Monday, 6 November 2023. Real estate investment trust Redefine Properties (JSE:RDF), one of South Africa's leading REITs, has posted robust financial results for the year ended 31 August 2023, driven largely by the local portfolio's continued improvement in operational metrics and the growing contribution of EPP, the largest retail real estate asset manager in Poland by leasable area.
Distributable income of R3.5 billion, representing distributable income per share of 51.53 cents for the year ended 31 August 2023, comes in higher than the midpoint of the company's guidance range of between 48 and 52 cents. The Group has a well-diversified asset portfolio that has grown by R7.9 billion during the year to a current value of R96.8 billion. A full year dividend of 43.80 cents per share was declared, increasing from 42.97 cents per share in FY22, which signals a healthy liquidity position and a continued commitment to rewarding shareholders despite the constrained environment. Earnings guidance for the 2024 financial year remains flat between 48 and 52 cents per share.
Redefine CFO Ntobeko Nyawo says the sustained value creation is a result of "a stable and healthy balance sheet despite the volatile environment with a loan-to-value ratio of 41.1%, which is marginally outside our internally set medium-term optimal gearing range largely due to Rand depreciation during the financial year."
He adds, however, that the Group's balance sheet holds sufficient short-term liquidity headroom of R5.5 billion – consisting of cash on hand and access to committed undrawn facilities. This, together with a flat debt maturity profile, places the business in a comfortable position to mitigate the anticipated volatility of the prevailing constrained capital environment.
While the cost of debt on a weighted average basis across the Group ticked up by 110 basis points, from 6.0% in FY 2022 to 7.1% as a function of higher interest rates, Nyawo says the company is protected against rising interest rates and is well-hedged at 77.1% of total Group debt.
Despite the headwinds and higher-for-longer interest rate environment, which impacts inter alia property valuations and fundamentals, operational performance and currency movements have offset this and resulted in a pleasing 6.4% increase in net asset value (NAV) to R7.66 per share.
Nyawo notes that another good outcome for the business, and an example of focusing on "variables within our control" like operational efficiency, is healthy cash generation. With the collection ratio sitting at 101%, this demonstrates that the business can fulfil its primary goal of generating cash flow.
"The FY23 outcome is testament to positive operational performance and strong quality of earnings. It's a solid set of results that were produced not by relying on any once-offs but recurring income. That underpins the quality of assets in SA and Poland," he says.
He says Redefine will continue to rely on positive operational strength of its overall portfolio, which will help the business to absorb some of the shocks of the interest rate environment.
“Redefine's local portfolio maintained a stable net profit margin of 78% despite the cocktail of challenges absorbed, while EPP's net profit margin improved by a robust 9% to 74% in FY 2023. EPP's delivery in its first financial year of ownership in the Redefine stable shows that it has been restored into a yielding asset post the corporate restructure and now makes for a strong contributor to the Group’s earnings,” Nyawo says.
Poland poised for growth
CEO Andrew König says, despite absorbing some hard knocks this year, the results demonstrate that Redefine's business remains sound.
The Polish economy has experienced challenges due to geopolitical tensions and resultant high inflation, which peaked in February but is now beginning to come down alongside interest rates. These factors have led to increased consumer spending.
CEO Andrew König says this bodes well for retail powerhouse EPP, which has proved to be a strong contributor to the Group’s earnings despite negative news coming out of Europe.
The company's Polish logistics platform has expanded by 275,014 sqm because of development activity completed during this period. The total gross lettable area is currently sitting at just under 1 million sqm, which König says puts Redefine in a commanding position in the logistics market in terms of size and scale.
He adds that Redefine's foray into the self-storage market, which is still in its infancy compared to neighbouring countries, holds the potential to grow substantially. The company, through its acquisition of self-storage platform Stokado, has secured a development pipeline that will increase its net leasable area by about 26,000 sqm.
Local portfolio 'largely stabilised'
COO Leon Kok says that Redefine's local portfolio "has largely stabilised, showing signs of improvement across most operating metrics, and is, as a result, well-positioned for organic growth."
The company completed 745,061 sqm of leases in the year with new deals accounting for 40% and renewals making up the balance. Kok says this is indicative of underlying confidence and activity in the sector.
Another metric of importance is the tenant retention level, which has increased from 92.1% to 92.8% and speaks to "the quality of our assets and ability to retain existing tenants in a competitive environment, which is critical to unlocking cash flow."
Although renewal reversion, in other words, the rate at which leases are renewed, is still in negative territory, this year's result of -6.7% is a substantial improvement on last year's (-12%). Again, this speaks to the ability to retain quality tenants in quality spaces.
A commendable achievement on the office front is the reduction in vacancies from 14.4% to just below 12%. "In an environment where office prospects have been largely negative, we think this is a phenomenal achievement. It speaks to the quality of our office portfolio, which is 95% invested in A- and Premium-grade office buildings. We will continue to invest in those well-located properties to ensure we attract demand within the office sector," Kok says.
Transforming challenges into opportunity
Says König: “While some may ruminate on the persistent challenges around real estate and the tough macro-economic factors, we are focused on variables under our control and spotting opportunities in every challenge. That is what we call, opting for the upside.”
He said Redefine faced down several market dynamics that have evolved and dissipated; not because they’ve disappeared but because “we have adapted and responded to them and strengthened our business as a result".
For instance, Redefine addressed liquidity risk arising from the global liquidity crunch by broadening its funding sources through the issuance of green bonds worth R4.2 billion, which has enabled the company to extend a new source of debt funding into its funding book.
The global energy crisis has resulted in cost challenges in Poland and the business has responded by significantly reducing energy consumption by 20% over two years, while the energy crisis in SA has created an investment opportunity into renewable energy.
Kok explains that the investments made into solar PV capacity (36MW) in SA “will stand the business in good stead going forward”. “This makes Redefine the REIT landlord with the largest fleet of rooftop solar panels in the country, which is highly relevant in an environment where we are not only battling an energy crisis, but severe cost pressures. Solar PV makes for a stable investment that can provide an attractive financial return."
Looking ahead, König says Redefine will continue to shift its emphasis to evolving market dynamics. "Navigating the effectiveness of the structural energy transition and spotting the opportunities as the interest rate cycle starts shifting will be key," he says. “When interest rates start to come down, it will mark a turning point for the investment real estate cycle."
He says Redefine will continue to build and manage a simplified property platform that offers enhanced transparency with an extreme focus on holding onto each tenant. "We continue to drive strategies that assist us in understanding and responding to stakeholder needs, leading the charge in ESG and maintaining our high staff engagement rate. We aim to achieve this by staying grounded by our purpose; we're not landlords, we're people."
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