The Nova Property Group may have significantly overstated and misrepresented the values of its property portfolio for several years, which now leads to the conclusion that debenture holders may never be repaid in full.
Nova auditor Geyser & Du Plessis states in its audit report, forming part of the company’s latest annual financial statements (AFS) to end February 2022, that Nova’s valuation of its investment properties of R2.17 billion could be overstated by as much as R1.48 billion. This means the portfolio could be worth only around R712 million – a far cry from the R2.2 billion Nova discloses as owing to debenture holders.
In a scathing audit report, the auditors slapped a second consecutive adverse audit opinion on the AFS, which means they believe it contains material misstatements and doesn’t reflect the company’s actual financial position.
The auditors also issued a fifth consecutive warning that “significant doubt” exists as to whether the company can continue to operate as a going concern.
Nova CEO Dominique Haese rejected the auditors’ opinion in the board report, stating that the valuations are “reasonable, appropriate” and in compliance with the accounting standards.
Charl Kocks, a leading corporate governance expert and CEO of CA-Tech, said in response:
“I struggle to find a word other than ‘breath-taking’ to describe my level of shock at the stated differences. I have not seen this magnitude of disagreement in an audit report in my 41 years as a chartered accountant.”
He said it suggests that Nova’s disclosed valuations in its financial statements have for years been “unreliable and represent intentional misrepresentation”.
“This indicates that debenture holders may never be repaid. Nova should have used the proceeds from the sale of the properties to repay debenture holders.
“If the properties are not worth the values Nova disclosed, they have run Nova into the ground and have achieved nothing to unlock value for debenture holders. The Nova board have dismally failed to implement the Section 311 Schemes of Arrangement, which explicitly tasked Nova to repay debenture holders [former Sharemax investors].”
If Kocks and the auditors are correct, Nova’s directors may be guilty of a criminal offence in terms of Section 214 of the Companies Act, if they knowingly published false or misleading financial statements.
Furthermore, the AFS shows that Nova is facing desperate cash flow problems and only remains in business by using the proceeds from the sale of properties to fund operational expenses, including lavish salaries for directors.
It’s unclear how long Nova will continue to operate, as the Companies and Intellectual Property Commission (CIPC) recently issued it with a compliance notice prohibiting the company from selling more properties. Nova is taking this notice on review.
Nova’s board denies it is facing financial difficulty and asserts that the company is financially sound.
Overvaluation of properties
Geyser & Du Plessis, Nova’s fourth auditor in six years, based its opinion on the valuations it received from an independent valuer it appointed to value Nova’s properties.
The unnamed valuers’ valuations of Nova’s two largest assets – the non-revenue-generating, half-built Villa Retail Park and Zambezi Retail Park in Pretoria – were significantly lower than the values Nova disclosed.
Nova valued The Villa at R750 million and Zambezi at R539 million.
However, the auditor’s valuer valued the Villa at R80 million and Zambezi at R0 – basically stating that it is worthless.
The independent valuer also believes Nova overvalued its flagship revenue-generating asset, the Waterglen Shopping Centre in Pretoria, by R177.5 million, and Cold Creek Developments by R70 million. (Nova bought Cold Creek in 2012 for around R43 million and prevented Nova chair Connie Myburgh from a potentially huge financial loss – an event Nova never disclosed.)
The valuations of several other properties were also much lower than Nova’s.
Per Nova financial statements
|According to independent auditor||Overvaluation|
|The Villa Retail Park||R750m||R80m||R670m|
|Zambezi Retail Park||R539m||R0||R539m|
|Waterglen Shopping Centre||R233m||R55m||R178m|
|Del Judor Mall/Witbank Highveld||R182m||R165m||R17m|
|Cold Creek Development||R101m||R30m||R71m|
|R1 805m||R330.2m||R1 475m|
In response, the board took exception, stating that the independent auditor did not consider IFRS 13 valuation requirements, “resulting in creating a disagreement with management and leading to an adverse audit opinion”.
The board report states that the Nova-appointed independent valuers are registered with the SA Council for the Property Valuers Profession and are members of the SA Institute of Valuers.
“The board of directors are of the opinion, guided by IFRS 13, which requires ‘Highest and Best Use’ values, that all judgments, estimates and methodologies used by both the independent external valuers and directors’ valuations are reasonable, appropriate and in compliance with the International Financial Reporting Standards.
“The values disclosed of the investment properties in the group’s financial statements fairly represent what willing market participants are willing to pay at arm’s length.”
The auditor also pointed out that the board increased the valuations it received from its own valuers for The Villa and Zambezi – by R85.7 million and R76.9 million respectively.
In response, Kocks said “it is crystal clear that the auditor has formed an opinion, based on what its chosen property valuation experts have found, of property values that are materially (if not grossly) lower than what the directors of the company and group regard as appropriate values to present on the AFS …
“Overall, I regard the disclosed differences, as well as the manner wherein the company board brushes them aside, to be utterly deplorable. And I use this word in its strongest sense.”
Cash flow and financial performance
The AFS, which the auditors believe is not worth the paper it is written on, still reveals the extent of Nova’s financial woes.
Despite the group’s revenue rising by 25% to R64.3 million, it suffered an operational loss of R295 000 (2021: R6 million profit) and a net loss of R14.8 million (2021: R15.4 million profit).
The cash flow statement reveals operational activities burnt cash of R16.3 million (2021: R10 million consumed). Nova funded this shortfall with the R21.5 million proceeds from the sale of Amogela Mall in Welkom. (Nova has not had a positive operational cash flow since inception.)
At the end of February, Nova only had cash in the bank of R6.3 million.
The balance sheet reveals Nova has total borrowings of R117 million (2021: R123 million), of which it must repay R32 million before the end of February next year. This amount significantly exceeds the R27.6 million it received from the sale of Athlone Park Centre in Amanzimtoti in March.
According to Moneyweb calculations based on the cash flow statement, since 2012, Nova has sold 19 of the 28 former Sharemax properties, yielding R611 million cash. During this period, only R177 million was paid to debenture holders.
Geyser & Du Plessis also flagged that Nova had not paid its full value-added tax (VAT) dues during the period.
Yet the board still believes Nova’s financial position is tip-top. The board report states: “The board of directors have satisfied themselves that the group is in a sound financial position and that it has access to sufficient resources to meet its foreseeable cash requirements.”
Despite the company’s dire financial position, the directors continue to earn exorbitant salaries.
Myburgh and Haese, who are majority shareholders and have 100% voting control, each received salaries of R4.5 million for the period, which included increases of 2.6% and 2.7% respectively. This means Myburgh and Haese have earned R41.5 million and R40.5 million respectively since the scheme launched in 2012.
|2022||2021||Total since 2012|
|D Haese||R4 485 655||R4 369 205||R41 491 260|
|C Myburgh||R4 476 721||R4 364 752||R40 482 843|
|MJ Osterloh (appointed in 2018)||R3 313 338||R3 231 064||R14 639 036|
|R12 275 714||R11 965 021||R96 613 139|
The salaries of the executive directors amounted to R12.3 million in the year to end-February 2022, representing 30% of the R40.6 million cash Nova received from customers.
Nova has always contended that the board’s salaries are market-related.
Nova’s financial position is also relevant for all debenture holders: the former Sharemax investors. The original Section 311 Schemes of Arrangement explicitly tasked Nova to repay investors within 10 years, which expired in January this year. However, Nova failed to do so, citing that the board has the discretion to delay repayment beyond 10 years.
The CIPC does not share Nova’s interpretation.
In the AFS, Nova states that the CIPC compliance notice prohibiting the company from selling properties will cause the company and debenture holders “immeasurable prejudice” and is taking it on review. The company says the CIPC’s interpretation is wrong and it is “certain that it will be successful in having the compliance notice set aside”.
No date has been set for the hearing before the Companies Tribunal.
The CIPC believes Nova should have repaid investors by January this year and stated in documentation accompanying the compliance notice that it thinks the Nova board may not have the capacity or intent to repay former Sharemax investors.
The CIPC further believes the board, under the leadership of chair Myburgh and Haese, are indirectly winding the company up through the aggressive selloff of properties.
Read the full report here.
An interesting revelation is that Nova is apparently in talks with an unnamed investor to fund R400 million to develop the Theresa Park Retirement Village in Pretoria North. Nova states that a final deal remains subject to “finalising certain security arrangements” which had not been fulfilled at the time of the publication of the AFS.
Moneyweb has learned that Nova approached the CIPC to amend the compliance notice forbidding it to dispose of any more properties – to allow it to sell plots or units in the development.
Moneyweb can also confirm that the CIPC is on the verge of applying for a high court declaratory order as to whether the South African Reserve Bank (Sarb) decision that Sharemax and several property syndication schemes contravened the Banks Act in the late 2000s was in fact correct.
This process may open a Pandora’s box if a court finds that the Sarb’s ruling was incorrect, as investors would then have a potential claim against the bank.
The CIPC has already interacted with several regulators and relevant parties to compile the application over the past few weeks, and it should be submitted early in 2023.
These regulators include the Sarb, the Financial Sector Conduct Authority (FSCA), the National Prosecuting Authority (NPA) and the Financial Intelligence Centre (FIC).
The involvement of the NPA and the FIC at this early stage of the process may indicate suspicions of possible fraud.
Harrison & White
Myburgh is also involved in another case, where he stands accused of being party to the delay in placing a company into liquidation to allow for the stripping of assets.
Myburgh and Hans Klopper, the head of BDO’s restructuring department, are being sued by the liquidator of Harrison & White Investments (H&W) for R110 million for delaying the “inevitable” liquidation of the company, allowing for the stripping of assets. Klopper is also one of the two receivers of the Nova Debenture Trust, Myburgh being the other.
Furthermore, the Master of the High Court referred the report to the NPA to investigate possible fraudulent conduct on Myburgh’s part.
Myburgh and Klopper vehemently deny any wrongdoing and accused Moneyweb of illegally publishing a Section 417 report related to H&W. (Klopper issued a statement regarding the report, which can be accessed here.)
Nova did not respond to Moneyweb’s questions.