Hyprop Investments Limited (HYP.JO) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Hyprop's Pre-Close update for the 5-month period ending May 2023. It's nice to see so many of you in person and a warm welcome to those of you joining us online as well. So, we are a bit later than we expected to start, but welcome to you. On behalf of SBG Securities. I'd just like to thank the Hyprop management team for giving us the opportunity to host this today. Just in terms of order of events quickly, I'll shortly hand over to Morné, Wilhelm and Brett, and they'll be taking us through their presentation. [Operator Instructions] So without further ado, I'd like to hand over to you, Morné.

Thank you very much. I hope you've got your popcorn ready and some cokes. And hopefully, it's not a horror show, but a good movie. Good morning, everyone. It's nice to see you all here, and thanks for hosting us. It's really great. And what I want to cover today is just a bit of operational update for the last 6 months since our interim results. And I've got a few slides to summarize what we want to discuss. Obviously, the SENS was released before close of business yesterday. So most of the information I am covering is in that SENS. Just in terms of highlights, we're quite excited to see how our portfolio is performing actually under a very tough economic environment. In terms of raising further money, we have successfully raised a bond of ZAR 1 billion. It was ZAR 240 million bond for a 3-year period and then ZAR 760 million for a 5-year period. That bond was oversubscribed by 2.25x. We also have successfully refinanced EUR 255 million. And that is to actually refinance facilities that's expiring. One of those facilities is the EUR 110 million, as we call it, euro equity debt, and the balance is what we've refinanced in Croatia. We also have successfully refinanced all our ZAR facilities that we required to refinance, and that will be implemented as and when those facilities expire. What is quite positive news is we successfully through RMB have got $8.5 million out of Nigeria and that is quite positive, and we haven't received any funds up to now. So that's quite good. What we have done with the proceeds of those funds is actually to reduce our interest -- rolled up interest on Ikeja City Mall in-country debt. Our loan-to-value has remained at 37.2%. And what is also quite good is, in terms of ESG, MSI has improved our rating from a single A to a double A. If we now look at our SA portfolio, I think we have done quite good work in terms of repositioning, ensuring we've got the right anchors and having the right tenant mix. That's an ongoing process. So one of the things we have been focusing on is specifically Pick 'n Pay. They've upgraded 4 of their stores. We've got a full upgrade at CapeGate, where they've done it completely today in light of CVP. And then we had minor upgrades at Clearwater, Rosebank as well as Hyde Park Corner. Operational performance of Pick 'n Pay is not completely where we wanted it to be as an anchor. And therefore, we are engaging quite a lot with management in terms of that. In terms of Somerset Mall, as you know, the old food court, we are taking -- making that available for a store for Checkers FreshX. And part of the project, we also are forming what we call a mini food court that actually complement and support the [indiscernible] in Somerset Mall. That will be completed in November of this year. Then the first Nooka flexible office space has been launched at Somerset Mall. Nooka flexible office space is really, for a lack of a better word, is almost like a container where they've got seating in and a table. They've got access to Wi-Fi. There's air-con. So they've got an app, you make a booking into the Nooka, so you can go into that space, and we're going to roll it out on the malls. How the deals work is we actually get in space within the mall, electric point, and there is a revenue-sharing arrangement between the 2 of us. Eastern Europe, we had a solid trading performance, positive things that has happened there. It's Skopje City Mall. We have secured H&M. And then as mentioned before, we've now successfully replaced the 2 Inditex stores and we replaced the one with Sinsay and the other with Intersport. In terms of Sub-Sahara Africa, as you know, there's 3 game stores on our Ghana portfolio, Game has decided to exit Ghana. We have negotiated early settlement deals with them. They've paid that, and we are in the process of securing some new stores to replace them, which Wilhelm will touch on a little bit more. One of the things that is positive in the Nigeria is the free floating of the ForEx. I think it's going to be positive in terms of the new regime, Nigeria is following and hopefully, that will come through. We are busy. We have minor amendments on the deal with Actis and we will proceed with that deal. What is very positive about our transaction is we've got [ ConCom ] approval. And obviously, the other key thing is they've done their DD. So effectively, there's some smaller CPs of which one is getting dollars, but it is positive and going in the right direction. In terms of our non-tangible asset strategy, as we said at pre-close, we are splitting the business between the physical SOKO district and the technology platform, the technology platform will be called [ Inter ] We are making further enhancements on the technology platform, and that will be, at the moment, be securing further third-party users on that platform. The physical district, the high -- Rosebank Mall team has taken that over, and it is actually performing much better. Now if we look at the operational performance of South Africa, I think the key thing, as I touched on, is to make sure we've got the right tenant mix. This is the recent -- on this photo, we actually show the recent upgrade of the food court at Clearwater Mall. And what's amazing when we've done this, the amount of increase in turnover from the specific restaurants around there was phenomenal. Now in terms of new tenants, at Somerset Mall, we've secured freedom of movement. And part of the reshuffling of the new Fresh-X stores at Somerset Mall, we are repositioning some of the food retailers. So RocoMamas, Spur, Toy Kingdom was relocated at Somerset Mall and exclusive books were upgraded. Yoyo Bubble Tea and Kase Artist opened new store at Clearwater Mall and as I mentioned, Pick 'n Pay was upgraded, although a minor upgrade. Vacancy at Rosebank Mall [ Amit ] and the team has done excellent work. They've reduced the vacancy from 4.7% to 2%. They've opened 5 new stores and 2 further stores were opened after year end. Some of the stores they've opened are Cultish; it's a streetwear clothing brand, The Bed Shop, Side Step and Game4U and the future stores, it is going to open at Rosebank Mall would be Wimpy as well as Toys R Us. Two new stores are opened at Canal Walk. It is Top Tailor and UNIQ, which is part of the Checkers group. International chicken diner, Chicking opened at The Glen and we also opened a PEP Home. Upcoming openings at CapeGate is Nando's and then we got a Suzuki dealership within the basement parking that's under construction, and that will also open within the calendar year. Now if we look at -- what we show on this slide is the history of the past few years since 2018, and see how we performed in terms of what we focus on. As I've mentioned, since we've got involved, the focus is really to improve your tenant turnover. When your tenants will do well, your shoppers will do well and you will be able to grow your rental income. I think that's something we have scored a bit of own goals historically. And as mentioned before, I believe our portfolio is over-rented, and we actually had a lot of reversions coming through on the portfolio due to that. But focusing on making sure your tenant trade well, I think will definitely support rental growth in the future. And there, you can actually see the tenant turnover has grown quite nicely. If you look at our effort ratio, that has reduced quite a lot. It starts from a historic high of 12.2%, and that is around 8.9%. So there is definitely opportunity where you can see some potential growth in that. It's also positive to see that our foot count has increased, although customers are not back to the footfall as pre-COVID. The amount of money they spend per visit has improved quite nicely. What I show on this slide is really, if you look at it in the last 5 months up to May, what we have done in terms of tenant turnover as well as trading density. And as you can see on that slide, it's doing very well, and it is actually better of what we've achieved in pre-COVID. Foot count, as I said, is not back to the numbers it used to be pre-COVID. Then the one thing that is showing and going in the right direction is our reversions. As you can see, we have renewed 92,000 squares in terms of the portfolio for the financial year up to May. That's 14% of our GLA. It is much better than the 13.4% we achieved at previous time. And what is very positive, if you look at the last 5 months, that reversion is minus 5%. So it's improving definitely. And I do think we have come to a point where if we keep on growing our tenant turnover, that will actually start showing into positive reversions. If you look at our renewals, we got an average term of 3.2 years and then on new leasing, 4.1 years. Something that has increased. Our historic, I think at interims, we were showing our average escalation was around 6.3%, and that has increased to 6.5%. The impact of load shedding, one big benefit we do have on our portfolio, 7 of our malls got full backup power. The one that doesn't have full backup power is Canal Walk. Canal Walk is on the curtailment program with the City of Cape Town. What that means is if we keep our power levels below a certain amount, they don't load shed us, but we are putting in full generator capacity at Canal Walk as well. Those tenders are out and we have a process of securing the generators for that. Then what we've done in terms of cost to diesel, which is something that's important, for those 4 months for January to May, it was ZAR 55 million, of which we recouped from our tenants' 86%. So the net cost to us was ZAR 7.5 million. So the recovery we're getting from these from our tenants is much better than we achieved from July to December. Another initiative we are busy with is putting up bulk diesel tanks, and that is to actually have on-site sufficient diesel storage for 7 days, and that is based on a 4 -- level -- stage 4 load shedding. We're also busy with a number of other initiatives One of them is the integration of our solar with our generators. Historically, when you had load shedding during the day, we couldn't use the solar. So effectively by integrating it with your generators, you can use that whilst load shedding is happening in the day. Next, I will look at a little bit on Europe. In terms of Europe, if you look at new tenants, H&M, we secured its Skopje City Mall. That is the second one that will open in North Macedonia. We also secured the first store for Body Shop in North Macedonia and a Nike flagship store has been upgraded. At City Center One East we secured deals with Triumph a mobile retailer A1, Salamander as well as Pandora. At City Center One West, we secured U.S. Polo as well as Polleo Sport. And then we actually secured a few new tenants at the Mall of Sofia. One of them is Tedi, a German value retailer and Dunk Shop, which is trendy basketball and lifestyle concept store. Other stores that opened at the Mall of Sofia is Skiny, Ozone and Pink Opium. Similarly, in South Africa, we compare -- look at our tenant turnover and what it's done over the last few years, as you can see, that is also going in the right direction. The tenant turnover is actually above when we bought these centers. So that's very positive. Our effort ratio is also reducing, which gives you scope for renewals. Foot count is actually higher than what we had in 2019, which is very positive on this portfolio. Now if you look at the 4, 5 months, you can also see all these graphs are going in the right direction, and the improvement is definitely there. Vehicle count and footfall, as I said, is coming back to normal. In terms of renewals and leasing activities, we had 34,000 square meters, which is about 18% of our GLA on that portfolio, which we renewed positive reversions of 3.9%. As we said historically, we had those negative reversions during the COVID period, which is evident in 2021. But that definitely has changed since then. What we must just remember the negative effect of the high inflation in Europe, although it's positive because a lot of your leases are indexed. The cost of occupancy for your tenants are getting more. Obviously, their operation margins are under pressure, given the fact that the salary cost is going up, plus the cost of the stores as well as utilities going up. So a key thing for us is to ensure we keep functional malls and where we can, we try and help our tenants. Now I will hand over to Wilhelm to give us an update on sub-Sahara Africa.

Thanks, Morné. Good morning, everybody. The operating environment in Africa remains tough, but there are a few silver linings. In Ghana, we're still dealing with the aftermath of the sovereign downgrade in 2022. And the sovereign default and the impact that, that's had on the exchange rate. The exchange rate, fortunately, has managed to settle somewhere between the worst-case scenario that it reached during 2022. And the pre-default level. So that's quite positive. Fortunately, there also seems to be some progress made between the Ghana government and the IMF in terms of rescue package. So things are looking up in the long term, but the operating environment remains tough in the interim. On Nigeria, the new President that was elected a month ago wasted no time in implementing 2 significant reforms that he promised leading up to the election. The first one was to abolish fuel subsidy, which is obviously much more sustainable for the [ fiscus ]. But in the interim, it reduces disposable income for the average Nigerian. The second measure that he introduced was to relax some of the very strict exchange control measures that were in place. The short-term impact of that is that the currency is depreciated significantly. By way of example, the official exchange rate used to be about 450 relative to the U.S. dollar. That's gone to more in line with the parallel rate, which is sitting at about 750 to the U.S. dollar. It is a bit of funny money because the currency was pegged artificially but nevertheless, it's caused a significant depreciation in the official exchange rate. Fortuitously, we managed, as Morné has alluded to, we managed to convert the equivalent of USD 8.5 million about a month ago at a rate that's fortunately much better than the current exchange rate. And we applied the proceeds towards interest on the senior debt. Operationally, there are 2 themes affecting the results. The first theme is the exchange rate, as I've commented in the past few presentations and specifically, the weakening of the Ghanaian exchange rate relative to the U.S. dollar as a result the sovereign default during 2022. So that has the effect of although the turnover and trading density figures are showing massive increases in the local currency in U.S. dollars, it's going the other way, and that's as a result of exchange rate depreciation over the last year. The second theme is, as Morné also mentioned, that Game has decided to withdraw from Ghana on 31 December last year. So the impact of that is quite evident in the foot count figures, the vacancy figures and the collections, not the collection rate necessarily, but the collections in absolute terms. In conclusion, conditions are tough in Africa, but the team is doing a great job in playing with the cards that it's been dealt with. By way of example, you'll see that despite the tough operating environment in Ghana over the last few years, the total portfolio vacancy rate has been coming down consistently over the last 3 years, excluding obviously the vacancy caused by Game on 31 December 2022. And plans are in place, and the team is working very hard to fill that vacancy with quality tenants. So with that, I'll hand you back to Morné.

If you look at this artist impression, that is actually the mini food court we are busy with at Somerset Mall so that is hopefully going to look nicely. In terms of the group, what we are focusing on is getting new opportunities in terms of finding new growth opportunities in line with our strategy. And obviously, one thing that is quite important for us is to ensure that we actually always recycle assets we see as mature. And our assets actually go every year through a review process and where we can see future growth opportunities. Obviously, we'll keep them and those that actually are what we will define as mature or not completely in line with our strategy where we want to take the building -- the business will basically will be disposed. We want to maintain our LTV of around 40%. Obviously, there could be potentially be some negative impacts on valuations given what's happening with interest rates. So we are always taking that into account when we do a sensitivity analysis. In terms of repositioning on our South African portfolio, we are very excited with a few of the initiatives we are busy with, and that is going into the ground quite soon, if not already. One of them is we're doing 3 drive-thru's at Woodlands Boulevard, which is going to be quite positive for that. What we have also done at Woodlands, we have agreed with Woolworths to expand their store, which will be very positive. And then as a further phase, we want to improve our entertainment, which wasn't that great at Woodlands historically, but we do think everything is going in the right direction, specifically on Woodland Boulevard. In the Western Cape, we are busy on the back tenant demand. To look at expanding about 6,500 square meters at Somerset Mall. During that process, we also want to rightsize Game as well as Edgars and we're going to improve the flow at Somerset Mall. Phase 2 or Phase 2b to put it that way, depending on how the feasibilities looks is to actually do a new food court, which will be around the Central Park and that will actually improve also the flow further where you will link through that into Woolworths on the front of the mall. So that's quite exciting. At CapeGate, we are looking at I'll turn it to also do expansion, also on the back of tenant demand. And the big thing that we're busy with -- is the food court upgrade at Canal Walk. Obviously, we're doing the feasibilities. And if those numbers are stacking up, we will pull the trigger on those initiatives. In terms of Eastern Europe, what we are doing further is simplifying our offshore structure. And the main reason for that is actually bring cost savings about. We are going to upgrade the food offering at City Center One East and then at the Mall of Sofia, one of the key things we want to improve, there's some dead ends and linking into the food court to improve the flow in that specific mall. On Africa, as Wilhelm touched, I think the key thing for us is to drive our exit strategy. I think we've been saying that for quite a while now. But hopefully, we can get that done. And then we're also exploring further opportunities at our nontangible assets. And this is actually what one of those Nooka flexible office spaces look. So it's quite a nice concept. The CapEx is spent by that company. So we don't incur any CapEx in terms of that. And I think this is something unique and let's see how it works. And now we can go into some Q&A. If I can ask Wilhelm and Pranita, if we can sit here in the front and Brett.

Maybe I'll kick off with a few of my own questions before we get to the ones online and maybe in the audience. So to start with, I think the key question is I suppose everyone's key concern is the debt. So the EUR 255 million that was refinanced, just maybe some color in the terms of floating versus fixed, what the interest rates looked like. I think at interim, you said 5% to 5.5%. Is that still the range that you're looking at for the refinance debt?

I think nothing much has changed since March and we spoke about all of this, Pranita. The EUR 255 million is probably lower than what people expected because we've repaid some of the Croatia debt as part of the refinance with some of the surplus cash we have in Europe. On the equity debt, we've tranched that, as we said we would. We've got some of that will be in 18-month terms, some of it 2 years, some of it 3 years, and that's to allow us to manage the refinance of that tranche and spread that load on a longer-term basis. In terms of hedging, we are sticking to our hedging policy. We still want to hedge. We don't want to second guess that this is the peak of the rate cycle. Anything can happen. So we will hedge those loans as we mature or as we refinance them, which will all be done during the course of the next week with the maturity date. The cost, yes, I mean, Euribor has gone from negative 0.25% up to about 3.5%. We forecast that at the -- when we spoke about the half year results. So you've got an approximate 3% increase in your funding cost. Some of the margins have come down in the way we tranched the equity debt, we've got a combination of margins there. That was why we took some of the shorter-term dated facilities there was to reduce the margin that we're actually paying on that debt. The numbers you can do, if we take EUR 250 million has been refinanced as a round number, you take a 3% differential in the rate that gives you EUR 7.5 million a year. Those are the numbers we spoke about at the half year as well. So that's what the landscape looks like going forward. Just -- I mean -- one last point on that. I mean, we've tested the sensitivities on the ICR covenants, the in-country banking covenants, and we don't have any bank covenants compliance problems that we are forecasting.

Okay, great. Maybe that leads to another question just in terms of your ICR, where do you expect that to settle once you sort of refinance both your ZAR and Euro debt?

Similarly, we tested the ZAR covenants going forward, and we don't anticipate any problems there. I mean our group portfolio, ICR is 2x cover. So we'll be above the 2x. Somewhere, I think, between 2x and 2.5x is where it will all settle that's down from where it was in the last reporting period, I think it was close to 3x.

And then just something interesting that you mentioned, Morné, just around growth opportunities and the recycling of mature assets. So maybe just a bit of color around what you consider mature assets in your portfolio and also in terms of the growth opportunities, would that be local offshore and then within the same sort of subsectors?

One of the things we never do is actually we don't openly tell which assets we are actually recycling so that I unfortunately can't disclose to you. But we are seeing opportunities and that's in Europe as well in South Africa, which we are pursuing. Obviously, we're quite in the beginning of that. But we've earmarked in South Africa specific areas we would like to grow further. I think we like -- almost like everyone house, Western Cape is a benefit. If you look at our existing portfolio, there is huge opportunities also in the Western Cape to do extensions. And currently, if you look at a value point of view, even where we are now, Western Cape is a bigger portion our [indiscernible] portfolio. In Europe, we are looking at opportunities. What I like on some of those and where maybe the ticket sizes, which will be more palatable for us is potentially retail parks, which I think is actually beneficial. It's much easier to manage, plus it ease a little bit of a resilient against online retail. So I think those are the ones we would consider if we'll go. When we focus offshore, we also want to focus on NATO countries. We actually would like to do get a bit of economies of scale. So if we find opportunities in place that we already operate, we will consider them. I don't think we will get involved with anything further at North Macedonia. I think Skopje City Mall is quite a good asset. Bulgaria. We're actually very excited on that train station that's going to open, and that will actually create more feet. And I think that could push that center quite nicely. At City Center One East and West, we actually have demand to do extensions. The town planning is a little bit more complicated, and we've got in South Africa because government approve what you can do on sites and to change that, you actually have to go back to government. We actually try to buy a site, but you can't do as in South Africa where you consolidate and you bring the rights across. It is a little bit more complicated. So we are looking at how we can do that.

Do we have any questions from the audience before I continue on my side? I'll maybe take some of the questions on the online chat then. Okay, Nazeem, I think we've answered your first question. Nazeem's second question is just around the strategy with expiring ZAR swaps, will you go variable or fixed at prevailing rates?

Similar to what I just said. We still believe we should be hedging the interest rates. We don't want to second guess it. I think on the ZAR portfolio, we have a flatter maturity profile of hedges and of the debt. And so the impact of entering into new swaps is not as significant as it's going to be in Eastern Europe. But you do still have the position of swaps maturing that had a rate of, call it, 5.5%, and you're refixing those at 8.5% as a base rate. So you do have an impact, but it's much lower than the European portfolio.

Thanks, Brett. Nazeem's next question.

Just one other thing to remember, I mean, we are not 100% hedged. We're roughly 80% hedged on the ZAR portfolio anyway. So you've still got that 20% flexibility.

Nazeem's next question is how many of your SA assets would you consider to be mature? I think we've covered that with Morne? And then what will you do with proceeds by assets? Which geographies preferred? SA or EE? And do you have authorization for share buybacks, if you want to add anything? I know you've touched on it already.

I think it is yes to all those questions. The focus, as I said, most probably Western Cape Europe in terms of new acquisitions. In terms of share buybacks, I think it's always the best option if you don't know what you want to do with your cash, given where we are trading compared to NAV and it's an investment, you understand. So I think it's always prudent to actually rather reinvest in opportunities you understand than buying new ones. New ones is always more complicated. You pick up a lot of information through your DD, but the reality is when you own the asset, what is the reality of that. So I think that is always the strategy we will also follow wherever we go. But in Europe, the strategy is really buying existing malls with a good performance up to date, and rather see how we can improve that through our asset initiatives. One thing I've learned over time is to develop South Africa, where we will develop stuff, new potentially. But in Europe and Africa, I think we learned that you actually don't develop yourself. I think you must be much closer to the assets to actually do developments, whereas, I think, making assets better, it's not that difficult, given there is already a good performance of that specific mall.

We've got 2 questions from [ Lukman ] He says, given the cost of capital, what is the hurdle rate for the capital projects in South Africa?

If you look at that purely like that, it must be at least 11.75 because that's we promised. But I think you must think a little bit long term as well. I do think there's also a way where you value these assets. Is it accretive and where you are trading and those type of things, we will take all of that into account. But I don't think it's purely always just a financial number work on day 1. It is what is you can create long term from it.

Okay. Lukman's next question is given that we are 2 days away from period end. Is there any reason why no guidance has been provided?

There is no -- well, we could have provided guidance. We actually thought the better thing to do is to give guidance. Obviously, when our results come out and then we will actually go into guidance going forward. And that was the decision we've taken as a Board.

Maybe just as an extension on that question, just in terms of your dividend policy. Are you still considering paying an interim dividend from your and out? And is that 75% payout still sort of the level you're looking at? And again, is that based on how quickly you can bring down that in-house LTV on your EE assets?

I think it's a combination of all of that, that you mentioned. I think we haven't changed our policy as yet. As I said at the interim results, we are contemplating a change. We have had a lot of discussions around our dividend policy. We call it almost like a guideline. So what we will do is because we aren't going to pay interim now. So obviously, the idea is to pay a final dividend. And at the final dividend, we also will communicate what is our strategy in terms of the policy. But it will be at a certain level. We will consider interim dividend, I can tell you now. And It -- we would like to get to the 75% payout ratio.

Luvanda has a question. He says encouraging tenant turnover and collection numbers in SA and EE, are you able to give the direction of rent in the period under review whether up or down?

Sorry. Just repeat the question, please? Are we able to give?

Sure. Are you able to give the direction of rent in the period under review, whether up or down?

I mean in terms of the financial performance and if the question is about growth in rental income. I don't think we can comment on that just yet given so -- being so close to the close period.