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Redefine’s ‘reconstructive surgery’ is over – CEO

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SUREN NAIDOO: JSE-listed property counter or real estate investment trust Redefine Properties released its full-year results to the end of August 2022 today [November 7]. It says it has weathered challenging economic conditions to deliver sustainable value. The group reported distributable income of R3.6 billion, representing distributable income of 53.71 cents per share for the year. A final dividend of 19.28 cents was declared, bringing the full-year dividend to 42.97 cents per share, which represents a payout ratio of around 80%.

Well, we have Redefine CEO Andrew König on the line. Welcome, Andrew.

ANDREW KÖNIG: Thank you, Suren, for having me.

SUREN NAIDOO: Andrew, while many metrics have improved, distributable income per share was up just 1.4% and the dividend per share was actually down quite a bit. According to your Sens you said you were pleased with the overall performance of the group nevertheless. Do you want to share some highlights and lowlights?

ANDREW KÖNIG: Thank you, Suren. Just to put the dividend per share in perspective, last year we had a number of taxable situations that resulted in taxable income exceeding distributable income. As a consequence of the 60 cents last year that was distributed, 7.2 cents was, let’s call it, an over-distribution in excess of the distributable income in that period as a consequence of tax considerations. So if you strip out let’s call it the over-distribution in respect of taxable gains and the like, last year there was a 100% payout to avoid the tax, and this year there’s a 80% payout. The 80% payout is really a prudent measure to retain some liquidity for, let’s call it, the unknowns going forth in what is a very volatile and uncertain environment.

SUREN NAIDOO: Okay, thanks for that, Andrew. Just in terms of payouts, I’m sure your shareholders are happy, because during Covid you had to withhold and not pay out for around 18 months, I believe you mentioned this morning.

ANDREW KÖNIG: Yes, correct, Suren. That was at the height of the pandemic when the uncertainty around the future was what predicated that decision in and among liquidity considerations for the counter, because, as you know, one has to always near in mind what your liquidity profile looks like as a consequence of making a dividend. And in that situation we were unfortunately unable to do so.

However, we are in a very different position right now with a very healthy liquidity position of R6.2 billion of access to undrawn facilities or cash on hand, which is some R400 million ahead of last year. And that is, as you said, after absorbing the catch-up in dividends we couldn’t pay in 2021, but in 2022

SUREN NAIDOO: On an LTV or loan-to-value gearing perspective, the group has brought it down to – I know you don’t like talking targets, but 40% is really good compared to around 46.7% during the height of Covid. How important is it for a real estate investment trust to have your LTV at around those manageable levels now, especially with the rising interest-rate environment?

ANDREW KÖNIG: Suren, it’s not really the rising interest rates that are  the concern from an LTV point of view. The greater concern is that if you have a blowout in asset valuations, what it would mean is that your value declines, your debt stays fixed and, as a consequence, your gearing levels can exceed your debt-covenant levels, which could potentially put you into financial breach with your bank funders.

So for us it’s important to have a very conservative gearing level. We call it a loan-to-value level of 40-odd percent. So it provides you with a cushion that in the event of asset value declining significantly, you have that cushion to absorb such shocks and not put you in a breach situation.

SUREN NAIDOO: Okay. You talked about the recovery. There has been quite a strong recovery overall for the sector from the Covid fallout in 2020, but let’s talk valuations. It’s also interesting to see that Redefine is back in positive property valuations, up some 1.4%. Even offices up, I see.

ANDREW KÖNIG: Yes, Suren. We are very pleased to report that the downward cycle of asset evaluations has bottomed. We are starting to see improvements, and that’s off back of more certainty around leasing expectations going forward.

SUREN NAIDOO: In the results media briefing this morning, you made quite a bold statement, declaring Redefine’s reconstructive surgeries over. What do you mean by this?

ANDREW KÖNIG: Suren, if you rewind to 2019 this time of the year, if we had to show you our group asset platform, you would note that it was all over the show in terms of sectoral allocation as well as geographic allocation. We had a presence in the UK, we had a presence in Australia, we had some exposure to Germany and obviously to Poland as well, and a little bit in Africa. The reconstructive surgery that I spoke about was taking a scalpel, if you like, to all of the non-core jurisdictions and sectors. So we exited the UK, we exited Australia [and] Germany, and we are now focused in South Africa, where 66% of our portfolio resides. The balance sits in in Poland.

So in addition to the geographic scaling done, we also looked at sectoral exposure – student accommodation, for example – and we exited that as well. So that is what we mean by reconstructive surgeries. It’s been deliberate in terms of exiting other, let’s call it non-core areas of the asset platform, so that we position our channels for growth, but at the same time provide a very simple and focused asset platform for investors to understand the model, and for us to manage on a more appropriate basis from a risk perspective.

SUREN NAIDOO: Thanks for that, Andrew. From an operating side, there were some positives as well, like with lower vacancies and that sort of thing. But I see both group-wide and for office in particular, there are still double-digit rent reversions. Do you want to share some insight on that?

ANDREW KÖNIG: Suren, the rental reversions that you would see mostly come from the pressure points in the office sector. The other sectors are showing a lot of improvement. But what is very pleasing to note is that the trend is reducing….

So we believe that we are reaching the end of these negative reversions. It will stabilise and then we’ll start seeing growth.

So we are reading positive news into these strengths and we don’t foresee significant negative reversions going forward, as we had experienced previously.

SUREN NAIDOO: Now, during the period EPP [the Dutch-based real estate company] came into the group totally. You were a majority shareholder, but it is now delisted and fully owned by Redefine. One of the things you mentioned last year is your concerns around EPP having not paid a dividend for quite a while. Obviously they were also impacted by Covid. When do you expect to get dividends out of EPP, because this year again there’s no dividend out of EPP?

ANDREW KÖNIG: Suren, it’s very important to stabilise EPP’s liquidity position, and that’s why we didn’t take a dividend out of EPP this year. We could have. What we did instead is we used that distributable income that could have been paid out as a dividend to bolster the liquidity to meet repayment of debt and to renew certain facilities where there are certain reductions of debt required. So everything is going according to plan. From financial year 2023 we anticipate that EPP will once again be in a dividend-paying position.

SUREN NAIDOO: Finally, Andrew, Redefine is in a strong position to benefit from the upward cycle. That was one of the sentiments you and your executives mentioned this morning in the media briefing. When do you expect this? Obviously you also mentioned that property fundamentals are not good still in South Africa. What is your outlook for the listed property sector in general for your two key locations of South Africa and Poland?

ANDREW KÖNIG: Suren, as I said earlier this morning, property’s fundamentals are influenced by confidence levels, the interest rate cycle, as well as the economic fundamentals of the country. Now we all know that all three of those elements are subdued at the moment and we need a catalyst for some change.

So how long is it going to take to play out? That is on everybody’s mind at the moment, but in the medium term, we expect this situation to prevail, and for such time that we start seeing meaningful – and I’m talking about at least 3% – GDP growth on a sustained basis going forward. So it will take some time before we get back to that level, but we expect that inflation should peak during 2023 and then start diminishing. And that should hopefully see the interest-rate cycle starting to reverse and that will be very positive for the sector.

So my guess is for the next two years it’s still going to be quite tough, and thereafter it should start getting better.

SUREN NAIDOO: Andrew, thanks so much for your time. That was Andrew König, CEO of Redefine Properties.

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