STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

For the year ended 30 June 2020

STATEMENT OF FINANCIAL POSITION

As at 30 June 2020

STATEMENT OF CHANGES IN EQUITY

For the year ended 30 June 2020

STATEMENT OF CHANGES IN EQUITY CONTINUED...

* The Board is still considering the final dividend to be paid.

STATEMENT OF CASH FLOWS

For the year ended 30 June 2020

SEGMENTAL ANALYSIS

For the year ended 30 June 2020

Segmental Analysis

The Group determines and presents operating segments based on the information that is provided internally to the Executive Management Committee (EXCO), the Group's operating decision-making forum. The Group is comprised of nine segments, namely Retail, Office, Industrial, Healthcare, Trading and Development, Growthpoint Australia, V&A Waterfront, Central and Eastern Europe and the United Kingdom. Growthpoint acquired a 51.1% shareholding in C&R during the period which comprises the United Kingdom segment. An operating segment's operating results are reviewed regularly by EXCO to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available.

Geographic segments

In addition to the main reportable segments, the Group also includes a geographical analysis of net property income, excluding straight-line lease income adjustment and investment property. The following geographic segments have been identified:

• South Africa
• Australia
• V&A Waterfront
• Central and Eastern Europe
• United Kingdom

Geographical split by revenue (%)

Geographical split by net property income (%)

Geographical split by fair value of property assets (%)

NOTES

For the year ended 30 June 2020

REIT RATIOS

For the year ended 30 June 2020

The second edition of the SA REIT Association’s best practice recommendations was issued in November 2019, outlining the need to provide consistent presentation and disclosure of relevant ratios in the SA REIT sector. This will ensure information and definitions are clearly presented, enhancing comparability and consistency across the sector. It would have only been effective for Growthpoint for the year ended 30 June 2021, but Growthpoint has chosen to adopt the recommendations early. The comparative figures have been computed and disclosed on the same basis.

* The Board is still considering the final dividend to be paid. R2 295m represents a 100% payout.

Growthpoint is an international property company that provides space to thrive with innovative and sustainable property solutions.

Introduction

Growthpoint is the largest South African primary JSE-listed REIT with a quality portfolio of 440 directly owned properties in South Africa (RSA) valued at R73.4bn, including four hospitals and one medical chambers valued at R2.6bn owned by Growthpoint Healthcare Property Holdings (RF) Limited (GHPH). Growthpoint has a 61.8% shareholding in GHPH.

We have a 62.2% interest in ASX-listed Growthpoint Properties Australia Limited (GOZ), which owns 58 properties in Australia valued at R51.8bn and a 52.1% interest in LSE-listed Capital & Regional Plc (C&R), which owns seven properties in the United Kingdom valued at R14.8bn.

Growthpoint has three equity-accounted investments, valued at R17.5bn. Our 50.0% share of the V&A Waterfront (V&A) (R7.2bn), 29.4% stake in London Stock Exchange AIM-listed Globalworth Real Estate Investments (GWI) (R10.3bn) are the largest of these investments.

Growthpoint has five unlisted investments, valued at R922.0m of which our 16.6% stake in Growthpoint Investec African Properties Limited (GIAP) (R837.7m) is the largest.

GOZ owns a 15.0% stake in ASX-listed Industrial REIT (ADI), valued at R837.0m.

Growthpoint is included in the FTSE/JSE Top 40 Index (J200) with a market capitalisation of R40.4bn at 30 June 2020 (FY20). On average, 218.5m shares (FY19: 202.2m) with a value of R3.9bn (FY19: R4.9bn) were traded per month during the year. This makes Growthpoint the most liquid and tradable way to own commercial property in South Africa.

The value of Growthpoint’s property portfolio is split between South African (inclusive of the V&A) (59.2%) and international (40.8%) assets. It is well diversified in the three major sectors of commercial property, being retail, office and industrial. Most of the RSA portfolio are in economic nodes within major metropolitan areas.

For the year under review the SA REIT net asset value (SA REIT NAV) of the Group decreased by 7.6% to 2 307 (FY19: 2 498) cents per share.

Impact of Covid-19 on the business

As we started the financial year we were concerned about the low economic growth in the South African business. We were expecting a tough year where performance was anticipated to be in line with FY19, with nominal growth overall. Negative growth in the South African business was projected to be offset by gains from the V&A Waterfront and the offshore businesses. We were substantially on track to achieve this result, as evidenced by our half year results, until mid-March when government announced a state of disaster in response to the Covid-19 pandemic.

Events in the last quarter of our financial year have impacted all of our businesses, some worse than others.

In South Africa our retail business was the most severely impacted due to the forced closure of all our retail tenants during the hard lockdown, except for those that provided essential services. Office tenants all moved to a work from home environment and in our industrial portfolio, only those that were linked to essential services continued to operate. We moved quickly to communicate with our tenants and assist where practically possible. The Property Industry group was established to assist the retail sector on an industry-wide basis. For the financial year we provided rental relief of R436.3m to our tenants with R158.8m in deferred rent (R17.4m recovered in the period) and R277.5m of rental discounts. We incurred R6.8m of Covid-19-related expenses.

Historically the V&A has been a standout performer for Growthpoint. However, given its strong reliance on international and local tourism and heavy weighting to the retail and restaurant trade, it has suffered disproportionately to the rest of the South African portfolio.

Our international investments in GOZ and GWI were also affected by Covid-19, but to a much lesser extent as a result of their focus on office and industrial properties, as well as their strong customer bases weighted toward listed corporates and government in Australia, and large multinational tenants in Poland and Romania.

C&R with its 100% retail focus has faced extreme challenges with the impact of the pandemic coming on top of an already weak environment due to both Brexit and the structural shifts in the sector.

Despite all of the above, our geographic and sectoral diversity has placed us in a position of strength to weather the Covid-19 storm.

Strategy

In line with Growthpoint’s vision “to be a leading international property company providing space to thrive”, the company’s strategy incorporates: the optimisation and streamlining of our RSA portfolio; the introduction of new revenue streams via the Funds Management business and trading and development for third parties; and further international diversification.

The company’s objective is to grow and nurture a diversified portfolio of quality investment properties, providing accommodation to a wide spectrum of clients and delivering sustainable income distribution and capital appreciation, optimised by effective financial structures. Effectively, net property income received by the property portfolios of RSA, GOZ and C&R, interest received, the distributable income received from the equity-accounted investments, and development fees, distributions and management fees, less administration, operating overheads, interest on debt and normal taxation, is distributed to Growthpoint shareholders bi-annually. As a result of Covid-19, the Board is deliberating all options, including reducing the dividend pay-out ratio, as we remain focused on liquidity and balance sheet management.

We at all times seek to strike a balance between a conservative managed and sustainable business and the interest of our investors in optimising distributions.

While our strategic pillars remain intact in the short to medium term, our priority will be the protection of our balance sheet and liquidity position. Once our financial position is sufficiently bolstered, we shall resume driving forward the three pillars of our long-term strategy.

Growth in distributable income per share (DIPS)

Growthpoint delivered negative growth in SA REIT FFO for FY20 of 17.2%. The total SA REIT FFO decreased by R1 074m from R6 259m to R5 185m and on a per share basis SA REIT FFO per share decreased by 19.4% from 211.7c in FY19 to 170.7c in FY20. After company specific adjustments to the SA REIT FFO, the DIPS decreased by 16.0% from 218.1c to 183.1c. Total distributable income decreased by R952m from R6 430m to R5 478m or 14.8%.

Basis of preparation

The summarised consolidated financial statements are prepared in accordance with International Financial Reporting Standards, IAS 34 Interim Financial Reporting, the SAICA Financial Reporting Guides as issued by the Accounting Practices Committee and Financial Pronouncements as issued by Financial Reporting Standards Council, and the requirements of the Companies Act of South Africa. The accounting policies applied in preparing these financial statements are in terms of International Financial Reporting Standards and are consistent with those applied in the previous annual financial statements, except for the adoption of IFRS 16 Leases and IFRIC 23 Uncertainty over Income Tax Treatments.

These summarised consolidated financial statements are extracted from the audited information but are not themselves audited. The annual financial statements were audited by Ernst & Young Inc., who expressed an unmodified opinion thereon. The auditor’s report does not report on all the information contained in these summarised consolidated financial statements.

Shareholders are therefore advised that in order to obtain a full understanding of the nature of the auditor’s engagement, they should obtain a copy of the auditor’s report together with the accompanying audited consolidated financial statements, both of which are available for inspection at the company’s registered office or on the company’s website. The directors of Growthpoint Properties Limited take full responsibility for the preparation of this report and confirms that the selected financial information has been correctly extracted from the underlying consolidated financial statements.

Mr G Völkel (CA(SA)), Growthpoint’s Group Financial Director, was responsible for supervising the preparation of these summarised consolidated financial statements.

GOZ

The investment in GOZ was accounted for in terms of IAS 21 The Effects of Changes in Foreign Exchange Rates. The statement of financial position includes 100% of the assets and liabilities of GOZ, converted at the closing exchange rate at FY20 of R11.98:AUD1 (FY19: R9.89:AUD1).

A deferred tax liability of R3.8bn (FY19: R2.7bn) is included in the statement of financial position. This relates to capital gains tax payable in Australia if Growthpoint were to sell its investment in GOZ.

The statement of profit or loss and other comprehensive income also includes 100% of the revenue and expenses of GOZ, which were translated at an average exchange rate of R10.49:AUD1 for FY20 (FY19: R10.15:AUD1). The resulting foreign currency translation difference is recognised in other comprehensive income. A non-controlling interest was raised for the 37.8% (FY19: 34.0%) not owned by Growthpoint.

Included in the FY20 distributable income is R1 010.1m dividend received from GOZ, compared to R1 071.2m for FY19. This accounts for AUD21.8c compared to AUD23.0c in FY19. Included in normal tax in the statement of profit or loss and other comprehensive income is R125.3m (FY19: R117.8m) that relates to withholding tax paid on the distributions received from GOZ. The increased withholding tax together with the Covid-19 implications had a negative impact on the distribution received from GOZ.

C&R

The investment in C&R was accounted for in terms of IAS 21 The Effects of Changes in Foreign Exchange Rates. The statement of financial position includes 100% of the assets and liabilities of C&R, converted at the closing exchange rate at FY20 of R21.52:GBP1.

The statement of profit or loss and other comprehensive income also includes 100% of the revenue and expenses of C&R, which were translated at an average exchange rate of R20.75:GBP1 for FY20. The resulting foreign currency translation difference is recognised in other comprehensive income. A non-controlling interest was raised for the 47.9% not owned by Growthpoint.

Included in the FY20 distributable income is R107.0m dividend received from C&R. This accounts for 11.0p. Included in normal tax in the statement of profit or loss and other comprehensive income is R19.6m that relates to withholding tax paid on the distributions received from C&R.

V&A, GWI and other equity-accounted investments

The investments in the V&A (Joint Venture), GWI and the other equity-accounted investments were accounted for in terms of IFRS 11 Joint Arrangements and IAS 28 Investments in Associates. The equity-accounting method was used where the Group’s share of the profit or loss and other comprehensive income of these investments were accounted for.

Included in the FY20 distributable income is R606.5m from the V&A (FY19: R677.5m) and R569.7m from GWI (FY19: R453.3m from GWI and R59.0m from GPRE).

Revenue and cost-to-income

Revenue increased by 5.4% for FY20 compared to FY19. RSA decreased revenue by 4.1%, and GOZ increased revenue by 9.5% compared to FY19. The SA REIT cost-to-income ratio for the Group increased to 40.1% at FY20 from 36.0% at FY19. For RSA the ratio increased to 44.5% from 40.0% at FY19 and GOZ increased to 22.1% from 21.4% at FY19. The ratio for C&R was 54.8% for FY20.

Fair value adjustments

The revaluation of properties in RSA, GOZ and C&R resulted in an overall decrease of R8.4bn (5.7%) to R139.1bn for investment property (including investment properties classified as held for sale). The revaluation of properties resulted in a decrease of R7.1bn (8.8%) in RSA, an increase of R1.1bn (2.2%) in GOZ and a decrease of R2.4bn (14.1%) in C&R. Property assets held for trading and development are held at the lower of cost or net realisable value. The RSA valuation decrease was driven mainly by lower market rental growth assumptions on the back of a weak macro-economic environment and the impact of Covid-19.

Interest-bearing borrowings and derivatives were fair valued using the RSA or foreign exchange denominated swap curves at FY20, increasing the overall liability by R1.7bn. These fair value adjustments and other non-distributable items, such as capital items, non-cash charges, deferred taxation and the net effect of the non-controlling interests’ portion of the non-distributable items, were transferred to the non-distributable reserve.

Finance costs

Finance costs, including finance income received on interest rate swaps, increased by 19.3% to R3.1bn (FY19: R2.6bn). The weighted average interest rate for RSA borrowings was 8.2% (FY19: 9.2%) (5.9% including foreign denominated loans and cross currency interest rate swaps (CCIRS) (FY19: 7.1%)). The weighted average maturity of debt for RSA borrowings decreased to 3.6 years (FY19: 4.0 years).

Finance costs for GOZ decreased by 4.0% from R570.0m in FY19 to R547.6m in FY20. Finance costs for C&R were R221.0m in FY20. The interest cover ratio, where income from the equity-accounted investments and listed investments is included in the operating profit, decreased to 3.1 times at FY20 (FY19: 3.8 times).

Finance income

Finance income decreased by 13.4% to R103.4m (FY19: R119.1m). This is mainly due to a decrease in interest received from banks.

Acquisitions and commitments

Growthpoint acquired one industrial property for R140.3m, two office properties for R134.3m and two telecommunications assets for R2.6m (included in office) during the year for its RSA portfolio. The development and capital outlay for RSA of R2.0bn (FY19: R2.7bn) was for various developments and capital expenditure in the year, including 144 Oxford Road, Rosebank for R285.6m, Pretoria Head and Neck Hospital for R242.6m and Bakers Transport, Cato Ridge, Durban for R132.5m. Growthpoint has commitments outstanding for RSA developments totalling R634m at FY20 (FY19: R1.5bn) of which Woodlands Office Park, Altron (R209.3m) and Longkloof Canopy, Cape Town (R147.3m) are the largest.

GOZ acquired one industrial property for R429.2m (AUD42.3m, including acquisition costs) and it incurred development costs of R843.1m (AUD71.9m). The largest two developments are at 599 Main North Road, Gepps Cross for R448.4m (AUD38.2m) and Building 3, 570 Swan Street, Richmond of R367.3m (AUD31.3m).

GOZ has commitments outstanding totalling R608.5m (AUD50.8m) (FY19: R2.1bn (AUD204.2m)). These commitments relate to a tenant incentive for a 25-year lease at 1 Charles Street, Parramatta, NSW.

C&R incurred development costs of R130.0m (GBP6.7m) and has commitments outstanding totalling R86.1m (GBP4.0m) which relate mainly to development projects at Maidstone of R32.3m (GBP1.5m) and Luton of R23.7m (GBP1.1m).

Funds Management

Part of Growthpoint’s strategy is to build a R15bn Fund Management business over the next three to five years. To this end we have already established two separately identifiable funds:

• Growthpoint Investec African Properties Limited (GIAP).

GIAP, a joint venture with Ninety One Limited, previously Investec Asset Management, has raised USD301.0m from third-party investors (including a USD50.0m investment by Growthpoint).

• Growthpoint Healthcare Property Holdings (RF) Limited (GHPH).

GHPH has attracted approximately R1.0bn in investments from third-party investors so far. Growthpoint has undertaken the development of the new Head and Neck Hospital in Pretoria due to open in January 2021. There is a significant pipeline of both acquisitions and greenfield developments.

Trading and development

Adhering to the limits previously communicated, the value of projects pre-identified as opportunities for trading and development for third parties in South Africa will not exceed 5.0% of the value of the South African portfolio and assets developed for our own balance sheet will not exceed 10.0%. In the present environment we have, however, scaled back all non-essential capital and development and will only proceed with opportunities which are client-driven or substantially pre-let.

Disposals and held-for-sale assets

Growthpoint disposed of 13 properties in the year (FY19: 14) for R581.8m (FY19: R2.9bn), the largest being the Sunward retail park at R147.0m. GOZ and C&R had no disposals for FY20, (FY19 R452.0m (AUD45.2m)). At FY20, two RSA properties (FY19: seven) valued at R84.4m (FY19: R325.4m) were classified as held for sale. No Australian or United Kingdom properties were classified as held for sale.

Arrears

Total RSA arrears at FY20 were R511.0m (FY19: R77.7m) with a loss allowance of R254.0m (FY19: R36.8m). This includes rental deferments granted to tenants as a result of Covid-19 of R141.4m. Total RSA bad debt write-offs and provisions were R236.5m (FY19: R18.9m).

Total GOZ arrears at FY20 were R9.7m (FY19: R3.0m) with a loss allowance of R2.8m (FY19: Rnil). Total C&R arrears at FY20 were R300.0m with a loss allowance of R13.2m.

Vacancy levels

At FY20, Growthpoint’s GLA and vacancy levels as a percentage of its total portfolio GLA were:

	GLA			Vacancy
	FY20 m²		FY19 m²	FY20 %		FY19 %
Retail	1 365 391		1 381 997	5.1		3.9
Office	1 672 010		1 675 560	15.4		10.4
Industrial	2 308 913		2 262 328	7.1		6.2
Healthcare	77 219		72 121	–		–
Trading and development	70 200		32 727	46.8		–
RSA total	5 493 733		5 424 733	9.5		6.8
V&A Waterfront	227 415		225 490	1.5		1.2
GOZ	1 042 929		1 026 466	5.5		1.4
C&R	328 512		–	5.5		–
Total/average %	7 092 589		6 676 689	7.6		5.8

Vacancies increased across all the RSA sectors. Tenant retention remains a priority and we are driving it through various initiatives including the UNdeposit, Smartmove and Growthpoint’s resource efficient, sustainable Thrive Portfolio.

Borrowings and net working capital

The consolidated SA REIT loan-to-value ratio (SA REIT LTV) was 43.9% for FY20 (FY19: 36.7%) and includes the increase in net derivative liabilities from R116.0m in FY19 to R3 155.0 million. The LTV would have been 2% lower if derivative liabilities were not included. The RSA LTV increased to 39.8% (FY19: 31.8%), the GOZ SA REIT LTV decreased to 31.2% (FY19: 35.2%) and the C&R SA REIT LTV was 51.4% for FY20.

Growthpoint has consistently applied its policy for measuring the fair value of long-term interest-bearing loans and derivatives. There were no changes in valuation techniques, nor were there any transfers between level 1, level 2 and level 3 during the year. The Group has unsecured interest-bearing borrowings of R24.5bn (FY19: R20.1bn). All other interest-bearing borrowings across the Group are secured. Growthpoint had unused committed bank facilities of R3.1bn in RSA and separately R4.3bn (AUD360.0m) in Australia at FY20, which assures their ability to meet their short-term commitments.

Change in directorate

Frank Berkeley and John van Wyk were appointed as Independent Non-executive Directors on 10 September 2019. Frank is Chairman of the Property and Investment Committee and he also serves on the Human Resources and Remuneration Committee, Audit Committee and Governance and Nomination Committee. John is a member of the Audit, Risk Management and Property and Investment Committees.

Rhidwaan Gasant was appointed as an Independent Non-executive Director on 1 June 2020. Rhidwaan is Chairman of the Audit Committee and he also serves as a member of the Governance and Nomination Committee and the Risk Management Committee.

Nonzukiso Siyotula resigned as Independent Non-executive Director with effect from 12 November 2019. Lynette Finlay resigned as Independent Non-executive Director with effect from 7 July 2020.

Peter Fechter retired as Non-executive Director on 12 November 2019.

We thank these directors for their contribution to Growthpoint.

Moody’s credit rating

On 6 April 2020, Moody’s downgraded Growthpoint’s global scale rating to Ba1 from Baa3 and the national scale rating to Aa1.za from Aaa.za, following the downgrade of the Government of South Africa. The ratings have a negative outlook.

Going concern

The directors have assessed the Group’s ability to continue as a going concern. As at 30 June 2020, the Group had a substantial positive net asset value and a robust liquidity position with access to R7.4bn (R3.1bn RSA and separately R4.3bn GOZ) in committed undrawn credit facilities. Furthermore, as a precautionary measure to provide the Group with additional financial flexibility and bolster its liquidity in unprecedented market conditions as a result of the Covid-19 pandemic, the Board of Directors resolved to defer its decision on a final dividend payment for the year ended 30 June 2020 until December 2020 or an earlier date to be determined by the Board. The following uncertainties were considered as part of the going concern assessment:

Access to liquidity

Stressed market conditions may impact debt funders’ risk appetite and limit access to liquidity.

Breach of covenants

Loan-to-value and interest cover ratio covenants may come under pressure due to decreasing property valuations and rental income because of the expected economic downturn related to the pandemic. The maximum loan-to-value covenants the Group is exposed to is 55%, which is well above the current Group SA REIT LTV of 43.9%.

Provision for credit losses

The provision for credit losses and write-off of unrecoverable amounts may increase as tenants’ businesses are impacted by the pandemic globally.

The directors’ response to the pandemic included:

• Establishment of a dedicated task team to implement a coordinated response across the business to ensure the health, safety and wellbeing of all stakeholders
• Implementation of business continuity plans to minimise disruption by initiatives implemented to curb the spread of the virus
• Curtailment of discretionary expenditure to make allowance for the anticipated costs associated with the various initiatives to combat the spread of the virus
• Dividend declaration decision deferred until December 2020 or earlier
• Frequent monitoring of the Group’s liquidity position
• Addressing temporary regulatory compliance challenges posed by the pandemic with regards to REIT tax legislation and JSE Listings Requirements with the appropriate authorities and engaging with debt funding providers regarding financial covenants and liquidity considerations
• Establishing and participating in the Property Industry group.

After due consideration, the directors have concluded that the Group has adequate resources to continue operating for the foreseeable future and that it is appropriate to adopt the going concern basis in preparing the financial statements.

Auditor

Ernst & Young Inc. was appointed as the new external auditor effective 1 July 2019, for the audit of the financial year ending 30 June 2020. This appointment was approved by shareholders at the 2019 annual general meeting (AGM).

Events after the reporting period

The Group disposed of the Exxaro Corporate Centre on 28 July 2020 for R243.0m, resulting in a profit of R106.0m.

Growthpoint signed a R750m Revolving Credit Facility with Standard Chartered Bank on 10 July 2020.

Prospects

The macro-economic environment in RSA is deeply concerning, most of the Group’s assets are in South Africa, both by EBIT (71.8%) and by market value of property assets (59.2%). The effects of the pandemic have been devastating, impacting all three of our domestic businesses where property fundamentals were already weak. The recovery of the V&A is dependent on the resumption of international tourism. GOZ and GWI will recover faster given the low impact of the pandemic on their businesses, their strong balance sheets, and liquidity positions as well as the strength of their tenancies. C&R has been severely impacted by the pandemic which has accelerated the structural trends that were already underway in the UK retail industry with the downturn being faster and more profound and the recovery anticipated to take much longer than expected.

Our prospects are inextricably linked to our operating environment. As the world and the RSA economies recover gradually, we have a tough couple of years ahead of us. We are a strong and diversified business and our conservative approach to management will stand us in good stead at this time.

It remains too early to quantify the ongoing effects of the pandemic on Growthpoint’s operations – as such no guidance for FY21 is provided by the Board at this time.

Declaration of a dividend

The Board is still considering the final dividend, being mindful of:

• the ongoing SA REIT Association discussions with the JSE and National Treasury relating to the current minimum pay-out ratio threshold of 75% and proposed tax concessions;
• the desire for Growthpoint to retain its REIT status;
• the implications of reducing the historical pay-out ratio of 100%;
• shareholders’ feedback in relation to the payment of dividends;
• the potential outcomes of offering shareholders the opportunity of participating in a Distribution Reinvestment Plan; and
• Growthpoint’s short and medium-term liquidity requirements and LTV ratios.

The Growthpoint Board, following a detailed strategic review process focusing on short and long term strategies, is currently evaluating all options available to it to ensure liquidity and balance sheet strength in the short term, in the wake of the weak property fundamentals in South Africa and the current cycle of falling asset values and rising LTV levels.

While no final dividend has been declared, and the exact timing of the declaration of the final dividend does not form part of this announcement, subject to there being no material regulatory changes or market disruptions which may have a materially negative impact on our overall financial position between the date of publication of these results, and the date of declaration of the final dividend for FY20, the Growthpoint Board is considering declaring a final dividend based on a pay-out ratio of not less than 75% of distributable income for FY20 which will ensure compliance with current REIT legislation.

By order of the Board

Growthpoint Properties Limited

8 September 2020