Commentary

NATURE OF OPERATIONS

Vukile is a high-quality, low-risk retail-focused Real Estate Investment Trust (REIT), domiciled and operating in southern Africa, with growing international exposure in Spain. The results reflect a strong operational focus with a core competence in active property asset management.

FINANCIAL PERFORMANCE

EXECUTIVE SUMMARY

Vukile remains focused on generating sustainable and predictable dividend growth over the long term. Key decisions and strategy are aligned to this long-term approach, and the group avoids transactions which do not complement the long-term strategy of the group.

Over the six-month period to 30 September 2019, we have continued to build on momentum gained with organic and acquisitive growth in the southern African and Spanish portfolios, offering investors a retail-focused investment property portfolio in southern Africa and Spain. Asset management interventions continue to add value and drive growth in both the Spanish and southern African portfolios.

At a high level, the following significant events and transactions took place during the six months to 30 September 2019:

  • Vukile raised equity capital of R700 million in April 2019 via an accelerated bookbuild;
  • Vukile acquired an additional 10.38% holding in Castellana over the period, bringing our total interest to 82.5%;
  • In Spain, Castellana acquired the Puerta Europa Mall situated in Algecira, Cadiz for €56.8 million and additional El Corte Ingles units at the Bahía Sur and Los Arcos Centres for €37 million (funded by Vukile by subscribing for additional Castellana equity totalling c.€76 million as well as debt of c.€17.8 million);
  • Vukile's senior secured long-term credit rating was upgraded to AAA(ZA)(EL), the corporate long-term credit rating was upgraded to AA-(ZA) and the corporate short-term rating was upgraded to A1+(ZA), with a stable outlook;
  • Subsequent to period-end, Vukile concluded the acquisition of Mdantsane Shopping Centre for R516.5 million (November 2019);
  • In South Africa, the asset management team achieved practical completion of Maluti Crescent phase 2 and Pine Crest developments in July and August respectively.

Group total assets amount to R37.6 billion at 30 September 2019 (31 March 2019: R35.1 billion). Direct property investments account for R32.9 billion at 30 September 2019 (31 March 2019: R30.5 billion). Listed property investments amounted to R2.3 billion at 30 September 2019.

DIVIDEND GROWTH AND DISTRIBUTABLE PROFIT FOR THE PERIOD

The directors of Vukile are pleased to report that dividends for the six months ended 30 September 2019 increased by 3.5% to 80.83610 cents per share (September 2018: 78.10251 cents per share), in line with guidance.

KEY FINANCIAL MEASURES

A summary of key financial measures is provided below:

Key financial measures 30 September
2019
  30 September
2018
31 March
2019

change 
 
Dividend per share (cents) 80.84   78.10 181.48 3.5   
Net asset value per share (cents) 2 000   2 027 2 026 (1.3)  
Interest cover ratio (times)(1) 6.44   5.10 6.05    
Loan-to-value ratio net of cash (%)(2) 40.8   39.7 37.2    

(1) Based on operating profit plus dividends from listed investments (EBITDA) divided by finance costs, after deducting all finance income (net interest cost) over the respective period.

(2) Based on directors’ valuations of the group’s portfolio and the market value of listed investments at 30 September 2019, less cash (excluding cash held on deposit from tenants).

SHARE PRICE AND LIQUIDITY

Vukile’s share price decreased by 5% from R20.00 per share at 31 March 2019, to R19.00 at 30 September 2019. The negative share price movement is largely in line with the decline in the SAPI Index, which reduced by 4.1% over the same period.

Over the six months ended 30 September 2019, 311.5 million Vukile shares were traded, which equates to approximately 26.0 million shares per month. The market capitalisation of Vukile at 30 September 2019 was R18.2 billion (31 March 2019: R18.4 billion). The shares traded represent R6.2 billion or 34.3% of market capitalisation at 30 September 2019 (31 March 2019: 38%), demonstrating the liquidity of Vukile’s shares in the market.

GROUP PROPERTY INCOME AND PROFIT BEFORE TAX

The high-level geographical split of revenue and net property income at 30 September 2019 is as follows:

Geographical segment Revenue(i)
30 September  
2019  
Rm  
  Revenue(i)
30 September  
2018  
Rm  
% change   Net property
income
30 September
2019
Rm
  Net property
income
30 September
2018
Rm
% change  
Southern Africa 793.0     741.2   7.0%   654.0   594.4 10.0  
Spain 603.0     309.4   94.9%   580.0   239.4 142.3  
Total 1 396.0     1 050.6   32.9%   1 234.0   833.8 48.0  
Split %                    
Southern Africa 56.8     70.6       53.0   71.3    
Spain 43.2     29.4       47.0   28.7    

(1) Excludes straight-line rental income and utility recoveries

The contribution to each geographical segment is shown in the table above. Group net property income increased by 48.0% from R833.8 million to R1 234.0 million. Portfolio specific measures and movements are discussed more fully in the relevant southern African and Spanish portfolio commentary hereafter.

GROUP CASH FLOW

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

  Rm   
Cash from operating activities 1 045.5   
Dividend paid (final dividend FY19) (1 033.8)  
Excess cash generated over dividend paid for the period 11.7   
Net proceeds from the issue of shares 696.3   
Borrowings and advances 2 536.0   
Borrowings repaid (418.0)  
Acquisitions/improvements to investment property: southern Africa (167.2)  
Acquisitions/improvements to investment property: Spain (1 720.9)  
Additional investment in Castellana (617.8)  

Cash flow from property investments (including net finance costs) comfortably covered the dividend paid for the period under review. The net proceeds from additional debt raised, combined with proceeds from shares issued, were utilised to acquire additional shares in Castellana, in addition to the acquisition of investment property, primarily in Spain.

GROUP CORPORATE EXPENDITURE

  30 September
2019
Rm
  30 September
2018
Rm
Variance
Rm
Variance
%
 
Southern Africa 86.0   68.0 18.0 26.5  
Spain 54.0   28.6 25.4 88.8  
Group total 140.0   96.6 43.4 44.9  

The primary factors giving rise to the increases in corporate costs are as follows:

  • Southern Africa:
    • Salary and related costs increased by R12.0 million due to additional amortisation of awards to qualifying employees on the group share scheme, following the outperformance of criteria set in the scheme, and additional members being included in the scheme for the period under review. There were also additional senior executives on the payroll, prior to the retirement of two longstanding directors
    • Additional costs relating to the Vukile Academy of R2.4 million.
  • Spain:
    • Of the total variance of R25 million, R20 million relates to increased salary costs, as the Castellana staff complement increased from 12 to 26 (a 116% increase). The balance of the increase relates primarily to increased travel costs, legal fees and office operational costs. The Castellana team is now operating at full capacity.

Annualised corporate expenditure equates to 0.74% of total assets, being 0.46% attributable to southern Africa and 0.29% attributable to Spain.

NET ASSET VALUE ( PER SHARE)

The net asset value (NAV) of the group decreased over the reporting period by 1.3% from R20.26 per share to R20.00 per share at 30 September 2019, as set out in the table below.

  Rand 
per share 
 
NAV 1 April 2019 20.26   
Increase in investment property 1.75   
Increase in investment property held for sale 0.86   
Increase in other non-current assets 0.30   
Decrease in current assets (0.20)  
Increase in current liabilities (0.80)  
Increase in non-current liabilities (0.77)  
Decrease in non-controlling interest 0.60   
Adjusted for additional shares in issue (2.00)  
NAV 30 September 2019 20.00   

The NAV of R20.00 per share represents a 5.3% premium to Vukile’s share price of R19.00 per share at 30 September 2019.

GROUP INVESTMENT AND OTHER INCOME

  30 September
2019
Rm
  30 September
2018
Rm
Movement  
Rm %  
Investment and other income 99.4   61.5 37.9 61.6  
Interest income 36.4   32.0 4.4 13.8  
Net interest received on cross-currency interest rate swaps (CCIRS) after deducting finance costs 93.1   74.3 18.8 25.3  
Total 229.0   167.8 61.2 36.5  

Further commentary on investment income is provided under “Listed investments”. The CCIRS ratio to total international investments (on a consolidated basis) has reduced to 30.2% (September 2018: 34.5%). Vukile has chosen to limit the utilisation of CCIRS to 45% of the total value of international investments. At 30 September 2019 the CCIRS nominal value was €182.5 million.

CALCULATION OF DISTRIBUTABLE EARNINGS

   30 September
2019
Rm
 
   30 September
2018
Rm 
Variance
  
Revenue  1 382     1 030  34.1    
Property expenses (net of recoveries) (162)    (217) 25.3    
Net profit from property operations  1 220     814  50.0    
Corporate administration expenses  (140)    (97) 44.3    
Investment and other income  229     168  36.3    
Operating profit before finance costs  1 309     885  48.0    
Finance costs  (296)    (247) (19.8)   
Profit before equity-accounted income  1 013     638  58.9    
Share of income from associate (Atlantic Leaf) 41     46  (10.9)   
Profit before taxation  1 054     684  54.2    
Taxation  (14)    (17) (17.6)   
Profit for the year  1 040     667  56.0    
Net profit attributable to non-controlling interests  (88)    (25) (100.0)   
Attributable to Vukile group  952     642  48.4    
Non-IFRS adjustments  (105)    70.9       
Profit before tax of subsidiary (Castellana) (111)    —  100.0    
Listed investments (Fairvest and Gemgrow)    —  100.0    
Non-cash impact of IFRS 16 (Leases)    —  100.0    
Antecedent dividend     70.9  (97.6)   
           
Available for distribution  847     713       
Total dividend for the period (Rand) 773     702       
Total dividend for the period (cents per share) 80.84     78.10  3.5    
Number of shares in issue at period end  956 226 628     875 339 319       

LISTED INVESTMENTS

Vukile views its investments in Arrowhead (formerly Gemgrow) and Atlantic Leaf as non-core to the group's strategy going forward. Given the right opportunity, the group will consider exiting these investments in order to deploy the sale proceeds into the core portfolio in South Africa and Spain.

  30 September 2019   31 March 2019  
Entity Carrying
value
Rm
Number
of shares
held
% held   Carrying
amount
Rm
  % held  
Fairvest 551.6 270 394 812 26.6   567.8   26.9  
Arrowhead 515.0   11.3   728.9   25.3  
Arrowhead – A shares 46.9 4 691 084     44.6      
Arrowhead – B shares 468.1 114 438 564     684.3      
Atlantic Leaf 1 251.8 65 958 606 34.9   1 302.9   34.9  
Total 2 318.4       2 599.6      

Fairvest – 26.6% shareholding

Fairvest Properties Limited (Fairvest) is a JSE listed REIT with a retail-focused portfolio, located mostly in rural and non-metropolitan areas, including convenience and community centres.

Fairvest’s management has forecast a distribution growth of 4% to 6% to 30 June 2020. Dividends calculated on a full 12-month period therefore reflect a yield of 11.1%, based on the value of Fairvest’s shares at 30 September 2019.

Arrowhead (formerly Gemgrow) – 11.3% shareholding

Arrowhead Properties Limited (Arrowhead) is a JSE listed REIT with a dual share structure, comprising A and B shares. Prior to 30 September 2019, the shareholders of Gemgrow and Arrowhead, approved the merger of the two entities to create a simpler, more efficient structure, reducing corporate costs and allowing for improved liquidity, and in order to better position the merged entity to access equity markets in future. Following the merger, the entity is a diversified fund that invests in retail, office and industrial property, situated across South Africa.

Vukile anticipates a total dividend from Arrowhead of R84.9 million for the year to March 2020, a decrease of 7.2% over the prior year. Dividends calculated on a full 12-month period reflect a yield of 16.8%, based on the share price at 30 September 2019.

Atlantic Leaf – 34.9% shareholding

Atlantic Leaf Properties (Atlantic Leaf) is a dual listed UK REIT focusing on industrial and warehouse distribution centres in the UK. Its shares are listed on the Johannesburg and Mauritian stock exchanges. In terms of IFRS, Atlantic Leaf is accounted for as an equity-accounted associate of Vukile.

Dividends received from Atlantic Leaf for the six months to September 2019 were R41.2 million after dividend withholding tax (WHT), compared to R46.5 million for the same period to September 2018 (the prior period had no WHT deducted since Atlantic Leaf converted to UK REIT in February 2019). In total, 89% of forecast net dividends from Atlantic Leaf (represented by a gross dividend of 9.5 pence per share) is hedged over the next 12 months. Dividends calculated on a full 12-month period reflect a yield of 8.6%, based on the value of Atlantic Leaf's shares at 30 September 2019.

INVESTMENT IN SUBSIDIARY

Castellana – 82.5%

Castellana Properties is a Spanish SOCIMI (equivalent to a REIT) specialising in the acquisition, ownership and management of shopping centres in Spain. The company was founded in 2015 and was listed on the Alternative Spanish Stock Exchange (MAB) on 25 July 2018.

Vukile's shareholding in Castellana over the six-month period increased from 72.1% to 82.5%, following share subscriptions and the acquisition of shares from Westbrooke, a minority shareholder in Castellana. Other minority shareholders hold the balance of the shares (17.5%).

Details of the Spanish property portfolio, including details relating to acquisitions, valuations, value creation and investment strategy are set out in the portfolio review below.

TREASURY MANAGEMENT

Group borrowings summary

The group’s funding strategy is to optimise funding costs and while minimising refinance risk. Total debt as at 30 September 2019 amounted to R15.5 billion. A summary of funding by currency is provided below:

Funding breakdown Number
of funders
  Rm            
Foreign Spanish funders (EUR) 7   8 144         Secured only against Castellana’s balance sheet with
no recourse to Vukile
 
SA funders (EUR) 4   3 926       Partly secured against Vukile’s SA balance sheet  
SA funders (GBP) 1   533  
SA funders (ZAR) 5   926  
DMTN (ZAR)     2 007  
Grand total     15 536            

Sources of funding

Vukile’s funding of R15.5 billion 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) 2 653     17.1 2 348      
Allianz 2 572    16.6 2 572     
ABSA 2 401    15.5 2 618     
DMTN – corporate bonds 2 007    12.9 –     
Caixabank(3) 1 336    8.6 1 253     
Standard Bank 1 149    7.4 913     
Banco Santander(3) 1 018    6.6 969     
Investec 969    6.2 966     
RMB 766    4.9 41     
Liberbank(3) 247    1.6 –     
Banco Popular(3) 186    1.2 186     
Pichincha(3) 132    0.8 –     
Nedbank 100    0.6 984     
Grand total 15 536    100.0 12 850     

(1) Foreign currency denominated debt converted at a EUR/ZAR spot rate of R16.49 and GBP/ZAR spot rate of R18.59 at 30 September 2019.

(2) Hedging exposure is represented by exposure per banking relationship.

(3) Group exposure includes Castellana Properties SOCIMI debt of €494 million (R8.144 billion equivalent), and swaps of €146.0 million (R2.408 billion equivalent).

VUKILE GROUP LOAN AND SWAP EXPIRY PROFILE AT 30 September 2019

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

  2020 2021 2022 2023 2024 2025 2026 2027
and
beyond
  Total  
Loan expiry profile including access facility (%) 7.6 12.0 21.5 12.5 10.6 0.1 33.8 1.9   100.0  
Loan expiry profile (Rm) 574 1 824 3 304 1 941 1 650 19 5 244 301   14 857  
Access facility expiry profile (Rm) 613 35 31   679  
Hedging (swap and fixed debt) profile (Rm) 75 382 1 367 2 234 8 767 25   12 850  

A summary of group debt ratios at 30 September 2019 is provided below:

  30 September 2019   31 March 2019  
  Group
Rm
Southern
Africa
Rm
Spain
Rm
  Group
Rm
Southern
Africa
Spain
Rm
 
Total debt (excluding access facilities) R14 857 R6 713 R8 144   R12 771 R5 450 R7 322  
Interest-bearing debt fixed/hedged (%) 86.5 82.2 90.0   95.7 91.7 98.7  
Hedged (swaps and fixed debt) maturity profile (years) 3.42 3.11 3.66   3.55 2.66 4.16  
Debt maturity profile (years) 3.51 1.67 5.18   3.92 2.01 5.46  
Loan-to-value ratio (net of cash)(1) (%) 40.8 38.8 42.9   37.2 30.0 45.9  
Interest cover ratio (six months)(2) 6.44 times 8.04 times 5.32 times   6.05 times 7.94 times 4.07 times  
Gearing ratio(3) (%) 40.6 37.7 43.9   37.0 30.1 45.6  
(1) Loan-to-value ratio 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 director’s valuation of all the direct property portfolio on a consolidated basis and (ii) the market value of listed investments.
(2) Interest cover ratio is based on operating profit excluding straight-line lease income plus dividends from equity-accounted investments and listed securities income (EBITDA) divided by the finance costs after deducting all finance income (net interest cost) over the respective period.
(3) Gearing ratio is calculated as a ratio of interest-bearing debt on a consolidated IFRS basis divided by total assets.

GROUP FINANCE COSTS

The group's average cost of finance (including amortisation of capitalised raising fees) for the period ended 30 September 2019 is 4.0% (31 March 2019: 4.7%).

Interest-bearing debt is 86.5% hedged (31 March 2019: 95.7%).

Group finance costs have increased by R49.0 million, from R247.0 million to R296.0 million, which is due to group borrowings increasing to R15.5 billion at 30 September 2019 from R13.2 billion at 30 September 2018.

Over the reporting period, the acquisition of the El Corte Ingles units, the Puerta Europa Centre and Westbrooke’s Castellana shares contributed to the increase in the group Euro debt. Castellana's cost of debt is c.2.5% in Spain, while Vukile's cost of Euro debt in South Africa is at 2.2%.

The average cost of finance decreased over the period since a larger portion of group debt is Euro based. Finance costs by currency, using the historic weighted average cost of debt, is represented in the following table:

  HY20
historical
cost
of debt
%
Debt at
30 September
2019
Rm
  FY19
historical cost
of debt
%
Debt at
31 March
2019
Rm
 
ZAR 9.6 2 900   9.2 3 226  
EUR 2.5 12 070   2.7 9 462  
GBP 3.4 534   3.5 542  
Total 4.0 15 504   4.5 13 230  

UNDRAWN FACILITIES

Undrawn available facilities amount to R1.2 billion at 30 September 2019 (31 March 2019: R1.4 billion).

UNENCUMBERED ASSETS

  30 September
2019
Rm
  31 March
2019
Rm
 
Property assets 3 300   3 400  
Listed shares 5 400   3 800  
Unencumbered assets 8 700   7 200  
Unsecured debt 1 500   1 300  
Unsecured debt to unencumbered assets ratio (%) 17.5   18.7  

CREDIT RATING

Global Credit Ratings Co. (GCR) upgraded Vukile’s rating in July 2019, such that the senior secured long-term credit rating was upgraded to AAA(ZA)(EL), the corporate long-term credit rating was upgraded to AA-(ZA) and the corporate short-term rating was upgraded to A1+(ZA), with a stable outlook.

MOVEMENT IN GROUP DEBT

During the period total group debt increased by R2.3 billion. In addition to foreign exchange movements on translation of balances in the group's foreign denominated debt, the most significant movements in debt were as follows:

  Nominal
debt drawn/
repaid
Rm
  Foreign
exchange
movements
Rm
  Net
Rm
 
Vukile ZAR bank debt (292.9)     (292.9)  
Vukile ZAR DMTN debt      
Vukile GBP debt   (8.5)   (8.5)  
Vukile EUR debt 1 754.5   30.7   1 785.2  
Castellana EUR debt 717.1   105.2   822.3  
Grand total 2 178.7   127.4   2 306.1  

There was no movement in the DMTN programme over the period. During the period, Vukile extended ZAR interest rate swaps amounting to R403 million at an estimated annualised saving of R0.5 million. Vukile extended and entered into new EUR interest rate swaps totalling €116.8 million, at an estimated annualised saving of R6.0 million, and Vukile EUR interest rate swaps amounting to c.€20.7 million matured. The group has comfortably complied with all bank and DMTN LTV and ICR covenants, where applicable.

GROUP FOREIGN EXCHANGE CURRENCY HEDGES

Vukile has adopted a strategy of hedging its foreign dividend exposure at 75% on average 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, while still maintaining its profile as a rand hedge share given the significant percentage of earnings generated offshore.

EUR net income exposure

Dividend payment dates Dec
2019
  Jun
2020
Dec
2020
Jun
2021
Dec
2021
Jun
2022
Dec
2022
Jun
2023
Dec
2023
Jun
2024
 
Fixed EUR/ZAR rate R17.4997   R18.1463 R18.4702 R19.2738 R19.2738 R20.9673 R21.8077 R22.6975 R23.0560 R23.9613  
  Average
over
1 year
  Average
over
3 years
Average
over
5 years
               
Average % net EUR dividend hedged 91   88 82                

GBP net income exposure

Dividend payment dates Nov
2019
  May
2020
Nov
2020
 
Fixed EUR/ZAR rate R19.9029   R20.6072 R21.3622  
  Average
over
1 year
  Average
over
3 years
Average
over
5 years
 
Average % net GBP dividend hedged 89   40 22  

Vukile has chosen not to enter into new GBP FECs for the periods between May 2021 and November 2023, as there is uncertainty to the long-term prospects of Vukile retaining its interest in Atlantic Leaf.

CROSS-CURRENCY INTEREST RATE SWAPS

At 30 September 2019, 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  
Nedbank CCIRS June 2018 93.2   1 346.2   14.4446   1.90    8.81    14 June 2021  
Nedbank CCIRS June 2018 23.8   360.4   15.1420    1.29    8.81    14 June 2021  
ABSA CCIRS July 2018 40.0   629.9   15.7465    3.70    11.88    13 June 2022  
Investec CCIRS July 2018 25.5   401.4   15.7400   3.72    11.88    13 June 2022  
Total 182.5   2 737.9                  

The board limits CCIRS to 45% of offshore investments. At 30 September 2019, CCIRS were 30.2% of total offshore investments on a consolidated basis. No new CCIRS were entered into during the period.

SA REIT ASSOCIATION BEST PRACTICE RECOMMENDATIONS (BPR)

The SA REIT Association has recently released a second edition BPR, which deals with best practice reporting for SA REITs. The new BPR is applicable for financial year-ends starting from 1 January 2020. Vukile will assess the new BPR in due course and will, as far as possible, endeavour to comply with the recommendations contained therein. Vukile confirms that this set of results is fully compliant with the current BPR as published by the SA REIT Association.

PORTFOLIO REVIEW – southern Africa

“In remarkably challenging market conditions, our resilient and defensive retail portfolio has again delivered a sterling performance. In an environment deficient of growth, we are driving operational efficiencies by embracing innovative solutions that are cost effective, ensure a high standard of property asset management and protect value in the long term.”

The southern Africa total direct property portfolio at 30 September 2019 consisted of 59 properties with a total value of R15.8 billion, and gross lettable area (GLA) of 993 361m2, with an average value of R268 million per property.

The southern African retail portfolio, which accounts for 92% of the value of the assets, was valued at R14.6 billion and consists of 45 properties with an average value of R325 million. 83% of retail space is let to national tenants with vacancies limited to 2.8%.

OPERATING ENVIRONMENT

Key themes

  • Performance: The portfolio has held up admirably under very tough trading conditions, portfolio metrics have shown improvement when compared to the corresponding prior period results.
  • Asset management model: Focused operational efficiency strategy yielding strong results with regards to operating costs and portfolio occupancy rates.
  • Portfolio composition: Marked improvement in trading densities and foot count across the portfolio, with all categories showing growth barring department stores.

At an industry level, retail sales have been under severe pressure, leading to challenged trading densities and lower occupancy levels. Notwithstanding this, the Vukile portfolio has shown a significant increase in trading statistics. Portfolio allocation both from a geographical and asset size perspective has been the key differentiator in delivering these impressive results.

The portfolio realised an annualised portfolio trading density growth of 3.5% and footfall was up 2.5% as at 30 September 2019. Trading densities including asset management interventions, driven mostly by tactical tenant introductions, have resulted in growth of 4.7% over the same period.

Township asset performance remains strong with annual trading densities of R39 450/m2 and a rent-to-sales ratio of 4.9%; R30 465/m2 and 5.3% for rural and R25 116/m2 and 7.0% for urban respectively. The portfolio delivered improved overall category performance with 13 of the 14 retail categories showing positive trading density growth. Department stores are now the only negative category within the portfolio, driven by the challenged Edcon business, which is receiving very close attention from the asset management team. (Refer to note regarding Edcon at the end of the southern Africa portfolio review).

At an industry level we are seeing a divergence in the micro-performance of properties between good, well-located dominant assets and secondary non-dominant assets. Due to our robust portfolio underwriting processes and our data driven asset management approach, we have ended up on the right side of this divergence in performance as can be seen from the overall improvement in operating metrics.

OPERATIONAL HIGHLIGHTS

  • Like-for-like net income growth of 6.1% compared to 3.4% at previous year-end
  • Retail vacancies down from 3.0% to 2.8%
    – 11 malls now fully let
    – 25 malls with vacancies less than 1 000m2
  • Rent-to-sales ratio of the portfolio marginally down from 6.0% to 5.9%
  • New retail leases were concluded at 3.8% above budget
  • Retail reversions have slowed from 4.5% in prior period to 1.9%. (Out of 201 leases renewed 70% were positive, 18% flat and only 12% were negative.)
  • 2% growth in asset value of property portfolio
  • In-contract escalations held steady at 7%, but under increasing pressure from fashion retailers
  • 82% retail retention rate
  • Fibre rolled out to 35 of our malls, wifi live in two malls with proof of concept relating to mall data analytics in progress
  • Specialised skills of in-house leasing and capital projects management yielding positive results
  • Building condition assessments for the portfolio concluded
  • Successful launch of redeveloped Pine Crest Centre
  • WALE down to 3.8 years from 4 years
  • Decreased Edcon exposure from 4.3% to 3.5% of retail portfolio rent (down to seventh from fifth biggest tenant)
  • Clicks now in top 10 tenants – testament to strong performance in health and beauty category
  • Trading densities up from 1.1% at year-end to 3.5% (like-for-like) and 4.7% (with asset management interventions)
  • Net cost-to-property revenue ratio well contained at 16.9% of all expenses
  • 4% of the electricity now generated through 12 PV projects generating enough power for c.1 600 houses.

Property asset management in action

We are committed to constantly improving and optimising our portfolio, to create both long term and short-term value. Acquisitions, new developments, redevelopments, maintenance, strategic leasing and disposals are all tools that we use to achieve this. Our acquisitions and upgrades are planned to ensure that our properties are dominant in their catchment areas, and this is now the case with most of our centres.

While opportunities to grow the South African retail portfolio by acquiring assets of the right quality at the right price were scarce in the market, Vukile continued to invest in the development, upgrade and expansion of its retail assets.

Utilities management

Energy efficiency, water savings, cost efficiency and the ability of our properties to operate without disruption are crucial factors for our tenants’ businesses. To ensure that our properties can offer this, we have in-house expertise that oversees the constant monitoring of energy and water consumption in the portfolio to identify potential areas to improve recoveries, reduce wastage and innovate savings. We focus on reviewing and investing in technologies that provide both optimal results and payback periods.

Alternative income management

To provide a top-quality experience for our tenants and their customers, we need to understand and connect with them. Value-add experiences are at the heart of this. We have grown in-house expertise to boost our understanding of consumers and how to engage with them, using the latest platforms and technology. This not only supports the positive performance of our retailers, and thus protects and supports our property income streams, but also creates added alternative income opportunities.

Leasing

We have established a new in-house leasing team, which is engaging with a far broader array of retailers and creating more diverse and interesting tenant mixes in our centres. While our portfolio will remain a combination of listed big nationals and second-tier nationals, we already have relationships with the big-name brands, and thus most leasing activity with them involves renewals.

Through bringing elements of our leasing in-house, we are driving new relationships with the retailers we believe are the future of the sector. These are typically second-tier national retailers that are growing aggressively. They are nimble because they are smaller, and they tend to be closer to their shoppers. This gives them a deeper understanding of their markets and what consumers want. They have a proficient grasp of price-points, and their marketing resonates well with shoppers.

Tenant arrears

Tenant arrears (including tenant recharge accruals) amounted to R97.5 million at 30 September 2019 compared to R117.3 million at 31 March 2019.

A significant portion of the arrears balance is fully provided for. In southern Africa, the retail sector continues to experience headwinds, resulting in difficult trading conditions for our tenants. This has been confirmed from macro-trends experienced by both our property managers, JHI and Broll over the portfolios they manage.

The allowance for the impairment of tenant receivables at 30 September 2019 increased slightly to R36.2 million, from R31.5 million at 31 March 2019. Bad debts written off in the six months to 30 September 2019 amounted to R12.4 million, compared to R10.0 million at 30 September 2018.

Small capital projects

We have built a new internal team to focus on the small capital projects that ensure the upkeep of our shopping centres, which supports successful leasing and tenant retention. The way that we spend money and manage and oversee these projects is driving much value. We want to ensure that we can get the right quality of work at the right price, and thus we have secured these dedicated skills in-house. Vukile spends approximately R70 million per year on various small “capital” projects.

By sharpening our focus in this area, delivering quality projects on time and within budget, we are creating real value for money. This gives us an essential advantage. The portfolio has undergone a complete building condition assessment for each asset, which has resulted in a capital budget plan to run into the medium term. This will ensure that the assets within the portfolio remain competitive and relevant within their context.

PROJECTS

Completed upgrade project

Pine Crest Shopping Centre, KwaZulu-Natal

The upgraded and extended Pine Crest Centre in Pinetown was successfully relaunched on 25 July 2019. Pine Crest Centre, the first and still the biggest shopping centre in Pinetown, underwent a R200 million redevelopment. The rebranding and relaunch of the centre, has added a brand-new look to the centre and an enhanced shopping experience.

The new food court, which will in future link directly to the GoDurban bus terminus, includes Spur, Nando’s, Roots Grill, KFC, Debonairs, Steers, Fishaways and Galaxy Bingo, which are all trading above expectations. More than 20 new brands were added with the upgrade and extensions which includes, inter alia, HiFi Corporation, Roots, Old Mutual, OK Furniture, Capitec Bank, Tekkie Town, Rage, Power Fashion, Street Fever, Cross Trainer, Skipper Bar and Pedros Chicken. The new mall entrance directly off Kings Road provides commuter shoppers with much easier access to the centre from the nearby taxi rank.

Current Vukile projects

Our major development capital expenditure projects approved and in progress at 30 September 2019 are:

Approved Completion Approved
R000
  Paid to
30 September
2019
R000
 
Phuthaditjhaba: Maluti Crescent 31 August 2019 391 650   353 738  
Pinetown: Pine Crest Centre 31 July 2019 200 000   178 979  
Durban: Phoenix Plaza 31 May 2018 35 000   31 916  
Meadowdale Mall (67%) 29 August 2018 16 264   14 365  
Springs Mall (25%) 29 March 2019 8 560   8 203  
Hammarsdale Junction Extension 31 March 2019 4 500   4 354  
    655 974   591 555  

The projects are financed from the proceeds of property sales and existing bank facilities.

SALES

Sandton Linbro Galaxy Drive was sold for R17.4 million at a yield of 8.9% during the period.

VALUATION OF SOUTHERN AFRICAN PORTFOLIO

The southern African portfolio consists of 59 properties with a total gross lettable area of 993 361m2. The accounting policies of the group require that the directors value the entire portfolio every six months at fair value. Using a DCF methodology, approximately one-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 R15.8 billion(i) at 30 September 2019. This is R300 million or 2.0% higher than the valuation as at 31 March 2019. The resulting forward yield for the portfolio is 8.4%.

The external valuations by Quadrant Properties (Pty) Ltd and Knight Frank (Pty) Ltd 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 (Pty) Ltd, which owns Moruleng Mall.

TOP 15 PROPERTIES BY VALUE

Vukile's top 15 properties are all retail assets. They are 83% exposed to national, listed and franchised tenants. These properties comprise 60.2% of the total portfolio value and 46.2% of the total portfolio GLA.

Property Location   GLA
Value
Rm
% of
total
portfolio
Valuation
R/m²
 
Boksburg East Rand Mall(i) Gauteng   34 202 1 448 9.2 42 331  
Pinetown Pine Crest KwaZulu-Natal   43 431 1 155 7.3 26 592  
Durban Phoenix Plaza KwaZulu-Natal   24 231 939 5.9 38 764  
Phuthaditjhaba Maluti Crescent Free State   35 303 808 5.1 22 890  
Pretoria Kolonnade Retail Park Gauteng   39 665 547 3.5 13 801  
Gugulethu Square Western Cape   25 323 545 3.4 21 514  
Soweto Dobsonville Mall Gauteng   26 438 545 3.4 20 603  
Queenstown Nonesi Mall Eastern Cape   27 898 507 3.2 18 181  
Bloemfontein Plaza Free State   43 771 458 2.9 10 461  
Germiston Meadowdale Mall(ii) Gauteng   33 156 454 2.9 13 702  
Thohoyandou Thavhani Mall(iii) Limpopo   17 780 447 2.8 25 163  
Oshakati Shopping Centre Namibia   24 632 428 2.7 17 392  
Daveyton Shopping Centre Gauteng   17 774 428 2.7 24 058  
Randburg Square Gauteng   40 777 413 2.6 10 116  
Moruleng Mall(iv) North West   25 274 411 2.6 16 242  
Total top 15 properties     459 655 9 533 60.2 20 739  
% of total portfolio     46.2 60.2      
% of retail portfolio     53.4 65.2      

(i)    50% undivided share in this property.

(ii)   67% undivided share in this property.

(iii)  33% undivided share in this property.

(iv)   80% share in Clidet No 1011 (Pty) Ltd.

SUMMARY OF PORTFOLIO CHANGES

GLA reconciliation GLA m2    
Balance at 31 March 2019 988 303     
GLA adjustments 7 489(i)    
Disposals (2 431)     
Acquisitions and extensions –     
Balance at 30 September 2019           993 361     
       
Vacancy reconciliation GLA m2 %  
Balance at 31 March 2019 38 845  3.9  
Less: Properties sold since 31 March 2019 –   
Remaining portfolio balance at 31 March 2019 38 845  3.9  
Leases expired 73 960     
Tenants vacated 14 855     
Moved from development vacancy 937     
Renewal of expired leases (38 956)    
Leases to be renewed (20 149)    
New letting of vacant space (31 429)    
Balance at 30 September 2019             38 063  3.8  

(i) Residential units were previously measured in number of units and not GLA. Randburg Square Apartments of 7 508m² is now included in GLA measures.

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 75% of the gross income comes from Gauteng, KwaZulu-Natal, Free State and Limpopo.

  % of gross
income
  % of
GLA
 
Gauteng 38   44  
KwaZulu-Natal 21   16  
Free State 8   8  
Limpopo 8   7  
Western Cape 7   6  
Namibia 7   6  
North West 4   5  
Mpumalanga 4   5  
Eastern Cape 3   3  

Sectoral profile

Based on value, 92% of the southern African portfolio is in the retail sector, followed by 3% in the industrial, 3% 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 77% of our tenants by rentable area. In the retail portfolio this is even higher, with 83% 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 68 66   73 68  
B – National and listed tenants, franchised and medium to large professional firms 12 11   10 9  
C – Other (1 226 tenants) 20 23   17 23  

Lease expiry profile

Vukile’s southern African lease expiry profile shows that 14% of the leases based on rentals are due for renewal in 2020. Some 47% of leases are due to expire in 2023 and beyond (up from 42% beyond 2022 in the prior year).

  March
2020
March
2021
March
2022
March
2023
Beyond
March
2023
 
% of contractual rent 14 19 20 15 32  
Cumulative 14 33 53 68 100  
  Vacant March
2020
March
2021
March
2022
March
2023
Beyond
March
2023
 
% of GLA 3.8 14 15 17 13 37  
Cumulative 3.8 18 33 50 63 100  

Vacancy profile

The portfolio’s vacancy measured on GLA improved marginally from 3.9% at 31 March 2019 to 3.8% at 30 September 2019. Retail vacancies reduced by 1 083m² from 3.0% to 2.8%, with some positive movement in both the industrial and office sectors as well. The main reason for the high office vacancies is the vacancy at Sunninghill Sunhill Park which is held for sale and transferred in early December 2019. If this property is excluded, the September 2019 vacancy on the total portfolio improves to 3.1% and offices to 2.7%.

Vacancies (% of GLA) September
2019
%
  March
2019
%
 
Retail 2.8   3.0  
Industrial 5.1   5.7  
Offices 20.0   21.0  
Motor Related    
Residential 15.6   (i)  
Total 3.8   3.9  

Including development vacancy, the September 2019 vacant GLA is 3.9%.
(i) Residential units were previously measured in number of units and not GLA and vacant rental is now included together with the change to measurement in GLA.

Vacancies (% of gross rental) September
2019
%
  March
2019
%
 
Retail 3.0   3.0  
Industrial 5.3   2.9  
Offices 18.3   19.6  
Motor Related    
Residential 9.5   (i)  
Total 3.6   3.6  

Including development vacancy, the September 2019 vacant rent is 3.8%.
(i) Residential units were previously measured in number of units and not GLA and vacant rental is now included together with the change to measurement in GLA.

Leasing profile

Vukile concluded new leases and renewals in excess of 83 000m2 with a contract value of R596 million. Tenant retention on the total portfolio was 80%, with retail retention at 82%.

Rental profile

We achieved positive reversions of 2.5% on the total portfolio, with retail reversions at 1.9%. To retain tenants in difficult market conditions, focus had to be given to the total cost of occupancy of 15 specific boxes which reduced the average retail reversion rate. If these 15 special transactions are excluded, the average renewal rate on the remaining retail reversions is 5.7%. Although transactions were limited in the industrial and offices sector, positive reversions of 8.8% and 8.0% were concluded in these sectors respectively.

New leases were concluded at 3.8% above budget in the retail sector but the ongoing pressure in the office and industrial sectors, to which we now have little exposure, dictated that new leases be concluded at or below budget rates. This resulted in the total portfolio’s new leases finalised at 3.1% above budget.

The weighted average base rental rates (excluding recoveries) increased by 3.5% from R127.54/m2 to R132.06/m2.

Base rental rates (excluding recoveries) (R/m2) September
2019
  March
2019
Escalation    
Retail 139.26   134.78 3.3    
Industrial 59.31   57.83 2.6    
Offices 101.20   95.32 6.2    
Motor Related 165.70   131.68 25.8(i)  
Residential 146.67   (ii)  
Portfolio weighted average base rentals 132.06   127.54 3.5    

(i) The increase in average rate for motor-related properties is due to the sale of Linbro Galaxy drive which carried lower rentals. The six-month growth in rental rates on the remainder of the portfolio was 3.1%.

(ii) Residential units were previously measured in number of units and not GLA therefore no average rental based on R/m2 was calculated in March 2019.

In-contract escalations remained stable at average 7.0%, with slight increases in the industrial and office sectors. Retail escalations of average 7.0% are under pressure with national tenants demanding lower in-contract escalations.

  September
2019
  March
2019
 
Retail 7.0   7.0  
Industrial 7.8   7.6  
Offices 7.5   7.0  
Motor Related 7.0   7.0  
Total 7.0   7.0  

COSTS

The largest expense categories contribute 84% to the total expenses. These are government services (48%), rates and taxes (18%), cleaning and security (11%) and property management (7%).

We continuously evaluate methods of containing costs in the portfolio and urge our property managers to implement innovative solutions to achieve this. The remaining portfolio’s recurring net costs to income ratios remain stable and well contained at 16.9% forecast for the 2020 year.

Net costs to income ratio: remaining portfolio 2014 2015 2016 2017 2018 2019   2020
forecast
 
All expenses 19.4 18.0 17.5 16.2 15.7 16.3   16.9  
All expenses excluding rates and taxes and electricity 16.9 17.9 16.3 15.5 15.4 15.2   16.1  

LIKE-FOR-LIKE NET OPERATING INCOME GROWTH

Like-for-like growth (stable portfolio) 30 September
2019
  30 September
2018
%
change
 
Property revenue (Rm) 662.7   628.0 5.5  
Net property expenses (Rm) 117.7   114.1 3.2  
Net property income (Rm) 545.0   513.9 6.1  
Net cost-to-income ratio (%) 17.8   18.2    

EDCON

During the period, Vukile, along with other landlords, subscribed for equity in Edcon as part of its restructure. At 30 September 2019, management is not aware of any information indicating that the investment in Edcon should be impaired. We are also not aware of any material deviations from Edcon's stated business plan as presented as part of its restructure. Accordingly, management's best estimate of the fair value of the investment is the cost thereof. Management continues to monitor the fair value of the investment and will reassess this fair value as more information becomes available.

PORTFOLIO REVIEW – Spain

“The Spanish portfolio is now substantial at over €1 billion. The management team is positioned to add significant value to our strategic assets through upgrades and repositioning projects.”

At 30 September 2019 the Spanish portfolio consisted of 18 properties with a total value of €1 028.4 million, and GLA of 373 022m², with an average value of €57.1 million per property.

The Spanish retail portfolio, which accounts for 97% of the value of the assets, was valued at €1 002.1 million and consists of 16 properties with an average value of €62.6 million. In total, 93% of retail space is let to national and international tenants with vacancies limited to 1.4%.

OPERATING ENVIRONMENT

Economy and political environment

The Spanish economy remains strong

The GDP outlook in Spain is highly favourable after registering growth of 2.6% in 2018, with a consensus forecast growth of 2.2% for 2019 according to Spanish market analysts. Consumption grew by 2.6% in 2018 and will grow by 2.0% this year. Inflation increased to 1.2% by the end of 2018 and is forecast to reach 1.4% at the FY19 year-end. The most impressive key performance indicator is employment growth, which is a positive economic driver as households start to increase their spending power. The unemployment rate decreased from 26% at its peak in 2012, to 14.3% at the end of 2018, and it is forecast to reduce to 13.9% in 2019.

After new elections during the first week of November 2019, the political situation has not improved since April 2019. Some main political parties have diluted against others, putting strain on the effectiveness of parliament. Although there is still uncertainty on the political front the positive is that while government is still forming, the economy is still growing at healthy rates, well ahead of its main Eurozone peers.

Retail environment

Spanish consumption continues to grow

Spanish consumption and retail sales continue to grow, fuelled by the favourable economic environment. Capital values have stabilised while rents continue to grow with the economy. Even so, rental levels have not yet reached pre-crisis levels. This means there are considerable opportunities for rental growth in the medium and long-term investment horizon as evidenced in these results.

One of the main industries in Spain, and a major driver of its economy, is tourism. Spain is the second biggest tourist destination in the world. It is only behind France having now moved ahead of the US. In 2018, international tourist visits to the country grew 9%, accounting for more than 82.6 million visits. In 2017, international tourist spending in Spain reached almost €87 billion, 12% higher than in 2016. As at August 2019, 58.1 million tourists visited Spain, up 2.7% on the previous year. These figures reflect a positive landscape for retail parks and shopping centres in Spain and provides a strong, defensive buffer against online sales.

OPERATIONAL HIGHLIGHTS

Tenant arrears

Tenant arrears (including tenant recharge accruals) amounted to R51.6 million at 30 September 2019 compared to R72.3 million at 31 March 2019. Castellana’s in-house leasing team collects at least 99% of monthly rentals invoiced.

The allowance for the impairment of tenant receivables at 30 September 2019 remained at R2.7 million (€165 000). Bad debts written off in the six months to 30 September 2019 amounted to a mere €9 000.

Asset management in action

We are committed to constantly improving and optimising our portfolio to create both long term and short-term value. Value-add projects undertaken this year include the repositioning projects in Los Arcos, Bahía Sur and El Faro to improve the customer offering and introduce more and improved food and beverage, leisure and fashion offerings, a continuation of the down-sizing of low-rent boxes to increase rentals, and consistently filling vacancies. In addition, we are continuously making new acquisitions to strengthen and grow the portfolio.

Castellana has established itself as a leading retail-focused SOCIMI in Spain, ranking as the eighth largest SOCIMI in Spain by market capitalisation and the seventh largest retail landlord by GLA. In the first half of 2019, Puerta Europa, a dominant shopping centre in the port city of Algeciras was acquired for a total price of €56.8 million (excluding transaction costs). Puerta Europa is a high quality dominant centre with low average rentals and high sales rates which should result in attractive income growth over the short to medium term. In addition, Castellana acquired additional units in Bahía Sur and Los Arcos shopping centres from El Corte Ingles (department store in Spain) in order to execute significant accretive value-add repositioning projects, thereby increasing its portfolio value to over €1 billion. Castellana now holds a diversified portfolio of high-performing shopping centres and retail parks across Spain.

Mirroring Vukile’s successful strategy, Castellana has invested in high-performing, low-risk retail assets, with attractive rental growth prospects. The portfolio is a well-balanced, geographically diverse portfolio.

The team, now with a significant retail portfolio platform in place, continues to deliver sustainable returns from the assets and drive outperformance through active asset management and value-enhancing repositioning projects.

Highlights for the period include:

  • Surpassing budgeted net operating income targets for the portfolio overall by 3.63%
  • Containing vacancy at 1.4% for the period
  • Letting activity has been vibrant, with more than 30 000m² of GLA let in the year to date
  • Heads of terms have been reached on more than 80% of the GLA in respect of the projects being undertaken in Los Arcos and Bahía Sur
  • Concluding the purchase of additional units at Bahía Sur and Los Arcos and commencing the repositioning projects, the projects are forecast to create an additional €5.1 million annualised NOI on completion

Acquisitions

In May 2019, Castellana acquired additional units at Bahía Sur and Los Arcos for €37 million (excluding transaction costs). The total GLA of the units is 23 434m². The units will be incorporated into the centre in the repositioning projects.

In June 2019, Castellana acquired additional units at Pinatar Park for €3.6 million (excluding transaction costs). The total GLA of the units is 2 624m². The units were opened at the moment of the purchase.

In July 2019, Castellana acquired Puerta Europa Shopping Centre in the port city of Algeciras, Andalusia for a price of €56.8 million excluding costs. The centre has a total GLA of 29 742m². The centre has an average monthly rental of €14.18/m² and a WALE to expiry of 9.0 years. The centre is dominant and currently experiences low rents coupled with strong sales performances which should result in attractive rental growth over time.

PROJECTS

Castellana has embarked on exciting redevelopment projects in Los Arcos, Bahía Sur and El Faro. The projects aim to strengthen the existing offerings in the centres through the addition of new and exciting retailers, the creation of pedestrianised open space, and the introduction of attractive F&B and leisure operators in the centres. These projects underpin Castellana’s strategy of continually improving and enhancing the shopper experience in its centres. The projects have already commenced and we aim to complete works by the second half of 2020.

In Los Arcos, 86% of GLA has been tied up with heads of terms including Media Markt and Mercadona. El Faro has 40% of GLA secured under heads of terms with Yelmo Cinemas already signed. Bahía Sur has 85% of tenants under heads of terms.

VALUATION OF SPANISH PORTFOLIO

The asset management team has successfully added value to the retail park portfolio through asset management initiatives and repositioning projects.

The Spanish portfolio has been independently valued by Colliers at €1 028.4 million (R17.0 billion) at 30 September 2019 (2019: €916.5 million; R14.9 billion).

The fair values of commercial buildings are estimated using an income 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.

TOP 10 PROPERTIES BY VALUE

All of our top 10 properties are retail assets. Cumulatively, 95% of their tenants are national and international tenants. These properties comprise 89% of the total portfolio value, 88% of the total portfolio rent and 81% of the total portfolio GLA.

Property Location   GLA 
Value
€m
% of
total
portfolio
Valuation 
€/m²
 
El Faro Extremadura   43 407  164.1 16.0 3 780   
Bahía Sur Andalucía   36 433  142.0 13.8 3 898   
Los Arcos Andalucía   29 696  136.4 13.3 4 593   
Granaita Retail Park Andalucía   54 490  114.9 11.2 2 109   
Vallsur Castilla Leon   35 212  93.4 9.1 2 653   
Habaneras Com. Valenciana   24 166  89.8 8.7 3 716   
Puerta Europa Andalucía   29 742  62.6 6.1 2 105   
Parque Oeste Madrid   13 604  51.8 4.9 3 808   
Parque Principado Asturias   16 246  34.7 3.4 2 136   
Marismas del Polvorín Andalucía   18 079  28.5 2.8 1 576   
Total top 10 properties     301 075  918.2 89.3 3 050   
% of total portfolio     80.7  89.3      
% of retail portfolio     84.5  91.6      

SUMMARY OF PORTFOLIO CHANGES

GLA reconciliation GLA m²  
Balance at 31 March 2019 317 106  
GLA adjustments 116  
Acquisitions and extensions 55 800  
Balance at 30 September 2019           373 022   
Areas under development (41 921)  
GLA excluding areas under development 331 101  
     
Vacancy reconciliation   GLA m²   %
Balance at 31 March 2019 6 796 2.1
Vacancy movement (2 253)  
Balance at 30 September 2019               4 543  1.4

PORTFOLIO PROFILES

Geographic profile

The geographical distribution of the Spanish portfolio is indicated in the table below. Some 88% of the gross income comes from Andalucía, Extremadura, Com. Valenciana and Castilla Leon.

Geographic portfolio % of rental
income
% of
GLA
 
Andalucía 48 48  
Extremadura 19 21  
Com. Valenciana 10 7  
Castilla Leon 11 9  
Madrid 7 7  
Asturias 3 4  
Murcia 2 4  

Tenant profile

Large national and international tenants account for 93% of tenants by rent and GLA.

  % of
rental income
% of
GLA
 
Large national and international tenants 93 93  
Local tenants (90 tenants) 7 7  

Expiry profile

Castellana has a 14.2-year retail tenant expiry profile and 2.8 years to break with 50% (52% 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:

  March
2020
%
March
2021
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
Beyond
March
2029
%
% of contractual rent 5 5 4 7 7 8 3 4 5 4 48
Cumulative 5 10 14 21 28 36 39 43 48 52 100

  March
2020
%
March
2021
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
Beyond
March
2029
%
Retail 5 6 4 7 7 8 3 5 5 4 46
Offices 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 earlier expiries portrayed by the break profile could impact positively on the portfolio if re-tenanting can be concluded at improved market-related rental rates, especially at recently upgraded centres.

  March
2020
%
March
2021
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
Beyond
March
2029
%
% of contractual rent 16 25 14 18 8 8 3 3 5
Cumulative 16 41 55 73 81 89 92 92 95 95 100

  March
2020
%
March
2021
%
March
2022
%
March
2023
%
March
2024
%
March
2025
%
March
2026
%
March
2027
%
March
2028
%
March
2029
%
Beyond
March
2029
%
Retail 16 26 15 18 8 8 3 4 2
Offices 100

Vacancy profile

The portfolio’s vacancy was 1.4% at 30 September 2019.

Vacancies (% of GLA) September
2019
%
  March
2019
%
 
Shopping centres 2.4   3.6  
Retail parks 0.5   1.0  
Offices    
Total 1.4   2.1  

Rental profile

The Castellana portfolio’s weighted average rental is €14.38/m². We believe that a significant portion of the portfolio is at below-market rentals. We anticipate rental growth to come through over the short to medium term.

  September
2019
  March
2019
Escalation
(%)
 
Shopping centres 20.05   19.98 0.4  
Retail parks 9.36   9.32 0.4  
Offices 9.60   9.32 3.0  
Portfolio weighted average base rentals 14.38   14.14 1.7  

THE VUKILE ACADEMY

The Vukile Academy (the Academy) officially launched its skills development and transformation programme in January 2019. Following the launch of the Academy, we are proud to announce the following progress:

  • The Vukile Bursary Fund – Our bursary fund has been able to award more than 55 bursaries to students currently studying towards an undergraduate degree in property/real estate related studies as well as in the fields of commerce and marketing. An amount in excess of R5.5 million has been spent for FY19 and we anticipate spending similar amounts for FY20. We expect 65% to 70% of the bursary recipients to graduate at the end of calendar year 2019, with the remaining students continuing their studies in 2020.
  • The Vukile Internship Programme – We welcomed eight interns to our programme this year. The interns have completed 10 of the 11 modules planned for calendar year 2019. The final module is their graduation and certification ceremony. The programme comprised a property-related component as well as a life skills/personal mastery component. This was to prepare our interns for the real world once they complete their programme.
    – A mentorship and support programme has been in place for our interns throughout their internship
    – Our interns are fully employed on a 12-month term contract with Vukile during their internship
    – The Vukile internship programme will result in an absorption rate close to 100% of our candidates into the South African property sector.
  • Vukile BEE certification – Vukile property Fund is proud to announce that the implementation of our board-approved transformation and empowerment strategy has resulted in Vukile achieving a level 3 B-BBEE certification for the 12-month period during FY19/20.

PROSPECTS FOR THE GROUP

SOUTHERN AFRICA

Due to the persistent macro-economic challenges which require structural changes over time, we expect the current challenging conditions to last into the next reporting period.

At an industry level, it is a welcomed development to see the national greenfield shopping centre development pipeline slow down. It is our view that dominant A grade malls should continue to show growth over time as the market consolidates into these sites due to slowing supply.

Operational efficiencies and efficient capital deployment will continue to be our primary goal into the next reporting cycle. The operational efficiency focus will help absorb the top line pressure of challenged sales growth.

We expect the portfolio’s full year like-for-like growth to be in line with the first half of the year. We also expect to gain more traction with regards to decreasing vacancies across the portfolio. On the downside, further pressure on escalations and lease duration will most likely persist. However, Vukile is well positioned with low vacancies and reduced exposure to high-risk tenants. We will continue to engage with our major tenants to ensure mutually acceptable reversions, space optimisation, and containment of administrative costs.

SPAIN

Castellana’s retail portfolio is well placed to deliver sustainable returns. Castellana’s strategy is to keep growing the portfolio through organic growth, value-added asset management initiatives and accretive acquisitions.

The Castellana team is resolutely focused on the delivery of the value-add projects in Los Arcos, Bahía Sur and El Faro which will transform the three assets in terms of an improved tenant mix, greater dominance in their catchment areas and better experience with leisure and food and beverage activities. We expect to complete those projects within the next 12 months and anticipate that it will change the outlook of the portfolio by increasing NOI over time, but most of all it will further demonstrate the Castellana team’s ability to deliver enhanced and growing income. On the retail park portfolio there are several projects taking place that will enhance the tenant mix. The team is working hard to continue to reduce exposure to electronics, mostly by replacing these shops with other operators in the sports, fashion and household sectors.

The Spanish retail real estate market is forecast to be less active this year as investors have turned to other asset classes. As a result, many opportunities are coming to Castellana as shown by the large pipeline. Our investment strategy will remain focused on enhancing and adding value to our portfolio of low-risk, dominant retail assets that produce predictable and sustainable income streams.

While capital values and yields are stabilising, we expect rentals to keep growing at healthy rates.

We believe the time is right for a different approach to soft services, repairs and maintenance in the Spanish shopping centre environment. We are challenging our property managers to keep developing innovative solutions that offer us better value in the year ahead.

We are well on our way to positioning Castellana at the top end of the market with our quality retail portfolio, highly skilled team and significant opportunities for value enhancement.

GROUP DIVIDEND GUIDANCE

With the strong benefits of geographic and macro-economic diversification becoming increasingly evident, and the ongoing focus on driving operational performance, Vukile reaffirms the guidance for growth in dividends of between 3% to 5% for the full year. The guidance assumes no material adverse change in trading conditions or large corporate failures. Forecast rental income is based on contracted escalations, market-related renewals and on the successful conclusion of certain transactions currently in progress. The forecast has not been reviewed or reported on by the company's auditors.

SUBSEQUENT EVENTS

DIVIDEND DECLARATION

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 27 November 2019 of 80.83610 cents per share for the six months ended 30 September 2019 amounting to R773 million.

ACQUISITION OF MDANTSANE CITY SHOPPING CENTRE (MDANTSANE)

During November 2019, Vukile concluded the acquisition of Mdantsane for R516.5 million. Mdantsane City is located in Mdantsane which is one of the largest townships in South Africa. It is an established and very well supported shopping centre in the node and is situated on the main arterial route through Mdantsane. Mdantsane City has over 90 shops, with Shoprite, Pick n Pay and Cashbuild as anchor tenants. It has a high national tenant component and includes retailers such as Truworths, Woolworths, Foschini, Mr Price and Markham.

SALE OF NON-CORE PROPERTY PORTFOLIOS

MICC Properties Namibia

Vukile has actively been marketing a wholly owned subsidiary, MICC Properties Namibia (Pty) Ltd, which is available for immediate sale. The price at which it is being marketed is in line with the fair value of the subsidiary, primarily driven by the fair market value of the underlying properties. As at 30 September 2019, no sale had been concluded, but it is highly probable that a sale will occur within 12 months. Vukile is in advanced discussions with a prospective purchaser.

Non-retail, commercial and industrial portfolio

On 27 November 2019, Vukile entered into an agreement with Mbako Property Fund (Mbako) whereby Vukile will dispose of all its remaining non-retail property assets for R700 million.

Mbako is a new black women-owned and managed property fund led by AWCA Investment Holdings (AIH) as its founding shareholder. Mbako, meaning “to build”, embodies its co-founders’ vision of working together to build a sustainable South African property fund.

The sizeable Mbako seed portfolio includes nine properties split between the office and industrial sectors. The portfolio has a total gross lettable area of more than
94 000m².

The sale is subject to a number of conditions precedent including, inter alia, Mbako obtaining equity funding and approval of the Competition Authority.

DECLARATION OF A CASH DIVIDEND

The board has approved and notice is hereby given of a final distribution of 80.83610 cents per share for the six months ended 30 September 2019. An announcement relating to the salient dates and tax treatment of the distribution payment will be released separately on SENS.

BASIS OF PREPARATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with and containing the information required by IFRS, IAS 34 – Interim Financial Reporting, 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 and the relevant sections of the South African Companies Act.

All amendments to standards applicable for Vukile’s financial period beginning on 1 April 2019 have been considered. All accounting policies applied in the preparation of these interim financial statements are consistent with those applied by Vukile in its consolidated annual financial statements for the year ended 31 March 2019, other than the adoption of those amendments or new standards that became effective or were early adopted in the current period. Note 1.2 to the financial statements explains these changes in further detail.

Preparation of the unaudited condensed consolidated interim financial statements was supervised by Laurence Cohen CA(SA) in his capacity as chief financial officer. These unaudited condensed consolidated interim financial statements have not been reviewed or reported on by Vukile’s independent external auditors.

On behalf of the board

N Payne
Chairman
LG Rapp
Chief executive officer

Houghton Estate
2 December 2019

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
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), GS Moseneke

Non-executive directors:NG Payne (chairman), PS Moyanga, SF Booysen, RD Mokate, H Ntene, HM Serebro, B Ngonyama

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 302, 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