Capital flows

Growthpoint sought to place a greater emphasis on proactive and prudent balance sheet and liquidity management this year, and we undertook various initiatives to accomplish this. These included a R4.3bn equity raise, R577m in proceeds received from the DRIP in December 2020, and R559m from asset sales. It is expected that around R865m (after income tax) is retained with the consistent application of the 80% dividend pay-out ratio for FY21.

In addition, we were able to pay R456.8m to the capex programme and a more muted R556.1m to the development programme. Direct property acquisitions were also muted at R309.0m. During FY21, Growthpoint invested very little in its foreign subsidiaries – only reinvesting Lango dividends of R6.6m – as the bulk of the funds were used to repay debt. This resulted in the nominal debt balance reducing from R43.4bn in FY20 to R37.8bn in FY21.

Liquidity position

Bolstering our liquidity position was an objective for FY21. In this respect, we managed to increase our unutilised committed facilities to R6.4bn as at June 2021 (from R3.1bn at the end of FY20) with a surplus cash balance of R709m. The undrawn facilities are spread across several financiers at different terms. At year end, loans due in the next 12 months amounted to R2.3bn. During the year, capital expenditure projects were curtailed to include only those that were critical or offered an opportunity to earn a development profit at acceptable risk. The Board continues to assess the impact of investment decisions on Growthpoint's balance sheet and liquidity position.

Interest-bearing liabilities

The SA debt capital market normalised during FY21, although investors continue to favour better credit quality issuers.

Growthpoint only undertook a public issue in April 2021, when we sought to re-finance R694m of maturing debt. The book was 4.1 times over-subscribed. We issued a three-year note for R249m at 155 basis points over Johannesburg interbank average rate (JIBAR) and a five-year note for R498m at 199 basis points over JIBAR.

Given the muted bond supply into the SA debt capital market, together with a subdued macro-economic outlook, it seems that the peak of the widening of the credit spreads has passed. The Covid-19 shock increased pricing on a three-year Growthpoint note from 125 basis points in November 2019 to 210 basis points in June 2020. Fortunately, it reduced to 155 basis points in April 2021.

On a net basis, Growthpoint redeemed R929m in the domestic debt capital market during FY21.

We believe that the quality of our credit rating will see the bond market continuing to support us in our bond issues. It is, however, concerning that the debt capital market seems to bifurcate the credit margins between corporates and REITs, with REIT issuance priced higher. Since the pandemic, the bond market interprets the credit risk of REITs as being higher than that of non-REIT corporates, due to the impact that the Covid-19 crisis has had on the real estate sector.

Growthpoint's Information Statement and other items relating to the DMTN Programme were updated and brought in line with the amended JSE Debt Listings Requirements.

The solid relationships we have with our banks proved invaluable during the Covid-19 crisis. The banks supported Growthpoint through the pandemic, and the capital raise provided an opportunity to convert existing debt to unutilised revolving credit facilities.

Interest-bearing liabilities

Post 30 June 2021, we signed a four-year, USD60m convertible loan facility from the IFC, with the IFC having the option to convert the loan to equity in the GHPH.

There is currently a great interest in ESG-related and sustainability-linked debt, and we are exploring various funding opportunities on the back of our recently approved ESG strategy. Liabilities of R2.4bn matured during FY21 and were repaid, while facilities to the tune of R4.6bn (with a maturity date post 30 June 2021) were either redeemed or re-financed.

Balance sheet hedge table

During the year under review, Growthpoint repaid the GBP78m facility that was used to fund the investment into C&R. We also re-financed a EUR50m facility into a ZAR facility. The table above reflects a number of metrics relating to our foreign-denominated investments and debt. The "Debt as a % of assets at NAV" (the LTV calculated as foreign-denominated liabilities over foreign-denominated assets at NAV) has declined since 30 June 2020 and reduced the valuation and foreign-exchange-rate risks related to our foreign investments.

Cost of funding

The weighted average cost of funding as per the SA REIT best practice recommendations is set out in the table:

SA REIT BPR – cost of debt

Growthpoint's weighted average cost of SA-denominated debt has decreased since the end of FY20 due to a further interest rate cut of 25 basis points by the Reserve Bank (SARB). However, Growthpoint's weighted average margin on the debt increased slightly, due to the impact of the higher margins on the book.

Credit ratings and covenants

After the April 2020 downgrade, Moody's again downgraded the credit rating of the government of SA, this time from Ba1 to Ba2 in anticipation of a weakening in SA's fiscal strength over the medium term. The downgrade reflected Moody's assessment of the impact the pandemic would have both directly on the government's debt burden and indirectly on the country's economic challenges, as well as the social obstacles to reform. The negative outlook was maintained to reflect the risk of the government's debt burden and debt affordability showing significant further deterioration.

In line with this, Growthpoint's global scale credit rating was also downgraded from Ba1 to Ba2, although the national scale rating was maintained at Aa1.za. The negative outlook was also maintained. Moody's does not consider our international exposure to be sufficient to warrant a delinking from the sovereign rating.

While the capital raise has provided some additional headroom in Growthpoint's loan covenants, the challenging operational environment and the resultant reduction in valuations remain a concern. As at the end of FY21, we were compliant with our covenants. Growthpoint's strictest corporate loan covenants are set out in the table below.

Given Growthpoint's targeted loan-to-value ratio of below 40%, the Board is carefully weighing the impact of each investment decision.

Interest rate risk management

Swap rates have consistently stayed above the three-month JIBAR rates as short-term interest rates are expected to increase.

The weighted average term of the fixed interest rate profile remained at 3.1 years (FY20: 3.1 years). Growthpoint has taken advantage of the lower swap curve and extended a number of the existing swaps with a shorter maturity.

Exchange rate risk management

The Rand is a volatile currency as reflected in the graph. Although the Rand weakened significantly due to the shock of the pandemic, it recovered during FY21 and, towards the end of the financial year, was stronger than before the onset of the pandemic.

From a balance sheet point of view, some of the foreign denominated investments are hedged via foreign denominated liabilities, either in the form of direct foreign denominated debt or via cross-currency interest rate swaps. The foreign exchange denominated liabilities section of the balance sheet hedge table reflects the percentage of hedging in Growthpoint's balance sheet.

As the dividends from the foreign investments are earned in foreign currency, our earnings are subject to exchange rate movements. Growthpoint mitigates this foreign exchange rate risk by matching the interest expense in the same currency as the dividend receipt, and by fixing the balance of the receipts via forward exchange contracts (FECs).

FY22 FX dividend hedge table

The table is based on the expected dividends from the foreign denominated investments in FY22. These are able to cover the expected interest payments in respect of the debt taken out for the GOZ, GWI and Lango investments. The dividend for Lango includes an expected dividend from Lango Real Estate Management Limited. Currently, no dividend is expected from C&R and no foreign denominated liabilities are outstanding in this regard.