

On behalf of the board

NG Payne LG Rapp
Chairman Chief executive officer

Houghton Estate

9 June 2021

VUKILE PROPERTY FUND LIMITED

Incorporated in the Republic of South Africa)
(Registration number: 2002/027194/06)
JSE share code: VKE ISIN: ZAE000056370
Debt company code: VKEI
Namibian Stock Exchange (NSX) share code: VKN
(Granted REIT status with the JSE)
(Vukile or the group or the company)

JSE sponsor: Java Capital
NSX sponsor: IJG Group, Windhoek, Namibia
Executive directors: LG Rapp (chief executive), LR Cohen (chief financial officer), IU Mothibeli (managing director: Southern Africa)
Non-executive directors: NG Payne (chairman)*, PS Moyanga*, SF Booysen*, RD Mokate*, H Ntene*, HM Serebro*, B Ngonyama*, GS Moseneke
*Independent
Registered office: 4th Floor, 11 Ninth Street, Houghton Estate, 2198
Company secretary: J Neethling
Transfer secretaries: Link Market Services South Africa (Pty) Ltd, Braamfontein, Johannesburg
Investor relations: Instinctif Partners, The Firs, 3rd Floor, Corner Craddock Avenue and Biermann Road, Rosebank, Johannesburg,
South Africa, Tel: +27 11 447 3030
Media relations: Marketing Concepts, 10th Floor, Fredman Towers, 13 Fredman Drive, Sandton, Johannesburg, South Africa,
Tel: +27 11 783 0700, Fax: +27 11 783 3702

www.vukile.co.za